TELEBANC FINANCIAL CORPORATION



                                    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, 1996

[ ]  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 8, 1996.

  $.01 par value of common stock                                2,049,500
  ------------------------------                                ---------
             (class)                                           (outstanding)


<PAGE>

                         TELEBANC FINANCIAL CORPORATION


                                    FORM 10-Q

                                      INDEX


Part I - Financial Information                                              Page
------------------------------                                              ----
 
Consolidated Statements of Financial Condition --
 September 30, 1996 and December 31, 1995                                     3

Consolidated Statements of Operations --
  Three and nine months ended September 30, 1996 and 1995                     5

Consolidated Statements of Changes in Stockholders' Equity -
  Nine months ended September 30, 1996 and 1995                               8

Consolidated  Statements  of Cash Flows -- Nine months
  ended  September 30, 1996 and 1995                                          9

Notes to Consolidated Financial Statements                                   11

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

Part II -- Other Information

Item 5, Other Information                                                    22

Item 6, Exhibits and Reports on Form 8-K                                     22

Signatures                                                                   23




<PAGE>

                         TELEBANC FINANCIAL CORPORATION


                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                  (Dollars in Thousands, Except Per Share Data)



<TABLE>
<CAPTION>


                                                                                    September 30,             December 31,
                                                                                    -------------             ------------
Assets:                                                                                 1996                      1995
-------                                                                                 ----                      ----
                                                                                    (unaudited)
<S>                                                                                       <C>                <C>       
Cash and amounts due from depository institutions                                         $ 2,008            $    2,817
Interest-bearing deposits                                                                   2,360                 5,243
Federal funds sold                                                                            656                   905
                                                                                         --------             ---------
     Total cash and cash equivalents                                                        5,024                 8,965

Investment securities available for sale, at fair value                                    70,251                40,058
Mortgage-backed securities available for sale, at fair value                              203,876               234,210
Loans receivable, net                                                                     191,674               248,667
Loans receivable held for sale, lower of cost or market                                   123,160                    --
Investment in subsidiaries                                                                  1,383                    --
Real estate acquired through foreclosure                                                    1,127                   790
Accrued interest receivable                                                                 4,994                 4,377
Premises and equipment, net                                                                 2,663                 2,229
Stock in Federal Home Loan Bank of Atlanta, at cost                                         6,600                 5,275
Acquisition costs, goodwill, and core deposit premium                                         378                   416
Deferred charges                                                                              971                 1,066
Other assets                                                                                9,415                 7,890
                                                                                         --------             ---------


                                                                                        $ 621,516             $ 553,943
                                                                                          =======               =======

</TABLE>

                                                                    (continued)
<PAGE>

                         TELEBANC FINANCIAL CORPORATION

            CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED

                  (Dollars in Thousands, Except Per Share Data)




<TABLE>
<CAPTION>

                                                                        September 30,         December 31,
Liabilities and Stockholders' Equity:                                        1996                 1995
-------------------------------------                                        ----                 ----
                                                                                             
                                                                         (unaudited)
<S>                                                                        <C>                  <C>      
Liabilities:
Deposits                                                                   $ 397,477            $ 306,500
Advances from the Federal Home Loan Bank of Atlanta                          121,500              105,500
Securities sold under agreements to repurchase                                47,687               93,905
Subordinated debt                                                             16,564               16,496
Advances from borrowers for taxes and insurance                                  629                  521
Income taxes payable                                                           1,126                1,760
Accrued interest payable                                                       2,762                2,682
Other accrued expenses and other liabilities                                   9,932                5,014
                                                                               -----                -----

                                                                             597,677              532,378
                                                                             -------              -------

Stockholders' equity:
Common stock, $.01 par value, 3,500,000 shares authorized;
     2,049,500 issued and outstanding                                             20                   20
Additional paid-in capital                                                    14,637               14,637
Retained earnings, substantially restricted                                    6,698                5,352
Unrealized gain on securities available for sale, net of              
     deferred tax                                                              2,484                1,556
                                                                               -----                -----

                                  Total stockholders' equity                  23,839               21,565
                                                                              ------               ------

Commitments and contingencies

                                                                           $ 621,516            $ 553,943
                                                                             =======              =======
</TABLE>


          See accompanying notes to consolidated financial statements.


<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,
                                                                           -------------                      -------------
                                                                        1996             1995              1996           1995
                                                                        ----             ----              ----           ----
<S>                                                                 <C>              <C>               <C>            <C>     
Interest income:
     Mortgage loans and other loans                                 $  6,080         $  4,478          $ 16,946       $ 12,297
     Mortgage-backed and related securities                              --             5,015                --         14,447
     Investment securities and interest-bearing deposits                 229               97               652            680
     Mortgage-backed and related securities available for sale         4,483              402            14,117          1,187
     Investment securities available for sale                          1,060              625             2,609            918
     Trading account assets                                              --                52                --            167
     Repurchase agreements                                                10               --                12             17
     Federal funds sold                                                    9               12                31             37
                                                                      ------           ------           -------         ------

           Total interest income                                      11,871           10,681            34,367         29,750
                                                                      ------           ------            ------         ------

Interest expense:
     Deposits                                                          5,635            4,524            15,419         12,413
     Advances from the Federal Home Loan Bank of Atlanta               1,902            1,491             4,980          4,475
     Reverse repurchase agreements                                       840            1,526             3,504          4,630
     Other borrowed money                                                138              148               381            440
     Subordinated debt                                                   519              526             1,556          1,563
                                                                       -----            -----             -----          -----

          Total interest expense                                       9,034            8,215            25,840         23,521
                                                                       -----            -----            ------         ------

          Net interest income                                          2,837            2,466             8,527          6,229

Provision for loan and mortgage related security losses                  125              502               744          1,111
                                                                       -----           ------            ------          -----

          Net interest income after provision for loan and
           mortgage related security losses                            2,712            1,964             7,783          5,118
                                                                       -----          -------            ------          -----

Non-interest income:
     Loan fees and service charges                                       195               28               653             68
     Gain (loss) on sale of loans held for sale                           98              (14)              415             48
     Gain on sale of mortgage-backed securities                          237               --               105            251
     (Loss) gain on sale of investment securities                        (56)             453               158            447
     Loss on equity investment                                          (108)              --              (114)            --
     Gain on trading account                                             --                32                --            669
     Gain (loss) on sale of assets                                       100               --               100             (6)

</TABLE>
                                   (continued)

<PAGE>
                         TELEBANC FINANCIAL CORPORATION


                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

                  (Dollars in Thousands, Except Per Share Data)

                                   (unaudited)
<TABLE>
<CAPTION>

                                                                      Three Months Ended              Nine Months Ended
                                                                         September 30,                    September 30,
                                                                         -------------                    -------------
                                                                 1996              1995               1996              1995
                                                                 ----              ----               ----              ----

<S>                                                               <C>              <C>                 <C>              <C>     
     Other                                                        $   74           $   (80)            $  119           $   (65)
                                                                   -----             -----              -----             -----

          Total non-interest income                                  540               419              1,436             1,412
                                                                   -----             -----              -----             -----

Non-interest expenses:
     General and administrative expenses:
          Compensation and employee benefits                         882               771              2,670             2,340
          Office occupancy and equipment                             135               102                364               319
          Federal insurance premiums                               1,881               146              2,224               371
          Professional services                                      192               232                821               700
          Other                                                      197               150                635               393
                                                                   -----             -----              -----             -----

               Total general and administrative expenses           3,287             1,401              6,714             4,123
                                                                   -----             -----              -----             -----

     Other non-interest expenses:
          Net operating costs of real estate acquired
             through foreclosure, including provision
             for losses                                              126                58                173               139
          Amortization of acquisition costs, goodwill and
             core deposit premium                                     13                --                 38                22
          Other                                                      108                32                419                95
                                                                   -----             -----              -----             -----

               Total other non-interest expenses                     247                90                630               256
                                                                   -----             -----              -----             -----

                    Total non-interest expenses                    3,534             1,491              7,344             4,379
                                                                   -----             -----              -----             -----


          (Loss) income before income tax expense                   (282)              892              1,875             2,151

Income tax (benefit) expense                                        (220)              343                528               772
                                                                   -----             -----              -----             -----

          Net (loss) income                                      $   (62)           $  549           $  1,347          $  1,379
                                                                    ====               ===              =====             =====

                                   (continued)
</TABLE>


<PAGE>
                         TELEBANC FINANCIAL CORPORATION


                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

                  (Dollars in Thousands, Except Per Share Data)

                                   (unaudited)

<TABLE>
<CAPTION>
                                                                        Three Months Ended                   Nine Months Ended
                                                                           September 30,                       September 30,
                                                                           -------------                       -------------
                                                                      1996              1995             1996                1995
                                                                      ----              ----             ----                ----
<S>                                                             <C>                <C>             <C>                  <C>    
Earnings per share:

          Net (loss) income                                       $  (0.03)          $  0.27         $   0.63             $  0.67

          Weighted average shares outstanding                    2,171,000         2,049,500        2,124,488           2,049,500
                                                                 =========         =========        =========           =========
</TABLE>


          See accompanying notes to consolidated financial statements.

<PAGE>
                         TELEBANC FINANCIAL CORPORATION


           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


              For the nine months ended September 30, 1996 and 1995

                             (Dollars in Thousands)

                                   (unaudited)

<TABLE>
<CAPTION>

                                                                                                          Unrealized
                                                                                                          Gain (Loss)
                                                                        Additional                       on Available
                                                          Common          Paid-in         Retained         for Sale
                                                          Stock           Capital         Earnings        Securities        Total
                                                          -----           -------         --------        ----------        -----

<S>                                                        <C>           <C>            <C>            <C>                <C>     
Balances at December 31, 1994                              $ 20          $ 14,637       $   2,633      $    (262)         $ 17,028

Net income for the nine months ended
   September 30, 1995                                        --                --           1,379              --            1,379

Unrealized Gain on Available for Sale
   Securities,  net of tax effect                            --                --              --           1,023            1,023
                                                             --                --              --           -----            -----

Balances at September 30, 1995                             $ 20          $ 14,637        $  4,012       $     761         $ 19,430
                                                             ==            ======           =====             ===           ======



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
                                                             ==            ======           =====           =====           ======
</TABLE>




          See accompanying notes to consolidated financial statements.




<PAGE>
                         TELEBANC FINANCIAL CORPORATION


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Dollars in thousands)

                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                                Nine Months Ended
                                                                                                  September 30,
                                                                                            1996                   1995
                                                                                            ----                   ----

<S>                                                                                      <C>                     <C>        
Net cash provided by operating activities                                                $    20,082             $    12,780
                                                                                              ------                  ------

Cash flows from investing activities:
     Mortgage loan originations                                                                  (25)                   (395)
     Mortgage loans purchased                                                               (126,392)                (98,691)
     Proceeds from sale of mortgage loans available for sale                                  16,334                     (62)
     Principal payments on loans and mortgage-backed and 
       related securities                                                                     83,667                  50,848
     Purchases of mortgage-backed and related securities                                    (160,911)                (84,609)
     Proceeds from sale of mortgage-backed securities available
       for sale                                                                              150,649                  22,598
     Purchases of investment securities held to maturity                                          --                  (1,379)
     Proceeds from the maturity of investment securities held to
       maturity                                                                                   --                  19,743
     Purchases of investment securities available for sale                                  (111,911)                (28,139)
     Proceeds from sale or maturity of investment securities
       available for sale                                                                     55,990                   9,297
     Principal repayments on investment securities
       available for sale                                                                     25,687                      --
     Proceeds from maturity of securities purchased under 
       agreement to resell                                                                        --                   1,181
     Increase in stock of the Federal Home Loan Bank                                          (1,325)                   (187)
     Proceeds from sale of real estate acquired through
       foreclosure                                                                               514                      39
     Investment in subsidiaries                                                               (1,383)                     --
     Purchase of premises and equipment                                                         (623)                   (434)
                                                                                               -----                   -----

          Net cash used in investing activities                                              (69,729)               (110,190)
                                                                                            --------               ---------
</TABLE>

                                                                     (continued)

<PAGE>
                         TELEBANC FINANCIAL CORPORATION


                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                             (Dollars in thousands)

                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                           Nine Months Ended
                                                                                           -----------------
                                                                                             September 30,
                                                                                             -------------
                                                                                       1996                  1995
                                                                                       ----                  ----
<S>                                                                                    <C>                   <C>     
Cash flows from financing activities:
     Net increase in demand deposits and passbook
       savings accounts                                                                $ 21,741              $ 55,881
     Net increase in certificates of deposit, net of
        interest credited                                                                54,183                20,512
     Increase in advances from Federal Home Loan Bank of Atlanta                        237,000                59,000
     Payment on advances from Federal Home Loan Bank of
       Atlanta                                                                        (221,000)              (49,500)
     Net increase (decrease) in securities sold under agreements
       to repurchase                                                                   (46,218)                11,223
                                                                                       --------                ------

Net cash provided by financing activities                                                45,706                97,116
                                                                                         ------                ------

Net decrease in cash and cash equivalents                                               (3,941)                 (294)

Cash and cash equivalents at beginning of period                                          8,965                 6,078
                                                                                          -----                 -----
Cash and cash equivalents at end of period                                              $ 5,024               $ 5,784
                                                                                          =====                 =====


Supplemental information:

Interest paid on deposits and borrowed funds                                          $  11,770             $  11,402
Income taxes paid                                                                           822                   436
Transfers from loans to real estate acquired through foreclosures                           326                   193
Gross unrealized gain (loss) on securities available for sale                             4,140                 1,168
Tax effect of gain (loss) on available for sale securities                                1,656                   397
</TABLE>


          See accompanying notes to consolidated financial statements.



<PAGE>
                         TELEBANC FINANCIAL CORPORATION


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

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
and the Bank's  subsidiaries.  The Bank is a federally  chartered  savings bank,
deposit  accounts  in  which  are  insured  by  the  Federal  Deposit  Insurance
Corporation ("FDIC").  The consolidated financial statements include accounts of
TeleBanc Financial Corporation and its wholly-owned subsidiary, the Bank.

     The  financial  statements  as of September  30, 1996 and for the three and
nine months ended  September  30, 1996 and 1995 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, 1996 and the results of consolidated  operations for the three and
nine  months  ended  September  30, 1996 and 1995.  The results of  consolidated
operations  for the three  and nine  months  ended  September  30,  1996 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,
1995,  included in the Company's Annual Report to Stockholders for 1995,  should
be read in conjunction with these statements.

Note 2. Reclassification

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

Note 3. Earnings per Share

     Earnings per common  share are 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  2,171,000  and 2,049,500 for the Company at September 30, 1996
and 1995, 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.  The Company has not separately  reported
fully diluted earnings per share as it is not materially different from earnings
per share.


<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, 1996

     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, 1996 COMPARED TO DECEMBER 31, 1995)

     The Company's total assets  increased by $67.6 million or 12.2% from $553.9
million at December  31,  1995 to $621.5  million at  September  30,  1996.  The
increase in total assets primarily reflects  increases in loans receivable,  net
of $66.2 million, or 26.6% and investment securities available for sale of $30.2
million,  or 75.4% offset by a decline in mortgage-backed  securities  available
for sale of $(30.3)  million,  or (12.9)%.  In the second  quarter of 1996,  the
Company re-evaluated its loan investment  strategy.  The Company determined that
the probable sale of loans, subsequent to a restructuring or credit enhancement,
would add value to the portfolio. Pursuant to this strategy, the Company created
a loans held for sale category  with a one-time  transfer of loans from the held
for investment portfolio that have characteristics that make them susceptible to
sell after restructuring,  credit enhancement, or other improvements. Loans held
for sale are  recorded  at the lower of cost or market.  The  Company  maintains
loans held for sale and loans held for  investment  categories.  The increase in
loans receivable includes purchases of primarily adjustable rate loans.

     The  Company  continues  to gather  deposits on a  nationwide  basis by the
direct  marketing  of money  market  accounts and  certificates  of deposit.  In
addition,  the Bank entered into an Agreement to Assume  Deposit  Liabilities by
and among First Commonwealth Savings Bank F.S.B. ("First  Commonwealth"),  First
Commonwealth  Financial  Corp.,  John  York,  Jr.  and the Bank on May 2,  1996.
Pursuant to this  agreement,  the Bank assumed  certain  brokered and  telephone
solicited deposit accounts of First  Commonwealth.  These deposits had a current
balance  of $41.8  million as of August 2, 1996,  the date of  transfer.  In the
deposit  assumption,  First Commonwealth paid the Bank the amount of the deposit
liabilities  assumed,  plus the amount of the deposit  liabilities (less certain
renewals)  multiplied  by .25%.  As a result  of the  acquisition  of the  First
Commonwealth deposits coupled with the Bank's marketing efforts,  total deposits
increased by $91.0 million, or 29.7% from $306.5 million at December 31, 1995 to
$397.5 million at September 30, 1996. The average term for the new time deposits
gathered in the three months ended  September  30, 1996 was  approximately  21.2
months with an average  percentage  yield of 6.2%.  The Company has continued to
focus on building  core  deposit  accounts.  Money  market  checking and savings
accounts  increased  31.5% from $79.7  million at  December  31,  1995 to $104.8
million at September 30, 1996.  During the third quarter of 1996,  approximately
$5.4  million of  interest  was  credited to accounts  while  deposits  exceeded
withdrawals  by $45.9  million,  which  reflects  the  acquisition  of the First
Commonwealth  deposits.  Federal  Home Loan Bank  Advances  increased  to $121.5
million at September  30, 1996 from $105.5  million at December 31, 1995.  As of
September 30, 1996,  the weighted  average  interest  rate and weighted  average
maturity  for  Federal  Home  Loan  Bank   Advances  was  5.86%

<PAGE>

and 647 days,  respectively.  Securities  sold under  agreements to  repurchase,
decreased by $46.2  million or 49.2% from $93.9  million at December 31, 1995 to
$47.7  million  at  September  30,  1996  largely  as a result  of  management's
intention to replace these  borrowings  with the deposits  acquired in the third
quarter.  As of September  30,  1996,  the weighted  average  interest  rate and
weighted average maturity for securities sold under agreements to repurchase was
5.76% and 19 days,  respectively.  As of September 30, 1996,  subordinated debt,
net of original issue discount was $16.6 million with a coupon rate of 11.5%.

     Stockholders' equity increased $2.2 million, from $21.6 million at December
31, 1995 to $23.8  million at September  30, 1996.  The increase was due to $1.3
million  in net income  for the nine  months  ended  September  30,  1996 and an
unrealized  gain on securities  available for sale,  net of deferred  taxes,  of
$928,000,  which pursuant to SFAS 115 affects the Company's stockholders' equity
but does not impact the statement of operations.

     The growth in total  assets  reflects  the  Company's  efforts to prudently
invest and leverage the $21.9  million of net proceeds  from its initial  public
offering in June 1995.  The result has been a growth in total assets from $220.3
million at December  31, 1993 to $621.5  million at  September  30,  1996.  This
growth has been  supported by increasing  total  deposits from $113.1 million at
December  31,  1993 to $397.5  million at  September  30,  1996 and total  other
liabilities  from  $94.8  million  at  December  31,  1993 to $169.2  million at
September  30,  1996.  Asset growth has slowed  considerably  from the prior two
years,  as the Bank has  utilized  most of the  capital  contributed  after  the
initial  public  offering.  The  Company  is  exploring  alternatives  to  raise
significant  amounts of  additional  equity  capital to fund  continued  growth,
introduce new products and build core franchise value.

     As the  Company  intends  to  continue  to  pursue  its  telephone  banking
strategy, it also continues to explore potential expansion opportunities through
the analysis of related  alternative lines of business that will further enhance
franchise  value.  In May 1996,  the Company  entered into an agreement with its
63.4%  stockholder,  MET Holdings to merge MET Holdings into the Company.  After
the  proposed  merger,  TeleBanc  will own 100% of MET  Holdings  and its  other
businesses,  including  primarily  Arbor Capital  Partners,  Inc., an investment
advisor and broker  dealer.  On October 8, 1996,  the  Company  filed a Form S-4
which  details the  proposed  transaction.  However,  as noted  above,  TeleBanc
currently  is  exploring   alternatives  to  raise  additional  equity  capital.
Accordingly,  until TeleBanc makes a final determination with respect to raising
additional  equity capital,  it does not intend to seek shareholder  approval or
proceed with the proposed MET Holdings merger  transaction.  TeleBanc  presently
anticipates making such a final determination in that regard,  updating the Form
S-4 and seeking shareholder approval in the fourth quarter of 1996.

     In October 1995, the FASB issued SFAS No. 123,  "Accounting for Stock-Based
Compensation,"  which requires entities to measure compensation costs related to
awards of  stock-based  compensation  using  either the fair value method or the
intrinsic  value method.  Under the fair value method,  compensation  expense is
measured  at the grant  date  based on the fair  value of the  award.  Under the
intrinsic value method,  compensation expense is equal to the

<PAGE>
                         TELEBANC FINANCIAL CORPORATION


excess,  if any, of the quoted  market price of the stock at the grant date over
the amount the  employee  must pay to acquire  the stock.  Entities  electing to
measure  compensation costs using the intrinsic value method must make pro forma
disclosures,  beginning  after the  effective  date of January  1, 1996,  of net
income and earnings per share as if the fair value method had been applied.  The
Company has elected to account for stock-based  compensation  programs using the
intrinsic  value method  consistent  with existing  accounting,  therefore,  the
standard will not have an effect on the consolidated financial statements.



<PAGE>
                         TELEBANC FINANCIAL CORPORATION



     The consolidated  average balance sheets, along with income and expense and
related  interest  yields  and rates at  September  30,  1996 and 1995 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, 1996           Quarter ended September 30, 1995
                                         ------------------------------------------ ------------------------------------------
                                                          Interest                                   Interest
(Dollars in thousands)                      Average       Income/       Average        Average       Income/        Average
         unaudited                          Balance       Expense      Yield/Cost      Balance        Expense     Yield/Cost
                                            -------       -------      ----------      -------        -------     ----------

<S>                                      <C>            <C>                <C>      <C>            <C>                <C>  
Interest-earning assets:
Loans receivable, net                    $  302,358     $     6,089        8.06%    $  200,817     $     4,478        8.92%
Mortgage-backed and related securities           --              --          --        245,189           5,015        8.18
Investment securities                         7,531             115        5.99          6,228              97        6.11
Mortgage-backed and related securities
   available for sale                       218,350           4,453        8.16         18,846             402        8.53
Investment securities available for          67,263           1,109        6.59         30,897             691        8.75
   sale
Federal funds sold                              659               9        5.19            864              12        5.66
Investment in FHLB                            7,059             129        7.25          5,275              92        6.99
Trading account                                  --              --          --          2,632              52        7.85
                                         ----------     -----------   ---------     ----------              --        ----
  Total interest-earning assets          $  603,220     $    11,904        7.90%    $  510,748     $    10,839        8.49%

Non-interest-earning assets              $   12,817                                 $   16,234
                                             ------                                     ------

  Total assets                           $  616,037                                 $  526,982
                                            =======                                    =======

Interest-bearing liabilities:
Savings deposits                         $  104,033     $     1,247        4.77%    $   52,214      $      676        5.13%
Time deposits                               275,302           4,384        6.34        229,752           3,849        6.65
FHLB advances                               136,332           2,040        5.85        105,500           1,638        6.08
Other borrowings                             57,204             839        5.74         95,504           1,520        6.23
Subordinated debt, net                       17,250             519       12.03         16,445             526       12.80
                                             ------     -----------   ---------         ------             ---   ---------
  Total interest-bearing liabilities     $  590,121     $     9,029        6.06%    $  499,415      $    8,209        6.58%

Non-interest-bearing liabilities         $    2,283                                 $   8,929
                                              -----                                     -----

Total liabilities                        $  592,404                                 $ 508,344

Stockholders' equity                     $   23,633                                 $  18,638
                                              ------                                   ------

Total liabilities and stockholders'
   equity                                $  616,037                                 $ 526,982
                                            =======                                   =======

Excess of interest-earning assets over
   interest-bearing liabilities/net
   interest income/interest rate spread  $   13,099     $       2,875      1.84%    $  11,333     $      2,630        1.91%
                                             ======             =====      =====       ======            =====        =====
Net yield on interest earning assets                                       1.91%                                      2.06%
                                                                           =====                                      =====
Ratio of interest-earning assets to
   interest-bearing liabilities                                          102.22%                                    102.27%
                                                                         =======                                    =======

</TABLE>

<PAGE>
                         TELEBANC FINANCIAL CORPORTION


RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
1995

     Net Income.  Net income for the three and nine months ended  September  30,
1996 was $(62,000)  and $1.3 million,  compared to $549,000 and $1.4 million for
the three and nine months ended September 30, 1995, respectively. Net income for
the three months ended September 30, 1996 consisted primarily of $2.8 million in
net  interest  income,  $237,000  on the  sale  of  mortgage-backed  securities,
non-interest  income gains of $98,000 on the sale of loans and $195,000 for loan
fees  and  service  charges,  reduced  by  $125,000  in  provision  for loan and
mortgage-related  security losses and $3.3 million in general and administrative
expenses.  General and  administrative  expenses for the quarter  include a $1.7
million  accrual  for a  special  assessment  mandated  by the  Federal  Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund  ("SAIF").  Net  income  for the three  months  ended  September  30,  1995
consisted  primarily  of $2.5  million of net  interest  income and  $419,000 in
non-interest  income  primarily  due to gains on the sale of certain  securities
reduced by $502,000 in provision for loan and mortgage  related  security losses
and $1.4 million of general and administrative expenses. Net income for the nine
months ended September 30, 1996 consisted of net interest income of $8.5 million
and non-interest income of $1.4 million offset by $744,000 of provision for loan
and mortgage related  security losses and $7.3 million of non-interest  expense.
Net income for the nine months ended September 30, 1995 consisted of $6.2 of net
interest income and $1.4 million of  non-interest  income offset by $1.1 million
of provision for loan and mortgage  related  security losses and $4.4 million of
non-interest expenses.

     Net Interest Income.  Net interest income was $2.8 million and $2.5 million
for the three months ended September 30, 1996 and 1995, respectively, reflecting
an annualized interest rate spread of 1.84% and 1.91% for the three months ended
September 30, 1996 and 1995,  respectively.  In the quarter ending September 30,
1996, total interest earning assets,  consisting  primarily of loans receivable,
net and  mortgage-backed  and related  securities,  yielded 7.90% as compared to
8.49% for the same period in 1995.  The decline is attributed to the transfer of
loans to the held for sale  category and an increase in  non-accrual  loans.  In
June 1996,  the Bank made a one-time  transfer of  approximately  $106.6 million
from  loans  receivable,  net to loans  held for sale.  According  to  generally
accepted  accounting  principles,  purchase discounts on mortgage loans held for
sale are not amortized as interest  revenue.  Discounts on  prepayments on loans
held for sale are recognized as non-interest  income. In the third quarter,  the
Company  recognized  $98,000 in discounts on prepayments on loans held for sale.
Non-accrual  loans  increased  from $4.3 million at  September  30, 1995 to $8.9
million at September  30, 1996 causing a decline in loan  interest  income.  The
Company  anticipates  that the  subsidiary  will  add  value  by  improving  the
servicing of non-performing assets, both for the Bank and third parties. Average
interest-earning  assets were $603.2 million and $510.7 million for the quarters
ending  September  30, 1996 and 1995,  respectively.  Average  interest  bearing
liabilities  were $590.1  million and $499.4  million  for the  quarters  ending
September 30, 1996 and 1995,  respectively.  Interest-bearing  liabilities  cost
6.06% in the third quarter of 1996 as compared 6.58% in the same period in 1995.
Yield on  interest-earning  assets for the  quarter  ending  September  30, 1996
decreased 59 basis points over the same quarter in 1995. Third quarter decreases
in interest-earning assets and interest-bearing liabilities primarily reflect an
overall  decrease in interest  rates.  Net interest  income was $8.5 million and
$6.2  million  for  the  nine  months  ended   September   30,

<PAGE>
                         TELEBANC FINANCIAL CORPORATION


1996 and 1995,  respectively.  For the  first  nine  months of 1996 the  Company
experienced  a 21 basis  point  increase  in  annualized  interest  rate  spread
compared  to the same  period in 1995.  The  increase  reflects a 47 basis point
decline in the cost of interest  bearing  liabilities.  This  decrease  reflects
decreases  in the  interest  rates paid on savings and time  deposits  and other
borrowings and the benefit of a swap on the savings deposits. In addition, total
liabilities  have  grown and the  subordinated  debt,  a stable  and  relatively
expensive source of funds, has become a smaller percentage of total liabilities,
thereby   decreasing   average  interest  costs.   Third  quarter  increases  in
interest-bearing  liabilities and increases in interest-earning assets primarily
reflected  an increase in volume.  Average  interest  bearing  liabilities  were
$562.0 million and $471.3  million for the nine months ended  September 30, 1996
and 1995,  respectively.  In the nine months ended  September  30,  1996,  total
interest  earning  assets,  consisting  primarily of loans  receivable,  net and
mortgage-backed and related securities, yielded 8.03% for the nine months ending
September  30,  1996  compared  to 8.29% for the same  period  in 1995.  Average
interest-earning  assets  were $572.8  million  and $481.9  million for the nine
months  ended  September  30,  1996  and  1995,  respectively.  Interest-bearing
liabilities cost 6.11% in the first nine months of 1996 as compared 6.58% in the
same period in 1995.  Net yield on  interest-earning  assets for the nine months
ending  September  30, 1996  increased  22 basis  points over the same period in
1995.

     Provision for Loan and Mortgage Related  Security  Losses.  Total provision
for loan and mortgage related  security losses decreased  $377,000 from $502,000
for the three months ending  September 30, 1995 to $125,000 for the three months
ending  September 30, 1996. The provision for loan and mortgage related security
losses reflects  management's  intent to provide prudent  reserves for potential
loan  losses  and for loan  acquisitions  made  during the  quarter.  During the
quarter ended September 30, 1996, the Company provided  additional  reserves for
single-family  loans acquired during the quarter.  The Company had recoveries of
$110,000 and charge-offs of $139,000 on five one-to-four  family mortgage loans.
During the third quarter of 1995,  the Company  provided  specific  reserves for
several  loan  investments  as well as  additional  general  reserves  for  loan
acquisitions.  Total  provision for loan and mortgage  related  security  losses
decreased  $367,000  from $1.1 million for the nine months ended  September  30,
1995 to $744,000 for the nine months  ended  September  30, 1996.  For the first
nine months of 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,  1996,  the Company
acquired $126.4 million in mortgage loans.  The provision for the same period of
1995 was attributable to an increase in reserves for several single-family loans
and for  reserves  on  approximately  $98.7  million in loan  acquisitions.  The
Company experienced a slower growth in loans for the three and nine months ended
September  30, 1996 as compared to the same periods in 1995.  During  1995,  the
Company recorded more provision for loan and mortgage related security losses to
match loan  acquisitions.  The Company also  maintains an allowance for mortgage
related  security  losses against  certain  mortgage  backed  securities held to
maturity  for which the  Company has credit risk on the  underlying  loans.  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%.
<PAGE>
                         TELEBANC FINANCIAL CORPORATION


     Non-Interest  Income.  Total non-interest income increased by $121,000 from
$419,000 for the three months ended September 30, 1995 to $540,000 for the three
months ended September 30, 1996. For the three months ending September 30, 1996,
the Company  reported  $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.  During the third  quarter of 1995,  the Company  sold a
corporate bond held for liquidity purposes for a gain of $453,000 and a security
held in the trading account and  restructured  earlier in the year by management
for a $32,000  gain.  These  gains were  offset by a $100,000  loss  recorded in
connection with the kiting of a deposit.  Total non-interest income increased by
$394,000 from $1.0 million for the nine months ended  September 30, 1995 to $1.4
million for the nine months ended  September  30, 1996.  The increase is related
primarily  to  the  Company's  acquisition  of  approximately  $2.5  million  of
purchased  mortgage  servicing rights which  contributed to the increase in loan
fees and service  charges.  As a result of the newly created loans held for sale
category, the Company recognized non-interest income on the prepayments of loans
held for sale.  In prior  quarters,  this income would have been  recognized  as
interest  income.  During the first quarter of 1995,  the Company  completed the
restructuring  of a  mortgage-backed  security  with  underlying  collateral  of
one-to-four family dwellings,  resulting in a $641,000 gain, offset by a $28,000
gain in marking the security in the trading  account to market and  subsequently
selling the security.  Management purchased the mortgage-backed security in 1995
and subsequently enhanced the credit through the purchase of insurance.

     Non-Interest Expenses.  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
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 will  result in lower  deposit  insurance  premiums  in the future for most
SAIF-insured  institutions,  including TeleBank.  Non-interest  expenses for the
three and nine  months  ended  September  30,  1995 were $1.5  million  and $4.4
million,  respectively.  Total  non-interest  expenses,  excluding  the  special
assessment,  increased by $371,000  from $1.5 million for the three months ended
September  30, 1995 to $1.9  million for the three months  ended  September  30,
1996.  The increase is largely the result of a $214,000  increase in general and
administrative expenses, excluding the special assessment,  attributable to a an
increase of expenses  associated  with a higher volume of deposit  accounts,  an
increase in marketing expenses,  and an overall increase in compensation levels.
Excluding the special  assessment,  total  non-interest  expenses increased $1.3
million for the nine months  ended  September  30, 1995 to $5.7  million for the
nine months ended  September 30, 1996. The increase is primarily the result of a
$919,000  increase  in general  and  administrative  expenses.  The  increase in
general and administrative  expense for the nine months ended September 30, 1996
is the result of increases in  compensation,  increases in personnel,  marketing
expenditures and an accrual for bonuses. Overall deposit growth has precipitated
the need for  additional  personnel  to handle  the  increased  volume of sales,
distribution,  and back office operations.  Additionally,  in an effort to build
core

<PAGE>
                         TELEBANC FINANCIAL CORPORATION


deposit franchise value, the Company has hired an affinity program manager and a
sales and customer service manager to oversee the TeleBanking operation.

     Income Tax Expense.  For the quarter ended  September 30, 1996, the Company
recorded a $220,000  tax  benefit,  or 78.1% of the  quarter's  net loss  before
income tax as compared to tax expenses of $343,000,  or an effective tax rate of
38.5%, for the quarter ended September 30, 1995. The effective tax rate declined
due to the $1.7 million federal insurance assessment. The effective tax rate for
the nine months  ended  September  30, 1996 was 28.2%  compared to 35.9% for the
nine months ended September 30, 1995. The Company carried a deferred tax payable
of $1.2  million on its  Consolidated  Statement  of  Financial  Condition as of
September 30, 1996.

LIQUIDITY

     Liquidity is the ability of the Company to generate  cash flows  sufficient
to fund  operations  and to meet  present and future  financial  obligations  to
borrowers  and  depositors  in  a  timely  manner.  Cash  flows  from  operating
activities,  consisting  primarily of interest  received  less  interest paid on
deposits  and  borrowings,  were $20.1  million  and $12.8  million for the nine
months ended  September 30, 1996 and 1995,  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 $69.7 million and $110.2 million for the nine months
ended  September  30, 1996 and 1995,  respectively.  The  increase in cash flows
related to investing  activities  for the nine months ended  September  30, 1996
reflects a  significant  increase in the amount of  mortgage-backed  securities,
mortgage loans and investment  securities  purchased.  Net financing  activities
(primarily net activity in deposits and borrowings) were $45.7 million and $97.1
million for the nine months ended September 30, 1996 and 1995, respectively. The
decrease in net cash provided by financing  activities for the nine months ended
September  30, 1996 is primarily the result of slower growth in 1996 as compared
to the same period in 1995. The total net decrease in cash and cash  equivalents
was $3.9 million and $294,000 for the nine months ended  September  30, 1996 and
1995, respectively.

     The Company's primary sources of funds are deposits, principal and interest
payments on loans and  mortgage-backed  securities,  and proceeds from sales and
maturities of mortgage-backed and related securities and investment  securities.
Investment  maturities,  and scheduled amortization of loans and mortgage-backed
securities  are  generally  a  predictable  source of funds.  Deposit  flows and
mortgage  prepayments  are greatly  influenced  by the general level of interest
rates,  economic  conditions,  and  competition.  The Company also accesses FHLB
advances, 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, 1996, the Company's liquidity ratio was 6.38%.

<PAGE>
                         TELEBANC FINANCIAL CORPORATION


     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.  The subordinated debt represents a
stable,  although relatively expensive,  source of funds. Upon completion of the
offering,  the Company  invested  $15 million of the  proceeds as capital of the
Bank.  The  annual  expense  to  service  the debt is $2.0  million.  Subject to
regulatory  approval,  the Bank will  dividend  this  balance to the  Company to
service the debt.  There are  various  regulatory  limitations  on the extent to
which federally chartered savings institutions may pay dividends.  Also, savings
institution  subsidiaries of holding companies generally are required to provide
their OTS  Regional  Director  with no less than 30 days notice of any  proposed
declaration on the institution's stock. Under terms of the indenture pursuant to
which the subordinated  notes were issued,  the Company presently is required to
maintain,  on an  unconsolidated  basis,  liquid assets in an amount equal to or
greater than $2.0  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 $5.0 million and $9.0 million as of September
30, 1996 and December  31, 1995,  respectively.  As of September  30, 1996,  the
Company had commitments to purchase $18.0 million in loans.  Also,  certificates
of deposit  which are  scheduled to mature in less than one year as of September
30, 1996 totaled $133.4 million.

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



<PAGE>
                         TELEBANC FINANCIAL CORPORATION


CAPITAL RESOURCES

           Capital  ratios at September  30, 1996 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, 1996:
<TABLE>
<CAPTION>

                                      Actual           Percent               Required                Percent                 Excess
                                      ------           -------               --------                -------                 ------
                                                                (Dollars in thousands)

<S>                                   <C>              <C>                    <C>                    <C>                   <C>    
Core                                  $31,024          5.07%                  $18,357                3.00%                 $12,667
Tangible                               31,008          5.07                     9,170                1.50                   21,838
Risk-based                             33,153         10.50                    25,260                8.00                    7,893
</TABLE>


RECENT DEVELOPMENTS

           On August 8,  1996,  the  Office of Thrift  Supervision  (the  "OTS")
terminated the May 24, 1993 Supervisory Agreement.









<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

     No information to report.



<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 13, 1996            By:  /s/ Mitchell H. Caplan
                                        ---------------------------
                                        Mitchell H. Caplan
                                        President



Date:  November 13, 1996            By:  /s/ Aileen Lopez Pugh
                                        ---------------------------
                                        Aileen Lopez Pugh
                                        Executive Vice President
                                        Chief Financial Officer/Treasurer