TELEBANC FINANCIAL CORP, S-3, 1999-02-11

TELEBANC FINANCIAL CORP
S-3, 1999-02-11
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------

TELEBANC FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 13-3759196
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

1111 NORTH HIGHLAND STREET

ARLINGTON, VIRGINIA 22201
(703) 247-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------

ARLEN W. GELBARD
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
-------------------------

COPIES TO:

<TABLE>
<S> <C>
STUART G. STEIN ROBERT H. CRAFT, JR.
STEVEN A. MUSELES SULLIVAN & CROMWELL
HOGAN & HARTSON L.L.P. 1701 PENNSYLVANIA AVENUE, N.W.
555 THIRTEENTH STREET, N.W. WASHINGTON, D.C. 20006
WASHINGTON, D.C. 20004 (202) 956-7500
(202) 637-5600
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM
TITLE OF SHARES TO AGGREGATE AMOUNT OF
BE REGISTERED OFFERING PRICE REGISTRATION FEE(1)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common stock, par value $.01 per share...................... $235,000,000 $65,330
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Determined pursuant to Rule 457(o) under the Securities Act.
-------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

Subject to Completion. Dated February 11, 1999

[LOGO]
TELEBANC FINANCIAL CORPORATION

Common Stock

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

TeleBanc Financial Corporation is offering of the shares to
be sold in the offering. The selling stockholders identified in this prospectus
are offering an additional shares.

TeleBanc's common stock is traded on the Nasdaq National Market under the
symbol "TBFC". On February 10, 1999, the last reported sale price for the common
stock was $39.375 per share.

See "Risk Factors" beginning on page 3 to read about factors you should
consider before buying shares of the common stock.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.

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

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to TeleBanc...................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>

The underwriters may purchase up to an additional shares
from TeleBanc at the initial public offering price less the underwriting
discount.

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

The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.

GOLDMAN, SACHS & CO. BANCBOSTON ROBERTSON STEPHENS

CIBC OPPENHEIMER LEGG MASON WOOD WALKER
INCORPORATED

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

Prospectus dated , 1999.
<PAGE> 3

[Samples of our advertising, including billboards, magazine, newspaper and
internet ads, and a graphic displaying our web site. This selection contains
graphics and text depicting our high rate, low fee product offerings.]

[PAGE FOR COVER PAGE GRAPHICS]
<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and our financial statements in this
prospectus.

This prospectus contains forward-looking statements and information
relating to TeleBanc and its subsidiaries. The words "believes", "expects",
"may", "will", "should", "projects", "contemplates", "anticipates", "forecasts",
"intends" or similar terminology are intended to identify forward-looking
statements. These statements are based on the beliefs of management as well as
assumptions made using information currently available to management. Because
these statements reflect the current views of management concerning future
events, they involve risks, uncertainties and assumptions. Therefore, actual
results may differ significantly from the results discussed in the
forward-looking statements. The factors that may cause a difference include
those discussed in the Risk Factors section and the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of this
prospectus. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available.

[TELEBANK LOGO]

We are the nation's leading branchless bank providing high value financial
products and services primarily over the Internet. We offer a wide range of
FDIC-insured and other banking products and services with significantly higher
rates and lower fees than traditional banks with brick-and-mortar branches.

We have been providing branchless banking for ten years using electronic
delivery channels. With the advent of the Internet, we have positioned ourselves
to exploit its low cost distribution, increased functionality and broader reach.
We believe that the low cost structure of our Internet-based platform provides
us with significant cost advantages over traditional banks who must support
their branch networks.

Currently, approximately 60% of our customer contacts occur over the
Internet. Using our secure, comprehensive and customer friendly web site,
individuals can open an account, transfer funds between accounts, view account
balances, pay bills and compare our premium rates to national averages.
Customers can deposit funds using direct deposit, wire or U.S. mail, and can
withdraw cash from over 430,000 automated teller machines on the Cirrus(R)
network worldwide. To support our products and services and build customer
loyalty, we seek to provide superior customer service through our 24-hour call
centers. We also offer a wide array of complementary products, including
residential mortgage loans and fixed annuities, through alliances with strategic
partners.

Our comprehensive marketing plan targets customers in all 50 states who
value the convenience and premium rates of our high value products. The four
main initiatives of our marketing plan are national advertising through print,
radio and online media, strategic alliances with popular web sites such as
Yahoo! and E-Loan, affinity partnerships with national organizations such as
Sam's Club and referral programs leveraging our existing customer base. As of
December 31, 1998, we had approximately 50,000 customer accounts, $2.3 billion
in total assets and $1.1 billion in retail deposits. During 1998, our retail
deposits and customer accounts grew 119% and 133%.

Our executive offices are located at 1111 North Highland Street, Arlington,
Virginia 22201, telephone (703) 247-3700. Our web site address is located at
www.telebankonline.com.

1
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
The following information assumes that the
underwriters do not exercise the option granted
by TeleBanc to purchase additional shares in the
offering. See "Underwriting".
Shares offered by TeleBanc....
Shares offered by the selling
stockholders................
Shares to be outstanding after
the offering................
Nasdaq National Market
symbol...................... "TBFC"
Use of proceeds............... To invest as
additional capital of TeleBank to support
further growth, to redeem subordinated debt and
for general corporate purposes.
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollars in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income.............................. $ 4,695 $ 8,565 $10,985 $13,238 $ 19,805
Non-interest income.............................. 175 3,777 2,756 4,093 7,564
Non-interest expenses............................ 3,656 6,240 9,075 10,142 22,078
Net income....................................... 540 2,720 2,552 4,217 1,375
Preferred stock dividends........................ -- -- -- 546 2,112(1)
Net income (loss) available to common
stockholders................................... 540 2,720 2,552 3,671 (737)(1)
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets..................................... $427,292 $553,943 $647,965 $1,100,352 $2,283,341
Loans receivable, mortgage-backed and investment
securities..................................... 403,650 522,935 615,390 972,254 2,166,959
Retail deposits.................................. 212,444 306,500 390,486 522,221 1,142,385
Borrowings....................................... 175,613 225,878 232,821 522,735 906,790
Total stockholders' equity....................... 17,028 21,565 24,658 45,824 113,435
OTHER:
Number of accounts............................... 8,564 12,919 16,506 21,817 50,835
</TABLE>

- ---------------
(1) Includes a $1.7 million non-recurring, non-cash charge related to a special
preferred stock dividend paid in common stock, upon conversion of the
preferred stock. This amount is based on the fair market value of the common
stock at the time the dividend was paid.

2
<PAGE> 6

RISK FACTORS

You should consider carefully the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones facing our company. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
such case, the trading price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.

FACTORS THAT WILL NEGATIVELY
AFFECT OUR PROFITABILITY

As a financial services firm, there are many factors that could negatively
affect our earnings. Our ability to make money depends on our ability to attract
funds and invest those funds profitably. The primary factors which will
negatively affect our earnings are as follows:

INCREASED GENERAL AND ADMINISTRATIVE EXPENSES. In 1998, we increased our
marketing expenses in our effort to establish TeleBank as the premier national
provider of high value banking products through the Internet. This resulted in a
$4.0 million increase in advertising and marketing expenses in 1998. In
addition, as a result of our rapid growth, compensation costs increased $3.0
million, or 61.2%, for the year ended December 31, 1998. We expect to continue
to pursue an aggressive brand building and growth strategy, which will require
continued substantial marketing expenditures. These expenses may not be matched
by corresponding increases in revenue. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1998 Compared to Year Ended December 31,
1997 -- Non-interest Expenses".

CHANGES IN INTEREST RATES. Our results of operations depend in large part
upon the level of our net interest income, that is, the difference between
interest income from interest-earning assets, such as loans and mortgage-backed
securities, and interest expense on interest-bearing liabilities, such as
deposits and borrowings. Many factors cause changes in interest rates, including
governmental monetary policies and domestic and international economic and
political conditions. If we are unsuccessful in managing the effects of changes
in interest rates, our financial condition and results of operations could
suffer.

Changes in market interest rates could reduce the value of our financial
assets. Fixed-rate investments, mortgage-backed and related securities and
mortgage loans generally decline in value as interest rates rise. We simulated
the effect as of December 31, 1998 that a hypothetical instantaneous 1% rise in
interest rates would have on our company. Based on this simulation analysis, we
estimated such an increase in interest rates would cause the fair value of
equity to decrease by 9.0%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate Sensitivity
Management".

OUR OPERATIONS ARE MORE SENSITIVE TO PRICE AND TECHNOLOGY COMPETITION THAN
TRADITIONAL FINANCIAL SERVICES FIRMS. Because we rely on remote access tools
such as the Internet and telephone, our customers may be more price sensitive
and more willing to try new technologies than customers of typical financial
services firms, which rely on branches and face-to-face customer service.
Consequently, the following competitive factors are of particular importance to
our profitability:

- price competition for deposits and borrowings;
- introduction of new products by us and our competitors;
- changes in the mix of products and services we sell; and
- the level of use of the Internet and on-line services.

3
<PAGE> 7

OUR QUARTERLY OPERATING RESULTS
FLUCTUATE, WHICH COULD CAUSE
OUR STOCK PRICE TO DECLINE

Our quarterly net interest income, margins and results of operations have
fluctuated in the past based on changes in the factors discussed above. We may
continue to experience fluctuations due to those factors as well as others, not
all of which are under our control. If we fail to meet the expectations of
securities analysts or investors as a result of any future fluctuations in our
quarterly operating results, the trading price of your common stock may decline.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Operating Results".

OUR SUCCESS DEPENDS ON CUSTOMER AWARENESS OF OUR BRAND

Our success in introducing new financial products and services through
electronic delivery channels and attracting new customers will depend in part
upon our ability to increase awareness of the TeleBank brand. Promoting our
brand name will depend largely on the success of our marketing efforts. As
discussed above, we anticipate that our efforts to develop and maintain brand
awareness will increase marketing and related costs significantly. We currently
do not own a federal registration for the servicemark "TeleBank", although an
application is pending. If a competitor successfully challenges our ability to
use the name "TeleBank", we could lose the right to use the "TeleBank" brand
name and the benefits of the brand awareness we have developed.

RAPID GROWTH COULD STRAIN RESOURCES

We have experienced rapid growth, and our strategy is to continue to do so
in the future. This expansion has placed, and we expect that it will continue to
place, a significant strain on our managerial, operational and financial
resources. Our continued growth depends to a significant degree on our ability
to do the following:

- maintain high value products and services;
- maintain our existing customer base and attract new customers;
- recruit, train, motivate and retain qualified personnel;
- raise additional capital for operational and regulatory capital
requirements;
- build enhanced operating and financial systems;
- enter into relationships with third parties necessary to our business;
and
- achieve our targeted asset allocation of securities and loans in a timely
manner.

Also, our primary federal banking regulator, the Office of Thrift
Supervision, has the authority to restrict the growth of our assets based on
safety and soundness considerations.

OUR STRATEGY DEPENDS ON CUSTOMER ACCEPTANCE OF THE INTERNET
AND OTHER NON-TRADITIONAL
DELIVERY CHANNELS

Since we rely solely on electronic delivery channels, including the
Internet, telephone and automatic teller machines, to offer our financial
products and services, our branchless banking strategy differs from that of
traditional financial institutions. Our future revenues and profits will depend,
in substantial part, upon customer acceptance of and demand for these means of
delivering financial products and services. The market for financial products
and services through electronic delivery channels, particularly the Internet, is
new and evolving, and the degree to which customers will use these channels for
their financial transactions is not yet fully determined. Our customer base will
grow only if consumers who have historically used traditional means of banking
begin to use our electronic services for this purpose.

Our future success will depend on our ability to adapt to rapidly changing
technologies. We also will have to enhance existing products and services and
develop and introduce a variety of new products and services to address our
customers' changing demands. We may experience difficulties that could delay or
prevent the successful design, development, introduction or marketing of our
products and services. Material delays in

4
<PAGE> 8

introducing new products and services and enhancements may cause customers to
forego purchases of our products and services and purchase those of our
competitors.

SYSTEM NETWORKS COULD FAIL OR SECURITY COULD BE BREACHED, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS

Our computer systems and network infrastructure may be vulnerable to
unforeseen problems. Our operations depend on our ability to protect our
computer equipment against damage from fire and water, power loss,
telecommunications failure or a similar unexpected adverse event. Customers may
become dissatisfied by any system failure that interrupts our ability to provide
our services to them. Sustained or repeated system failures would reduce the
attractiveness of the services which we provide. Slower response time or system
failures may also result from straining the capacity of our software or hardware
due to an increase in the volume of services delivered through our servers. To
the extent that we do not effectively address any capacity constraints or system
failures, our customers could seek other providers of banking services.

We also must protect our computer systems and network from physical
break-ins, security breaches and other disruptive problems caused by the
Internet or other users. Computer break-ins and power disruptions could
jeopardize the security of information stored in and transmitted through our
computer systems and network, which would likely adversely affect our ability to
retain or attract customers and could subject us to litigation. Although we
intend to continue to implement security technology and establish operational
procedures to prevent break-ins, damage and failures, these security measures
may fail. A failure of such security measures could damage our reputation for
security and deter customers from using our services.

WE RELY EXTENSIVELY ON THIRD-PARTY SERVICE PROVIDERS

We receive, and will continue to receive, essential technical and customer
service support from third-party providers. These third-party providers provide
check processing, check imaging, Internet processing, Internet software, home
page hosting and statement rendering services. We expect to use third-party
providers for additional services in the future. Our current agreements with
each of these service providers may be canceled without cause by either party
upon specified notice periods, and future agreements may contain similar
clauses. If one of our third-party service providers terminates its agreement
with us, we may not be able to enter into a new agreement on similar terms, and
our operations may be interrupted. If an interruption were to continue for a
significant period of time, we could lose customers to other providers.

WE FACE INTENSE COMPETITION

We believe that the principal competitive factors in the financial services
industry in which we operate are price, that is, interest rates paid on savings
products and fees charged on financial products, as well as customer service,
convenience and product quality. Although we believe our operating strategy
enables us to offer competitive financial products on a nationwide basis, we may
not be able to differentiate our products from the products of our competitors
in the financial services industry.

We face intense competition in the financial services industry from
providers of direct-marketed savings and investment products and other
Internet-based financial institutions. Additionally, because there are few
barriers to market entry, traditional, branch-based and other financial services
companies may be able to adopt business strategies similar to ours with relative
ease. Many of the financial institutions with which we currently compete or may
compete in the future have significantly greater capital and management
resources, longer operating histories, greater brand recognition and larger
customer bases. Increased competition could

5
<PAGE> 9

result in pricing pressure and a consequent reduction in our revenues and
profitability. See "Business -- Competition".

WE DEPEND ON OUR KEY MANAGEMENT
PERSONNEL FOR OUR FUTURE SUCCESS

Our future success depends to a significant extent on the continued
services of our key senior management, including Mitchell H. Caplan, Vice
Chairman of the Board of Directors, Chief Executive Officer and President and
Laurence P. Greenberg, Executive Vice President and Chief Marketing Officer. We
have no employment agreements with these executives and do not maintain "key
person" life insurance policies. The loss of the services of any of these
individuals or other key employees would likely have a material adverse effect
on our business.

OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL OF OUR MANAGEMENT AND
AFFAIRS, WHICH THEY COULD EXERCISE AGAINST
YOUR BEST INTERESTS

Upon completion of the offering, David A. Smilow, Chairman of the Board,
Mr. Caplan, our Employee Stock Ownership Plan, of which Messrs. Smilow and
Caplan are trustees, and our directors and executive officers as a group will
beneficially own % of our outstanding common stock. As a result, Messrs.
Smilow and Caplan and our directors and executive officers as a group can
exercise significant control over our management and affairs, including the
election of directors and the determination of all other matters requiring
stockholder approval. Acting as a group, they will retain the power to block
certain business combinations in accordance with our certificate of
incorporation and bylaws. Accordingly, this concentration of ownership may have
the effect of delaying or preventing a change of control of our company that may
be in your best interests. See "Principal and Selling Stockholders".

In addition, provisions of our certificate of incorporation and our bylaws,
as well as federal banking and Delaware law, could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to stockholders.
These provisions include:

- a staggered board of directors;

- advance notice procedures for nomination of directors and for stockholder
proposals;

- limits on the ability of stockholders to call special meetings;

- super-majority board or stockholder approval for change of control; and

- limitations on control share acquisitions.

FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY AFFECT
OUR STOCK PRICE AND OUR ABILITY TO
RAISE FUNDS IN NEW STOCK OFFERINGS

If our stockholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of the offering, we will have shares of
common stock outstanding, assuming no exercise of outstanding options or
warrants as of December 31, 1998. of these shares constitute "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933 and
may be sold in compliance with Rule 144. Of these shares are subject to
the 180-day lock-up period described below, and of these shares are not
subject to that lock-up period.

As of the date of this prospectus, holders of 2,098,146 of these shares
have rights to require us to register their shares for sale with the SEC. By
exercising their registration rights and causing a large number of shares to be
sold in the public market, these stockholders may cause the market price of the
common stock to fall. In addition, if they demand to include their shares in one
of our registration statements, our ability to raise needed capital could be
adversely effected. Our company, our directors and officers and

6
<PAGE> 10

some of our other stockholders who will beneficially own, collectively,
approximately shares of common stock after this offering, have agreed not
to offer or sell any shares of common stock for 180 days following the date of
this prospectus without prior written consent from Goldman Sachs & Co. We may,
however, issue shares of common stock pursuant to employee stock option plans or
upon conversion of outstanding securities.

As of December 31, 1998, there were outstanding options to purchase
2,137,906 shares of common stock and warrants to acquire 906,176 shares of
common stock. The common stock underlying these options and warrants will be
eligible for sale in the public market from time to time subject to certain
requirements, such as vesting. The stock options and warrants generally have
exercise prices significantly below the current market price of our common
stock. The possible sale of a significant number of these shares may cause the
market price of our common stock to fall.

TELEBANK'S ABILITY TO PAY DIVIDENDS TO TELEBANC IS RESTRICTED

We have never paid cash dividends on our common stock, and we do not intend
to pay cash dividends on our common stock for the foreseeable future. Our
ability to pay dividends to our stockholders is derived primarily from, and
dependent upon, our ability to receive dividends from our subsidiary, TeleBank.
We historically have received dividends from TeleBank only if funds are needed
to cover our operating expenses, to pay interest on our debt and to pay
dividends to any preferred stockholders. TeleBank is subject to substantial
regulatory restrictions on its ability to pay dividends to us.

Under current Office of Thrift Supervision capital distribution
regulations, as long as TeleBank meets the Office of Thrift Supervision capital
requirements before and after the payment of dividends, TeleBank may pay
dividends to us without prior Office of Thrift Supervision approval in an amount
equal to its net income to date over the calendar year, plus retained net income
over the preceding two years.

In addition, the Office of Thrift Supervision has discretion to prohibit
any otherwise permitted capital distribution on general safety and soundness
grounds, and must be given 30 days' advance notice of all capital distributions,
during which time it may object to any proposed distribution. As of December 31,
1998, TeleBank had approximately $21.3 million available for payment of
dividends under applicable restrictions without regulatory approval. There can
be no assurance that such amounts can or will be paid to us as dividends.

PROBLEMS RELATED TO THE "YEAR 2000 ISSUE" COULD ADVERSELY AFFECT OUR BUSINESS

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The failure to
correct any such programs or hardware could result in system failures or
miscalculations causing disruptions of our operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities. For further information regarding our efforts to
handle the Year 2000 issue, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Readiness Disclosure
Statement".

7
<PAGE> 11

USE OF PROCEEDS

We estimate our net proceeds from the sale of the shares of
common stock we are offering to be $ at the initial public offering
price of $ per share, after deducting the underwriting discount and
estimated offering expenses. If the underwriters exercise their over-allotment
option in full, then our net proceeds will be $ .

We intend to use $32.0 million of the proceeds of this offering to redeem
subordinated debt and the remainder of the proceeds to invest as capital of
TeleBank to support our continued growth and for general corporate purposes.

We will use $18.3 million of proceeds to redeem $17.3 million face amount
of subordinated debt after May 1, 1999, including a 5.75% premium. This debt
bears interest at 11.5% and matures on May 1, 2004. We will use $13.7 million of
proceeds to redeem $13.7 million face amount of subordinated debt bearing
interest at 9.5% and maturing on March 31, 2004.

PRICE RANGE OF COMMON STOCK

Our common stock has been quoted on the Nasdaq National Market under the
symbol TBFC since July 1998. Prior to that time, the common stock was traded in
the over-the-counter market under the same symbol.

The following table sets forth, for the periods indicated, the range of
high and low closing sale prices per share of common stock, as reported in the
over-the-counter market through July 1998 and on the Nasdaq National Market
after that date.

<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------ ---- ---
<S> <C> <C>
1997
First Quarter.......................................... $ 8.500 $ 6.000
Second Quarter......................................... 8.750 6.250
Third Quarter.......................................... 9.500 7.875
Fourth Quarter......................................... 9.375 8.750
1998
First Quarter.......................................... $10.625 $ 8.875
Second Quarter......................................... 14.000 9.875
Third Quarter.......................................... 24.750 12.375
Fourth Quarter......................................... 35.625 8.175
1999
First Quarter through February 10, 1999................ $47.625 $30.375
</TABLE>

On February 10, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $39.375 per share.

DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock and
we do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the development and
growth of our business.

8
<PAGE> 12

CAPITALIZATION

The following table sets forth our consolidated capitalization at December
31, 1998 on an actual basis and as adjusted to give effect to the sale of common
stock in this offering and the use of the net proceeds to redeem subordinated
debt, assuming that the underwriters do not exercise their over-allotment
option. See "Use of Proceeds". This table excludes 3,044,082 shares of common
stock issuable upon exercise of stock options and warrants, at a weighted
average exercise price of $7.02. You should read this information together with
the consolidated financial statements and notes beginning on page F-1.

<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(Dollars in thousands)
<S> <C> <C>
Subordinated debt, net...................................... $ 29,855 $ --
Corporation -- obligated manditorily redeemable capital
securities of subsidiary trust............................ 35,385 35,385
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $.01 par value, 29,500,000 shares
authorized; 12,388,242 shares issued and outstanding,
actual; shares issued and outstanding, as
adjusted............................................... 123
Additional paid-in capital.................................. 103,194
Unearned compensation....................................... (2,578) (2,578)
Retained earnings........................................... 10,819 10,819
Unrealized gain on securities available for sale, net of
tax....................................................... 1,877 1,877
-------- --------
Total stockholders' equity............................. 113,435
-------- --------
Total capitalization................................. $178,675 $
======== ========
</TABLE>

9
<PAGE> 13

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents our selected statement of operations data and
statement of financial condition data on a consolidated basis for each of the
five years in the period ended December 31, 1998. The selected historical
consolidated financial data presented below for each of the years ended December
31, 1994 through 1998 are derived from our audited consolidated financial
statements and notes. You should read this data together with our consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income............................................. $ 22,208 $ 40,511 $ 45,800 $ 59,301 $ 100,110
Interest expense............................................ 17,513 31,946 34,815 46,063 80,305
-------- -------- -------- ---------- ----------
Net interest income......................................... $ 4,695 $ 8,565 $ 10,985 $ 13,238 $ 19,805
Provision for loan losses................................... 492 1,722 919 921 905
Non-interest income......................................... 175 3,777 2,756 4,093 7,564
Non-interest expenses:
Selling, general and administrative expenses.............. 3,503 5,561 8,375 9,042 19,819
Other non-interest expenses............................... 153 679 700 1,100 2,259
-------- -------- -------- ---------- ----------
Income before income tax expense and minority interest...... $ 722 $ 4,380 $ 3,747 $ 6,268 $ 4,386
Income tax expense.......................................... 182 1,660 1,195 1,657 1,649
Minority interest in subsidiary(1).......................... -- -- 394 1,362
-------- -------- -------- ---------- ----------
Net income.................................................. $ 540 $ 2,720 $ 2,552 $ 4,217 $ 1,375
Preferred stock dividends................................... -- -- -- 546 2,112(2)
-------- -------- -------- ---------- ----------
Net income (loss) available to common stockholders.......... $ 540 $ 2,720 $ 2,552 $ 3,671 $ (737)(2)
======== ======== ======== ========== ==========
Earnings per share:
Basic..................................................... $ 0.16 $ 0.66 $ 0.62 $ 0.84 $ (0.09)(2)
Diluted................................................... $ 0.16 $ 0.66 $ 0.58 $ 0.57 $ (0.09)(2)
Weighted average shares:
Basic..................................................... 3,498 4,099 4,099 4,383 7,840
Diluted................................................... 3,498 4,104 4,406 7,411 7,840
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets................................................ $427,292 $553,943 $647,965 $1,100,352 $2,283,341
Loans receivable, net....................................... 154,742 248,492 351,821 540,704 904,854
Mortgage-backed securities(3)............................... 236,464 234,385 184,743 340,313 1,041,747
Investment securities....................................... 12,444 40,058 78,826 91,237 220,358
Retail savings and certificates of deposit.................. 212,411 306,500 390,486 522,221 1,142,385
Advances from the FHLB...................................... 96,000 105,500 144,800 200,000 472,500
Securities sold under agreements to repurchase.............. 79,613 93,905 57,581 279,909 404,435
Trust preferred securities(4)............................... -- -- -- 9,572 35,385
Total stockholders' equity.................................. 17,028 21,565 24,658 45,824 113,435
OTHER FINANCIAL AND OPERATING DATA:
Return on average total assets.............................. 0.17% 0.53% 0.61%(5) 0.45% (0.05)%
Return on average stockholders' equity...................... 3.17% 14.10% 16.50%(5) 9.17% (1.11)%
Selling, general and administrative expenses to total
assets.................................................... 0.82% 1.00% 1.03%(5) 0.82% 0.87%
Number of deposit accounts.................................. 8,564 12,919 16,506 21,817 50,835
CAPITAL RATIOS OF TELEBANK:
Core........................................................ 6.27% 5.31% 5.08% 5.06% 5.57%
Tangible.................................................... 6.35% 5.36% 5.07% 5.06% 5.57%
Total capital............................................... 15.96% 11.74% 10.41% 11.91% 13.35%
</TABLE>

10
<PAGE> 14

- ---------------
(1) Minority interest reflects expense related to payments on trust preferred
securities issued by TeleBanc Capital Trust I and TeleBanc Capital Trust II.
TeleBanc Capital Trust I and TeleBanc Capital Trust II are business trusts
formed for the purpose of issuing trust preferred securities and investing
the proceeds in subordinated debentures issued by TeleBanc.

(2) Pursuant to a conversion agreement dated May 15, 1998, 29,900 of our
outstanding shares of preferred stock converted to 2,399,479 shares of
common stock upon consummation of our July 1998 equity offering. In
addition, upon the conversion, we issued a special dividend in the amount of
119,975 shares of common stock to the holders of the preferred stock. In
connection with the special dividend, we recorded a $1.7 million
non-recurring, non-cash charge related to the additional preferred stock
dividend payable in common stock, based on the fair market value of the
common stock at the time the dividend was paid.

(3) Includes mortgage-backed securities available-for-sale and trading.

(4) Consists of trust preferred securities of TeleBanc Capital Trust I and
TeleBanc Capital Trust II. See Note 14 to the consolidated financial
statements.

(5) Excludes one-time pre-tax charge of $1.7 million, $1.1 million after tax, to
recapitalize the Savings Association Insurance Fund. Giving effect to the
charge, return on average assets, return on average stockholders' equity,
and selling, general and administrative expenses to total assets for 1996
were 0.42%, 11.4% and 1.29%.

11
<PAGE> 15

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are the nation's leading branchless bank providing high value financial
products and services primarily over the Internet. By avoiding the costs of
brick-and-mortar branches, we are able to offer significantly higher rates and
lower fees on our FDIC-insured and other banking products and services than
traditional banks. Our branchless platform allows us to deliver these services
worldwide through the convenient anytime, anywhere access of the Internet and
other electronic delivery channels.

Our revenue consists of interest income and, to a lesser degree,
non-interest income, which includes income primarily from services and gains on
the sale of loans and securities. Our net interest income is the difference
between the rates of interest earned on our loans and other interest-earning
assets and the rates of interest paid on our deposits and borrowed funds. An
indicator of an institution's profitability is its net interest margin or net
yield on interest-earning assets, which is its annualized net interest income
divided by the average balance of interest-earning assets. Fluctuations in
interest rates as well as volume and composition changes in interest-earning
assets and interest-bearing liabilities may materially affect net interest
income.

Our asset acquisition strategy is to purchase pools of one-to four-family
first lien mortgages and mortgage-related securities. We do not currently
originate loans. We believe that by purchasing a seasoned and geographically
diverse mortgage loan portfolio, we reduce expenses related to loan acquisition
and are better able to actively manage our credit quality risk.

We actively monitor our net interest rate sensitivity position. Effective
interest rate sensitivity management seeks to ensure that net interest income
and the market value of equity are protected from the impact of changes in
interest rates. To this end, we have established an asset-liability committee
and implemented a risk measurement guideline employing market value of equity
and gap methodologies and other measures. In an effort to manage interest rate
exposure, we use various hedging techniques such as caps, floors, interest rate
swaps, futures and financial options.

In 1998, we implemented a strategy to build the "TeleBank" brand name by
expanding the marketing of high value savings and investment and other financial
products, superior customer service and anytime, anywhere convenience. We
believe that associating our brand name with our services and delivery channels
will enable us to attract a growing number of customers who are increasingly
relying on alternative channels for the delivery of their financial services. In
pursuing this strategy, we increased our marketing expenditures significantly to
implement a targeted, national advertising campaign and marketing initiative. We
plan to continue this strategy to further strengthen the "TeleBank" brand. See
"-- Results of Operations -- Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997 -- Non-interest Expenses".

DIRECT FINANCIAL CORPORATION ACQUISITION

On August 10, 1998, we acquired Direct Financial Corporation, the thrift
holding company of Premium Bank, F.S.B. Premium Bank employed a direct marketing
strategy similar to ours. Premium Bank operated from a single branch in New
Jersey, and its deposit base was concentrated in the mid-Atlantic region of the
United States. We are using Premium Bank's former office as a back-up call
center and operations center pending a final systems conversion of Premium Bank,
expected to be completed in March 1999. We paid approximately $22.3 million cash
in the transaction. At the time of the acquisition, Direct Financial Corporation
had $307.1 million in deposits and 19,263 accounts.

12
<PAGE> 16

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

INTEREST INCOME. Total interest income increased by $40.8 million, or
68.8%, to $100.1 million for the year ended December 31, 1998 from $59.3 million
for the year ended December 31, 1997. A portion of this increase was caused by a
$16.8 million increase in interest income from mortgage-backed and related
securities. This increase in income from mortgage-backed and related securities
is primarily volume-related, as we increased our securities portfolio
significantly in 1998 following the completion of our securities offerings and
the acquisition of Direct Financial Corporation. We also increased our mortgage
loan portfolio, which generated a $16.5 million, or 47.6%, increase in interest
income on mortgage loans to $51.2 million in 1998 from $34.7 million in 1997.
The increase in the portfolio of interest-earning assets was slightly offset as
a result of a decline in the yield on our interest-earning assets to 7.28%
during 1998 from 7.70% during 1997, primarily due to overall declines in market
interest rates during the year. Additionally, interest income from investment
securities available for sale increased by $4.2 million during 1998 reflecting
an $83.7 million increase in the average balance of such securities, slightly
offset by a 0.09% decrease in the yield.

INTEREST EXPENSE. Total interest expense increased by $34.2 million from
$46.1 million in 1997 to $80.3 million in 1998, an increase of 74.2%. This
increase is almost entirely volume-driven, as the average interest cost of
liabilities decreased during 1998. The significant increase in retail deposits
during 1998 caused interest expense on retail deposits to increase $19.0
million, or 73.4%, from $25.9 million in 1997 to $44.9 million in 1998. The cost
of our interest-bearing liabilities decreased from 6.21% in 1997 to 6.08% in
1998, due to declining interest rates during 1998. We saw the majority of this
decrease in our short-term borrowings, while the cost of our deposits declined
only two basis points from 6.00% to 5.98%. Also during 1998, we initiated a
brokered callable certificate of deposit program. The average balance of these
deposits was $54.5 million in 1998, and the average rate paid was 6.68%.

LOAN LOSS PROVISION. The provision for loan losses is the annual cost of
providing an allowance for estimated losses in the loan portfolio. The provision
reflects management's judgment as to the reserve necessary to absorb loan losses
based upon our assessment of a number of factors, including delinquent loan
trends and historical loss experience, current and anticipated economic
conditions, the mix of loans in our portfolio, and our internal credit review
process. The provision for loan losses decreased slightly to $905,000 for the
year ended December 31, 1998, compared to $921,000 for the year ended December
31, 1997, despite a significant increase in the loan portfolio. This decrease in
the provision reflects the historically low level of net charge-offs that we
have experienced, due in part to our focus on geographically diverse first lien
residential mortgage assets. Net charge-offs during 1998 totaled $457,000, or
seven basis points of average loan balances for the year, compared to six basis
points during 1997. As of December 31, 1998, our total loan loss allowance was
$4.8 million, or 0.53% of total loans outstanding. The total loan loss allowance
at December 31, 1997 was $3.6 million, or 0.66% of total loans outstanding.
Total loan loss allowance as a percentage of total non-performing loans was
53.7% as of December 31, 1998, compared to 31.7% as of December 31, 1997.

NON-INTEREST INCOME. Total non-interest income increased by $3.5 million
to $7.6 million for the year ended December 31, 1998, from $4.1 million for the
year ended December 31, 1997, an increase of 85.4%. This increase in
non-interest income consisted primarily of $3.5 million of gains on sales of
mortgage-backed and investment securities during 1998, compared to gains of $1.0
million in 1997, as well as $2.1 million from gain on sale of loans held for
sale, compared to $1.1 million in 1997. The increase in the gain on sale of
loans in 1998 reflects the sale of primarily home equity loans. In 1998,
non-interest income totaled 7.0% of total revenue, compared to 6.5% in
13
<PAGE> 17

1997. Total revenue is comprised of total interest income and total non-interest
income.

NON-INTEREST EXPENSES. Total non-interest expenses increased substantially
during 1998 to $22.1 million, compared to $10.1 million in 1997, an increase of
$12.0 million, or 118.8%. In 1998, we implemented a strategy of increasing
marketing expenses associated with brand building that seeks to establish
TeleBank as the premier national provider of high-value banking products. This
strategy resulted in the $4.0 million increase in advertising and marketing
expenses to $4.6 million in 1998 from $600,000 in 1997. For 1999, we anticipate
our marketing strategy will result in significantly greater increases in
marketing expenses. In addition, compensation costs increased $2.9 million, or
59.2%, from $4.9 million for the year ended December 31, 1997, to $7.8 million
for the year ended December 31, 1998, as a result of hiring additional
personnel.

Other non-interest expenses increased $1.2 million to $2.3 million during
the year ended December 31, 1998 from $1.1 million during the year ended
December 31, 1997, primarily as a result of the amortization of goodwill
resulting from the Direct Financial Corporation acquisition in August 1998.

INCOME TAX EXPENSE. Income tax expense for the year ended December 31,
1998 was $1.6 million, compared with $1.7 million for the year ended December
31, 1997. TeleBanc's effective tax rate for 1998 was 37.6%, compared to 26.4%
for 1997. The effective tax rate increased largely as a result of goodwill
acquired in the Direct Financial Corporation acquisition, since goodwill
amortization expense is not deductible for tax purposes.

NET INCOME. Net income for the year ended December 31, 1998 decreased $2.8
million to $1.4 million from $4.2 million for the year ended December 31, 1997,
a decrease of 66.7%. Net income in 1998 consisted primarily of $19.8 million in
net interest income and $7.6 million in non-interest income, which was offset by
$22.1 million in non-interest expenses, $905,000 in provision for loan losses,
and $1.6 million in income tax expense. Net income available to common
stockholders which decreased $4.4 million, or 118.9%, from 1997, to a loss of
$737,000 in 1998, includes a non-cash charge totaling $1.7 million, related to a
one-time dividend paid to the holders of our preferred stock in the form of
119,975 shares of common stock. We paid this dividend upon conversion of 29,900
outstanding shares of preferred stock to 2,399,479 shares of common stock. We
based the $1.7 million charge related to the special dividend on the fair market
value of the common stock on the date we paid the dividend.

Our net interest margin decreased from 1.73% in 1997 to 1.42% in 1998. This
decline reflects falling interest rates and increased competition for
high-yielding mortgage products.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

INTEREST INCOME. Total interest income increased by $13.5 million to $59.3
million for the year ended December 31, 1997 from $45.8 million for the year
ended December 31, 1996, an increase of 29.5%. This increase is due primarily to
the $11.6 million increase in interest income on mortgages and other loans, an
increase of 50.4% in 1997, principally due to a significant increase in the
average loan balance during the period. Interest income on mortgage-backed and
related securities decreased slightly to $17.6 million at December 31, 1997 from
$18.0 million at December 31, 1996 largely as a result of a decline in the
yield.

INTEREST EXPENSE. Total interest expense increased by $11.3 million to
$46.1 million for the year ended December 31, 1997 from $34.8 million for the
year ended December 31, 1996, an increase of 32.5%. The increase is attributable
to both an increase in interest-bearing liabilities and a slight increase in the
average interest rate paid.

LOAN LOSS PROVISION. The provision for loan losses remained substantially
unchanged at $921,000 for the year ended December 31, 1997, compared to $919,000
for the year ended December 31, 1996. The ratio of net charge-offs to net
average loans outstanding during 1997 was 0.06%, compared to 0.10%
14
<PAGE> 18

during 1996. Total loan loss allowance as a percentage of total non-performing
loans was 31.7% as of December 31, 1997, compared to 27.7% as of December 31,
1996.

NON-INTEREST INCOME. Total non-interest income increased by $1.3 million
to $4.1 million for the year ended December 31, 1997, from $2.8 million for the
year ended December 31, 1996, an increase of 46.4%. Non-interest income
increased primarily because we recognized $1.2 million of non-interest income as
gain on trading securities during 1997. In addition, we recognized an $864,000
decline in equity investment primarily attributable to the write-off of the
equity investment by TeleBank in AGT Mortgage Services, which had provided our
loan servicing services for a fee and ceased operations in July 1997.

NON-INTEREST EXPENSES. Total non-interest expenses, principally selling,
general and administrative expenses, increased $1.0 million to $10.1 million for
the year ended December 31, 1997, from $9.1 million for the year ended December
31, 1996, an increase of 11.0%. Selling, general and administrative expenses
increased $600,000 to $9.0 million during 1997 from $8.4 million during 1996, an
increase of 7.1%, primarily as a result of a $1.2 million increase in
compensation and employee benefits in 1997. During 1996, we incurred a one-time
$1.7 million assessment to recapitalize the Savings Association Insurance Fund.

Other non-interest expenses increased $400,000 to $1.1 million during the
year ended December 31, 1997 from $700,000 during the year ended December 31,
1996, an increase of 57.1%, primarily as a result of increased amortization of
purchased mortgage servicing rights.

INCOME TAX EXPENSE. Income tax expense for the year ended December 31,
1997 was $1.7 million, compared with $1.2 million for the year ended December
31, 1996. Our effective tax rate for 1997 was 26.4%, compared to 31.9% for 1996.
The effective tax rate decreased largely as a result of an increase during 1997
in interest earned on municipal bonds, which generally were tax-exempt.

NET INCOME. Net income for the year ended December 31, 1997 increased $1.6
million to $4.2 million from $2.6 million for the year ended December 31, 1996,
an increase of 61.5%. Net income for 1997 consisted primarily of $12.3 million
in net interest income, $3.3 million in net gain on the sale of trading
securities, loans held for sale, and mortgage-backed and investment securities,
which was offset by $10.1 million in non-interest expenses, $921,000 in
provision for loan losses, and $1.7 million in income tax expense. Net income
available to common stockholders increased $1.1 million in 1996 to $3.7 million
in 1997, or 42.3%.

15
<PAGE> 19

QUARTERLY RESULTS

The following table sets forth our selected unaudited quarterly financial
data for each of the eight quarters in the two-year period ended December 31,
1998. The consolidated financial data presented below have been prepared on a
basis consistent with our audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of this information. This
information should be read in conjunction with our consolidated financial
statements and notes beginning on page F-1. The operating results for any
quarter are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Interest income............. $12,837 $15,275 $14,821 $16,368 $18,071 $18,581 $27,632 $35,826
Interest expense............ 9,878 11,865 11,548 12,772 14,477 15,276 21,979 28,573
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 2,959 3,410 3,273 3,596 3,594 3,305 5,653 7,253
Provision for loan losses... 243 308 120 250 250 75 300 280
Non-interest income......... 607 1,244 1,084 1,158 1,947 1,104 1,832 2,681
Selling, general and
administrative expenses... 1,897 2,251 2,078 2,816 3,889 3,441 5,666 6,823
Other non-interest operating
expenses.................. 208 202 260 430 315 487 586 871
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes and minority
interest.............. 1,218 1,893 1,899 1,258 1,087 406 933 1,960
Income tax expense.......... 355 618 709 (25) 475 51 389 734
Minority interest(1)........ -- 67 285 42 176 176 439 571
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 863 1,208 905 1,241 436 179 105 655
Preferred stock
dividends............. 60 162 162 162 162 162 1,788(2) --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders.......... 803 1,046 743 1,079 274 17 (1,683)(2) 655
Other comprehensive
income(3)................. (1,165) 2,443 (24) (612) 262 (1,109) 8,579 (8,593)
------- ------- ------- ------- ------- ------- ------- -------
Comprehensive income........ $ (362) $ 3,489 $ 719 $ 467 $ 536 $(1,092) $ 6,896 $(7,938)
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.... $ 0.19 $ 0.24 $ 0.16 $ 0.24 $ 0.06 $ 0.00 $ (0.17)(2) $ 0.05
Diluted earnings per
share..................... 0.15 0.16 0.11 0.16 0.05 0.00 (0.17)(2) 0.05
</TABLE>

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

(1) Minority interest reflects expense related to payments on trust preferred
securities issued by TeleBanc Capital Trust I and TeleBanc Capital Trust II.

(2) Includes $1.7 million non-recurring, non-cash charge related to the
additional preferred stock dividend payable in common stock, based on the
fair market value of the common stock at the time such dividend was paid.
The charge reduced net income available to common stockholders by the same
amount and diluted earnings per share in the third quarter of 1998 by $0.18
per share.

(3) Other comprehensive income is comprised of unrealized gains and losses on
available-for-sale securities.

16
<PAGE> 20

During the second quarter of 1998, we focused on maintaining stable asset
levels and sufficient liquidity in anticipation of our acquisition of Direct
Financial Corporation in August 1998. As a result, our interest income and
selling, general and administrative expenses remained relatively steady, as
compared to the first quarter of 1998. In the third quarter of 1998, the
completion of our equity and trust preferred offerings and our acquisition of
Direct Financial Corporation resulted in a substantial increase in our asset
size.

Other comprehensive income represents unrealized gains and losses on
securities that we consider available for sale. We experienced wide swings in
other comprehensive income during the third and fourth quarters of 1998, due
primarily to increased volatility in the fixed-income market.

FINANCIAL CONDITION

Total assets increased by $1.2 billion to $2.3 billion at December 31, 1998
from $1.1 billion at December 31, 1997, an increase of 109.1%. The growth in
total assets is primarily the result of a $693.0 million increase in
mortgage-backed securities and a $364.1 million increase in loans receivable.
The primary sources of funds for this growth in assets were deposits, borrowings
and capital raised through our 1998 equity offering and trust preferred
offering.

Loans receivable, net and loans receivable held-for-sale, increased $364.1
million to $904.8 million at December 31, 1998 from $540.7 million at December
31, 1997, an increase of 67.3%. The increase reflects whole loan purchases of
$668.1 million, offset in part by $280.2 million of principal repayments and
$20.6 million of loans sold in 1998. During 1997, we recorded whole loan
purchases of $342.9 million, offset in part by $94.9 million of principal
repayments and $60.7 million of loans sold.

Mortgage-backed securities available-for-sale increased $693.0 million to
$1.0 billion at December 31, 1998 from $319.2 million at December 31, 1997, an
increase of 217.1%. Investment securities available-for-sale increased $129.2
million to $220.4 million at December 31, 1998 from $91.2 million at December
31, 1997, an increase of 141.7%. We hold these investment securities for
liquidity purposes, and the increases in these categories of assets are
consistent with the overall growth of our assets in 1998.

Retail deposits increased $620.2 million to $1.1 billion at December 31,
1998 from $522.2 million at December 31, 1997, an increase of 118.8%, largely as
a result of our continued targeted marketing efforts to attract new customers
and deposit accounts. During the year ended December 31, 1998, we credited
approximately $45.0 million of interest to retail deposit accounts, and deposits
exceeded withdrawals by $577.9 million, resulting in the net overall increase in
deposits.

Federal Home Loan Bank, or FHLB, advances increased $272.5 million to
$472.5 million at December 31, 1998, from $200.0 million at December 31, 1997,
an increase of 136.3%. Other borrowings, composed primarily of securities sold
under agreements to repurchase, increased $124.5 million to $404.4 million at
December 31, 1998 from $279.9 million at December 31, 1997, an increase of
44.5%. At December 31, 1998, subordinated debt, net of original issue discount,
consisting of the 9.5% senior subordinated debentures issued in February 1997
and the 11.5% subordinated debentures issued in the second quarter of 1994,
totaled $29.9 million. Additionally, we issued $67.1 million of callable
certificates of deposit during 1998 as relatively cost-effective borrowings with
hedging properties that improve our overall interest rate risk position.

In June 1997, we formed TeleBanc Capital Trust I, which sold an aggregate
of $10.0 million in shares of capital securities, series A, with an annual
dividend rate of 11.0% payable semi-annually, beginning in December 1997,
callable beginning December 2007. In July 1998, we formed TeleBanc Capital Trust
II, which sold an aggregate of $27.5 million in shares of beneficial unsecured
securities, series A, with

17
<PAGE> 21

an annual dividend rate of 9.0% payable quarterly, beginning in September 1998,
callable beginning September 2003.

Stockholders' equity increased $67.6 million to $113.4 million at December
31, 1998 from $45.8 million at December 31, 1997. The increase is primarily the
result of the receipt of approximately $70.0 million in net proceeds from the
issuance of common stock in July and August 1998. This increase was offset by
net income during 1998 of $1.4 million, less preferred stock dividends of $2.1
million. Additionally, our unrealized gain on securities available for sale
decreased to $1.9 million at December 31, 1998. Upon consummation of the July
1998 common stock offering, 29,900 outstanding shares of preferred stock
converted to 2,399,479 shares of common stock. In addition, upon the conversion,
we issued 119,975 shares of common stock as a special dividend to the holders of
the preferred stock. The dividend had a value of $1.7 million, based on the fair
market value of the common stock on the date the dividend was paid.

LIQUIDITY

Liquidity represents our ability to raise funds to support asset growth,
fund operations and meet obligations, including deposit withdrawals, maturing
liabilities, and other payment obligations, to maintain reserve requirements and
to otherwise meet our ongoing obligations. We have historically met our
liquidity needs primarily through financing activities, consisting principally
of increases in core deposit accounts, maturing short-term investments, loans
and repayments of investment securities, and to a lesser extent, sales of loans
or securities. We believe that we will be able to renew or replace our funding
sources at then-existing market rates, which may be higher or lower than current
rates. Pursuant to applicable Office of Thrift Supervision, or OTS, regulations,
TeleBank is required to maintain an average liquidity ratio of 4.0% of certain
borrowings and its deposits, which requirement it fully met during 1998. Prior
to November 24, 1997, this requirement was 5.0%, which TeleBank fully met during
1996 and 1997.

In the third quarter of 1998, we raised capital through our common stock
offering, in which we sold 5,175,000 shares of common stock to the public at an
offering price of $14.50. We also raised $27.5 million in the third quarter of
1998 through TeleBanc Capital Trust II's sale of 1,100,000 shares of 9.0% trust
preferred securities, series A. We are using the net proceeds of both offerings
to fund continued growth.

We seek to maintain a stable funding source for future periods in part by
attracting core deposit accounts, which are accounts that tend to be relatively
stable even in a changing interest rate environment. Typically, time deposit
accounts and accounts that maintain a relatively high balance provide a
relatively stable source of funding. At December 31, 1998, our average retail
account balance was approximately $22,000, and our average customer maintained
1.7 accounts. Savings and transactional deposits increased $91.8 million to
$215.4 million during the year ended December 31, 1998, an increase of 74.3%.
Retail certificates of deposit increased $528.4 million to $927.0 million during
the year ended December 31, 1998, an increase of 132.6%. During 1998, we also
began to offer callable certificates of deposit, which totaled $67.1 million at
December 31, 1998.

We also rely on borrowed funds, such as FHLB advances and securities sold
under agreements to repurchase, to provide liquidity. Total borrowings increased
$397.0 million to $876.9 million at December 31, 1998, an increase of 82.7%. At
December 31, 1998, TeleBank had approximately $667.3 million in additional
borrowing capacity.

At December 31, 1998, we had outstanding $31.0 million face amount of
subordinated debentures. In addition, at the same date, we also had outstanding
$37.5 million face amount of junior subordinated debentures held by our trust
preferred subsidiaries. Additionally, from January 1, 1998 through July 28,
1998, we had outstanding $15.3 million of preferred stock,

18
<PAGE> 22

which converted to 2,399,479 shares of common stock upon consummation of our
1998 common stock offering. We paid $373,000 in cash dividends on the preferred
stock during 1998. Our aggregate annual interest expense on the subordinated
debentures and junior subordinated debentures is $6.9 million.

Subject to the approval of the OTS and compliance with federal regulations,
TeleBank pays a dividend to TeleBanc semi-annually in an amount equal to the
aggregate debt service and dividend obligations. Under current OTS capital
distribution regulations, as long as TeleBank meets the OTS capital requirements
before and after the payment of dividends, TeleBank may pay dividends to us
without prior OTS approval in an amount equal to the net income to date over the
calendar year, plus retained net income over the preceding two years. In
addition, the OTS has discretion to prohibit any otherwise permitted capital
distribution on general safety and soundness grounds, and we must give 30 days'
advance notice to the OTS of all capital distributions, during which time it may
object to any proposed distribution. As of December 31, 1998, TeleBank had
approximately $21.3 million available for payment of dividends under applicable
restrictions without regulatory approval. Under the terms of the indenture
pursuant to which the 11.5% subordinated debentures were issued and the terms of
the 9.5% subordinated debentures, TeleBanc currently is required to maintain, on
an unconsolidated basis, liquid assets in an amount equal to or greater than
$7.0 million, which represents 100% of the aggregate interest expense for one
year on our outstanding subordinated debentures and junior subordinated
debentures. We had $10.0 million in liquid assets as of December 31, 1998.

CAPITAL

As of December 31, 1998, TeleBank was in compliance with all of its
regulatory capital requirements and its capital ratios exceeded the ratios for
"well capitalized" institutions under OTS regulations.

The following table sets forth TeleBank's regulatory capital levels as of
December 31, 1998 in relation to the regulatory requirements in effect at that
date. The information below reflects only the regulatory capital of TeleBank and
does not give effect to additional available capital of its parent TeleBanc. See
Note 4 to the consolidated financial statements.

<TABLE>
<CAPTION>
REQUIRED TO BE
REQUIRED FOR WELL
CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Core Capital................... $ 52,617 5.06% $41,606 4.0% $ 52,008 5.0%
Tangible Capital............... 52,608 5.06 15,602 1.5 N/A N/A
Tier I Capital................. 52,617 11.25 N/A N/A 28,057 6.0
Total Capital.................. 55,701 11.91 37,409 8.0 46,761 10.0

As of December 31, 1998:
Core Capital................... $122,871 5.57% $88,310 4.0% $110,388 5.0%
Tangible Capital............... 122,871 5.57 33,116 1.5 N/A N/A
Tier I Capital................. 122,871 12.90 N/A N/A 57,157 6.0
Total Capital.................. 127,179 13.35 76,210 8.0 95,262 10.0
</TABLE>

19
<PAGE> 23

RATE/VOLUME TABLE

The following table allocates the period-to-period changes in our various
categories of interest income and expense between changes due to (1) changes in
volume, calculated by multiplying the change in average volume of the related
interest-earning asset or interest-bearing liability category by the prior
year's rate, and (2) changes in rate, calculated by multiplying changes in rate
by the prior year's volume. Changes due to changes in rate-volume, which is
calculated as the change in rate multiplied by changes in volume, have been
allocated proportionately between changes in volume and changes in rate.

<TABLE>
<CAPTION>
1997 VS. 1996 1998 VS. 1997
--------------------------- ----------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net....... $12,732 $(1,092) $11,640 $17,102 $ (665) $16,437
Interest-bearing deposits... 68 (29) 39 8 13 21
Mortgage-backed and related
securities available for
sale..................... 373 (682) (309) 18,433 (1,605) 16,828
Investment securities
available for sale....... 809 8 817 5,358 (62) 5,296
Federal funds sold.......... 54 2 56 (84) 3 (81)
Investment in FHLB stock.... 153 1 154 247 18 265
Trading account............. 1,124 -- 1,124 495 (142) 353
------- ------- ------- ------- -------- -------
Total
interest-earning
assets............ $15,313 $(1,792) $13,521 $41,559 $ (2,440) $39,119
======= ======= ======= ======= ======== =======
Interest-bearing liabilities:
Savings deposits............ $ 1,111 $ 454 $ 1,565 $ 1,784 $ (38) $ 1,746
Time deposits............... 3,315 (279) 3,036 17,666 (354) 17,312
Brokered callable
certificates of
deposit.................. -- -- -- 3,638 -- 3,638
FHLB advances............... 2,400 796 3,196 3,475 (338) 3,137
Other borrowings............ 2,838 (466) 2,372 7,289 (81) 7,208
Subordinated debt........... 1,207 (128) 1,079 288 (41) 247
------- ------- ------- ------- -------- -------
Total
interest-bearing
liabilities....... 10,871 377 11,248 34,140 (852) 33,288
------- ------- ------- ------- -------- -------
Change in net interest
income...................... $ 4,442 $(2,169) $ 2,273 $ 7,419 $ (1,588) $ 5,831
======= ======= ======= ======= ======== =======
</TABLE>

20
<PAGE> 24

AVERAGE BALANCE TABLE

The following table presents consolidated average balance sheet data,
income and expense and related interest yields and rates for each of the three
years in the period ended December 31, 1998. The table also presents information
for the periods indicated with respect to net interest margin, an indicator of
an institution's profitability. Another indicator is net interest spread, which
is the difference between the weighted average yield earned on interest-earning
assets and weighted average rate paid on interest-bearing liabilities. Interest
income includes the incremental tax benefit of tax exempt income.
<TABLE>
<CAPTION>
1996 1997
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE INC./EXP. YIELD/COST BALANCE INC./EXP. YIELD/COST
-------- --------- ---------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................ $279,038 $23,089 8.28% $441,819 $34,729 7.86%
Interest-bearing deposits............ 6,612 420 6.24 7,865 459 5.84
Mortgage-backed and related
securities, available for sale..... 221,656 17,955 8.10 226,064 17,646 7.81
Investment securities, available for
sale............................... 61,169 3,959 6.47 73,649 4,776 6.49
Federal funds sold................... 842 44 5.22 1,844 100 5.37
Investment in FHLB stock............. 6,229 451 7.25 8,338 605 7.25
Trading account...................... -- -- -- 12,581 1,124 8.81
-------- ------- -------- -------
Total interest-earning
assets........................ $575,546 $45,918 7.98% $772,160 $59,439 7.70%
-------- ------- -------- -------
Non-interest earning assets........... 26,929 41,465
-------- --------
Total assets................... $602,475 $813,625
======== ========
Interest-bearing liabilities:
Retail deposits...................... $358,216 $21,357 5.96% $432,641 $25,958 6.00%
Brokered callable certificates of
deposit............................ -- -- -- -- -- --
FHLB advances........................ 120,678 6,689 5.54 160,681 9,885 6.07
Other borrowings..................... 68,154 4,569 6.70 117,515 6,941 5.83
Subordinated debt, net............... 17,250 2,200 12.75 27,434 3,279 11.95
-------- ------- -------- -------
Total interest-bearing
liabilities................... $564,298 $34,815 6.14% $738,271 $46,063 6.21%
-------- ------- -------- -------
Non-interest-bearing liabilities...... 15,900 25,719
-------- --------
Total liabilities.............. $580,198 $763,990
Trust preferred securities............ -- $ 9,597
Total stockholders' equity..... 22,277 40,038
-------- --------
Total liabilities and
stockholders' equity.......... $602,475 $813,625
======== ========
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income...................... $ 11,248 $11,103 $ 33,889 $13,376
======== ======= ======== =======
Net interest spread................... 1.84% 1.49%
====== ======
Net interest margin (net yield on
interest-earning assets)............. 1.94 1.73
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities......... 101.99 104.59
====== ======

<CAPTION>
1998
-----------------------------------
AVERAGE INTEREST AVERAGE
BALANCE INC./EXP. YIELD/COST
---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................ $ 663,913 $51,166 7.71%
Interest-bearing deposits............ 7,993 480 5.92
Mortgage-backed and related
securities, available for sale..... 492,077 34,474 7.01
Investment securities, available for
sale............................... 157,381 10,072 6.40
Federal funds sold................... 346 19 5.53
Investment in FHLB stock............. 11,651 870 7.47
Trading account...................... 19,760 1,477 7.47
---------- -------
Total interest-earning
assets........................ $1,353,121 $98,558 7.28%
---------- -------
Non-interest earning assets........... 52,841
----------
Total assets................... $1,405,962
==========
Interest-bearing liabilities:
Retail deposits...................... $ 753,352 $45,016 5.98%
Brokered callable certificates of
deposit............................ 54,491 3,638 6.68
FHLB advances........................ 219,487 13,022 5.85
Other borrowings..................... 242,412 14,149 5.76
Subordinated debt, net............... 29,880 3,526 11.80
---------- -------
Total interest-bearing
liabilities................... $1,299,622 $79,351 6.08%
---------- -------
Non-interest-bearing liabilities...... 19,312
----------
Total liabilities.............. $1,318,934
Trust preferred securities............ $ 20,599
Total stockholders' equity..... 66,429
----------
Total liabilities and
stockholders' equity.......... $1,405,962
==========
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income...................... $ 53,499 $19,207
========== =======
Net interest spread................... 1.20%
======
Net interest margin (net yield on
interest-earning assets)............. 1.42
======
Ratio of interest-earning assets to
interest-bearing liabilities......... 104.12
======
</TABLE>

21
<PAGE> 25

INTEREST RATE SENSITIVITY MANAGEMENT

We actively monitor our net interest rate sensitivity position. Effective
interest rate sensitivity management seeks to ensure that net interest income
and the market value of equity are protected from the impact of changes in
interest rates. The risk management function is responsible for measuring,
monitoring and controlling market risk and communicating risk limits in
connection with our asset/liability management activities and trading.

Our strategies are intended to stabilize our net interest margin and its
exposure to market risk under a variety of changes in interest rates. By
actively managing the maturities of our interest-sensitive assets and
liabilities, we seek to maintain a relatively consistent net interest margin and
mitigate much of the interest rate risk associated with such assets and
liabilities.

Management uses a risk management process that allows risk-taking within
specific limits. To this end, we have established an asset-liability committee
and implemented a risk measurement guideline employing market value of equity
and gap methodologies and other measures.

The asset-liability committee establishes the policies and guidelines for
the management of our assets and liabilities. The committee's policy is directed
toward reducing the variability of the market value of our equity under a wide
range of interest rate environments. Fair value of equity represents the net
fair value of our financial assets and liabilities, including off-balance sheet
hedges. We monitor the sensitivity of changes in the fair value of equity with
respect to various interest rate environments and report regularly to the
asset/liability committee. Effective fair value management maximizes net
interest income while constraining the changes in the fair value of equity with
respect to changes in interest rates to acceptable levels. The model calculates
a benchmark fair value of equity for current market conditions.

We use sensitivity analysis to evaluate the rate and extent of changes to
our fair value of equity under various market environments. In preparing
simulation analyses, we break down the aggregate investment portfolio into
discrete product types that share similar properties, such as fixed or
adjustable rate, similar coupon and similar age. Under this analysis, we
calculate net present value of expected cashflows for interest sensitive assets
and liabilities under various interest rate scenarios. In conducting this
sensitivity analysis, the model considers all assets, liabilities and
off-balance sheet hedges, including whole loan mortgages, mortgage-backed
securities, mortgage derivatives, corporate bonds, and interest rate swaps,
caps, floors and options. The range of interest rate scenarios evaluated
encompasses significant changes to current market conditions. By this process,
we subject our interest rate sensitive assets and liabilities to substantial
market stress and evaluate the fair value of equity resulting from various
market scenarios. The asset-liability committee reviews the results of these
stress tests and establishes appropriate strategies to promote continued
compliance with established guidelines.

Management measures the efficiency of its asset/liability management
strategies by analyzing, on a quarterly basis, TeleBank's theoretical fair value
of equity and the expected effect of changes in interest rates. The board of
directors establishes limits within which such changes in the fair value of
equity are to be maintained in the event of changes in interest rates.

We calculated a theoretical fair value of equity in response to a
hypothetical change in market interest risk. The model addresses the exposure to
TeleBank of its market sensitive non-trading financial instruments. The model
excludes TeleBank's trading portfolio, which, based on management's analysis,
has an immaterial impact on TeleBank's fair value of equity. A hypothetical
instantaneous 1% rise in interest rates would cause the fair value of equity to
decrease by 9.0%.

Every method of market value sensitivity analysis contains inherent
limitations and express and implied assumptions that can affect the resulting
calculations. For example,

22
<PAGE> 26

each interest rate scenario reflects unique prepayment and repricing
assumptions. In addition, this analysis offers a static view of assets,
liabilities and hedges held as of December 31, 1998 and makes no assumptions
regarding transactions we might enter into in response to changing market
conditions.

We employ various hedging techniques to implement the asset/liability
committee's strategies directed toward managing the variability of the fair
value of equity by controlling the relative sensitivity of market value of
interest-earning assets and interest-bearing liabilities. The sensitivity of
changes in market value of assets and liabilities is affected by factors,
including the level of interest rates, market expectations regarding future
interest rates, projected related loan prepayments and the repricing
characteristics of interest-bearing liabilities. We use hedging techniques to
reduce the variability of fair value of equity and its overall interest rate
risk exposure over a one- to seven-year period.

We also monitor our assets and liabilities by examining the extent to which
such assets and liabilities are interest rate sensitive and by monitoring the
interest rate sensitivity gap. An asset or liability is said to be interest rate
sensitive within a specific period if it will mature or reprice within that
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or repricing
within the same time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities and is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. Our current asset-liability management strategy
is to maintain an evenly matched one-to-five year gap giving effect to hedging,
but depending on market conditions and related circumstances, a positive or
negative one-to-five year gap of up to 20% may be acceptable. Inclusive of our
hedging activities, our one-year gap at December 31, 1998 was (3.4)%. Our
hedge-affected one-to-five year gap at such date was (11.4)%.

We used the following assumptions to prepare our gap table at December 31,
1998. Non-amortizing investment securities are shown in the period in which they
contractually mature. Investment securities that contain embedded options such
as puts or calls are shown in the period in which that security is currently
expected to be put or called or to mature. The table assumes that fully indexed,
adjustable-rate, residential mortgage loans and mortgage-backed securities
prepay at an annual rate between 10% and 15%, based on estimated future
prepayment rates for comparable market benchmark securities and our prepayment
history. The table also assumes that fixed-rate, current-coupon residential
loans prepay at an annual rate of between 10% and 15%. The above assumptions
were adjusted up or down on a pool-by-pool basis to model the effects of product
type, coupon rate, rate adjustment frequency, lifetime cap, net coupon reset
margin and periodic rate caps upon prevailing annual prepayment rates. Time
deposits are shown in the period in which they contractually mature, and savings
deposits are shown to reprice immediately. The interest rate sensitivity of our
assets and liabilities could vary substantially if different assumptions were
used or if actual experience differs from the assumptions used.

23
<PAGE> 27

The following table sets forth our gap at December 31, 1998.

<TABLE>
<CAPTION>
REPRICING REPRICING REPRICING REPRICING
BALANCE AT WITHIN WITHIN WITHIN IN
DECEMBER 31, PERCENT 0-3 4-12 1-5 MORE THAN
1998 OF TOTAL MONTHS MONTHS YEARS 5 YEARS
------------ -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net.......... $ 904,854 40.92% $ 154,771 $ 305,557 $ 337,540 $106,986
Mortgage-backed securities,
available for sale and
trading...................... 1,041,747 47.10 69,134 220,375 394,455 357,783
Investment securities available
for sale and FHLB stock...... 245,533 11.10 52,116 6,484 59,273 127,660
Federal funds sold and interest
bearing deposits............. 19,401 0.88 -- 1,940 17,461 --
---------- ------ --------- --------- --------- --------
Total interest-earning assets.... 2,211,535 100.00% $ 276,021 $ 534,356 $ 808,729 $592,429
====== ========= ========= ========= ========
Non-interest-earning assets:..... 71,806
----------
Total assets................... $2,283,341
==========
Interest-bearing liabilities:
Savings deposits............... $ 215,402 10.18% $ -- $ 21,540 $ 193,862 $ --
Time deposits.................. 994,068 46.97 43,306 526,935 351,882 71,945
FHLB advances.................. 472,500 22.33 332,500 134,000 6,000 --
Other borrowings............... 404,435 19.11 401,100 3,335 -- --
Subordinated debt.............. 29,855 1.41 -- 29,855 -- --
---------- ------ --------- --------- --------- --------
Total interest-bearing
liabilities.................. 2,116,260 100.00% $ 776,906 $ 715,665 $ 551,744 $ 71,945
====== ========= ========= ========= ========
Non-interest-bearing
liabilities.................... 18,261
----------
Total liabilities.............. 2,134,521
Total trust preferred.......... 35,385
Stockholders' equity........... 113,435
----------
Total liabilities and
stockholders' equity......... $2,283,341
==========
Periodic gap..................... $(500,885) $(181,309) $ 256,985 $520,484
========= ========= ========= ========
Cumulative gap................... $(500,885) $(682,194) $(425,209) $ 95,275
========= ========= ========= ========
Cumulative gap to total assets... (21.9)% (29.9)% (18.6)% 4.2%
Cumulative gap to total assets
hedge affected................. 6.8% (3.4)% (11.4)% 4.2%
</TABLE>

24
<PAGE> 28

IMPACT OF INFLATION AND CHANGING PRICES

The impact inflation has on us is different from the impact on an
industrial company because substantially all of our assets and liabilities are
monetary in nature, and interest rates and inflation rates do not always move in
concert. We believe that the impact of inflation on financial results depends
upon our ability to manage interest rate sensitivity and, by such management,
reduce the inflationary impact upon performance. The most direct impact of an
extended period of inflation would be to increase interest rates and to place
upward pressure on our operating expenses. The actual effect of inflation on our
net interest income, however, would depend on the extent to which we were able
to maintain a spread between the average yield on our interest-earning assets
and the average cost of our interest-bearing liabilities, which would depend to
a significant extent on our asset-liability sensitivity. As discussed above, we
seek to manage the relationship between interest-sensitive assets and
liabilities to protect against wide interest rate fluctuations, including those
resulting from inflation. The effect of inflation on our results of operations
for the past three years has been minimal.

YEAR 2000 READINESS DISCLOSURE STATEMENT

In 1997, we began Year 2000 planning, following the five steps recommended
by the Federal Financial Institutions Examination Council. We have completed
phases focused on awareness and assessment and continue to update the results of
these phases for new information received. Currently, the renovation phase,
which consists of implementing changes and monitoring vendor renovation, and the
validation phase, which consists of testing renovated systems, are underway. We
are monitoring vendors for final compliance certification statements and
software updates and have begun to receive such certifications. Following the
receipt of certification statements relating to those systems identified as
mission critical in the assessment phase, we internally validate such
certifications through testing. To date, we have identified no significant Year
2000 issues through our testing of mission critical systems. Our mission
critical systems include the deposit processing system, general ledger system
and Internet banking applications. We plan to be substantially complete with
renovation, validation and implementation of all mission critical systems by the
end of the first quarter of 1999, and with all other systems to be tested by
June 30, 1999.

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

To date, we have not hired any outside consultants to address the Year 2000
issue, and few upgrades have been accelerated due to the Year 2000 issue. We
estimate that we have spent approximately $25,000 on upgrades related to our
Year 2000 remediation efforts, with an additional $75,000 expected to be spent
before the year 2000.

The majority of our loans are serviced by a large company that uses the
same system as several of the largest loan servicers in the United States and
that is expected to be Year 2000 compliant. We are currently monitoring this
servicer's Year 2000 plan and testing. However, approximately 38% of our loans
are serviced by smaller loan servicers whose systems may not be Year 2000
compliant. If these systems were to fail, principal and interest payments on the
loans serviced by these servicers could be delayed, and we would lose interest
income that we would normally earn on these funds. We have developed a
contingency plan to address this loan servicing issue specifically. Under the
contingency plan, we have notified these servicers that if we have not received
confirmation of compliance by March 31, 1999, we will begin transferring
servicing of these loans to servicers who are known to be Year 2000 compliant.
We hope to complete
25
<PAGE> 29

any such transfers that are necessary by June 30, 1999.

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

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

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

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

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

CHANGES IN ACCOUNTING PRINCIPLES

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

SFAS 133 is effective for fiscal years beginning after June 15, 1999,
although a company may implement the statement as of the beginning of any fiscal
quarter after issuance, that is, fiscal quarters beginning June 16, 1998 and
after. SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 and, at our election, before January 1, 1998.

We plan to adopt SFAS 133 as of January 1, 2000 but have not yet quantified
the impact of adopting SFAS 133 on our financial statements. However, the
statement could increase volatility in earnings and other comprehensive income.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Cost of Start-up Activities
("SOP 98-5"), which is effective for fiscal years beginning after December 18,
1998. The statement requires that the cost of start-up activities be expensed as
incurred rather than capitalized, with initial application reported as the
cumulative effect of a change in accounting principle, as described in
Accounting Principles Board Opinion Number 20, Accounting Changes. As of
December 31, 1998, we carried on our books approximately $740,000 of capitalized
start-up costs, relating primarily to the establishment of TeleBanc Insurance
Services, Inc. We intend to implement SOP 98-5 on January 1, 1999, and, as a
result, will recognize this amount, net of tax, as an expense classified as the
cumulative effect of a change in accounting principle.

26
<PAGE> 30

BUSINESS

OVERVIEW

We are the nation's leading branchless bank providing services primarily
over the Internet. Like traditional banks, we provide a wide range of
FDIC-insured and other banking products and services to consumers. Unlike
traditional banks, we deliver these products and services exclusively through
the Internet and other electronic channels, thus avoiding the costs of
brick-and-mortar branches. As a result, we are able to offer significantly
higher rates and lower fees than traditional banks and deliver these services
worldwide through the convenient anytime, anywhere access of the Internet. To
support our products and services and build customer loyalty, we provide
extensive customer service through our 24-hour call centers.

Using our secure, comprehensive and customer friendly web site
(www.telebankonline.com), individuals can open an account, transfer funds
between accounts, view account balances, pay bills and compare our premium rates
to national averages. Customers can deposit funds using direct deposit, wire or
U.S. mail, and can withdraw cash from any one of over 430,000 ATM machines on
the Cirrus(R) network worldwide. If customers desire to speak to a customer
service representative, they can call our integrated call center 24 hours a day.
Through alliances with our strategic partners, customers can obtain a wide array
of complementary products, including residential mortgage loans and
premium-yield fixed annuities.

To attract customers, we have a comprehensive marketing program which
consists of four main initiatives:

- - national advertising through print, radio, television and online media;

- - strategic alliances with popular web sites such as Yahoo! and E-Loan;

- - affinity partnerships with many national organizations such as our exclusive
agreement to promote FDIC-insured products to members of Sam's Club; and

- - customer referral and cross-sell programs.

Our national campaign targets customers in all 50 states and is the
cornerstone of our strategy to build TeleBank into a national brand that stands
for high value financial products and services.

The following table describes some of our products and compares our rates
with the national average rates of similar products.

COMPARISON OF PRODUCT RATES

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRODUCT RATES(1)
-----------------------------------------------
PRODUCT TELEBANK(2) NATIONAL AVERAGE(3) TELEBANK PRODUCT DESCRIPTION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Checking - 3.15% - 1.26% - Free checking/no account fees
- Premium yield NOW account
- Free unlimited online bill payment service
- Free unlimited check writing
- Free Internet banking
- Free checks
- Free ATM and debit cards
- -------------------------------------------------------------------------------------------------------------------------
Money - 4.80% - 2.25% - Super premium yield
Market - No term restrictions
- No account fees
- -------------------------------------------------------------------------------------------------------------------------
CDs - 1 Year: 5.20% - 1 Year: 4.34% - Premium yield CDs
- 5 Years: 5.50% - 5 Years: 4.62%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

- ---------------
(1) Represents annual percentage yield on the account as of February 10, 1999.
(2) Account requires a $2,500 minimum balance.
(3) Source: Bank Rate Monitor.

27
<PAGE> 31

Although commercial use of the Internet is relatively new, we have been
providing branchless banking for ten years using the telephone. During that
time, we have developed considerable expertise in delivering financial products
and services successfully and reliably without using branches. With the advent
of the Internet, we positioned ourselves to exploit the increased functionality
and broader reach it offers. For example, during December 1998, approximately
60% of our contacts with consumers occurred over the Internet.

Our deposits grew at a compound annual growth rate of 47% from 1993 to
1997. With the development and marketing of our Internet banking platform in
1998, deposit growth accelerated to 60% in that year, before giving effect to
our acquisition of Direct Financial Corporation. Including that acquisition, our
deposits grew 119% from year-end 1997 to 1998. As of December 31, 1998, we had
over 50,000 accounts, $1.1 billion in retail deposits and $2.3 billion in
assets. The following chart shows our annual growth in total accounts and total
retail deposits since 1993.

[CHART-DATA POINTS AS FOLLOWS:]

Deposit and Account Growth
(1993-1998)
<TABLE>
<CAPTION>
Deposits Number of Accounts
Year (Dollars in Millions) (In Thousands)
- ---- --------------------- ------------------
<S> <C> <C>
1993 $113 2.9
1994 $212 8.6
1995 $307 12.9
1996 $390 16.5
1997 $522 21.8
1998 (1) $1,142 50.8

(1) Includes 19,263 accounts and $307 million in retail
deposits from our acquisition of Direct Financial
Corporation

Deposit compound
annual growth rate
(1993-1998): 59%

Account compound
annual growth rate
(1993-1998): 77%
</TABLE>

28
<PAGE> 32

THE INTERNET AND ONLINE FINANCIAL SERVICES

The Internet has quickly become a global medium for worldwide
communication, instant access to information and electronic business
transactions. International Data Corporation estimates that at the end of 1997
there were over 38 million web users in the United States and over 68 million
worldwide, and projects that by the end of 2002 the number of web users will
increase to over 135 million in the United States and over 319 million
worldwide.

For many businesses, the Internet has created a new communications and
sales channel enabling large numbers of geographically dispersed organizations
and consumers to be reached quickly and cost-effectively. International Data
Corporation estimates that the number of consumers buying goods and services on
the Internet will grow from 17.6 million in 1997 to 128.4 million in 2002, and
that the total value of goods and services purchased over the Internet will
increase from approximately $12 billion in 1997 to approximately $426 billion by
2002.

Over the last few years, the Internet has transformed the financial
services industry from one constrained by the geographic limitations of
brick-and-mortar branches to one that provides global access to financial
products and services, including online brokerage services, credit-cards,
insurance products and savings and investment products. According to Forester
Research, the number of online brokerage accounts in 1998 was 5.3 million and is
expected to grow to 14.4 million accounts with over $688 billion in assets in
2002. The online brokerage industry has been built predominantly by companies
that have moved quickly to exploit the Internet to offer significantly lower
prices, reach national scale rapidly and establish brands that stand for better
value for the consumer. We believe traditional brokerages, for the most part,
have not been competitive in this online market.

We believe the transformation that has taken place among brokerage
companies as brokerage customers have moved online provides a preview of the
transformation that will take place among banks as banking customers move
online. According to Faulkner & Gray, the number of households forecast to bank
and pay bills online is expected to grow from 2.6 million in 1998 to over 15.0
million in 2002.

To compete with branchless banks, traditional banks need to offer
significantly higher rates of return online than are currently available through
their branches. This could draw customers away from their branches while still
requiring them to support their branch network. We believe this conflict creates
the opportunity for branchless banks to exploit the low cost structure of the
Internet and introduce products and services designed to work in the online
world.

OUR STRATEGY

Our objective is to be the premier Internet bank. To achieve this
objective, we have developed a growth strategy that includes four key elements:

- high value products and services;

- extensive national marketing campaign;

- selective outsourcing; and

- conservative asset acquisition program.

HIGH VALUE PRODUCTS AND SERVICES

We use the Internet and other electronic delivery channels to offer
products and services with higher rates and lower fees than traditional banks
and the convenience of 24-hour access to accounts and customer service
representatives. We develop some of these products ourselves, such as FDIC-
insured savings products. Others, such as rate-competitive residential mortgage
loans and fixed-rate annuities, are provided by our alliance partners E-Loan and
nationally recognized insurance companies. We intend to expand our product
offerings further through strategic partnerships to include credit cards, online
brokerage services and insurance products.

EXTENSIVE NATIONAL MARKETING CAMPAIGN

We have created a national marketing campaign designed to acquire new
customers and build the "TeleBank" brand as the premier provider of financial
services over the
29
<PAGE> 33

Internet. We intend to distinguish our brand through our high value savings and
investment products, anytime, anywhere convenience and quality customer service.
We view the development of our brand as key to our success because brand
recognition should allow us to:

- become recognized as a leading provider of online financial services;
- lower customer acquisition costs;
- increase cross-selling opportunities and commission income; and
- increase our penetration among more profitable consumers.

Our marketing campaign uses national advertising, strategic alliances,
affinity partnerships and customer referral programs to build brand recognition
and expand our customer base. Since our national marketing efforts began in
1998, our marketing surveys indicate a greater awareness of the "TeleBank"
brand, and we have seen strong growth in the number of accounts.

SELECTIVE OUTSOURCING

To maintain our low operating costs, we carefully evaluate whether to build
specific operations and systems internally or outsource them to leading
technology vendors to capitalize on their technical capabilities and scalable
platforms. When determining whether to outsource a particular service or
operation, we analyze the following factors:

- potential cost and time savings of outsourcing a particular technology;
- competitive advantage inherent in developing a specific technology
in-house; and
- impact on our ability to maintain high quality customer service.

Currently, we outsource Internet processing and home page hosting, check
processing, check imaging and statement rendering. We have outsourcing
relationships with, and use the products of, M&I Data Services, Inc., Security
First Technologies, Midwest Payment Systems and Exodus Communications, among
others.

We do not outsource systems and operations we consider central to achieving
our business objectives, including product offering, web site design, call
center management, marketing and asset aquisition.

CONSERVATIVE ASSET ACQUISITION PROGRAM

We intend to continue our conservative asset acquisition strategy of
purchasing and managing pools of one-to four-family residential, first lien
mortgage loans and investment-grade mortgage-backed securities. We do not
currently originate residential mortgage or other loans, but instead purchase
them in the secondary market. We believe that purchasing assets in the secondary
market, including first lien residential mortgage loans and mortgage-backed
securities, lowers our loan acquisition costs and allows us to better manage our
credit quality by purchasing a geographically diverse loan portfolio.

We determine the appropriate mix of whole loans versus mortgage-backed
securities based on market conditions. In periods of fast asset growth, we
purchase a greater percentage of mortgage-backed securities relative to whole
loans to increase assets rapidly while maintaining credit quality. As deposits
grow, we replace the mortgage-backed securities with higher yielding whole
loans.

30
<PAGE> 34

PRODUCTS

We directly offer FDIC-insured deposit products that we produce internally,
as well as co-branded products that are developed with third-party strategic
partners. We also are currently developing and intend to offer additional
co-branded products in the future.

<TABLE>
<CAPTION>
DEPOSIT PRODUCTS
----------------
<S> <C>
Interest checking account................... Premium yield NOW account with unlimited
free check writing, free Internet banking,
free unlimited online bill payment service
and free ATM/debit card
Money market account........................ Premium yield money market account with
immediate access to funds via checks and ATM
card
SmartSaver(SM) account...................... Super premium yield account without term
restrictions
Certificates of deposit..................... Guaranteed premium yields in terms ranging
from three months to five years
Callable certificates of deposit............ Super premium yield CDs, subject to
redemption after two years, with terms
ranging from seven to ten years
</TABLE>

<TABLE>
<CAPTION>
CO-BRANDED PRODUCTS
-------------------
<S> <C>
Fixed annuities............................. Line of premium yield flexible and single
premium fixed annuities offering a variety
of value-added features
Residential mortgage loans.................. Competitively priced selection of
residential mortgage loans
</TABLE>

<TABLE>
<CAPTION>
PRODUCTS UNDER DEVELOPMENT
--------------------------
<S> <C>
Variable rate annuities..................... Line of variable annuities with value-added
features, including low expense structure
and no surrender charges
Credit cards................................ Credit cards offering low rates, Internet
statement presentation, tailored customer
benefits and ability to open accounts online
Online brokerage............................ Discount brokerage services, including
online trading and no load mutual fund
selection
Insurance products.......................... Selection of term life and auto insurance
with competitive pricing
</TABLE>

31
<PAGE> 35

DEPOSIT PRODUCTS

We currently offer the following deposit products:

INTEREST CHECKING ACCOUNTS. Our interest checking account is designed for
customers who are seeking a premium yield checking account and certain
additional benefits, including unlimited personal check writing, free check
printing, free Internet banking, free unlimited online bill payment and an
ATM/debit card. As of February 10, 1999, interest checking customers earned
3.15% annual percentage yield, or APY, for balances of $2,500 to $9,999, 3.75%
APY for balances of $10,000 to $24,999 and 4.45% APY for balances of $25,000 or
more.

MONEY MARKET AND SMARTSAVER(SM) ACCOUNTS. Our money market and
SmartSaver(SM) accounts are designed for consumers who are seeking premium and
super premium yields with immediate access to funds without term restrictions or
early withdrawal penalties. As of February 10, 1999, money market account
customers earned 4.80% APY for a minimum balance of $2,500, and SmartSaver(SM)
account customers earned 5.00% APY for a minimum balance of $2,500.

CERTIFICATES OF DEPOSIT. Our standard CDs are designed for consumers who
want a fixed premium yield for terms ranging from three months to five years.
For those consumers who seek an even higher premium yield CD, we offer seven- to
ten-year callable CDs, which are subject to redemption by us anytime after two
years. As of February 10, 1999, CD rates ranged from 5.07% APY for a three-month
CD to 5.85% APY for a ten-year callable CD.

CO-BRANDED PRODUCTS

We currently offer the following financial products through strategic
alliances:

FIXED ANNUITY PRODUCTS. Our subsidiary, TeleBanc Insurance Services, Inc.,
offers co-branded insurance products to customers who are seeking fixed
annuities with value-added features. We have entered into agreements with
nationally recognized insurance companies, including USG Annuity & Life Company,
Jackson National Life Insurance Company and First Penn-Pacific Life Insurance
Company, through which we offer co-branded insurance products at commissions
that are significantly lower than the average commission charged by traditional
insurance agencies. Through TeleBanc Insurance, we offer a selection of high
value fixed annuity products, with interest rates in the range of 0.5% to 1%
above the interest rates on full commission products. These products provide
customers with multiple-year guarantees, cumulative free withdrawals,
introductory year bonus rates and no surrender charges.

RESIDENTIAL MORTGAGE LOANS. We have entered into a strategic alliance with
E-Loan, an online mortgage broker, to offer co-branded, rate-competitive
residential mortgage loans to our customers, and to offer TeleBank branded
products and services to E-Loan's customers. Currently we do not originate loans
directly. We receive referral fees for any loan originated through our web site.
In turn, we pay referral fees to E-Loan for any customer acquired through the E-
Loan web site.

PRODUCTS UNDER DEVELOPMENT

We intend to offer the following co-branded products in the future through
strategic alliances:

VARIABLE RATE ANNUITIES. Through our strategic alliances, we intend to
offer a line of variable rate annuities with value-added features, including a
low expense structure and no surrender charges.

CREDIT CARDS. Responding to customer requests and to expand affinity
relationships, we intend to offer credit cards to our customers and to members
of our affinity partners. We expect TeleBank branded credit cards will feature
low rates, Internet statement presentation, tailored customer benefits and the
ability to open accounts online.

ONLINE BROKERAGE. Through additional strategic alliances, we intend to
provide discounted online brokerage services including access to mutual funds.
32
<PAGE> 36

INSURANCE PRODUCTS. We are also exploring strategic alliances with select
insurance companies to offer high value term life insurance and automobile
insurance products.

Based on our analysis of the feasibility and profitability of our
developing products and services, we may determine not to offer all or some of
these products and services, may significantly delay the time at which we
introduce them or may determine to withdraw them shortly after their
introduction based on our assessment of certain factors, including customer
acceptance and costs.

CUSTOMER SERVICE AND SUPPORT

High quality customer service is an essential element in attracting and
retaining customers. Customer service starts with convenient access. Through our
web site and the Internet, customers can access their accounts 24 hours a day,
seven days a week. Customers may view balances, transfer funds, pay bills and,
if desired, send electronic communications to our support centers. It is our
policy to respond to customer e-mails within 24 hours.

Telephone support is an essential complement to our Internet service.
Consequently, we have made considerable investment in our telephone support
services to provide 24-hour access to customer service representatives. We have
an in-house call center staffed by customer service representatives who are
specially trained to handle customer requests. We also have an overflow call
center for spikes in volume and a specialty call center for Internet banking
support. We continually monitor all our call centers and, whenever possible,
direct sales-related calls to customer service representatives who are
responsible for our sales program. We believe that the combination of fast,
efficient Internet service and knowledgeable, responsive 24-hour telephone
support has become one of our key competitive advantages.

Our in-house call center employs customer service representatives, known as
"TeleBankers", who are primarily college-educated professionals trained to
satisfy customers' demands. If a customer would like to speak to someone
personally, he can call 1-800-TELEBANK to reach a TeleBanker or contact us over
the Internet, and one of our TeleBankers will return his call. A TeleBanker can
access data relating to the customer and his existing accounts. TeleBankers also
have access to information about our other savings and investment products,
which permits them to cross-market.

Based on data we gathered through our automatic call distribution system,
during January 1999, the average customer call was personally answered by a
TeleBanker within 29 seconds of receipt of the call, and incoming calls had a
rate of abandonment by customers before contact with a TeleBanker of less than
3%.

We offer incentives to our TeleBankers through a comprehensive compensation
package that rewards high quality customer service and builds long-term employee
loyalty. TeleBankers are compensated through an annual salary and a monthly
performance bonus. We also offer an employee stock ownership plan in which every
full-time employee participates.

CUSTOMERS

We have customers in all 50 states, the District of Columbia and many
foreign countries. We believe that our products appeal to both long-term savers
and transaction-oriented savers. Our long-term savers tend to be older, more
financially aware customers and tend to be more concerned with high value
products. These customers invest predominantly in certificates of deposit,
savings accounts and money market checking accounts. By comparison, our
transaction-oriented savers tend to be younger customers seeking the convenience
of Internet access. Many of these customers choose our interest checking and
money market checking accounts as an alternative to their brokerage accounts.

We believe that our customers are very satisfied with our products and
service. For example, as of December 31, 1998, 32% of our customers had two or
more accounts and the average customer had 1.7 accounts. As of
33
<PAGE> 37

December 31, 1998, our average retail deposit account size was approximately
$22,000.

MARKETING AND STRATEGIC ALLIANCES

We have developed a consumer-oriented, direct marketing strategy designed
to reach potential customers and build brand awareness nationally. Using
demographic information and analyzing current regional banking conditions, we
target key consumer markets through a variety of advertising and promotional
media. To expand our marketing activities, we plan to significantly increase our
marketing levels during 1999. Our current marketing strategy consists of our
national advertising campaign, strategic alliances, affinity partnerships, and
customer referral and cross-sell programs.

NATIONAL ADVERTISING CAMPAIGN

We target key consumer markets through a variety of advertising and
promotional media, including billboard advertising, as well as print advertising
in national periodicals, local newspapers and specialty publications. For the
past several years we have developed and implemented a national radio campaign
aimed at consumer segments most likely to be interested in our products. Our ads
are frequently heard on stations in major markets, including New York,
Philadelphia, San Francisco, Washington, DC and Los Angeles. We also place
advertisements on several leading Internet web sites. Additionally, we intend to
expand our national advertising efforts by rolling out strategically placed
television advertisements.

We have developed a concentrated regional advertising campaign, originating
in the Los Angeles area that, over time, will scale up to a national campaign
with consumer reach from coast to coast. These regional campaigns will use all
of our advertising channels to penetrate prime consumer segments.

STRATEGIC ALLIANCES

We have strategic marketing agreements with several leading Internet web
sites. On November 4, 1998, we announced a marketing relationship with Yahoo!.
Through this agreement, we have introduced a customer acquisition program with
tailored benefits for customers who open their accounts through Yahoo!,
including the reimbursement of third-party ATM surcharges. This agreement also
provides us with strategically placed advertising in Yahoo!'s banking and
finance pages. We have additional marketing agreements with Third Age Media, an
online community of older adults, and Chinese Cyber City, an online community of
Chinese-Americans. In addition, we have placed advertising strategically
throughout the Internet on sites that reach our target audiences.

AFFINITY PARTNERSHIPS

Our affinity marketing program is designed to reach targeted groups of
consumers with the endorsement of their membership organization. Through our
affinity partnerships, we contract with professional and other organizations to
promote our savings and investment products. We believe our affinity
partnerships lower customer acquisition costs and increase customer conversion
rates. Currently, we have 14 affinity partnerships, including the following:

- Sam's Club;
- Chinese Cyber City;
- National Association of Realtors;
- National Council of Senior Citizens; and
- National Association for the Self-Employed.

CUSTOMER REFERRAL AND CROSS-SELL PROGRAMS

We have several customer incentive programs designed to encourage our
existing customers to refer new customers and to open additional accounts
themselves. In 1995, we introduced the Refer-a-Saver(SM) program, pursuant to
which we pay cash to existing customers who refer new customers to us. This
program significantly lowers our customer acquisition cost. Since introduction
in 1993, the Refer-a-Saver(SM) program has accounted for 5% of our account
growth. Additionally, as an incentive to maintain multiple accounts, we offer
lower minimum balances and higher rates on select products
34
<PAGE> 38

for customers with multiple accounts through our Preferred Saver(SM) program.
Currently, approximately 15% of our customers are enrolled in the Preferred
Saver(SM) program.

SECURITY

Together with our technology partners, we have created systems environments
which are continuously monitored and managed using early detection, intervention
and access control to prevent unauthorized entry and activity. We test our
system periodically using an outside security firm. In addition, we have taken
the following specific steps to ensure our customer information is adequately
protected:

ENCRYPTED DATA TRANSMISSIONS. All data transmitted and transacted on our
web hosting environment is encrypted to ensure that sensitive information cannot
be read or easily deciphered. This encryption is accomplished through Verisign's
Secure Socket Layer, or SSL. SSL protocol provides data privacy, integrity and
authentication in a point-to-point connection between a consumer's web browser
and our web server so that information, including the requested URL, submitted
form contents, user names and passwords, and any data sent back to the client,
are fully encrypted. This encryption technology is widely supported in browsers
including Netscape Navigator(TM) version 2.0 or higher and Microsoft's(R)
Internet Explorer version 3.0 and higher.

FIREWALLS. Security firewalls are in place to protect our web server,
Internet banking platform and our internal network environment. Through the use
of Checkpoint's hardware and software products, we control access, authenticate
users and ensure the privacy and integrity of communications over untrusted
public networks.

ASSET ACQUISITION PROGRAM

Our asset acquisition strategy is focused on investing in mortgage-backed
securities purchased in the secondary market and one-to four-family first lien
residential mortgage loans.

MORTGAGED-BACKED SECURITIES

Our mortgage-backed securities portfolio consists primarily of privately
insured mortgage pass-through securities, Government National Mortgage
Association participation certificates, Fannie Mae participation certificates,
Freddie Mac participation certificates and other securities issued by other
non-agency organizations. As of December 31, 1998, over 91% of the face value of
our mortgage-backed securities portfolio was rated "AAA" by Standard & Poor's or
"Aaa" by Moody's Investment Services. As of December 31, 1998, mortgage-backed
securities represented 47.1% of our total earning assets.

MORTGAGE LOANS

As of December 31, 1998, more than 97.5% of our whole loan portfolio
consisted of first lien one-to four-family residential mortgage loans, an asset
class we consider the safest in terms of credit risk. We purchase loans from
various sources, including brokers, other banks, pension funds and other holders
of residential mortgages. As our portfolio has grown, we have developed a
national flow program to directly purchase loans from originators, thereby
increasing our spreads by eliminating intermediary fees. We purchase loans
nationwide, allowing for a steady supply of loans and improving credit quality
through a regionally diverse portfolio. As of December 31, 1998, mortgage loans
represented 41.2% of our total earning assets.

ASSET/LIABILITY MANAGEMENT

We actively monitor our net interest rate sensitivity position. Effective
interest rate sensitivity management seeks to ensure that net interest income
and the market value of equity are protected from the impact of changes in
interest rates. To this end, we have established an asset-liability committee
and implemented a risk measurement guideline employing market value of equity
and gap methodologies and other measures. To manage interest rate exposure, we
use various hedging techniques such as caps, floors, swaps, futures and
financial options.

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<PAGE> 39

COMPETITION

The financial services industry in the United States is highly competitive
and characterized by rapid change. We compete for deposits throughout the United
States with financial service providers, including savings and commercial banks,
credit unions, mutual fund companies and brokerage companies.

Because we purchase rather than originate residential mortgage loans and
mortgage-backed securities, our competitors for these investments are primarily
commercial banks, savings banks, mortgage brokers, pension funds, real estate
investment trusts and other financial service providers that purchase
mortgage-related products. We believe that the secondary market for residential
mortgage loans is large and relatively fluid, with pricing typically a function
of supply and demand and general market conditions. We compete principally on
the basis of bid price for these investments. We believe that we are able to
compete effectively for mortgage loans and mortgage-backed securities primarily
because of our relatively low cost infrastructure.

We believe that customers choose financial products and services primarily
on the basis of price, convenience and service. We also believe that we attract
and retain

customers primarily because we offer the following:

- - higher interest rates and lower fees than those offered by many of our
competitors;

- - convenient anytime, anywhere access to our products and services; and

- - quality customer service.

See "Risk Factors -- We Face Intense Competition".

GOVERNMENT REGULATION

TeleBanc, as a savings and loan holding company, and TeleBank, as a
federally chartered savings bank, are subject to extensive regulation,
supervision and examination by the OTS as their primary federal regulator.
TeleBank also is subject to regulation, supervision and examination by the FDIC.

TeleBanc Capital Markets, Inc., a wholly owned subsidiary of TeleBanc, is a
registered broker-dealer under the Securities Exchange Act of 1934 and is
regulated by the SEC.

TeleBanc Insurance Services, Inc., a subsidiary of TeleBanc, is required to
be licensed in each state where it sells insurance products and is subject to
the regulatory requirements of these states. Currently, TeleBanc Insurance is
licensed in six states.

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<PAGE> 40

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table lists our current directors, executive officers and
certain key employees as of February 10, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Smilow........................ 36 Chairman of the Board of Directors
Mitchell H. Caplan..................... 41 Vice Chairman of the Board of Directors, Chief
Executive Officer and President
Aileen Lopez Pugh...................... 31 Executive Vice President and Chief Financial Officer
Laurence P. Greenberg.................. 37 Executive Vice President and Chief Marketing Officer
Michael Opsahl......................... 36 Executive Vice President and Chief Credit Officer
Sang-Hee Yi............................ 35 Executive Vice President and Chief Operating Officer
Ross C. Atkinson....................... 31 Executive Vice President and Chief Information
Officer
Arlen W. Gelbard....................... 41 Executive Vice President and General Counsel
Stephen G. Dervenis.................... 34 Executive Vice President
David R. DeCamp........................ 40 Director
Dean C. Kehler......................... 42 Director
Marcia Myerberg........................ 53 Director
Steven F. Piaker....................... 36 Director
Mark Rollinson......................... 63 Director
</TABLE>

DAVID A. SMILOW, a founder and Chairman of TeleBanc, will continue to
reduce his operational role at TeleBanc and, in 1999, is expected to focus
exclusively, in his capacity as non-executive chairman, on long term strategic
initiatives and asset liability management.

Mr. Smilow has served as the Chairman of the Board of Directors since March
1994 and as Chief Executive Officer of TeleBanc from March 1994 to April 1998.
He has also served as the Chairman of the Board of Directors of TeleBank since
January 1994 and as Chief Risk Management Officer of TeleBank since February
1996. Prior to January 1994, Mr. Smilow served as President of TeleBank. Mr.
Smilow is the brother-in-law of Mr. Opsahl.

MITCHELL H. CAPLAN has served as the Vice Chairman of the Board of
Directors and President of TeleBanc since January 1994 and has served as Chief
Executive Officer of TeleBanc since April 1998. Mr. Caplan has also served as
Vice Chairman, President and Chief Executive Officer of TeleBank since January
1994. Mr. Caplan also serves as Vice President of TeleBanc Capital Markets. From
1985 until September 1990, Mr. Caplan was an associate of the law firm of
Shearman & Sterling, where he represented and advised private and public
commercial institutions.

AILEEN LOPEZ PUGH has served as Executive Vice President and Chief
Financial Officer of TeleBanc and TeleBank since August 1994. Prior to joining
management, Ms. Pugh served as a director from April 1993 to August 1994. From
December 1993 to May 1994, she served as a consultant to MET Holdings in
connection with the organization of TeleBanc and its initial public offering.

LAURENCE P. GREENBERG has served as Executive Vice President and Chief
Marketing Officer of TeleBanc and TeleBank since 1995. He is responsible for
developing and implementing our marketing strategy and overseeing the call
center and deposit operations functions. From October 1994 to 1995, Mr.
Greenberg served as Senior Vice President of Marketing. Prior to joining
management, Mr. Greenberg served as a consultant to TeleBank between April and

37
<PAGE> 41

September 1994. From 1993 to April 1994, Mr. Greenberg was a Senior Associate at
T.H. Land Research Group, Inc., a marketing research company serving direct
marketing companies. From 1989 to 1993, Mr. Greenberg was a Marketing Manager
for specialty publications with Capital Cities/ABC, Inc.

MICHAEL OPSAHL has served as Executive Vice President and Chief Credit
Officer of TeleBanc, TeleBank and TeleBanc Capital Markets or their predecessors
since 1990. He is responsible for the development of the loan acquisition
process, including the acquisition and pricing of loans and the swapping of
purchased loan pools for mortgage-backed securities. Prior to joining TeleBanc,
Mr. Opsahl served as a trading assistant at the Federal Home Loan Mortgage
Corporation. Mr. Opsahl is the brother-in-law of Mr. Smilow.

SANG-HEE YI has served as Executive Vice President and Chief Operating
Officer of TeleBanc and TeleBank since April 1996. She is responsible for
operations and regulatory compliance. Prior to serving in her current position,
Ms. Yi served as the compliance officer of TeleBanc. From 1986 to April 1994,
she was a federal thrift regulator at the Office of Thrift Supervision.

ROSS C. ATKINSON has served as Executive Vice President and Chief
Information Officer of TeleBanc and TeleBank since June 1998. He is responsible
for the strategic direction of all information processing, communication systems
and operations. From 1997 until June 1998, Mr. Atkinson served as a principal
consultant with Platinum Technology, Inc., a database systems and information
management software provider. From 1991 through 1996, Mr. Atkinson served as a
systems engineer for Electronic Data Systems.

ARLEN W. GELBARD has served as Executive Vice President and General Counsel
of TeleBanc and TeleBank since June 1998. From 1982 until June 1998, Mr. Gelbard
was a member of the law firm of Hofheimer Gartlir & Gross, LLP, New York, where
he specialized in transactional real estate, lending, leasing, foreclosures and
workouts. Prior to joining management of TeleBanc, from April 1996 to June 1998,
Mr. Gelbard served as a director, as well as Chairman of the Compensation
Committees of TeleBanc and TeleBank.

STEPHEN G. DERVENIS has served as Executive Vice President of TeleBanc, as
well as Chief Executive Officer of TCM since June 1998. From October 1997 to
June 1998, Mr. Dervenis served as Director of Amortizing and Emerging Assets
Securitization at Barclays Capital in New York. From April 1994 to September
1997, Mr. Dervenis served as a Managing Director of Furman Selz, and from
January 1993 to March 1994, as a Vice President at J.P. Morgan, both in New
York.

DAVID R. DECAMP has served as a director of TeleBanc since its formation in
March 1994 and as a director of TeleBank since July 1992. Mr. DeCamp is a Senior
Vice President of Grubb & Ellis, a commercial real estate broker. From 1988 to
1996, Mr. DeCamp was a commercial real estate broker with Cassidy & Pinkard,
Inc. Mr. DeCamp is the Chairman of the Audit and Compliance Committees of
TeleBanc and TeleBank.

DEAN C. KEHLER has served as a director of TeleBanc and TeleBank since
March 1997. Mr. Kehler has been a Managing Director of CIBC Oppenheimer Corp., a
subsidiary of CIBC, and co-head of the High Yield Group since August 1995. From
February 1990 to August 1995, Mr. Kehler was a founding partner and Managing
Director of The Argosy Group, L.P., which was acquired by CIBC in August 1995.
He is also a director of Global Crossing Ltd. and Booth Creek Ski Group, Inc.

MARCIA MYERBERG has served as a director of TeleBanc and TeleBank since May
1998. Ms. Myerberg has been Chief Executive Officer of Myerberg & Company, L.P.,
an investment banking firm specializing in the mortgage-backed securities
markets, since February 1994. Prior to her current position, from March 1989 to
February 1994, Ms. Myerberg was a Senior Managing Director of The Bear Stearns
Companies, Inc. From July 1985 to February 1989, she was a
38
<PAGE> 42

Director of Salomon Brothers, Inc., and from November 1979 to June 1985 she was
the Senior Vice President-Corporate Finance and Treasurer of Federal Home Loan
Mortgage Corporation.

STEVEN F. PIAKER has served as a director of TeleBanc and TeleBank since
March 1997. Since January 1997, Mr. Piaker has been a Senior Vice President of
Conning & Company, a provider of asset management, private equity capital,
corporate finance services and research to the insurance and financial services
industries, which he joined in 1994. From September 1992 to June 1994, Mr.
Piaker served as a Senior Vice President of Conseco, Inc. where he was involved
in company-sponsored leveraged buyouts and private placements in the insurance
industry.

MARK ROLLINSON has served as a director of TeleBanc since its formation in
March 1994 and as a director of TeleBank since 1992. He has been a self-employed
attorney in Leesburg, Virginia, for the past ten years.

39
<PAGE> 43

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 31, 1998, and as
adjusted to give effect to the sale of common stock offered by this prospectus
by: (i) each stockholder known by us to beneficially own 5% or more of our
common stock, (ii) each of our current directors and executive officers, (iii)
all of our directors and executive officers, as a group and (iv) all other
selling stockholders.

<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP NUMBER OF OWNERSHIP
PRIOR TO THIS SHARES AFTER THIS
OFFERING(1) BEING OFFERING(1)
---------------------- SOLD IN --------------------
NAME OF BENEFICIAL OWNER(2) NUMBER PERCENTAGE THIS OFFERING NUMBER PERCENTAGE
- --------------------------- --------- ---------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
David A. Smilow(3)...................... 1,645,350 12.86%
Mitchell H. Caplan(4)................... 869,277 6.79 %
Aileen Lopez Pugh(5).................... 108,959 * -- 108,959
Laurence P. Greenberg(6)................ 81,906 * -- 81,906
David R. DeCamp(7)...................... 24,000 * -- 24,000
Dean C. Kehler(8)....................... 686,590 5.50 -- 686,590
Marcia Myerberg(9)...................... 2,000 * -- 2,000
Steven F. Piaker(10).................... 4,000 * -- 4,000
Mark Rollinson(11)...................... 23,000 * -- 23,000
CIBC WG Argosy Merchant Fund 2 LLC(8)... 682,590 5.47 -- 682,590
Conning & Company(12)................... 772,590 6.19 -- 772,590
General American Mutual Holding
Company(13)........................... 967,616 7.81 -- 967,616
PC Investment Company(14)............... 867,866 6.94 -- 867,866
TeleBanc Employee Stock Ownership
Plan(15).............................. 469,095 3.77 -- 469,095
Directors and executive officers, as a
group (9 individuals)(16)............. 3,445,082 25.49% -- %
</TABLE>

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

* Less than 1% of the shares of outstanding common stock.

(1) Applicable percentage of ownership is based on 12,388,242 shares of common
stock outstanding as of December 31, 1998, and shares of common
stock outstanding upon completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. For each beneficial
owner, shares of common stock subject to options or conversion rights
exercisable within 60 days of the date of this prospectus are included as
outstanding for purposes of this table.

(2) Except as specifically noted in the footnotes below, the address of each of
the named stockholders is c/o TeleBanc Financial Corporation, 1111 North
Highland Street, Arlington, Virginia 22201.

(3) Includes 344,064 shares of common stock issuable upon exercise of options
and 64,200 shares issuable upon exercise of warrants exercisable within 60
days of the date of this prospectus and 33,096 shares of common stock held
by the ESOP and allocated to Mr. Smilow's account. Excludes 385,999 shares
of common stock and warrants to acquire 50,000 shares of common stock held
by the ESOP (excluding the shares allocated to his account), of which Mr.
Smilow is a trustee.

(4) Includes 370,730 shares of common stock issuable upon exercise of options
and 46,000 shares issuable upon exercise of warrants exercisable within 60
days of the date of this prospectus and 15,809 shares of common stock held
by the ESOP and allocated to Mr. Caplan's account. Excludes 403,286 shares
of common stock and warrants

40
<PAGE> 44

to acquire 50,000 shares of common stock held by the ESOP (excluding the
shares allocated to his account), of which Mr. Caplan is a trustee. Mr.
Caplan disclaims beneficial ownership of warrants to acquire 23,000 shares
of common stock listed above.

(5) Includes 79,998 shares of common stock issuable upon exercise of options
and 12,200 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus and 7,481 shares
of common stock held by the ESOP and allocated to Ms. Pugh's account.

(6) Includes 71,999 shares of common stock issuable upon exercise of options
and 2,000 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus and 7,507 shares
of common stock held by the ESOP and allocated to Mr. Greenberg's account.

(7) Includes 22,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of the date of this prospectus. Mr. DeCamp's
address is c/o Grubb & Ellis, 1717 Pennsylvania Avenue, N.W., Suite 250,
Washington, D.C. 20006.

(8) Mr. Kehler is the designated director for CIBC WG Argosy Merchant Fund 2
LLC ("CIBC Merchant Fund"), which directly holds 589,840 shares of common
stock and 92,750 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus. Mr. Kehler is a
partner of CIBC Merchant Fund and disclaims beneficial ownership of such
shares. Mr. Kehler's beneficial ownership interest includes 4,000 shares of
common stock issuable upon exercise of options exercisable within 60 days
of the date of this prospectus, which are not part of CIBC's holdings. Mr.
Kehler's address is c/o CIBC Oppenheimer, 425 Lexington Avenue, 3rd Floor,
New York, New York, 10017.

(9) Represents common stock issuable upon exercise of options exercisable
within 60 days of the date of this prospectus. Ms. Myerberg's address is
201 E. 87th Street, Apt. 16R, New York, NY 10128.

(10) Represents common stock issuable upon exercise of options exercisable
within 60 days of the date of this prospectus. Mr. Piaker is the designated
director for Conning & Company and serves as its Senior Vice President. Mr.
Piaker does not exercise voting or investment control over the shares held
by Conning & Company. Mr. Piaker's address is c/o Conning & Company, City
Place II, 185 Asylum Street, Hartford, Connecticut 06103.

(11) Includes 12,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of the date of this prospectus. Mr. Rollinson's
address is P.O. Box 826, Leesburg, Virginia 22075.

(12) Conning Insurance Capital Limited Partnership III ("CICLP III") directly
holds 558,441 shares of common stock and 76,188 shares of common stock
issuable upon exercise of warrants exercisable within 60 days of the date
of this prospectus. Conning Insurance Capital International Partners III,
L.P. directly holds 121,399 shares of common stock and 16,562 shares of
common stock issuable upon exercise of warrants exercisable within 60 days
of the date of this prospectus. Conning & Company controls the general
partner of each of these partnerships. The address of Conning & Company is
City Place II, 185 Asylum Street, Hartford, Connecticut 06103.

(13) General American Life Insurance Company ("General American"), an indirect
subsidiary of General American Mutual Holding Company directly holds
168,526 shares of common stock and 26,500 shares of common stock issuable
upon exercise of warrants exercisable within 60 days of the date of this
prospectus. General American Mutual Holding Company indirectly controls
Conning & Company and may be deemed to beneficially own all of the shares
held by Conning & Company partnerships. Accordingly, the 772,590 shares
held by Conning & Company are also included in the table above. The address
of General American is 700 Market Street, St. Louis, Missouri 63101.

(14) PC Investment Company holds 749,940 shares of common stock and 117,926
shares of common stock issuable upon exercise of warrants exercisable
within 60 days of the date of this prospectus. The address of PC Investment
Company is 401 Theodore Freund Avenue, Rye, New York 10580.

(15) Includes 50,000 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus.

(16) Includes 910,791 shares of common stock issuable upon exercise of options
and 217,150 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus. Excludes 355,202
shares of common stock, except for any shares allocable to the accounts of
Messrs. Smilow, Caplan and Greenberg and Ms. Pugh, and warrants to acquire
50,000 shares of common stock exercisable within 60 days of the date of
this prospectus held by the ESOP, of which Messrs. Smilow and Caplan act as
trustees.

41
<PAGE> 45

INCORPORATION OF INFORMATION WE FILE WITH THE SEC

The SEC allows us to "incorporate by reference" the information we file
with them, which means:

- incorporated documents are considered part of the prospectus;

- we can disclose important information to you by referring you to those
documents; and

- information that we file with the SEC will automatically update and
supersede this prospectus.

We incorporate by reference the documents listed below which were filed
with the SEC under the Securities Exchange Act of 1934:

- Annual Report on Form 10-K for the year ended December 31, 1998; and

- The description of our common stock in the registration statement on Form
8-A filed on July 1, 1998.

We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before the end of
the offering:

- Reports filed under Section 13(a) and (c) of the Exchange Act;

- Documents filed under Section 14 of the Exchange Act; and

- Reports filed under Section 15(d) of the Exchange Act.

WHERE YOU CAN FIND MORE INFORMATION

We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for more information on the public reference room
and their copy charges.

You may request a copy of any filings referenced to above, excluding
exhibits, at no cost, by contacting Todd C. Mackay at the following address:

TeleBanc Financial Corporation
1111 North Highland Street
Arlington, Virginia 22201
(703) 247-3700

We have filed a registration statement on Form S-3 with the SEC covering
the offering. For further information about us and the offering, you should
refer to our registration statement and its exhibits. Since the prospectus may
not contain all the information that you may find important, you should review
the full text of the documents included or incorporated by reference in the
registration statement.

You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing or incorporated by reference in
this prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects may
have changed since that date.

42
<PAGE> 46

VALIDITY OF THE SHARES

For purposes of this offering, Hogan & Hartson L.L.P., Washington, D.C.,
has given its opinion as to the validity of the shares offered by this
prospectus. The validity of these shares will be passed upon for the
underwriters by Sullivan & Cromwell, Washington, D.C.

EXPERTS

The consolidated financial statements as of December 31, 1996, 1997 and
1998 and for each of the three years in the period ending December 31, 1998
included in this prospectus and registration statement to the extent indicated
in their report have been audited by Arthur Andersen LLP, independent certified
public accountants, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.

43
<PAGE> 47

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Statement of Financial Condition -- As of
December 31, 1998 and 1997................................ F-3
Consolidated Statements of Operations and Comprehensive
Income -- For the Years Ended December 31, 1998, 1997 and
1996...................................................... F-4
Consolidated Statements of Changes in Stockholders'
Equity -- For the Years Ended December 31, 1998, 1997 and
1996...................................................... F-5
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE> 48

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries

We have audited the accompanying consolidated statements of financial
condition of TeleBanc Financial Corporation (a Delaware Corporation) and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive income, stockholders' equity, and
cash flows for each of the three years ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleBanc Financial
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years ended
December 31, 1998, in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Vienna, Virginia
February 10, 1999

F-2
<PAGE> 49

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 26,282 $ 92,156
Trading securities.......................................... 29,584 21,110
Federal Home Loan Bank stock................................ 25,175 10,000
Investment securities available-for-sale.................... 220,358 91,237
Mortgage-backed securities available-for-sale............... 1,012,163 319,203
Loans receivable held for sale.............................. 117,928 149,086
Loans receivable, net....................................... 786,926 391,618
Other assets................................................ 64,925 25,942
---------- ----------
Total assets................................................ $2,283,341 $1,100,352
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits............................................. $1,142,385 $ 522,221
Brokered callable certificates of deposit................... 67,085 --
Advances from the Federal Home Loan Bank of Atlanta......... 472,500 200,000
Securities sold under agreements to repurchase and other
borrowings................................................ 404,435 279,909
Subordinated debt, net...................................... 29,855 29,614
Other liabilities........................................... 18,261 13,212
---------- ----------
Total liabilities........................................... 2,134,521 1,044,956
Corporation-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation................ 35,385 9,572
Commitments and contingencies............................... -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value, 500,000
shares authorized
Series A, 0 and 18,850 issued and outstanding at December
31, 1998 and 1997...................................... -- 9,634
Series B, 0 and 4,050 issued and outstanding at December
31, 1998 and 1997...................................... -- 2,070
Series C, 0 and 7,000 issued and outstanding at December
31, 1998 and 1997...................................... -- 3,577
Common stock, $0.01 par value, 29,500,000 shares authorized;
12,388,242 and 4,458,322 issued and outstanding at
December 31, 1998 and 1997................................ 123 44
Additional paid-in capital.................................. 103,194 16,205
Unearned ESOP shares........................................ (2,578) --
Retained earnings........................................... 10,819 11,556
Unrealized gain on securities available for sale, net of
tax....................................................... 1,877 2,738
---------- ----------
Total stockholders' equity.................................. 113,435 45,824
---------- ----------
Total liabilities and stockholders' equity.................. $2,283,341 $1,100,352
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.
F-3
<PAGE> 50

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans..................................................... $ 51,197 $34,729 $23,089
Mortgage-backed and related securities.................... 34,474 17,646 17,955
Investment securities..................................... 9,951 5,702 4,690
Trading securities........................................ 2,861 1,124 --
Other..................................................... 1,627 100 66
-------- ------- -------
Total interest income............................... 100,110 59,301 45,800
Interest expense:
Retail deposits........................................... 44,913 25,958 21,357
Brokered callable certificates of deposit................. 3,638 -- --
Advances from the Federal Home Loan Bank of Atlanta....... 13,022 9,885 6,689
Repurchase agreements and other borrowings................ 15,204 6,941 4,569
Subordinated debt......................................... 3,528 3,279 2,200
-------- ------- -------
Total interest expense.............................. 80,305 46,063 34,815
-------- ------- -------
Net interest income................................. 19,805 13,238 10,985
Provision for loan losses................................... 905 921 919
-------- ------- -------
Net interest income after provision for loan
losses............................................ 18,900 12,317 10,066
-------- ------- -------
Non-interest income:
Gain on sale of available for sale securities............. 3,536 982 935
Gain on sale of loans..................................... 2,088 1,148 874
(Loss) gain on trading securities......................... (43) 1,204 --
Income (loss) on equity investments....................... 531 (1,138) (274)
Fees, service charges, and other.......................... 1,452 1,897 1,221
-------- ------- -------
Total non-interest income........................... 7,564 4,093 2,756
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits........................ 7,779 4,909 3,690
Advertising and marketing................................. 4,634 606 93
Special SAIF assessment................................... -- -- 1,671
Other..................................................... 7,406 3,527 2,921
-------- ------- -------
Total general and administrative expenses........... 19,819 9,042 8,375
Other non-interest expenses:
Net operating cost of real estate acquired through
foreclosure............................................. 336 278 238
Amortization of goodwill and other intangibles............ 1,923 822 462
-------- ------- -------
Total other non-interest expenses....................... 2,259 1,100 700
-------- ------- -------
Total non-interest expenses......................... 22,078 10,142 9,075
-------- ------- -------
Income before income tax expense and minority
interest.............................................. 4,386 6,268 3,747
Income tax expense.......................................... 1,649 1,657 1,195
Minority interest in subsidiary............................. 1,362 394 --
-------- ------- -------
Net income.......................................... $ 1,375 $ 4,217 $ 2,552
Preferred stock dividends................................... 2,112 546 --
-------- ------- -------
Net (loss) income available to common
stockholders...................................... $ (737) $ 3,671 $ 2,552
======== ======= =======
Other comprehensive income, before tax:
Unrealized holding gain on securities arising during the
period.................................................. 1,331 1,251 1,088
Less: reclassification adjustment for gains included in
net income.............................................. (3,536) (982) (882)
-------- ------- -------
Other comprehensive income, before tax.................. (2,205) 269 206
Income tax expense related to reclassification adjustment
for gains on sale of securities......................... 1,344 373 335
-------- ------- -------
Other comprehensive income, net of tax.................. (861) 642 541
-------- ------- -------
Comprehensive income.................................... $ (1,598) $ 4,313 $ 3,093
======== ======= =======
Earnings per share:
Basic..................................................... $ (0.09) $ 0.84 $ 0.62
Diluted................................................... $ (0.09) $ 0.57 $ 0.58
</TABLE>

See accompanying notes to consolidated financial statements.
F-4
<PAGE> 51

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES)
ON
ADDITIONAL AVAILABLE-
PREFERRED COMMON PAID-IN UNEARNED RETAINED FOR-SALE
STOCK STOCK CAPITAL ESOP SHARES EARNINGS SECURITIES TOTAL
--------- ------ ---------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995............ $ -- $ 40 $ 14,637 $ -- $ 5,333 $ 1,555 $ 21,565
Net income............................... -- -- -- -- 2,552 -- 2,552
Unrealized gain on available-for sale
securities, net of tax effect.......... -- -- -- -- -- 541 541
-------- ---- -------- ------- ------- ------- --------
BALANCES AT DECEMBER 31, 1996............ -- 40 14,637 -- 7,885 2,096 24,658
Net income............................... -- -- -- -- 4,217 -- 4,217
Common stock issued...................... -- 4 1,568 -- -- -- 1,572
Issuance of 4% cumulative preferred
stock, Series A........................ 9,634 -- -- -- -- -- 9,634
Issuance of 4% cumulative preferred
stock, Series B........................ 2,070 -- -- -- -- -- 2,070
Issuance of 4% cumulative preferred
stock, Series C........................ 3,577 -- -- -- -- -- 3,577
Dividends on 4% cumulative preferred
stock.................................. -- -- -- -- (546) -- (546)
Unrealized gain on available for sale
securities, net of tax effect.......... -- -- -- -- -- 642 642
-------- ---- -------- ------- ------- ------- --------
BALANCES AT DECEMBER 31, 1997............ 15,281 44 16,205 -- 11,556 2,738 45,824
Net income............................... -- -- -- -- 1,375 -- 1,375
Common stock issued...................... -- 54 69,994 -- -- -- 70,048
Dividends on 4% cumulative preferred
stock.................................. -- 1 1,738 -- (2,112) -- (373)
Conversion of 4% cumulative preferred
stock to common stock.................. (15,281) 24 15,257 -- -- -- --
Unearned ESOP shares..................... -- -- -- (2,578) -- -- (2,578)
Unrealized gain on available for sale
securities, net of tax effect.......... -- -- -- -- -- (861) (861)
-------- ---- -------- ------- ------- ------- --------
BALANCES AT DECEMBER 31, 1998............ $ -- $123 $103,194 $(2,578) $10,819 $ 1,877 $113,435
======== ==== ======== ======= ======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-5
<PAGE> 52

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 1,375 $ 4,217 $ 2,552
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest............................. 1,362 394 --
Equity in (income) losses of subsidiaries..... (531) 1,129 274
Depreciation, amortization, and discount
accretion................................... 1,197 (1,038) (1,516)
Provision for loan losses..................... 905 921 919
Provision for losses on foreclosed real
estate...................................... -- 19 78
Other gains and losses, net................... (86) (1,624) (1,011)
Deferred income tax provision................. (3,004) (445) (224)
Proceeds from sales, repayments and maturities
of loans held-for-sale...................... 69,762 60,145 27,865
Purchases of loans held-for-sale.............. (2,297) (72,804) (91,943)
Net realized gains on available-for-sale
securities, loans held-for-sale and
trading..................................... (4,105) (2,613) (935)
Purchases of trading assets................... (623,913) (100,630) --
Proceeds from sales, repayments and maturities
of trading assets........................... 616,110 80,990 --
Increase in accrued interest receivable....... (7,089) (1,492) (2,220)
Increase in accrued expenses and other
liabilities................................. 1,113 345 3,730
Increase in other assets...................... (18,296) (3,373) (2,433)
Interest credited to deposits................. 45,023 25,958 21,361
----------- --------- ---------
Net cash (used in) provided by operating
activities............................... 77,526 (9,901) (43,503)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received from business acquisition...... 10,347 -- --
Net increase in loans held to maturity, net of
loans received in business acquisition........ (281,603) (269,036) (90,717)
Loans extended to Employee Stock Ownership Plan.. (2,578) -- --
Equity investments in subsidiaries............... (1,687) (1,736) (2,359)
Purchases of available-for-sale securities, net
of securities received in business
acquisition................................... (1,286,948) (395,675) (356,882)
Proceeds from sales of available-for-sale
securities.................................... 379,166 144,718 220,293
Proceeds from maturities of and principal
payments on available-for-sale securities..... 214,466 197,036 201,547
Net sales (purchases) of premises and equipment,
net of premises and equipment received in
business acquisition.......................... (2,070) 110 (842)
Proceeds from sale of foreclosed real estate..... 978 1,563 1,156
----------- --------- ---------
Net cash used in investing activities....... (969,929) (323,020) (27,804)
----------- --------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.
F-6
<PAGE> 53

<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits, net of deposits
received in business acquisition.............. 335,136 105,777 62,625
Advances from Federal Home Loan Bank of
Atlanta....................................... 1,201,577 322,000 273,500
Payments on advances from Federal Home Loan Bank
of Atlanta.................................... (929,077) (266,800) (234,200)
Net increase (decrease) in securities sold under
agreements to repurchase...................... 124,526 222,328 (36,324)
Net increase in other borrowed funds, net of
borrowings received in business acquisition... 241 13,028 --
Proceeds from the issuance of trust preferred
securities, net............................... 25,813 9,572 --
Proceeds from the issuance of common stock and
preferred stock............................... 71,787 16,853 --
Dividend paid on Trust Preferred securities...... (1,362) (394) --
Dividends paid on preferred stock................ (2,112) (546) --
----------- --------- ---------
Net cash provided by financing activities... 826,529 421,818 65,601
----------- --------- ---------
Net (decrease) increase in cash and cash
equivalents...................................... (65,874) 88,897 (5,706)
Cash and cash equivalents at beginning of period... 92,156 3,259 8,965
----------- --------- ---------
Cash and cash equivalents at end of period......... $ 26,282 $ 92,156 $ 3,259
=========== ========= =========
SUPPLEMENTAL INFORMATION:
Interest paid on deposits and borrowed funds..... $ 74,701 $ 45,440 $ 32,660
Income taxes paid................................ 999 2,473 972
Gross unrealized (loss) gain on marketable
securities available-for-sale................. (1,389) 873 795
Tax effect of gain on available-for-sale
securities.................................... 528 231 254
Transfer from loans to REO....................... 1,923 1,454 1,513
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Additional common stock, totaling 119,975 shares,
was issued upon conversion of 29,900 shares of
4% Cumulative Preferred Stock.
</TABLE>

The Company purchased all of the capital stock of DFC for $22.3 million, in
a merger transaction consummated on August 10, 1998. The total fair value of
assets acquired was $333.7 million and total fair value of liabilities assumed
was $315.4 million.

See accompanying notes to consolidated financial statements.
F-7
<PAGE> 54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

TeleBanc Financial Corporation ("TeleBanc" or the "Company") is a savings
and loan holding company organized under the laws of Delaware in 1994. The
primary business of the Company is the activities conducted by TeleBank (the
"Bank") and TeleBanc Capital Markets, Inc. ("TCM"). The Bank is a federally
chartered savings bank that provides deposit accounts insured by the Federal
Deposit Insurance Corporation ("FDIC") to customers nationwide. TCM is a funds
manager and registered broker-dealer. Telebanc Capital Trust I ("TCT I") and
TeleBanc Capital Trust II ("TCT II") are business trusts formed for the purpose
of issuing capital securities and investing the proceeds in junior subordinated
debentures issued by the Company. The Bank, through its wholly owned subsidiary
TeleBanc Servicing Corporation ("TSC"), owns 100% of TeleBanc Insurance Services
("TBIS"), which was formed in May 1998 to offer co-branded insurance products.
In 1997, TSC funded 50% of the capital commitment for two entities, AGT Mortgage
Services, LLC ("AGT") and AGT PRA, LLC ("AGT PRA"). AGT, which ceased operation
on July 31, 1997, serviced performing loans and administered workouts for
troubled or defaulted loans for a fee. The primary business of AGT PRA is its
two-thirds investment in Portfolio Recovery Associates, LLC ("PRA"). PRA
acquires and collects delinquent consumer debt obligations for its own
portfolio.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
TeleBank, TCM, TCT I, TCT II and TSC. All significant intercompany transactions
and balances are eliminated in consolidation. The investment in AGT PRA is
accounted for under the equity method. The Company's net equity investment in
AGT PRA at December 31, 1998 totaled approximately $4.0 million. During 1998,
1997 and 1996, TeleBank recorded $526,000, ($487,000), and ($155,000) in
earnings/(loss) from its investment in AGT PRA, respectively.

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

Basis of Financial Statement Presentation

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities, and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates for which a change
is reasonably possible in the near-term relate to the determination of the
allowance for loan losses, the fair value of investments and mortgage-backed
securities available-for-sale, loans receivable held for sale, trading
securities and the valuation of real estate acquired in connection with
foreclosures and mortgage servicing rights. In addition, the regulatory agencies
that supervise the financial services industry periodically review the Bank's
allowance for losses on loans. This review, which is an integral part of their
examination process, may result in additions or deductions to the allowance for
loan losses based on judgments with regard to available information provided at
the time of their examinations.

F-8
<PAGE> 55

Cash and Cash Equivalents

Cash and cash equivalents are composed of interest-bearing and
non-interest-bearing deposits, certificates of deposit, funds due from banks,
and federal funds sold with original maturities of three months or less. The
Company is required to maintain an overnight balance of $2.4 million in its
account with the Federal Reserve Bank of Richmond. As of December 31, 1998, the
Company had $18.1 million of interest-bearing deposits that were held at other
depository institutions.

Investment Securities and Mortgage-Backed Securities

The Company generally classifies its debt and marketable equity securities
in one of three categories: held-to-maturity, trading, or available-for-sale.
During 1997 and 1998, the Company held no investment or mortgage-backed
securities that it classified as held-to-maturity.

Trading securities are bought and held principally for the purpose of
selling them in the near term. Securities purchased for trading are carried at
market value with the corresponding realized and unrealized gains and losses
recognized by credits or charges to non-interest income. The Company had $29.6
million and $21.1 million classified as trading securities at December 31, 1998
and 1997, respectively. For the years ending December 31, 1998, 1997 and 1996,
the Company recognized $569,000, $564,000 and $0, respectively, in realized
gains from the sale of trading assets, as well as ($612,000), $640,000 and $0,
respectively, in unrealized depreciation or appreciation of trading assets. All
other securities not included in the trading category are classified as
available-for-sale. Available-for-sale securities are recorded at fair value.
Unrealized gains and losses on available-for-sale securities, net of the related
tax effects, are reported as a separate component of stockholders' equity until
realized. A decline in market value of any available-for-sale asset below its
cost, that is deemed other than temporary, is charged to earnings, resulting in
the establishment of a new cost basis for the asset. Transfers of securities
into the available-for-sale category are recorded at fair value at the date of
the transfer. Any unrealized gain or loss at the date of transfer from
held-to-maturity is recognized as a separate component of stockholders' equity,
net of tax effect. Dividend and interest income is recognized when earned.
Realized gains and losses for securities classified as available-for-sale and
trading are included in earnings and are derived using the specific
identification method for determining the cost of the security sold.

Loans Held for Sale

Mortgages acquired by the Company and intended for sale in the secondary
market are carried at lower of cost or estimated market value in the aggregate.
The market value of these mortgage loans is determined by obtaining market
quotes for loans with similar characteristics.

Loans Receivable

Loans receivable consist of mortgages that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off. These
loans are carried at amortized cost adjusted for charge-offs, the allowance for
loan losses, any deferred fees or costs on purchased or originated loans and
unamortized premiums or discounts on purchased loans. The loan portfolio is
reviewed by the Company's management to set provisions for estimated losses on
loans, which are charged to earnings in the current period. In this review,
particular attention is paid to delinquent loans and loans in the process of
foreclosure. The allowance and provision for loan losses are based on several
factors, including continuing examinations and appraisals of the loan portfolio
by management, examinations by supervisory authorities, continuing reviews of
problem loans and overall portfolio quality, analytical reviews of loan loss
experience in relation to outstanding loans, and management's judgment with
respect to economic conditions and their impact on the loan portfolio.

F-9
<PAGE> 56

Nonperforming Assets

Nonperforming assets consist of loans for which interest is no longer being
accrued, troubled loans that have been restructured in order to increase the
opportunity to collect amounts due on the loan, real estate acquired in
settlement of loans. Interest previously accrued but not collected on nonaccrual
loans is reversed against current income when a loan is placed on nonaccrual
status. Accretion of deferred fees is discontinued for nonaccrual loans. All
loans at least ninety days past due, as well as other loans considered
uncollectable, are placed on nonaccrual status. Payments received on nonaccrual
loans are recognized as interest income or applied to principal when it is
doubtful that full payment will be collected.

Loan and Commitment Fees, Discounts and Premiums

Loan fees and certain direct loan acquisition costs are deferred and the
net fee or cost recognized into interest income using the interest method over
the contractual life of the loans. Premiums and discounts on loans receivable
are amortized or accreted, respectively, into income using the interest method
over the remaining period to contractual maturity and adjusted for anticipated
prepayments. Discounts on loans held for sale are recognized as part of the loss
or gain upon sale and not amortized or accreted, respectively.

Real Estate Acquired through Foreclosure and Held for Sale

Real estate properties acquired through foreclosure and held for sale are
recorded at fair value less estimated selling costs at acquisition. Fair value
is determined by appraisal or other appropriate method of valuation. Losses
estimated at the time of acquisition are charged to the allowance for loan
losses. Management performs periodic valuations and establishes an allowance for
losses through a charge to income if the carrying value of a property exceeds
its estimated fair value less selling costs.

Deferred Financing Costs

Deferred financing costs related to the issuance of the subordinated notes
have been capitalized and are being amortized using the interest method over the
life of the subordinated notes.

Income Taxes

Effective January 1, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.

Financial Instruments

The Company uses interest rate swaps, caps, floors and futures in the
management of its interest-rate risk. The Company is generally exposed to rising
interest rates because of the nature of the repricing of rate-sensitive assets
as compared with rate-sensitive liabilities. These instruments are used
primarily to hedge specific assets and liabilities. For interest rate swaps, the
net interest received or paid is treated as an adjustment to the interest income
or expense related to the hedged assets or obligations in the period in which
such amounts are due.

In order to be eligible for hedge accounting treatment, high correlation
must be probable at the inception of the hedge transaction and must be
maintained throughout the hedge period.

F-10
<PAGE> 57

Upon the sale or disposition of the hedged item, the hedging instrument is
marked-to-market with changes recorded in the income statement. Any gain or loss
that is incurred upon termination of a hedging instrument is added to the
carrying value of the hedged item and amortized over its remaining life.
Premiums and fees associated with interest rate caps are amortized to interest
income or expense on a straight-line basis over the lives of the contracts. For
instruments that are not designated or do not qualify as hedges, realized and
unrealized gains and losses are recognized in the income statement as gain or
loss on trading securities in the period during which they are incurred.

Other Assets

Other assets include purchased loan servicing rights, premiums paid on
interest rate caps, and prepaid assets. The Bank services loans totaling $245.0
million as of December 31, 1998, which underlie these servicing rights. The cost
of the loan servicing rights is amortized in proportion to, and over the period
of, the estimated net servicing income. For the period ending December 31, 1998,
amortization expense of loan servicing rights was $925,000. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on mortgage product types. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights exceed their fair
value in aggregate. As of December 31, 1998, the amortized cost and fair value
of the loan servicing rights were $2.4 million. No valuation allowance was
recognized at December 31, 1998. Effective January 1, 1997, the Company adopted
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
125"), as amended by Statement of Financial Accounting Standards No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125 -- An Amendment of FASB Statement No. 125 ("SFAS 127"). The implementation
of SFAS 125 did not have a material impact on the Company's financial position.

Federal Home Loan Bank Stock

The Federal Home Loan Bank ("FHLB") stock is carried at its amortized cost
of $25.2 and $10.0 million as of December 31, 1998 and 1997, respectively.

Advertising Costs

The Company's policy is to expense advertising costs when incurred. For the
years ended December 31, 1998, 1997, and 1996, the Company incurred advertising
expense of $4.6 million, $606,000, and $93,000, respectively.

Effects of Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), effective for fiscal years beginning after December 15,
1997. This statement requires that certain financial activity typically
disclosed in stockholders' equity be reported in the financial statements as an
adjustment to net income in determining comprehensive income. The Company
adopted SFAS No. 130 effective January 1, 1998. As a result, comprehensive
income for the periods ending December 31, 1998 and 1997 is reported in the
Consolidated Statement of Operations.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related
Information("SFAS No. 131"), effective for fiscal years beginning after December
15, 1997. This statement requires entities to disclose selected information
regarding "reportable segments," which are defined as material operating
segments, and certain enterprise-wide information in quarterly and annual
reports. Segment

F-11
<PAGE> 58

disclosures are unnecessary, because only one operating segment meets the
materiality test to be considered a reportable segment. As of December 31, 1998,
the Bank, considered one segment, accounted for approximately 97.5% of the
Company's combined total assets and approximately 96.0% of the Company's
combined 1998 revenues. As of December 31, 1998, the Company's other operating
segment, TCM, was not sufficiently material to be considered a reportable
segment, as defined by SFAS No. 131. In 1998, the Company did not earn
significant revenue from foreign sources and did not hold a material amount of
long-lived assets in foreign countries. Additionally, the Company does not rely
on any one source for a significant portion of its revenue.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). The statement establishes accounting and reporting standards requiring
that every derivative instrument, including derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at fair value. SFAS No. 133 requires that changes in the
derivative instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative instrument's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting treatment. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, although a company may implement the statement as
of the beginning of any fiscal quarter after issuance, that is, fiscal quarters
beginning June 16, 1998 and after. SFAS 133 cannot be applied retroactively.
SFAS No. 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 and, at the Company's
election, before January 1, 1998. We plan to adopt SFAS 133 as of January 1,
2000 but have not yet quantified the impact of adopting SFAS 133 on our
financial statements. However, the statement could increase volatility in
earnings and other comprehensive income.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Cost of Start-up
Activities("SOP 98-5"), which is effective for fiscal years beginning after
December 15, 1998. The statement requires that the cost of start-up activities
be expensed as incurred rather than capitalized, with initial application
reported as the cumulative effect of a change in accounting principle, as
described in Accounting Principles Board Opinion Number 20, Accounting Changes.
As of December 31, 1998, the Company carries on its books approximately $740,000
of capitalized start-up costs, relating primarily to the establishment of TBIS.
The Company intends to implement SOP 8-5 on January 1, 1999, and, as a result,
will recognize this amount, net of tax, as an expense classified as the
cumulative effect of a change in accounting principle.

Reclassifications

Certain reclassifications of the 1997 and 1996 financial statements have
been made to conform to the 1998 presentation.

3. BUSINESS ACQUISITIONS

Effective August 10, 1998, the Company acquired Direct Financial
Corporation ("DFC"), a regional savings and loan holding company, and its wholly
owned subsidiary, Premium Bank F.S.B., a federal savings bank ("Premium Bank"),
in a merger transaction for approximately $22.3 million in cash (the "DFC
Acquisition"). This transaction has been accounted for under the purchase method
of accounting. The Company recorded the excess of the purchase price over the
estimated fair value of the net tangible assets acquired, as well as the direct
costs of the DFC Acquisition, as goodwill. The Company plans to amortize
goodwill over a period of 15 years using the straight-line method. At December
31, 1998, goodwill totaled $17.5 million, net of
F-12
<PAGE> 59

accumulated amortization of $584,000. Operating results of DFC have been
included with those of the Company from the closing date.

The following pro forma combined financial information presents the
historical results of operations of the Company and DFC for the years ended
December 31, 1997 and 1998, with pro forma adjustments as if DFC had been
acquired as of the beginning of the periods presented. The pro forma information
presented is not necessarily indicative of what the results of operations
actually would have been if the transaction had occurred on the date indicated,
or of future results of operations.

<TABLE>
<CAPTION>
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income............................................. $113,394 $82,450
Interest expense............................................ 91,502 64,344
-------- -------
Net interest income....................................... 21,892 18,106
Provision for loan losses................................... 1,106 1,377
Non-interest income......................................... 7,671 4,533
Non-interest expense:
Selling, general and administrative expenses.............. 24,807 12,510
Other non-interest expense................................ 2,907 2,473
-------- -------
Income before income tax, minority interest and preferred
dividend.................................................. 743 6,279
Income tax expense.......................................... 625 2,128
Minority interest........................................... 1,362 394
-------- -------
Net income from continuing operations before nonrecurring
charges directly attributable to the transaction and
preferred dividend........................................ $ (1,244) $ 3,757
Preferred dividend.......................................... 2,112 546
-------- -------
Net income available to common stockholders................. $ (3,356) $ 3,211
======== =======
Other comprehensive income.................................. (861) 708
-------- -------
Comprehensive income........................................ $ (4,217) $ 3,919
======== =======
Earnings per share:
Basic..................................................... $ (0.43) $ 0.73
Diluted................................................... $ (0.43)(a) $ 0.51
</TABLE>

- ---------------
(a) The impact of the Company's outstanding options, warrants, and convertible
preferred stock is antidilutive for the year ended December 31, 1998.

In April 1998, the Company purchased and assumed substantially all of the
assets and liabilities of MET Holdings Corporation ("MET") in accordance with
the Amended and Restated Acquisition Agreement between MET and the Company (the
"Agreement"), dated as of March 17, 1998. Thereafter, MET dissolved. Pursuant to
the Agreement, MET sold substantially all of its assets, including 2,866,162
shares of Common Stock owned by MET, and assigned substantially all of its
liabilities to the Company in exchange for 2,876,162 shares of Common Stock,
which shares were distributed to the shareholders of MET upon MET's dissolution.
The Company accounted for this transaction under the purchase method of
accounting and recorded the excess of the purchase price over the estimated fair
value of the net tangible assets acquired as goodwill. Goodwill from this
transaction totaled $275,000 at December 31, 1998, net of accumulated
amortization of $12,000. The Company amortizes this goodwill using the straight-
line method over a period of 15 years.

F-13
<PAGE> 60

4. CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 1998 and 1997,
the Office of Thrift Supervision categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.

The Bank's actual capital amounts and ratios are presented in the table
below (dollars in thousands):

<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL
ADEQUACY CAPITALIZED UNDER
ACTUAL PURPOSES: PROMPT CORRECTIVE
---------------- ------------------- ACTION PROVISIONS:
AMOUNT RATIO AMOUNT RATIO ---------------------------
-------- ----- ----------- ----- AMOUNT RATIO
------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Core Capital (to adjusted
tangible assets).............. $122,871 5.57% > $88,310 >4.0% > $110,388 >5.0%
Tangible Capital (to tangible
assets)....................... $122,871 5.57% > $33,116 >1.5% N/A N/A
Tier I Capital (to risk weighted
assets)....................... $122,871 12.90% N/A N/A > $ 57,157 >6.0%
Total Capital (to risk weighted
assets)....................... $127,179 13.35% > $76,210 >8.0% > $ 95,262 >10.0%

AS OF DECEMBER 31, 1997:
Core Capital (to adjusted
tangible assets).............. $ 52,617 5.06% > $41,606 >4.0% > $52,008 >5.0%
Tangible Capital (to tangible
assets)....................... $ 52,608 5.06% > $15,602 >1.5% N/A N/A
Tier I Capital (to risk weighted
asset)........................ $ 52,617 11.25% N/A N/A > $28,057 >6.0%
Total Capital (to risk weighted
assets)....................... $ 55,701 11.91% > $37,409 >8.0% > $46,761 >10.0%
</TABLE>

F-14
<PAGE> 61

5. INVESTMENT SECURITIES

The cost basis and estimated fair values of available-for-sale investment
securities other than mortgage-backed securities at December 31, 1998 and 1997,
by contractual maturity, are shown below (in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998:
Due within one year:
Municipal bonds.................... $ 145 $ -- $ -- $ 145
Due within one to five years:
Agency notes....................... 13,282 778 -- 14,060
Municipal bonds.................... 835 1 -- 836
Asset backed....................... 758 16 -- 774
Certificate of deposit............. 499 -- -- 499
Due within five to ten years:
Corporate debt..................... 4,981 307 -- 5,288
Municipal bonds.................... 980 9 -- 989
Other investments.................. 500 -- (132) 368
Due after ten years:
Corporate debt..................... 149,552 734 (2,369) 147,917
Equities........................... 13,937 457 (12) 14,382
Municipal bonds.................... 13,790 268 -- 14,058
Agency notes....................... 13,379 553 -- 13,932
Asset backed....................... 337 8 -- 345
Other investments.................. 6,815 1 (51) 6,765
-------- ------ ------- --------
$219,790 $3,132 $(2,564) $220,358
======== ====== ======= ========
1997:
Due within one year:
Agency notes....................... $ 539 $ -- $ -- $ 539
Other investments.................. 323 1 -- 324
Due within one to five years:
Municipal bonds.................... 565 12 -- 577
Other investments.................. 25,038 16 -- 25,054
Certificates of deposit............ 499 -- -- 499
Due within five to ten years:
Corporate debt..................... 7,433 242 -- 7,675
Municipal bonds.................... 3,562 130 -- 3,692
Other investments.................. 175 -- -- 175
Due after ten years:
Agency notes....................... 21,608 398 (40) 21,966
Equities........................... 15,038 436 (50) 15,424
Corporate debt..................... 11,103 797 -- 11,900
Municipal bonds.................... 3,200 212 -- 3,412
-------- ------ ------- --------
$ 89,083 $2,244 $ (90) $ 91,237
======== ====== ======= ========
</TABLE>

The proceeds from sale and gross realized gains and losses on investment
securities available for sale that were sold in 1998 were $85.7 million, $1.3
million, and $8,000, respectively.

F-15
<PAGE> 62

The proceeds from sale and gross realized gains and losses on investment
securities available for sale that were sold in 1997 were $25.9 million,
$423,000, and $34,000, respectively. The proceeds from sale and gross realized
gains and losses on investment securities available for sale that were sold in
1996 were $25.1 million, $311,000, and $153,000, respectively.

6. MORTGAGE-BACKED AND RELATED SECURITIES

Mortgage-backed and related securities represent participating interests in
pools of long-term first mortgage loans originated and serviced by the issuers
of the securities. The Company has also invested in collateralized mortgage
obligations ("CMOs"), which are securities issued by special purpose entities
generally collateralized by pools of mortgage-backed securities. The Company's
CMOs are senior tranches collateralized by federal agency securities or whole
loans. The fair value of mortgage-backed and related securities fluctuates
according to current interest rate conditions and prepayments. Fair value is
estimated using quoted market prices. For illiquid securities, market prices are
estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two securities, such as
credit risk, liquidity, term, coupon, payment characteristics, and other
information.

The amortized cost basis and estimated fair values of mortgage-backed
securities available-for-sale at December 31, 1998 and 1997, by contractual
maturity, are shown as follows (in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998:
Due within one year:
Private issuer.................. $ 391 $ 12 $ -- $ 403
Due within one to five years:
Private issuer.................. 2,971 -- (10) 2,961
Due within five to ten years:
Agencies........................ 109 -- (1) 108
Collateralized mortgage
obligations.................. 4,110 25 -- 4,135
Private issuer.................. 8,560 389 (82) 8,867
Due after ten years:
Agencies........................ 11,154 48 (4) 11,198
Private Issuer.................. 107,159 2,790 (335) 109,614
Collateralized mortgage
obligations.................. 875,209 1,650 (1,982) 874,877
---------- ------ ------- ----------
$1,009,663 $4,914 $(2,414) $1,012,163
========== ====== ======= ==========
</TABLE>

F-16
<PAGE> 63

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1997:
Due within one year:
Agencies........................ $ 939 $ -- $ -- $ 939
Due within one to five years:
Agencies........................ 627 2 (6) 623
Private issuer.................. 2,643 -- (22) 2,621
Due within five to ten years:
Private issuer.................. 5,982 39 -- 6,021
Due after ten years:
Agencies........................ 23,907 124 (27) 24,004
Private Issuer.................. 143,889 2,971 (1,443) 145,417
Collateralized mortgage
obligations.................. 139,663 536 (621) 139,578
---------- ------ ------- ----------
$ 317,650 $3,672 $(2,119) $ 319,203
========== ====== ======= ==========
</TABLE>

The Company pledged $439.0 million and $104.7 million of private issuer
mortgage-backed securities as collateral for repurchase agreements at December
31, 1998 and 1997, respectively. The proceeds from sale and gross realized gains
and losses on mortgage-backed securities available for sale that were sold in
1998 were $294.8 million, $2.4 million, and $113,000, respectively. The proceeds
from sale and gross realized gains and losses on mortgage-backed securities
available for sale that were sold in 1997 were $112.4 million, $845,000, and
$253,000, respectively. The proceeds from sale and realized gains and losses on
mortgage-backed securities available for sale that were sold in 1996 were $185.2
million, $1.4 million, and $707,000.

F-17
<PAGE> 64

7. LOANS RECEIVABLE

Loans receivable at December 31, 1998 and 1997 are summarized as follows
(in thousands):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one- to four-family residences................. $897,168 $547,757
Secured by commercial real estate......................... 8,916 3,033
Secured by mixed-use property............................. 929 856
Secured by five or more dwelling units.................... 3,224 1,447
Secured by land........................................... 316 463
-------- --------
Total first mortgage loans.................................. 910,553 553,556
Other loans:
Home equity and second mortgage loans..................... 5,895 564
Other..................................................... 3,312 305
-------- --------
Total loans................................................. 919,760 554,425
Less:
Net deferred loan origination fees........................ (13) (34)
Unamortized discounts, net................................ (9,989) (9,938)
Other..................................................... (138) (155)
-------- --------
909,620 544,298
Less: allowance for loan losses............................. (4,766) (3,594)
-------- --------
Net loans receivable........................................ $904,854 $540,704
======== ========
</TABLE>

The mortgage loans are located primarily in California, New Jersey, and New
York according to the following percentages 24.8%, 10.4%, and 8.0%,
respectively. As of December 31, 1998, the mortgage loan portfolio consisted of
variable rate loans of $436.3 million, or 47.6%, and fixed rate loans of $480.1
million, or 52.4%. The weighted average maturity of mortgage loans secured by
one- to four-family residences is 291 months as of December 31, 1998. The unpaid
principal balance of mortgage loans owned by the Company but serviced by other
companies was $904.9 million and $301.5 million at December 31, 1998 and 1997,
respectively. Loans past due ninety days or more, and therefore on non-accrual
status at December 31, 1998 and 1997, are summarized as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
First mortgage loans:
Secured by one- to four-family residences................. $7,727 $10,802
Secured by commercial real estate......................... 372 635
Home equity and second mortgage loans....................... 255 --
Other....................................................... 521 --
------ -------
Total............................................. $8,875 $11,437
====== =======
</TABLE>

The interest accrual balance for each loan that enters non-accrual is
reversed from income. If all non-performing loans had been performing during
1998, 1997, and 1996, the Bank would have recorded $597,000, $739,000 and
$789,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1998 and 1997.

F-18
<PAGE> 65

Activity in the allowance for loan losses for the years ended December 31,
1998, 1997, and 1996 is summarized as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of the year......................... $3,594 $2,957 $2,311
Provision for loan losses.............................. 905 921 919
Loan loss allowance acquired in merger with DFC........ 724 -- --
Charge-offs, net....................................... (457) (284) (273)
------ ------ ------
Balance, end of year................................... $4,766 $3,594 $2,957
====== ====== ======
</TABLE>

According to Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"), a loan is
considered impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The term "all amounts due" includes
both the contractual interest and principal payments of a loan as scheduled in
the loan agreement. The Company has determined that once a loan becomes 90 or
more days past due, collection of all amounts due is no longer probable and is
therefore considered impaired. The amount of impairment is measured based upon
the fair value of the underlying collateral and is reflected through the
creation of a valuation allowance.

The table below presents impaired loans as of December 31, 1998 and 1997
(in thousands):

<TABLE>
<CAPTION>
AMOUNT
TOTAL AMOUNT OF OR RECORDED
RECORDED INVESTMENT SPECIFIC INVESTMENT NET OF
DESCRIPTION OF LOANS IN IMPAIRED LOANS RESERVES SPECIFIC RESERVES
- -------------------- ------------------- --------- -----------------
<S> <C> <C> <C>
1998:
Impaired loans:
Commercial real estate............... $ 667 $ 351 $ 316
One- to four-family.................. 7,880 1,095 6,785
Other................................ 776 67 709
------- ------ ------
Total...................... $ 9,323 $1,513 $7,810
======= ====== ======
Restructured loans:
Commercial real estate............... $ -- $ -- $ --
One- to four-family.................. -- -- --
------- ------ ------
Total...................... $ -- $ -- $ --
======= ====== ======
1997:
Impaired loans:
Commercial real estate............... $ 635 $ 248 $ 387
One- to four-family.................. 10,802 1,760 9,042
------- ------ ------
Total...................... $11,437 $2,008 $9,429
======= ====== ======
Restructured loans:
Commercial real estate............... $ 248 $ -- $ 248
One- to four-family.................. 177 -- 177
------- ------ ------
Total...................... $ 425 $ -- $ 425
======= ====== ======
</TABLE>

The average recorded investment in impaired loans, as of December 31, 1998,
1997, and 1996 was $1.4 million, $2.3 million and $2.2 million, respectively.
The related amount of interest income the Company would recognize as additional
interest income for the years ended December 31, 1998, 1997, and 1996 was
$597,000, $739,000 and $789,000, respectively. The

F-19
<PAGE> 66

Company's charge-off policy for impaired loans is consistent with its charge-off
policy for other loans; impaired loans are charged-off when, in the opinion of
management, all principal and interest due on the impaired loan will not be
fully collected. Consistent with the Company's method for non-accrual loans,
payments received on impaired loans is recognized as interest income or applied
to principal when it is doubtful that full payment will be collected.

8. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS

Real estate acquired through foreclosure at December 31, 1998 and December
31, 1997 was $1.5 million and $681,000, respectively.

9. LOANS SERVICED FOR OTHERS

Mortgage loans master serviced by the Bank for others are not included in
the accompanying consolidated statements of financial condition because the
related loans are not owned by the Company or any of its subsidiaries. The
unpaid principal balances of these loans at December 31, 1998 and 1997 are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Mortgage loans underlying pass-through securities:
Federal Home Loan Mortgage Corporation.................... $106,006 $135,973
Federal National Mortgage Association..................... 110,162 148,269
-------- --------
Subtotal.................................................. 216,168 284,242
-------- --------
Mortgage loan portfolio serviced for:
Other investors........................................... 28,855 44,702
-------- --------
Total............................................. $245,023 $328,944
======== ========
</TABLE>

Custodial escrow balances held in connection with the foregoing loans
serviced were approximately $740,000 and $120,000 at December 31, 1998 and 1997,
respectively.

Included in other assets is purchased mortgage servicing rights of $2.4
million and $3.3 million as of December 31, 1998 and 1997, respectively.

10. DEPOSITS

The Bank initiates deposits directly with customers through contact on the
Internet, the phone, the mail, and walk-in at its headquarters. Deposits at
December 31, 1998 and 1997 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT
DECEMBER 31 AMOUNT PERCENT
----------- --------------------- ---------------
1998 1997 1998 1997 1998 1997
---- ---- ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Demand accounts, non-interest-
bearing........................... --% --% $ 5,605 $ 761 0.46% 0.15%
Demand accounts, interest-bearing... 3.81 -- 4,721 -- 0.39 --
Money market........................ 4.70 5.26 204,551 122,185 16.91 23.39
Passbook savings.................... 3.00 3.00 525 665 0.04 0.13
Certificates of deposit............. 5.93 6.24 926,983 398,610 76.65 76.33
Brokered callable certificates of
deposit........................... 6.16 -- 67,085 -- 5.55 --
---------- -------- ------ ------
Total..................... $1,209,470 $522,221 100.00% 100.00%
========== ======== ====== ======
</TABLE>

F-20
<PAGE> 67

Certificates of deposit and money market accounts, classified by rates as
of December 31, 1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
AMOUNT 1998 1997
- ------ ---------- --------
<S> <C> <C>
0 - 1.99%......................... $ 5 $ 5
2 - 3.99%......................... 424 --
4 - 5.99%......................... 756,618 231,048
6 - 7.99%......................... 440,711 289,046
8 - 9.99%......................... 793 696
10 - 11.99%........................ 44 --
12 - 20%........................... 24 --
---------- --------
Total.................... $1,198,619 $520,795
========== ========
</TABLE>

At December 31, 1998, scheduled maturities of certificates of deposit and
money market accounts are as follows (in thousands):

<TABLE>
<CAPTION>
LESS THAN 1-2 2-3 3-4 4-5 5+
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- -------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 1.99%............ $ 5 $ -- $ -- $ -- $ -- $ -- $ 5
2 - 3.99%............ 424 -- -- -- -- -- 424
4 - 5.99%............ 642,358 53,613 41,260 940 17,354 1,093 756,618
6 - 7.99%............ 161,520 110,448 31,567 29,920 37,569 69,687 440,711
8 - 9.99%............ 469 284 -- 40 -- -- 793
10 - 11.99%........... 44 -- -- -- -- -- 44
12 - 20%.............. 24 -- -- -- -- -- 24
-------- -------- ------- ------- ------- ------- ----------
$804,844 $164,345 $72,827 $30,900 $54,923 $70,780 $1,198,619
======== ======== ======= ======= ======= ======= ==========
</TABLE>

The aggregate amount of certificates of deposit with denominations greater
than or equal to $100,000 was $197.5 million and $47.5 million at December 31,
1998 and 1997, respectively.

Interest expense on deposits for the years ended December 31, 1998, 1997,
and 1996 is summarized as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Money market................................................ $ 7,961 $ 6,353 $ 4,740
Passbook savings............................................ 16 27 59
Checking.................................................... 46 -- --
Certificates of deposit..................................... 36,890 19,578 16,558
Brokered callable certificates of deposit................... 3,638 -- --
------- ------- -------
Total............................................. $48,551 $25,958 $21,357
======= ======= =======
</TABLE>

Accrued interest payable on deposits at December 31, 1998 and 1997 was $3.4
million and $728,000, respectively.

F-21
<PAGE> 68

11. ADVANCES FROM THE FHLB OF ATLANTA

Advances to the Bank from the FHLB of Atlanta at December 31, 1998 and 1997
were as follows (dollars in thousands):

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1998 INTEREST RATE 1997 INTEREST RATE
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
1998.............................. $ -- --% $ 71,000 5.61%
1999.............................. 466,500 5.19 129,000 5.69
2000.............................. 6,000 5.30 -- --
2001.............................. -- -- -- --
-------- ---- -------- ----
Total........................ $472,500 5.19% $200,000 5.66%
======== ==== ======== ====
</TABLE>

All advances are floating rate advances and adjust daily to the Federal
Funds Rate or quarterly or semi-annually to the London InterBank Offering Rate
("LIBOR") rate. In 1998 and 1997, the advances were collateralized by a specific
lien on mortgage loans in accordance with an "Advances, Specific Collateral
Pledge and Security Agreement" with the FHLB of Atlanta, executed September 10,
1980. Under this agreement, the Bank is required to maintain qualified
collateral equal to 120 to 160 percent of the Bank's FHLB advances, depending on
the collateral type. As of December 31, 1998 and 1997, the Company secured these
advances with an assignment of specific mortgage loan collateral from its loan
and mortgage-backed security portfolio. These one- to four-family whole first
mortgage loans and securities pledged as collateral totaled approximately $647.6
million and $259.9 million at December 31, 1998 and 1997, respectively. The
Company is required to be a member of the FHLB System and to maintain an
investment in the stock of the FHLB of Atlanta at least equal to the greater of
1 percent of the unpaid principal balance of its residential mortgage loans or 1
percent of 30 percent of its total assets or 1/20 of its outstanding advances
from the FHLB.

12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Information concerning borrowings under fixed and variable rate coupon
repurchase agreements is summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Weighted average balance during the year (calculated on a
daily basis).............................................. $259,846 $117,431
Weighted average interest rate during the year (calculated
on a daily basis)......................................... 5.69% 5.76%
Maximum month-end balance during the year................... $519,078 $279,909
Balance at year-end......................................... $401,100 $279,909
Mortgage-backed securities underlying the agreements as of
the end of the year:
Carrying value, including accrued interest................ $441,323 $295,556
Estimated market value.................................... $438,955 $295,500
</TABLE>

The securities sold under the repurchase agreements at December 31, 1998
are due in less than one year. The Company enters into sales of securities under
agreements to repurchase the same securities. Repurchase agreements are
collateralized by fixed and variable rate mortgage-backed securities or
investment grade securities. Repurchase agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the balance sheet. The dollar amount of securities underlying the agreement
remains in the asset accounts. The securities underlying the agreements are
physical and book entry securities and the brokers retain possession of the
securities collateralizing the repurchase agreements. If the counterparty in a
repurchase agreement were to fail, the Company may incur an accounting loss for
the excess collateral posted with the counterparty. As of December 31, 1998,
there were no
F-22
<PAGE> 69

counterparties with which the Company's amount at risk exceeded 10% of the
Company's stockholders' equity.

As of December 31, 1998, the Company carried borrowings of approximately
$3.3 million that were secured by a pool of loans owned by the Company. Under
the borrowing agreement, which expires in August 1999, the Company may not sell
or otherwise transfer the pledged assets.

13. SUBORDINATED DEBT

In May and June 1994, the Company issued 15,000 units of subordinated debt
at a price of $15.0 million and 2,250 units at a price of $2.3 million,
respectively. The units each consist of $1,000 of 11.5% subordinated notes due
in 2004 and 20 detachable warrants to purchase two shares each of TeleBanc
Common Stock. The notes are subordinated to all senior indebtedness of the
Company and may not be redeemed prior to May 1, 1999. The notes are redeemable
at the option of the Company after May 1, 1999, at an initial redemption price
of 105.75% of the principal amount plus accrued interest with the redemption
price declining to 104.60%, 103.45%, 102.30%, and 101.15% annually each year
thereafter. Interest is payable semi-annually on May 1 and November 1,
commencing November 1, 1994. The indenture, among other things, restricts the
ability of the Company under certain circumstances to incur additional
indebtedness, limits cash dividends and other capital distributions by the
Company, requires the maintenance of a reserve equal to 100% of the Company's
annual interest expense on all indebtedness, restricts disposition of the Bank
or its assets, and limits transactions with affiliates. The annual interest
expense to service the subordinated debt is $2.0 million. The total value of the
690,000 warrants was $948,750, which resulted in an original issue discount on
the subordinated debt in the amount of $899,288. The original issue discount is
amortized on a level yield basis over the life of the debt. The warrants became
transferable on November 27, 1994 and are exercisable on or after May 27, 1995.
The exercise price of each warrant is $3.8281.

On February 28, 1997, the Company sold $29.9 million of units in the form
of 4% convertible preferred stock and 9.5% senior subordinated notes and
warrants to investment partnerships managed by Conning & Co., CIBC Wood Gundy
Argosy Merchant Fund 2, LLC, General American Life Insurance Company, 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 396,176 detachable
warrants, $16.2 million in 4.0% convertible preferred stock, par value $0.01
(the "Preferred Stock"), and rights to 411,126 contingent warrants. The senior
subordinated notes, which are subordinated to all senior indebtedness of the
Company, 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, each of
which entitles the bearer to purchase two shares of Common Stock, are
exercisable at $4.75 with an expiration date of February 28, 2005. The Preferred
Stock, which consisted of Series A Voting Convertible Preferred Stock, Series B
Nonvoting Convertible Preferred Stock, and Series C Nonvoting Convertible
Preferred Stock, converted to 2,399,479 shares of Common Stock upon consummation
of the Company's Equity Offering on July 28, 1998. The contingent warrants, each
of which entitles the bearer to purchase two shares of Common Stock, may be
exercised upon a change of control or at any time after February 19, 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 $0.005 until an internal rate of return of 25% is reached. The
annual interest expense to service the senior subordinated notes is $1.3
million. The Company paid $2.1 million and $546,000 in dividends on the
preferred stock in 1998 and 1997, respectively.

F-23
<PAGE> 70

14. TRUST PREFERRED SECURITIES

In June 1997, the Company formed TCT I, which in turn sold, at par, 10,000
shares of trust preferred securities, Series A, liquidation amount of $1,000,
for a total of $10,000,000 in a private placement. TCT I is a business trust
formed for the purpose of issuing capital securities and investing the proceeds
in junior subordinated debentures issued by the Company. The trust preferred
securities, which are subordinated to the 11.5% subordinated notes and the 9.5%
subordinated notes, mature in 2027 and have an annual dividend rate of 11.0%, or
$1.1 million, payable semi-annually, beginning in December 1997. The net
proceeds were used for general corporate purposes, including to fund Bank
operations and the creation and expansion of its financial service and product
operations.

In July 1998, the Company formed TCT II, a business trust formed solely for
the purpose of issuing capital securities. TCT II sold, at par, 1,100,000 shares
of Beneficial Unsecured Securities, Series A, (the "BLUS(SM)"), with a
liquidation amount of $25, for a total of $27.5 million and invested the net
proceeds in the Company's 9.0% Junior Subordinated Deferrable Interest
Debentures, Series A. The BLUS(SM), which are subordinated to the 11.5%
subordinated notes and the 9.5% subordinated notes, mature in 2028 and have an
annual dividend rate of 9.0%, payable quarterly, beginning in September 1998.
The net proceeds were used for general corporate purposes, which include funding
the Company's continued growth and augmenting working capital.

15. STOCKHOLDERS' EQUITY

As of December 31, 1998, the authorized capital stock of the Company
consisted of 29.5 million shares of Common Stock and 500,000 shares of Preferred
Stock. In July and August 1998, the Company sold 5,175,000 shares of Common
Stock to the public at an offering price of $14.50 (the "Equity Offering").
Simultaneously, pursuant to a conversion agreement dated May 15, 1998, the
Company's 29,900 outstanding shares of Preferred Stock converted to 2,399,479
shares of Common Stock, upon consummation of the Equity Offering on July 28,
1998. In addition, upon the conversion, the Company issued a special dividend in
the amount of 119,975 shares of Common Stock to the holders of the Preferred
Stock.

16. EARNINGS PER 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.

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. Diluted earnings per
common share for the years ended December 31, 1998, 1997, and 1996 were
determined on the assumptions that the dilutive options and warrants were
exercised upon issuance. The options and warrants are deemed to be dilutive if
(a) the average market price of the related common stock for a period exceeds
the exercise price or (b) the security to be tendered is selling at a price
below that at which it may be tendered under the option or warrant agreement and
the resulting discount is sufficient to establish an effective exercise price
below the market price of the common stock obtainable upon exercise. The
Company's year to date weighted average number of common shares outstanding was
7,840,214 at December 31, 1998, 4,382,910 at December 31, 1997 and 4,099,000 at
December 31, 1996. For diluted earnings per share computation, weighted average
shares outstanding also include potentially dilutive securities.

F-24
<PAGE> 71

EPS CALCULATION

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------
INCOME SHARES PER SHARE AMOUNT
------- ------ ----------------
<S> <C> <C> <C>
Net income.................................... $ 1,375
Less: preferred stock dividends............... (2,112)
-------
Basic earnings per share
Income available to common shareholders....... $ (737) 7,840 $(0.09)
======= ====== ======
Options issued to management.................. -- 866
Warrants...................................... -- 757
Convertible preferred stock................... 2,112 1,368
------- ------
Diluted earnings per share.................... $ 1,375 10,831 $(0.09)(a)
======= ====== ======
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
INCOME SHARES PER SHARE AMOUNT
------ ------ ----------------
<S> <C> <C> <C>
Net income...................................... $4,217
Less: preferred stock dividends................. (546)
------
Basic earnings per share
Income available to common shareholders......... $3,671 4,383 $0.84
====== ===== =====
Options issued to management.................... -- 510
Warrants........................................ -- 501
Convertible preferred stock..................... 546 2,017
------ -----
Diluted earnings per share...................... $4,217 7,411 $0.57
====== ===== =====
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
INCOME SHARES PER SHARE AMOUNT
------ ------ ----------------
<S> <C> <C> <C>
Basic earnings per share
Net income...................................... $2,552 4,099 $0.62
====== ===== =====
Options issued to management.................... -- 182
Warrants........................................ -- 125
Diluted earnings per share...................... $2,552 4,406 $0.58
====== ===== =====
</TABLE>

- ---------------
(a) The impact of the Company's outstanding options, warrants, and convertible
preferred stock is antidilutive for the year ended December 31, 1998.

F-25
<PAGE> 72

17. INCOME TAXES

Income tax expense for the years ended December 31, 1998, 1997, and 1996 is
summarized as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current: Federal....................................... $1,706 $1,881 $1,194
State................................................ 164 221 225
------ ------ ------
1,870 2,102 1,419
Deferred: Federal...................................... (196) (398) (78)
State................................................ (25) (47) (146)
------ ------ ------
(221) (445) (224)
Total: Federal......................................... 1,510 1,483 1,116
State................................................ 139 174 79
------ ------ ------
$1,649 $1,657 $1,195
====== ====== ======
</TABLE>

A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1998, 1997, and 1996
is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate........................ 34.0% 34.0% 34.0%
State taxes, net of federal benefit......................... 4.2 4.2 4.2
Municipal bond interest, net of disallowed interest
expense................................................... (4.7) (5.8) (3.6)
Amortization of goodwill.................................... 9.8 -- --
Other....................................................... (5.7) (6.0) (2.7)
---- ---- ----
37.6% 26.4% 31.9%
==== ==== ====
</TABLE>

Deferred income taxes result from temporary differences in the recognition
of income and expense for tax versus financial reporting purposes. The sources
of these temporary differences and the related tax effects for the years ended
December 31, 1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Purchase accounting premium............................... $ -- $ (75)
Depreciation.............................................. (185) (44)
Tax reserve in excess of base year........................ (101) (134)
Tax effect of securities available-for-sale adjustment to
fair value (notes 5 and 6)............................. (1,181) (722)
FHLB stock dividends...................................... (129) (129)
Other..................................................... (23) (89)
------- -------
Total............................................. (1,619) (1,193)
DEFERRED TAX ASSETS:
Reserves for loan losses.................................. 1,875 1,293
Acquisition of DFC........................................ 2,770 --
Other..................................................... 12 80
------- -------
Total............................................. 4,657 1,373
------- -------
Net deferred tax asset (liability)........................ $ 3,038 $ 180
======= =======
</TABLE>

F-26
<PAGE> 73

18. FINANCIAL INSTRUMENTS

The Company is party to a variety of interest rate caps, floors, swaps and
futures to manage interest rate exposure. The Company enters into interest rate
swap agreements to assume fixed-rate interest payments in exchange for variable
market-indexed interest payments. The effect of these agreements is to lengthen
short-term variable liabilities into longer-term fixed-rate liabilities or to
shorten long-term fixed rate assets into short-term variable rate assets. The
interest rate swaps are specifically designated to specific liabilities or, to a
lesser extent, assets at their acquisition. The net payments of these agreements
are charged to interest expense or interest income, depending on whether the
agreement is designated to hedge a liability or an asset.

Interest rate swap agreements for the years ended December 31, 1998 and
1997 are summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Weighted average fixed rate payments............. 6.04% 6.15%
Weighted average original term................... 4.2yrs 4.6yrs
Weighted average variable rate obligation........ 5.43% 5.81%
Notional amount.................................. $355,000 $205,000
</TABLE>

The counterparties to the interest rate swap agreements described above are
Goldman Sachs, Merrill Lynch, NationsBank, Nomura, and Salomon Brothers. As of
December 31, 1998, the Company had no credit risk associated with any of the
aforementioned counterparties. The interest rate swap agreements described above
required the Company to post cash of approximately $9.8 million as collateral.

The Company enters into interest rate cap agreements to hedge outstanding
mortgage loans, mortgage-backed securities, FHLB advances and repurchase
agreements. Under the terms of the interest rate cap agreements, the Company
generally would receive an amount equal to the difference between 3 month LIBOR
or 6 month LIBOR and the cap's strike rate, multiplied by the notional amount.
Premiums paid for the caps are amortized into expense based on the term of the
cap. The interest rate cap agreements are summarized as follows (dollars in
thousands):

<TABLE>
<CAPTION>
EFFECTIVE NOTIONAL MATURITY
DATE BALANCE DATE
-------------- -------- --------------
<S> <C> <C> <C>
Cap Strike Rate
4%............................... July 1992 $ 10,000 July 1999
4.4%............................. September 1998 $250,000 November 2000
4.4%............................. September 1998 $400,000 October 2000
5%............................... September 1998 $300,000 October 2000
5.5%............................. September 1998 $150,000 September 2000
5.5%............................. September 1998 $150,000 September 1999
6%............................... September 1998 $150,000 September 2000
6%............................... September 1998 $150,000 September 1999
6%............................... October 1996 $ 20,000 October 1999
6.1%............................. December 1998 $225,000 December 1999
6.1%............................. December 1998 $225,000 December 1999
6.5%............................. August 1998 $ 50,000 August 2003
7%............................... January 1997 $ 10,000 January 2002
7.5%............................. July 1997 $ 25,000 July 1999
8%............................... July 1997 $ 25,000 July 2000
8%............................... June 1997 $ 25,000 June 2000
10%.............................. April 1995 $ 10,000 January 2002
</TABLE>

F-27
<PAGE> 74

The counterparties to the interest rate cap agreements described above are
Goldman Sachs, Lehman Brothers, Merrill Lynch, NationsBank, Nomura, Salomon
Brothers, and UBS. As of December 31, 1998, the associated credit risk with the
aforementioned counterparties was $3.6 million, $366,000, $68,000, $1.8 million,
$11,000, $203,000, and $353,000, respectively. The credit risk is attributable
to the unamortized cap premium and any amounts due from the counterparty as of
December 31, 1998.

As of December 31, 1998, the Company was party to four interest rate caps
and one interest rate floor that were not designated as hedges. Realized and
unrealized gains and losses on these instruments have been recognized in the
income statement as gain or loss on trading securities. The following table
summarizes the Company's interest rate cap and floor agreements that were not
designated as hedges as of December 31, 1998 (dollars in thousands):

<TABLE>
<CAPTION>
EFFECTIVE NOTIONAL MATURITY
DATE BALANCE DATE
----------- -------- --------
<S> <C> <C> <C>
Cap Strike Rate
7%.................................. May 1998 $50,000 May 2001
7.25%............................... May 1998 $50,000 May 2001
7.5%................................ May 1998 $25,000 May 2002
7.75%............................... August 1998 $25,000 May 2003
Floor Strike Rate
5.00%............................... August 1998 $25,000 May 2001
</TABLE>

The counterparties to the interest rate cap and floor agreements described
above are Lehman Brothers and Salomon Brothers. As of December 31, 1998, the
associated credit risk with the aforementioned counterparties was $152,000 and
$205,000, respectively. The total amortization expense for premiums on all
interest rate caps and floors was $1.6 million, $777,000 and $638,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.

19. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The fair value information for financial instruments that is provided below
is based on the requirements of Statement of Financial Accounting Standards No.
107, Disclosure About Fair Value of Financial Instruments ("SFAS No. 107") and
does not represent the aggregate net fair value of the Bank. Much of the
information used to determine fair value is subjective and judgmental in nature.
Therefore, fair value estimates, especially for less marketable securities, may
vary. In addition, the amounts actually realized or paid upon settlement or
maturity could be significantly different. The following methods and assumptions
were used to estimate the fair value of each class of financial instrument for
which it is reasonable to estimate that value:

CASH AND INTEREST-BEARING DEPOSITS -- Fair value is estimated to be
carrying value.

FEDERAL FUNDS SOLD -- Fair value is estimated to be carrying value.

SECURITIES PURCHASED UNDER AGREEMENT TO RESELL -- Fair value is
estimated to be carrying value.

INVESTMENT SECURITIES -- Fair value is estimated by using quoted
market prices for most securities. For illiquid securities, market prices
are estimated by obtaining market price quotes on similar liquid securities
and adjusting the price to reflect differences between the two securities,
such as credit risk, liquidity, term coupon, payment characteristics, and
other information.

MORTGAGE-BACKED AND RELATED SECURITIES -- Fair value is estimated
using quoted market prices. For illiquid securities, market prices are
estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two

F-28
<PAGE> 75

securities, such as credit risk, liquidity, term coupon, payment
characteristics, and other information.

INTEREST RATE CAPS -- Fair value is based on quotes received from
third parties.

LOANS RECEIVABLE -- For certain residential mortgage loans, fair value
is estimated using quoted market prices for similar types of products. The
fair value of certain other types of loans is estimated using quoted market
prices for securities backed by similar loans. The fair value for loans
that could not be reasonably established using the previous two methods was
estimated by discounting future cash flows using current rates for similar
loans. Management adjusts the discount rate to reflect the individual
characteristics of the loan, such as credit risk, coupon, term, payment
characteristics, and the liquidity of the secondary market for these types
of loans.

DEPOSITS -- For passbook savings, checking and money market accounts,
fair value is estimated at carrying value. For fixed maturity certificates
of deposit, fair value is estimated by discounting future cash flows at the
currently offered rates for deposits of similar remaining maturities.

ADVANCES FROM THE FHLB OF ATLANTA -- For adjustable rate advances,
fair value is estimated at carrying value. For fixed rate advances, fair
value is estimated by discounting future cash flows at the currently
offered rates for fixed-rate advances of similar remaining maturities.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE -- Fair value is
estimated using carrying value. The securities are repriced on a semiannual
basis.

SUBORDINATED DEBT -- For subordinated debt, fair value is estimated
using quoted market prices.

OFF-BALANCE SHEET INSTRUMENTS -- The fair value of interest rate
exchange agreements is the net cost to the Company to terminate the
agreement as determined from market quotes.

F-29
<PAGE> 76

The fair value of financial instruments as of December 31, 1998 and 1997 is
as follows (in thousands):

<TABLE>
<CAPTION>
1998 1998 1997 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ 26,282 $ 26,282 $ 92,156 $ 92,156
Investment securities
available-for-sale.................. 220,358 220,358 91,237 91,237
Mortgage-backed securities available-
for-sale............................ 1,012,163 1,012,163 319,203 319,203
Loans receivable....................... 904,854 935,167 540,704 562,270
Trading................................ 29,584 29,584 21,110 21,110
Caps................................... 6,213 8,363 1,386 477

LIABILITIES:
Retail deposits........................ $1,142,385 $1,088,921 $522,221 $524,022
Brokered callable certificates of
deposit............................. 67,085 66,360 -- --
Advances from the FHLB Atlanta......... 472,500 472,500 200,000 200,000
Securities sold under agreements to
repurchase.......................... 404,435 404,435 279,909 279,909
Subordinated debt, net................. 29,855 30,810 29,614 30,953
Trust preferred........................ 35,385 35,385 9,572 10,000
Off-balance sheet instruments.......... -- (8,648) -- (1,818)
Commitments to purchase loans.......... -- 298 -- --
</TABLE>

20. DISTRIBUTIONS

The Bank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At December 31, 1998,
approximately $21.3 million of retained earnings was available for dividend
declaration.

21. EMPLOYEE STOCK OWNERSHIP PLAN

The Company sponsors an Employee Stock Ownership Plan ("ESOP"). All
employees of the Company who meet limited qualifications participate in the
ESOP. Under the ESOP, the Company contributes to a separate trust fund
maintained exclusively for the benefit of those employees who have become
participants. The ESOP has borrowed from the Company and used the proceeds to
acquire Company stock. The ESOP shares initially were pledged as collateral for
its debt to the Company. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the shares pledged as collateral are
reported as unearned ESOP shares in the statement of financial position. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares. As of December 31, 1998 and
1997, the ESOP owned 419,095 and 261,094 shares, respectively, of the Company's
stock, with approximately 223,000 and 196,536 shares allocated, respectively. As
of December 31, 1998 and 1997, the fair value of unearned shares held by the
ESOP was $6.7 million and $254,000, respectively. Compensation expense was
$391,000, $247,000 and $224,000 for the years ended December 31, 1998, 1997, and
1996, respectively.

22. STOCK BASED COMPENSATION

In 1998, the Company authorized and issued 959,710 options to directors,
officers and employees to purchase 959,710 shares of TeleBanc Common Stock at
prices ranging from $9.75
F-30
<PAGE> 77

to $14.50. In 1997, directors, officers and employees were issued 698,402
options to purchase 698,402 shares of TeleBanc Common Stock at prices ranging
from $1.33 to $6.75. As of December 31, 1998 and 1997, 904,797 and 598,248 of
the options outstanding, respectively, were vested at exercise prices ranging
from $1.33 to $14.50. The maximum term for the outstanding options is 10 years.
At the discretion of management, options are assigned a vesting period of five
years, with 20% of options vesting at the end of each year, or four years, with
20% of options vesting on the grant date and the remaining 80% vesting ratably
over the 4 years. As of December 31, 1998, the total number of authorized
options was 2,737,996. The options' exercise price was the market value of the
stock at the date of issuance.

<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000'S) PRICE (000'S) PRICE (000'S) PRICE
- ------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......... 1,330 $ 4.86 704 $3.45 542 $3.26
Granted................................... 960 $12.53 698 $6.26 162 $4.09
Exercised................................. 46 $ 5.93 34 $3.26 -- --
Forfeited................................. 106 $ 7.34 38 $5.70 -- --
Expired................................... -- $ -- -- $ -- -- $ --
----- ----- -----
Outstanding at end of year................ 2,138 $ 8.20 1,330 $4.86 704 $3.45
===== ===== =====
Options exercisable at year-end........... 905 $ 5.84 598 $4.03 360 $3.45
===== ===== =====
Weighted avg. fair value of options
granted during the year................. $ 4.81 $1.75 $1.31
</TABLE>

The following table summarizes information about fixed options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING (000'S) OPTIONS EXERCISABLE (000'S)
-------------------------------------- ---------------------------
WEIGHTED
AVG.
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVG. AVG.
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Less than $5.00................. 689,862 6.04 $ 3.32 535 $ 3.24
$5.00 -- $7.49.................. 513,334 8.15 $ 6.75 189 $ 6.75
$7.50 -- $9.99.................. 373,000 9.07 $ 9.75 71 $ 9.75
$10.00 -- $12.49................ -- -- -- -- --
$12.50 -- $14.99................ 561,710 9.81 $14.50 110 $14.50
---------- ---
Less than $5.00 -- $14.99....... 2,137,906 8.07 $ 8.20 905 $ 5.84
========== ===
</TABLE>

Because the method of accounting required by SFAS No. 123 has not been
applied to options granted prior to January 1996, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following weighted average
assumptions for grants; risk-free interest rates of 4.71 percent, 5.08 percent
and 5.25 percent for 1998, 1997, and 1996, respectively; expected life of 5
years in 1998 and 10 years in 1997 and 1996 for all options granted; expected
volatility of 81.6 percent, 25.0 percent and 23 percent for 1998, 1997, and
1996, respectively.

F-31
<PAGE> 78

The Company accounts for this plan under APB No. 25, under which no
compensation cost has been recognized. Had compensation cost for the plan been
determined consistent with SFAS No. 123, the Company's net income and net income
per share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/98 12/31/97 12/31/96
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported.......................... $ (737) $3,671 $2,552
Pro forma............................ $(2,061) $2,629 $2,409
Basic earnings per share:
As reported.......................... $ (0.09) $ 0.84 $ 0.62
Pro forma............................ $ (0.26) $ 0.60 $ 0.59
Diluted earnings per share:
As reported.......................... $ (0.09) $ 0.57 $ 0.58
Pro forma............................ $ (0.26) $ 0.43 $ 0.55
</TABLE>

23. COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments of the
Company are as follows:

At December 31, 1998, the Company was obligated under three operating
leases for office space with original terms ranging from three to ten years. Net
rent expense under operating leases was approximately $333,000, $238,000 and
$142,000 for the years ended December 31, 1998, 1997, and 1996, respectively.

The projected minimum rental payments under the terms of the lease are as
follows:

<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C>
1999........................................................ 419,000
2000........................................................ 382,000
2001........................................................ 294,000
2002........................................................ 297,000
2003........................................................ 185,000
2004 and thereafter......................................... 95,000
----------
$1,672,000
==========
</TABLE>

As of December 31, 1998, the Company had commitments to purchase $53.3
million of mortgage loans.

F-32
<PAGE> 79

24. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

STATEMENTS OF FINANCIAL CONDITION
($ IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 4,941 $ 5,401
Investment securities available-for-sale.................... 2,468 4,186
Mortgage-backed securities available-for-sale............... 3,651 26,219
Loans receivable, net....................................... -- 566
Loan receivable held for sale............................... 2,089 6,367
Trading..................................................... -- 14,011
Equity in net assets of subsidiary.......................... 162,859 58,976
Deferred charges............................................ 1,291 1,460
Other assets................................................ 7,154 4,806
-------- --------
Total assets........................................... $184,453 $121,992
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated debt........................................... $ 68,515 $ 39,614
Securities sold under agreements to repurchase.............. -- 33,555
Accrued interest payable.................................... 751 1,037
Taxes payable and other liabilities......................... 1,752 1,962
-------- --------
Total liabilities...................................... 71,018 76,168
-------- --------
Stockholders' Equity Preferred Stock........................ -- 15,281
Common Stock................................................ 123 44
Additional Paid in Capital.................................. 103,194 16,205
Unearned ESOP Shares........................................ (2,578) --
Retained earnings........................................... 10,819 11,556
Unrealized gain/loss on securities available-for-sale....... 1,877 2,738
-------- --------
Total stockholders' equity.................................. 113,435 45,824
-------- --------
Total liabilities and stockholders' equity............. $184,453 $121,992
======== ========
</TABLE>

F-33
<PAGE> 80

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income............................................. $ 2,777 $ 2,683 $ 531
Interest expense............................................ 4,311 4,352 2,163
------- ------- -------
Net interest loss........................................... (1,534) (1,669) (1,632)
Non interest income......................................... 383 13 133
Total selling, general and administrative expenses.......... 3,214 1,288 1,393
Other non-interest expenses................................. 285 195 127
------- ------- -------
Net loss before equity in net income of subsidiaries and
income taxes.............................................. (4,650) (3,139) (3,019)
Equity in net income of subsidiaries........................ 4,200 5,668 6,716
Income taxes................................................ (1,825) (1,688) 1,145
Preferred stock dividends................................... 2,112 546 --
------- ------- -------
Net income.................................................. (737) 3,671 2,552
Other comprehensive income, net of tax...................... (861) 642 541
------- ------- -------
Comprehensive income........................................ $(1,598) $ 4,313 $ 3,093
======= ======= =======
</TABLE>

F-34
<PAGE> 81

STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 1,375 $ 4,217 $ 2,552
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries..... (4,200) (5,668) (4,426)
Purchases of loans held for sale..................... (2,622) (6,367) --
Proceeds from sales of loans held for sale........... 4,388 -- --
Proceeds from maturities of and principal payments on
loans held for sale............................... 2,512 -- --
Net (increase) in trading securities................. 14,011 (14,011) --
(Increase) decrease in other assets.................. (5,077) (4,227) (686)
Increase in accrued expenses and other liabilities... (258) 2,223 267
-------- -------- ---------
Net cash provided by operating activities.............. 10,129 (23,833) (2,293)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loan to Employee Stock
Ownership Plan.................................... (2,578) -- (65)
Net increase in loans................................ 566 (261) --
Net (increase) decrease in equity investments........ (97,736) (19,178) 2,074
Purchases of available-for-sale securities........... (25,476) (92,862) (100,574)
Proceeds from sale of available-for-sale
securities........................................ 36,873 80,159 11,103
Proceeds from maturities of and principal payments on
available-for-sale securities..................... 12,791 1,158 76,910
Net sales (purchases) of premises and equipment...... (50) -- (37)
-------- -------- ---------
Net cash (used in) provided by investing activities.... (75,610) (30,984) (10,589)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in securities sold under agreements to
repurchase........................................ (33,555) 20,724 12,831
Increase in subordinated debt........................ 28,901 23,028 --
Increase in common stock and additional paid in
capital........................................... 71,787 16,853 --
Dividends paid on common and preferred stock......... (2,112) (546) --
-------- -------- ---------
Net cash provided by financing activities.............. 65,021 60,059 12,831
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents... (460) 5,242 (51)
Cash and cash equivalents at beginning of period....... 5,401 159 210
-------- -------- ---------
Cash and cash equivalents at end of period............. $ 4,941 $ 5,401 $ 159
======== ======== =========
SUPPLEMENTAL INFORMATION:
Interest paid on borrowed funds...................... 4,597 3,734 2,074
</TABLE>

TeleBanc Financial Corporation commenced activities on January 27, 1994,
the effective date of its formation as a holding company of the Bank. The Bank
paid dividends of $0 and $992,000 to TeleBanc for subordinated interest expense
payments for the years ended December 31, 1998 and 1997, respectively.

F-35
<PAGE> 82

25. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Condensed quarterly financial data for the years ended December 31, 1998
and 1997 is shown as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income................................. $18,071 $18,581 $27,632 $35,826
Interest expense................................ 14,477 15,276 21,979 28,573
------- ------- ------- -------
Net interest income........................... 3,594 3,305 5,653 7,253
Provision for loan and lease losses............. 250 75 300 280
Non-interest income............................. 1,947 1,104 1,832 2,681
General and administrative expenses............. 3,889 3,441 5,666 6,823
Other non-interest operating expenses........... 315 487 586 871
------- ------- ------- -------
Income before income taxes and minority
interest.................................... 1,087 406 933 1,960
Income tax expense.............................. 475 51 389 734
Minority interest in subsidiary................. 176 176 439 571
------- ------- ------- -------
Net income...................................... 436 179 105 655
Preferred stock dividends....................... 162 162 1,788 --
------- ------- ------- -------
Net income available to common stockholders... 274 17 (1,683) 655
Other comprehensive income...................... 262 (1,109) 8,579 (8,593)
------- ------- ------- -------
Comprehensive income............................ $ 536 $(1,092) $ 6,896 $(7,938)
======= ======= ======= =======
Basic earnings per share........................ $ 0.06 $ 0.00 $ (0.17)(1) $ 0.05
Diluted earnings per share...................... $ 0.05 $ 0.00 $ (0.17)(1) $ 0.05
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income................................. $12,837 $15,275 $14,821 $16,368
Interest expense................................ 9,878 11,865 11,548 12,772
------- ------- ------- -------
Net interest income........................... 2,959 3,410 3,273 3,596
Provision for loan and lease losses............. 243 308 120 250
Non-interest income............................. 607 1,244 1,084 1,158
General and administrative expenses............. 1,897 2,251 2,078 2,816
Other non-interest operating expenses........... 208 202 260 430
------- ------- ------- -------
Income before income taxes and minority
interest.................................... 1,218 1,893 1,899 1,258
Income tax expense.............................. 355 618 709 (25)
Minority interest in subsidiary................. -- 67 285 42
------- ------- ------- -------
Net income...................................... 863 1,208 905 1,241
Preferred stock dividends....................... 60 162 162 162
------- ------- ------- -------
Net income available to common stockholders... 803 1,046 743 1,079
Other comprehensive income...................... (1,165) 2,443 (24) (612)
------- ------- ------- -------
Comprehensive income............................ $ (362) $ 3,489 $ 719 $ 467
======= ======= ======= =======
Basic earnings per share........................ $ 0.19 $ 0.24 $ 0.16 $ 0.24
Diluted earnings per share...................... $ 0.15 $ 0.16 $ 0.11 $ 0.16
</TABLE>

- ---------------
(1) Reflects a $1.7 million nonrecurring, noncash charge related to the
additional Preferred Stock dividend payable in Common Stock, based on the
fair market value of the Common Stock at the time such dividend was paid.
The charge reduced net income available to common stockholders by the same
amount and diluted earnings per share in the third quarter of 1998 by $0.18
per share.

F-36
<PAGE> 83

UNDERWRITING

TeleBanc, the selling stockholders and the underwriters for the offering
named below have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., CIBC
Oppenheimer Corp. and Legg Mason Wood Walker, Incorporated are the
representatives of the underwriters.

<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co.........................................
BancBoston Robertson Stephens Inc. .........................
CIBC Oppenheimer Corp. .....................................
Legg Mason Wood Walker, Incorporated........................
--------
Total..................................................
========
</TABLE>

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

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from us to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.

The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the selling
stockholders. Such amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
Paid by TeleBanc
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>

<TABLE>
<CAPTION>
Paid by the Selling
Stockholders
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.

TeleBanc, our directors and certain officers, the selling stockholders and
certain of our other stockholders have agreed with the underwriters not to
dispose of or hedge any of their common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the

U-1
<PAGE> 84

date 180 days after the date of this prospectus, except with the prior written
consent of Goldman, Sachs & Co. This agreement does not apply to any existing
employee benefit plans or upon conversion of outstanding securities.

In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.

The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

As permitted by Rule 103 under the Exchange Act, underwriters and selling
group members, if any, that are market makers in the common stock may make bids
for or purchases of the common stock in the Nasdaq National Market until such
time, if any, when a stabilizing bid for the securities has been made. Rule 103
generally provides that (1) a passive market maker's net daily purchases of the
common stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months, or any 60 consecutive
days ending within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part, (2) a passive
market maker may not effect transactions or display bids for the common stock at
a price that exceeds the highest independent bid for the common stock by persons
who are not passive market makers and (3) bids made by passive market makers
must be identified as such.

TeleBanc and the selling stockholders estimate that their shares of the
total expenses of this offering, excluding underwriting discounts and
commissions, will be approximately $ and $ .

TeleBanc and the selling stockholders have agreed to indemnify the several
underwriters against specified liabilities, including liabilities under the
Securities Act of 1933.

CIBC Oppenheimer, an affiliate of CIBC, beneficially owns, through an
affiliate, CIBC WG Argosy Merchant Fund 2 LLC, 589,840 shares of common stock,
warrants to acquire 92,750 shares of common stock and contingent warrants to
acquire 96,250 shares of common stock. In addition, Mr. Kehler, a director of
TeleBanc, is a managing director of CIBC Oppenheimer Corp., a subsidiary of
CIBC. Mr. Kehler was elected to the board of directors pursuant to a provision
in the certificate of designation of our preferred stock.

U-2
<PAGE> 85

[Large full page of our web site screenshot and bar graph showing our account
and deposit volume for 1993 through 1998.]
<PAGE> 86

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

No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 3
Use of Proceeds......................... 8
Price Range of Common Stock............. 8
Dividend Policy......................... 8
Capitalization.......................... 9
Selected Consolidated Financial and
Other Data............................ 10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 12
Business................................ 27
Management.............................. 37
Principal and Selling Stockholders...... 40
Incorporation of Information We File
With the SEC.......................... 42
Where You Can Find More Information..... 42
Validity of the Shares.................. 43
Experts................................. 43
Index to Consolidated Financial
Statements............................ F-1
Underwriting............................ U-1
</TABLE>

- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
Shares

TELEBANC FINANCIAL
CORPORATION
Common Stock
----------------------
LOGO

----------------------
GOLDMAN, SACHS & CO.

BANCBOSTON ROBERTSON STEPHENS

CIBC OPPENHEIMER

LEGG MASON WOOD WALKER
INCORPORATED
Representatives of the Underwriters
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 87

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses to be incurred by TeleBanc
Financial Corporation (the "Registrant") in connection with the issuance and
distribution of the securities registered hereby, all of which expenses, except
for the registration fee and the Nasdaq National Market filing fee, are
estimates:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $65,330
Nasdaq National Market application and listing fees......... *
NASD filing fee............................................. 24,000
Printing expenses........................................... *
Legal fees and expenses (other than Blue Sky)............... *
Accounting fees and expenses................................ *
Blue Sky legal fees and filing expenses (including fees of
counsel).................................................. *
Transfer agent fees and expenses............................ *
Miscellaneous expenses...................................... *
Total............................................. $ *
=======
</TABLE>

- ---------------
* To be filed by amendment.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify any person against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened, pending or
completed action, suit or proceeding in which such person is made a party by
reason of his being or having been a director, officer, employee or agent of the
Delaware corporation. The DGCL provides that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to which a person
may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors, or otherwise. The certificate of incorporation of the
Registrant provides for the elimination and limitation of the personal liability
of directors of the Registrant for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders; (ii) for acts of
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) in respect of certain unlawful dividend payments or
stock redemption or repurchases; and (iv) for any transaction from which the
director derived and improper benefit. In addition, the certificate of
incorporation provides that the Registrant shall, to the fullest extent
permitted by the DGCL, as amended from time to time, indemnify each or its
currently acting and former directors, officers, employees and agents. Article
Eight of the Registrant's bylaws, entitled "Indemnification", provides for
indemnification of the Registrant's directors, officers, employees and agents
under certain circumstances.

II-1
<PAGE> 88

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1* Form of Underwriting Agreement
4.1 Specimen certificate evidencing shares of Common Stock of
the Registrant (incorporated by reference herein to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
dated March 25, 1994, File No. 33-76930)
5 * Opinion of Hogan & Hartson L.L.P. as to the legality of the
securities being registered
23.1 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5)
23.2 Consent of Arthur Andersen L.L.P.
24 Power of Attorney (included on signature page to the
Registration Statement)
</TABLE>

- ---------------
* To be filed by amendment.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes:

(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE> 89

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Arlington, State of Virginia, on this 11th day of
February, 1999.

TELEBANC FINANCIAL CORPORATION
(Registrant)

By: /s/ MITCHELL H. CAPLAN
------------------------------------
Mitchell H. Caplan
Vice Chairman, Chief Executive
Officer
and President

POWER OF ATTORNEY

Each individual whose signature appears below hereby constitutes and
appoints Mitchell H. Caplan and Arlen W. Gelbard, and each and either of them,
such individual's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign this Registration Statement
or any registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, including, without limitation, any
and all amendments thereto, and to file the same with the Securities and
Exchange Commission, with all exhibits thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or either of
them or any substitute therefor, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of February 11th, 1999.

<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>

Chairman of the Board
- --------------------------------------------
David A. Smilow

/s/ MITCHELL H. CAPLAN Vice Chairman of the Board, Chief Executive
- -------------------------------------------- Officer and President (principal executive
Mitchell H. Caplan officer)

/s/ SANG HAN Controller and Acting Chief Financial
- -------------------------------------------- Officer (acting principal financial and
Sang Han accounting officer)

/s/ DAVID DECAMP Director
- --------------------------------------------
David DeCamp

/s/ DEAN C. KEHLER Director
- --------------------------------------------
Dean C. Kehler
</TABLE>

II-3
<PAGE> 90

<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>
/s/ MARCIA MYERBERG Director
- --------------------------------------------
Marcia Myerberg

/s/ STEVEN F. PIAKER Director
- --------------------------------------------
Steven F. Piaker

/s/ MARK ROLLINSON Director
- --------------------------------------------
Mark Rollinson
</TABLE>

II-4
<PAGE> 91

EXHIBIT INDEX

- ---------------
* To be filed by amendment.

<PAGE> 1

Exhibit 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference
in this registration statement of our report dated February 10, 1999 included in
TeleBanc Financial Corporation's Form 10-K for the year ended December 31, 1998
and to all references to our Firm included in this registration statement.

/s/ Arthur Andersen LLP

Vienna, Virginia
February 10, 1999