<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-Q

(MARK ONE)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED: MAY 31, 1998

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________________ TO ________________________

                         COMMISSION FILE NUMBER: 1-8645




                              MEGO FINANCIAL CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                    NEW YORK                               13-5629885
        (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)

                   4310 PARADISE ROAD, LAS VEGAS, NEVADA 89109
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                                 (702) 737-3700
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]



                      APPLICABLE ONLY TO CORPORATE ISSUERS:

        As of July 10, 1998, there were 21,009,506 shares of Common Stock, $.01
par value per share, of the Registrant outstanding.


================================================================================


<PAGE>   2
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES



                                      INDEX


<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>                                                                                           <C>
PART I     FINANCIAL INFORMATION

Item 1.    Condensed Financial Statements (unaudited)

           Condensed Consolidated Statements of Financial Condition at May 31, 1998 and
             August 31, 1997..............................................................      1

           Condensed Consolidated Statements of Operations for the Three and Nine Months
             Ended May 31, 1998 and 1997..................................................      2

           Condensed Consolidated Statements of Stockholders' Equity for the Nine Months
             Ended May 31, 1998...........................................................      3

           Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
             May 31, 1998 and 1997........................................................      4

           Notes to Condensed Consolidated Financial Statements...........................      5

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of
             Operations...................................................................     12

PART II    OTHER INFORMATION

Item 1.    Legal Proceedings..............................................................     22

Item 5.    Other Events...................................................................     23

Item 6.    Exhibits and Reports on Form 8-K...............................................     23

SIGNATURE ................................................................................     24
</TABLE>


                                       i


<PAGE>   3
PART I    FINANCIAL INFORMATION
ITEM 1.   CONDENSED FINANCIAL STATEMENTS

                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                (thousands of dollars, except per share amounts)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                                               MAY 31,          AUGUST 31,
ASSETS                                                                                          1998              1997
                                                                                             ------------      ------------
<S>                                                                                          <C>               <C>         
Cash and cash equivalents                                                                    $      2,417      $     10,376
Restricted cash                                                                                     2,015             2,049
Notes receivable, net of allowance for cancellations and discounts of $13,425
   at May 31, 1998 and $11,341 at August 31, 1997                                                  48,214            34,274
Interest only receivables, at fair value                                                            2,955             3,296
Timeshare interests held for sale                                                                  36,719            35,088
Land and improvements inventory                                                                     8,367             2,206
Other investments                                                                                   4,164             2,149
Property and equipment, net of accumulated depreciation of $13,713
   at May 31, 1998 and $15,292 at August 31, 1997                                                  23,996            24,220
Deferred selling costs                                                                              3,226             3,153
Prepaid debt expenses                                                                               1,355             1,286
Other receivables                                                                                   1,371                --
Other assets                                                                                        8,391             6,930
Net assets of discontinued operations                                                                  --            53,276
                                                                                             ------------      ------------

            TOTAL ASSETS                                                                     $    143,190      $    178,303
                                                                                             ============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
   Notes and contracts payable                                                               $     83,257      $     65,569
   Accounts payable and accrued liabilities                                                        19,763            17,202
   Reserve for notes receivable sold with recourse                                                  5,577             8,703
   Deposits                                                                                         4,547             2,983
   Negative goodwill                                                                                   17                53
   Accrued income taxes                                                                             4,708             6,235
                                                                                             ------------      ------------

            Total liabilities before subordinated debt                                            117,869           100,745
                                                                                             ------------      ------------

Subordinated debt                                                                                   4,174             4,321
                                                                                             ------------      ------------

Stockholders' equity:
   Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding)                    --                --
   Common stock, $.01 par value (authorized--50,000,000 shares;  issued and
     outstanding--21,009,506 shares at May 31, 1998 and August 31, 1997)                              210               210
   Additional paid-in capital                                                                      12,789            34,524
   Retained earnings                                                                                8,148            38,503
                                                                                             ------------      ------------

            Total stockholders' equity                                                             21,147            73,237
                                                                                             ------------      ------------

            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $    143,190      $    178,303
                                                                                             ============      ============
</TABLE>


           See notes to condensed consolidated financial statements.


                                       1


<PAGE>   4
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (thousands of dollars, except per share amounts)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                            MAY 31,                       MAY 31,
                                                                ----------------------------    ----------------------------
                                                                   1998            1997            1998            1997
                                                                ------------    ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>             <C>         
REVENUES OF CONTINUING OPERATIONS
   Timeshare interest sales, net                                $      9,579    $      8,466    $     26,872    $     23,595
   Land sales, net                                                     3,530           4,736          10,114          12,510
   Gain on sale of notes receivable                                       --             503              --           1,393
   Interest income                                                     1,931           1,941           5,248           5,340
   Financial income                                                      769             726           2,773           2,055
   Incidental operations                                                 821             881           2,242           2,324
   Other                                                                 881           1,002           2,277           2,596
                                                                ------------    ------------    ------------    ------------
            Total revenues of continuing operations                   17,511          18,255          49,526          49,813
                                                                ------------    ------------    ------------    ------------

COSTS AND EXPENSES OF CONTINUING OPERATIONS
   Direct cost of:
     Timeshare interest sales                                          1,755           1,354           5,206           3,866
     Land sales                                                          421             392           1,234           1,126
     Incidental operations                                               652             719           1,949           2,127
   Commissions and selling                                             9,143           8,901          24,739          24,952
   General and administrative                                          4,675           4,237          13,561          12,511
   Interest expense                                                    2,157           2,084           5,635           6,351
   Depreciation                                                          549             469           1,691           1,402
                                                                ------------    ------------    ------------    ------------
            Total costs and expenses of continuing operations         19,352          18,156          54,015          52,335
                                                                ------------    ------------    ------------    ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
   BEFORE INCOME TAXES                                                (1,841)             99          (4,489)         (2,522)

INCOME TAXES (BENEFIT)                                                (1,728)         (2,084)         (1,728)         (5,009)
                                                                ------------    ------------    ------------    ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                                (113)          2,183          (2,761)          2,487

INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME 
   TAXES OF $2,619 AND $6,230 FOR THE THREE AND NINE 
   MONTHS ENDED MAY 31, 1997, RESPECTIVELY, AND NET OF
   $799 AND $1,493 OF MINORITY INTEREST FOR 
   THE THREE AND NINE MONTHS ENDED MAY 31, 1997, RESPECTIVELY             --           2,944              --           7,587
                                                                ------------    ------------    ------------    ------------

NET INCOME (LOSS) APPLICABLE TO COMMON STOCK                    $       (113)   $      5,127    $     (2,761)   $     10,074
                                                                ============    ============    ============    ============

EARNINGS (LOSS) PER COMMON SHARE
   Basic:
     Income (loss) from continuing operations                   $      (0.01)   $       0.11    $      (0.13)   $       0.13
     Income from discontinued operations                                  --            0.16              --            0.41
                                                                ------------    ------------    ------------    ------------
     Net income (loss) applicable to common stock               $      (0.01)   $       0.27    $      (0.13)   $       0.54
                                                                ============    ============    ============    ============

   Weighted-average number of common shares outstanding           21,009,506      18,733,121      21,009,506      18,582,572
                                                                ============    ============    ============    ============

   Diluted:
     Income (loss) from continuing operations                   $      (0.01)   $       0.11    $      (0.13)   $       0.13
     Income from discontinued operations                                  --            0.16              --            0.39
                                                                ------------    ------------    ------------    ------------
     Net income (loss) applicable to common stock               $      (0.01)   $       0.27    $      (0.13)   $       0.52
                                                                ============    ============    ============    ============

   Weighted-average number of common shares and
     common share equivalents outstanding                         21,009,506      19,299,365      21,009,506      19,497,659
                                                                ============    ============    ============    ============
</TABLE>


           See notes to condensed consolidated financial statements.


                                       2


<PAGE>   5
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                (thousands of dollars, except per share amounts)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                            COMMON STOCK        
                                                           $.01 PAR VALUE           ADDITIONAL
                                                     ------------   ------------     PAID-IN        RETAINED
                                                        SHARES         AMOUNT        CAPITAL         EARNINGS         TOTAL
                                                     ------------   ------------   ------------    ------------    ------------
<S>                                                  <C>            <C>            <C>             <C>             <C>         
Balance at August 31, 1997                             21,009,506   $        210   $     34,524    $     38,503    $     73,237

Distribution of Mego Mortgage Corporation
   common stock in connection with the
   Spin-off (see Note 6 of Notes to
   Condensed Consolidated Financial Statements)                --             --        (21,735)        (21,441)        (43,176)

Adjustment of receivable from Mego Mortgage
   Corporation (See Note 5 of Notes to Condensed
   Consolidated Financial Statements)                          --             --             --          (6,153)         (6,153)

Net loss for the nine months ended
   May 31, 1998                                                --             --             --          (2,761)         (2,761)
                                                     ------------   ------------   ------------    ------------    ------------

Balance at May 31, 1998                                21,009,506   $        210   $     12,789    $      8,148    $     21,147
                                                     ============   ============   ============    ============    ============
</TABLE>


           See notes to condensed consolidated financial statements.


                                       3


<PAGE>   6
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (thousands of dollars)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                                            NINE MONTHS ENDED MAY 31,
                                                                                            --------------------------
                                                                                                1998         1997
                                                                                            ------------  ------------
<S>                                                                                         <C>           <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                                                        $     (2,761) $     10,074
                                                                                            ------------  ------------
   Adjustments to reconcile net income (loss) to net cash
        provided by (used in) operating activities:
     Amortization of negative goodwill                                                               (36)          (21)
     Charges to allowance for cancellations                                                       (5,152)       (7,677)
     Provision for cancellations                                                                   3,760         8,806
     Gain on sale of notes receivable                                                                 --            --
     Provision for uncollectible Owners' Association advances                                       (403)         (275)
     Cost of sales                                                                                 6,440         4,992
     Depreciation                                                                                  1,691         1,402
     Gain on sale of stock of subsidiary                                                              --         8,113
     Additions to interest only receivables                                                           --        (1,082)
     Amortization of interest only receivables                                                       341           221
     Repayments on notes receivable                                                               27,548        22,506
     Additions to notes receivable                                                               (40,096)      (40,260)
     Proceeds from sale of notes receivable                                                           --        20,099
     Purchase of land and timeshare interests                                                    (14,232)       (5,938)
     Additions to other receivables                                                               (4,193)           --
     Decreases in other receivables                                                                6,769            --
     Changes in operating assets and liabilities:
        Decrease in restricted cash                                                                   34           413
        Increase in other assets                                                                  (4,253)       (1,090)
        Increase in deferred selling costs                                                           (73)          (45)
        Increase in accounts payable and accrued liabilities                                       2,561           910
        Decrease in payable to assignors                                                              --        (2,579)
        Increase (decrease) in deposits                                                            1,564          (497)
        Increase (decrease) in accrued income taxes                                               (1,527)        6,405
                                                                                            ------------  ------------

          Total adjustments                                                                      (19,257)       14,403
                                                                                            ------------  ------------

            Net cash provided by (used in) operating activities                                  (22,018)       24,477
                                                                                            ------------  ------------

NET CASH USED IN DISCONTINUED OPERATIONS                                                              --       (12,472)
                                                                                            ------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment                                                             (1,826)       (5,259)
   Proceeds from the sale of property and equipment                                                  359            24
   Additions to other investments                                                                 (2,015)         (785)
   Payments on other investments                                                                      --           826
                                                                                            ------------  ------------

            Net cash used in investing activities                                                 (3,482)       (5,194)
                                                                                            ------------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from borrowings                                                                       35,745        32,010
   Reduction of debt                                                                             (18,057)      (36,072)
   Increase in common stock due to exercise of warrants                                               --             3
   Increase in additional paid-in capital due to exercise of warrants                                 --           357
   Payments on subordinated debt                                                                    (639)       (1,422)
   Increase in subordinated debt                                                                     492            --
                                                                                            ------------  ------------

            Net cash provided by (used in) financing activities                                   17,541        (5,124)
                                                                                            ------------  ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                              (7,959)        1,687

CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD                                                  10,376         2,742
                                                                                            ------------  ------------

CASH AND CASH EQUIVALENTS -- END OF PERIOD                                                  $      2,417  $      4,429
                                                                                            ============  ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid during the period for:
     Interest, net of amounts capitalized                                                   $      5,656  $      5,652
                                                                                            ============  ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
   Issuance of 1,000,000 common stock warrants in connection with commitment received       $         --  $      3,000
   Reduction of additional paid-in capital due to Spin-off of Mego Mortgage Corporation          (21,735)           --
   Reduction of retained earnings due to Spin-off of Mego Mortgage Corporation                   (21,441)           --
   Adjustments of receivable from Mego Mortgage Corporation                                       (6,153)           --
</TABLE>


           See notes to condensed consolidated financial statements.


                                       4


<PAGE>   7
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997
                                   (unaudited)

1.  FINANCIAL STATEMENTS

        In the opinion of management, when read in conjunction with the audited
Consolidated Financial Statements for the years ended August 31, 1997 and 1996
contained in the Annual Report on Form 10-K ("Form 10-K") of Mego Financial
Corp. (Mego Financial) filed with the Securities and Exchange Commission for the
year ended August 31, 1997, the accompanying unaudited Condensed Consolidated
Financial Statements contain all of the information necessary to present fairly
the financial position of Mego Financial and Subsidiaries at May 31, 1998, the
results of its operations for the three and nine months ended May 31, 1998 and
1997, the change in stockholders' equity for the nine months ended May 31, 1998
and the cash flows for the nine months ended May 31, 1998 and 1997. All
intercompany accounts between Mego Financial and its subsidiaries have been
eliminated. Certain reclassifications have been made to conform prior periods
with the current period presentation. The accompanying Condensed Consolidated
Statements of Operations reflect the operating results of Mego Mortgage
Corporation (MMC) for prior periods as discontinued operations in accordance
with Accounting Principles Board (APB) Opinion No. 30. Prior period financial
results and cash flows have been restated to reflect continuing operations. The
footnote information presented herein applies only to the continuing operations
of Mego Financial unless otherwise stated. See Note 6 for further discussion.

        The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all material adjustments necessary for the fair
presentation of these statements have been included herein which are normal and
recurring in nature. The results of operations for the three and nine months
ended May 31, 1998 are not necessarily indicative of the results to be expected
for the full year.

2.  NATURE OF OPERATIONS

        Mego Financial is a specialty financial services company that, through
its subsidiary, Preferred Equities Corporation (PEC), is engaged primarily in
originating, selling, servicing and financing consumer receivables generated
through timeshare and land sales. Mego Financial and its subsidiaries are also
herein collectively referred to as "the Company" as the context requires. Mego
Financial was incorporated under the laws of the state of New York in 1954 under
the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp.

        In 1992, Mego Financial organized a subsidiary, MMC, a specialized
consumer finance company that originates, purchases, sells, securitizes and
services consumer loans consisting primarily of debt consolidation loans and to
a lesser extent conventional uninsured home improvement loans. After an initial
public offering (the IPO) of MMC common stock in November 1996, Mego Financial
held 81.3% of the outstanding stock of MMC. On September 2, 1997, Mego Financial
distributed all of its remaining 10,000,000 shares of MMC's common stock to Mego
Financial's shareholders in a tax-free spin-off (the Spin-off).
See Note 6.

3.  PREFERRED EQUITIES CORPORATION

        PEC markets and finances timeshare interests and land in select resort
areas. By providing financing to virtually all of its customers, PEC also
originates consumer receivables that it sells and generally services. In
February 1988, Mego Financial acquired PEC, pursuant to an assignment by the
Assignors (Comay Corp., Growth Realty Inc., RER Corp., and H&H Financial, Inc.)
of their contract right to purchase PEC.

        To facilitate its sales of timeshare interests, the Company has entered
into several trust agreements. The trustees administer the collection of the
related notes receivable. The Company has assigned title to certain of its
resort properties in Nevada and its interest in certain related notes receivable
to the trustees.


                                       5


<PAGE>   8
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997
                                   (unaudited)
4.  MERGER AGREEMENT WITH SYCAMORE PARTNERS

        On March 27, 1998, the Company announced that it had entered into a
definitive merger agreement (the "Merger Agreement") under which it was to be
acquired by Sycamore Partners, LLC ("Sycamore"). Sycamore was to be financed by
Blackacre Capital Group, L.P., a real estate investment fund. Under the terms of
the Merger Agreement, the Company shareholders were to receive $6.00 per share
of Common Stock, in cash, less an adjustment related to a receivable from MMC on
the Company's financial statements. The adjustment was expected to be at least
$0.25 per share but not more than $0.29 per share so that the per share price
which was to be received by shareholders would have been a minimum of $5.71 per
share up to an estimated maximum of $5.75 per share. See Note 5.

        On May 19, 1998, Sycamore announced that it was prepared to go forward
with the previously announced merger only if certain terms of the Merger
Agreement were modified, including a reduction of the purchase price to $4.50
per share of outstanding Common Stock. The Company has notified Sycamore that
Sycamore is in default under the Merger Agreement. Nevertheless, the Company
intends to maintain communications with Sycamore and to continue to negotiate so
long as it deems such negotiations to be in the best interest of the Company's
shareholders.

5.  ADJUSTMENT OF RECEIVABLE FROM MEGO MORTGAGE CORPORATION

        In April 1998, an agreement was made to adjust by reductions (recorded
in the three months ended February 28, 1998) the income tax portion of a
receivable in the amount of $5,283,000 owed by MMC to the Company under a Tax
Allocation and Indemnity Agreement dated November 19, 1996. As of the date of
the April 1998 agreement, MMC owed the Company an estimated total of $6,153,000,
of which $5,283,000 was a result of filing a consolidated federal income tax
return with the Company's affiliated group prior to the Spin-off. An agreement
was subsequently made to settle (recorded in the three months ended May 31,
1998) the remaining $870,000 balance due the Company by MMC. In consideration of
this settlement, MMC paid the entire amount of $1,574,000, which was separately
owed to PEC, in June 1998. Following this transaction, MMC had no outstanding
indebtedness to the Company.

6.  DISCONTINUED OPERATIONS OF MEGO MORTGAGE CORPORATION

        On September 2, 1997, Mego Financial distributed all of its 81.3%
interest in MMC, comprised of 10,000,000 shares of MMC's common stock, to Mego
Financial's shareholders in the Spin-off. MMC's financial results have been
accounted for as discontinued operations and, accordingly, the Company
reclassified its Condensed Consolidated Financial Statements for all periods
presented prior to that date. The net effect of the Spin-off resulted in the
Company recording an equity distribution in the amount of $43,176,000 in fiscal
1998, comprised of $21,735,000 of additional paid-in capital and $21,441,000 of
retained earnings.

7.  RECENTLY ISSUED ACCOUNTING STANDARDS

        Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed
Of," (SFAS 121) was issued by the Financial Accounting Standards Board (FASB) in
March 1995, and effective for fiscal years beginning after December 15, 1995.
SFAS 121 requires that long-lived assets be reviewed for impairment and written
down to fair value whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Under the provisions of SFAS 121,
impairment losses are recognized when expected future cash flows are less than
the assets' carrying value. The Company has not recorded any expense related to
impairment losses since adoption of SFAS 121.

        The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 125) in June 1996.
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. This statement also
provides 


                                       6


<PAGE>   9
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997
                                   (unaudited)

consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. It requires that liabilities
and derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value. SFAS 125 also requires
that servicing assets be measured by allocating the carrying amount between the
assets sold and retained interests based on their relative fair values at the
date of transfer. Additionally, this statement requires that the servicing
assets and liabilities be subsequently measured by (a) amortization in
proportion to and over the period of estimated net servicing income or loss and
(b) assessment for asset impairment or increased obligation based on their fair
values. SFAS 125 requires the Company's excess servicing rights be measured at
fair market value and reclassified as interest only receivables and accounted
for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As required by SFAS 125, the Company adopted the new
requirements effective January 1, 1997. Implementation of SFAS 125 did not have
any material impact on the financial statements of the Company, as the book
value of the Company's interest only receivables approximated fair value.

        SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB in
March 1997, effective for financial statements issued after December 15, 1997.
SFAS 128 provides simplified standards for the computation and presentation of
earnings per share (EPS), making EPS comparable to international standards. SFAS
128 requires dual presentation of "Basic" and "Diluted" EPS by entities with
complex capital structures, replacing "Primary" and "Fully-diluted" EPS under
APB Opinion No. 15.

        Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from common stock equivalents, similar to
fully-diluted EPS, but uses only the average stock price during the period as
part of the computation.

        An entity that reports discontinued operations is required to present
Basic and Diluted EPS for each of the income related line items. Data utilized
in calculating earnings per share under SFAS 128 are as follows (thousands of
dollars, except share amounts):


<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED                NINE MONTHS ENDED
                                                           MAY 31,                            MAY 31,
                                               ------------------------------     ------------------------------
                                                   1998              1997             1998             1997
                                               ------------      ------------     ------------      ------------
<S>                                            <C>               <C>              <C>               <C>         
BASIC EPS
  Income (loss) from continuing operations     $       (113)     $      2,183     $     (2,761)     $      2,487
  Income from discontinued operations                    --             2,944               --             7,587
                                               ------------      ------------     ------------      ------------
  Net income (loss)                            $       (113)     $      5,127     $     (2,761)     $     10,074
                                               ============      ============     ============      ============

  Weighted-average number of common shares
    outstanding                                  21,009,506        18,733,121       21,009,506        18,582,572
                                               ============      ============     ============      ============

DILUTED EPS
  Income (loss) from continuing operations     $       (113)     $      2,183     $     (2,761)     $      2,487
  Income from discontinued operations                    --             2,944               --             7,587
                                               ------------      ------------     ------------      ------------
  Net income (loss)                            $       (113)     $      5,127     $     (2,761)     $     10,074
                                               ============      ============     ============      ============

  Weighted-average number of common
    shares and common share equivalents
    outstanding                                  21,009,506        19,299,365       21,009,506        19,497,659
                                               ============      ============     ============      ============
</TABLE>



                                       7


<PAGE>   10
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997
                                   (unaudited)

        The following tables reconcile income (loss)from continuing operations,
basic and diluted shares and EPS for the following periods (thousands of
dollars, except per share amounts):


<TABLE>
<CAPTION>
                        THREE MONTHS ENDED MAY 31, 1998      THREE MONTHS ENDED MAY 31, 1997
                       -----------------------------------  -----------------------------------
                                                PER SHARE                            PER SHARE
                         INCOME      SHARES      AMOUNT       INCOME      SHARES      AMOUNT
                       ----------- ------------ ----------  ----------- ------------ ----------
<S>                    <C>         <C>          <C>         <C>         <C>          <C>
Income (loss) from
  continuing           $     (113)                          $    2,183
  operations

BASIC EPS
Income (loss) from
  continuing
  operations                 (113)  21,009,506  $   (0.01)       2,183   18,733,121  $    0.11
                       ----------  -----------  =========   ----------  -----------  =========

Effect of dilutive
 securities:
    Warrants                    -            -                       -      337,662
    Stock options               -            -                       -      228,582
                       ----------  -----------              ----------  -----------

DILUTED EPS
Income (loss) from
  continuing
  operations and
  assumed conversions  $     (113)  21,009,506  $   (0.01)  $    2,183   19,299,365  $    0.11
                       ==========  ===========  =========   ==========  ===========  =========
</TABLE>


<TABLE>
<CAPTION>
                         NINE MONTHS ENDED MAY 31, 1998       NINE MONTHS ENDED MAY 31, 1997
                       -----------------------------------  -----------------------------------
                                                PER SHARE                            PER SHARE
                         INCOME      SHARES      AMOUNT       INCOME      SHARES      AMOUNT
                       ----------- ------------ ----------  ----------- ------------ ----------
<S>                    <C>         <C>          <C>         <C>         <C>          <C>
Income (loss) from
  continuing           $   (2,761)                          $    2,487
  operations

BASIC EPS
Income (loss) from
  continuing               (2,761)  21,009,506  $   (0.13)       2,487   18,582,572  $    0.13
                       ----------  -----------  =========   ----------  -----------  =========
  operations

Effect of dilutive
 securities:
    Warrants                    -            -                       -      658,160
    Stock options               -            -                       -      256,927
                       ----------  -----------              ----------  -----------

DILUTED EPS
Income (loss) from
  continuing
  operations and
  assumed conversions  $   (2,761)  21,009,506  $   (0.13)  $    2,487   19,497,659  $    0.13
                       ==========  ===========  =========   ==========  ===========  =========
</TABLE>


                                       8


<PAGE>   11
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997
                                  (unaudited)

        The following tables reconcile income from discontinued operations, net
of taxes and minority interest, basic and diluted shares, and EPS for the
following periods (thousands of dollars, except per share amounts):


<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED MAY 31, 1997
                                                ----------------------------------------------
                                                                                  PER SHARE
                                                    INCOME          SHARES         AMOUNT
                                                --------------- -------------   --------------
<S>                                             <C>             <C>             <C>
Income from discontinued operations             $       3,743
Less:  Minority interest in discontinued                  799
  operations                                    --------------

BASIC EPS
Income from discontinued operations                     2,944      18,733,121   $         0.16
                                                -------------   -------------   ==============

Effect of dilutive securities:
    Warrants                                                -         337,662
    Stock options                                           -         228,582
                                                -------------   -------------

DILUTED EPS
Income from discontinued operations and
  assumed conversions                           $       2,944      19,299,365   $         0.16
                                                =============   =============   ==============
</TABLE>


<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED MAY 31, 1997
                                                ----------------------------------------------
                                                                                  PER SHARE
                                                    INCOME          SHARES         AMOUNT
                                                --------------- --------------- --------------
<S>                                             <C>             <C>             <C>
Income from discontinued operations             $       9,080
Less:  Minority interest in discontinued                1,493
  operations                                    --------------

BASIC EPS
Income from discontinued operations                     7,587      18,582,572   $         0.41
                                                -------------   -------------   ==============

Effect of dilutive securities:
    Warrants                                                -         658,160
    Stock options                                           -         256,927
                                                -------------   -------------

DILUTED EPS
Income from discontinued operations and
  assumed conversions                           $       7,587      19,497,659   $         0.39
                                                =============   =============   ==============
</TABLE>


                                       9


<PAGE>   12
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997
                                   (unaudited)

        The following tables reconcile the net income (loss) applicable to
common shareholders, basic and diluted shares and EPS for the following periods
(thousands of dollars, except per share amounts):


<TABLE>
<CAPTION>
                         THREE MONTHS ENDED MAY 31, 1998       THREE MONTHS ENDED MAY 31, 1997
                       ------------------------------------- ------------------------------------
                                                  PER SHARE                            PER SHARE
                         INCOME        SHARES      AMOUNT      INCOME       SHARES      AMOUNT
                       ------------  -----------  ---------- -----------  -----------  ----------
<S>                    <C>           <C>          <C>        <C>          <C>          <C>
Net income (loss)      $     (113)                           $    5,127

BASIC EPS
Income (loss)
  applicable to
  common stockholders        (113)    21,009,506  $   (0.01)      5,127    18,733,121  $    0.27
                       ----------    -----------  =========  ----------    ----------  =========

Effect of dilutive
  securities:
    Warrants                    -              -                      -       337,662
    Stock Options               -              -                      -       228,582
                       ----------     ----------             ----------    ----------

DILUTED EPS
Income (loss)
  applicable to
  common stockholders
  and assumed          
  conversions          $     (113)    21,009,506  $   (0.01) $    5,127    19,299,365  $    0.27
                       ==========    ===========  =========  ==========   ===========  =========
</TABLE>


<TABLE>
<CAPTION>
                          NINE MONTHS ENDED MAY 31, 1998       NINE MONTHS ENDED MAY 31, 1997
                       ------------------------------------- ------------------------------------
                                                  PER SHARE                            PER SHARE
                         INCOME        SHARES      AMOUNT      INCOME       SHARES      AMOUNT
                       ------------  -----------  ---------- -----------  -----------  ----------
<S>                    <C>           <C>          <C>        <C>          <C>          <C>
Net income (loss)      $   (2,761)                           $   10,074
                       ----------

BASIC EPS
Income (loss)
  applicable to
  common stockholders      (2,761)    21,009,506  $   (0.13)     10,074    18,582,572  $    0.54
                       ----------    -----------  =========  ----------    ----------  =========

Effect of dilutive
  securities:
    Warrants                    -              -                      -       658,160
    Stock Options               -              -                      -       256,927
                       ----------     ----------             ----------    ----------

DILUTED EPS
Income (loss)
  applicable to
  common stockholders
  and assumed          
  conversions          $   (2,761)    21,009,506  $   (0.13) $   10,074    19,497,659  $    0.52
                       ==========    ===========  =========  ==========   ===========  =========
</TABLE>


                                       10


<PAGE>   13
                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997
                                  (unaudited)

        As a result of Mego Financial's loss from continuing operations for the
three and nine months ended May 31, 1998, incentive stock options outstanding to
purchase 351,500 shares of Mego Financial's common stock were considered
antidilutive under SFAS 128 requirements and therefore were not included in the
weighted-average number of common shares.

        In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (SFAS 130) and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. SFAS 131 establishes standards of
reporting by publicly-held business enterprises and disclosure of information
about operating segments in annual financial statements and, to a lesser extent,
in interim financial reports issued to shareholders. SFAS 130 and 131 are
effective for fiscal years beginning after December 15, 1997. As both SFAS 130
and 131 deal with financial statement disclosure, the Company does not
anticipate the adoption of these new standards will have a material impact on
its financial position, results of operations or cash flows. The Company has not
yet determined what its reporting segments will be under SFAS 131.

8.  STOCKHOLDERS' EQUITY

        Mego Financial's stock option plan (Stock Option Plan) was increased by
500,000 shares upon shareholder approval which was obtained on September 9,
1997. On September 3, 1997, an additional 348,500 incentive stock options were
granted under the Stock Option Plan to employees at fair market value, which was
authorized by the Stock Option Committee, of which 15,000 are subject to future
shareholder approval of certain amendments to the Stock Option Plan in
accordance with applicable law. The total number of options outstanding is
351,500 which includes 40,000 options which were previously outstanding.

        The Spin-off resulted in a distribution by the Company of $21,735,000 of
additional paid-in capital and $21,441,000 of retained earnings. These equity
amounts related to MMC which, as a result of the Spin-off, is no longer owned by
the Company. See Note 6.


                                       11


<PAGE>   14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

        The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains certain forward-looking
statements and information relating to Mego Financial Corp. (Mego Financial)
(Mego Financial and its subsidiaries are referred to herein collectively as the
Company) that are based on the beliefs of management as well as assumptions made
by and information currently available to management. Such forward-looking
statements include, without limitation, the Company's expectation and estimates
as to the Company's business operations, including the introduction of new
timeshare and land sales programs and future financial performance, including
growth in revenues and net income and cash flows. In addition, included herein
the words "anticipates," "believes," "estimates," "expects," "plans," "intends"
and similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company's management with respect to future events and are
subject to certain risks, uncertainties and assumptions. Also, the Company
specifically advises readers that the factors listed under the caption
"Liquidity and Capital Resources" could cause actual results to differ
materially from those expressed in any forward-looking statement. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.

        The following discussion and analysis should be read in conjunction with
the Condensed Consolidated Financial Statements, including the notes thereto,
contained elsewhere herein and in the Consolidated Financial Statements,
including the notes thereto, in the Company's Form 10-K for the fiscal year
ended August 31, 1997.

GENERAL

        The business of the Company following the Spin-off is primarily the
marketing, financing and sale of timeshare interests, retail lots and land
parcels, and servicing the related notes receivable. The Company, through its
subsidiary Preferred Equities Corporation (PEC), provides financing to
purchasers of its timeshare interests and land. This financing is generally
evidenced by notes secured by deeds of trust and mortgages as well as
non-recourse installment sale contracts. These notes receivable are generally
payable over a period ranging from two to twelve years, bear interest at rates
ranging from 0% to 16% and generally require equal monthly payments of principal
and interest.

Discontinued Operations of Mego Mortgage Corporation (MMC)

        The Company formed MMC in June 1992 as a wholly-owned subsidiary and
operated MMC as such until November 1996. MMC is a specialized consumer finance
company that originates, purchases, sells, securitizes and services consumer
loans consisting primarily of debt consolidation loans and, to a lesser extent,
conventional uninsured home improvement loans.

        In November 1996, MMC consummated an initial public offering (the IPO)
and as a result, the Company's ownership of MMC was reduced to approximately
81.3% of the outstanding common stock. On September 2, 1997, the Company
distributed all of its 10 million shares of MMC's common stock to the Company's
shareholders in the tax-free Spin-off. To fund MMC's past operations and growth
and in conjunction with filing consolidated tax returns, MMC incurred debt and
other obligations due to the Company and its subsidiary, PEC. There was no
outstanding indebtedness due to the Company at May 31, 1998 after the adjustment
of a receivable of $6.2 million described in Note 5 of Notes to Condensed
Consolidated Financial Statements and $10.1 million at August 31, 1997, other
than $1.4 million due PEC which was paid in June 1998. It is not anticipated
that the Company will provide funds to MMC or guarantee MMC's indebtedness in
the future, although it may do so.

        MMC had an agreement with PEC for providing management services. This
agreement was cancelled on April 22, 1998, effective 90 days thereafter. In June
1998, MMC paid $585,000 to PEC, which was the amount owed for these management
services for the nine months ended May 31, 1998. MMC still has an agreement with
PEC for loan servicing, which is expected to be terminated. Effective January 1,
1998, the servicing fees paid to PEC by MMC were reduced from 40 basis points to
35 basis points per year by written agreement. In January 


                                       12


<PAGE>   15
1998, the loan servicing agreement between PEC and MMC was amended to permit the
assignment by MMC of its servicing rights and obligations with respect to
certain Conventional loans sold to a financial institution, and subsequent
thereto, the agreement to service those loans was terminated. The servicing fees
for the nine months ended May 31, 1998 and 1997 aggregated $1.8 million and $1.2
million, respectively.

        The accompanying Consolidated Statements of Operations reflect the
operating results of MMC as discontinued operations in accordance with
Accounting Principles Board (APB) Opinion No. 30. For additional information see
Note 6 of Notes to Condensed Consolidated Financial Statements.

PEC

        PEC recognizes revenue primarily from sales of timeshare interests and
land sales in resort areas, gain on sale of receivables and interest income.
Periodically, PEC may sell its consumer receivables, generally retaining the
servicing rights. Revenue from sales of timeshare interests and land is
recognized after the requisite rescission period has expired and at such time as
the purchaser has paid at least 10% of the sales price for sales of timeshare
interests and 20% of the sales price for land sales. Land sales typically meet
these requirements within eight to ten months of closing, and sales of timeshare
interests typically meet these requirements at the time of sale. The sales
price, less a provision for cancellation, is recorded as revenue and the
allocated cost related to such net revenue of the timeshare interest or land
parcel is recorded as expense in the year that revenue is recognized. When
revenue related to land sales is recognized, the portion of the sales price
attributable to uncompleted required improvements, if any, is deferred.

        Notes receivable with payment delinquencies of 90 days or more have been
considered in determining the allowance for cancellations. Cancellations occur
when the note receivable is determined to be uncollectible and the related
collateral, if any, has been recovered. Cancellation of a note receivable in the
quarter the revenue is recognized is not deemed to represent a sale and is
accounted for as a reversal of the revenue with an adjustment to cost of sales.
Cancellation of a note receivable subsequent to the quarter the revenue was
recognized is charged to the allowance for cancellations.

        Gain on sale of notes receivable includes the present value of the
differential between contractual interest rates charged to borrowers on notes
receivable sold by PEC and the interest rates to be received by the purchasers
of such notes receivable, after considering the effects of estimated prepayments
and a normal servicing fee. PEC retains certain participations in cash flows
from the sold notes receivable and generally retains the associated servicing
rights. PEC generally sells its notes receivable at par.

        The present values of expected net cash flows from the sale of notes
receivable are recorded at the time of sale as interest only receivables.
Interest only receivables are amortized as a charge to income, as payments are
received on the retained interest differential over the estimated life of the
underlying notes receivable. Interest only receivables are recorded at the lower
of unamortized cost or estimated fair value. The expected cash flows used to
determine the interest only receivables asset have been reduced for potential
losses under recourse provisions of the sales agreements. Reserve for notes
receivable sold with recourse represents PEC's estimate of the fair value of its
future credit losses to be incurred over the lives of the notes receivable in
connection with the recourse provisions of the sales agreements and is shown
separately as a liability in the Company's Condensed Consolidated Statements of
Financial Condition.

        In discounting cash flows related to notes receivable sales, PEC defers
servicing income at an annual rate of 1% and discounts cash flows on its sales
at the rate it believes a purchaser would require as a rate of return. Earned
servicing income is included under the caption of financial income. The cash
flows were discounted to present value using a discount rate of 15% for the nine
months ended May 31, 1998 and 1997. PEC has developed its assumptions based on
experience with its own portfolio, available market data and consultations with
its investment bankers.

        In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates may be
revised as necessary using the original discount rate, and any losses arising
from prepayment and loss experience will be recognized as realized.


                                       13


<PAGE>   16
        Provision for cancellations relating to notes receivable is recorded as
expense in amounts sufficient to maintain the allowance at a level considered
adequate to provide for anticipated losses resulting from customers' failure to
fulfill their obligations under the terms of their notes receivable. PEC records
provision for cancellations at the time revenue is recognized, based on
historical experience and current economic factors. The related allowance for
cancellations represents PEC's estimate of the amount of the future credit
losses to be incurred over the lives of the notes receivable. The allowance for
cancellations is reduced by actual cancellations experienced, including
cancellations related to previously sold notes receivable which were reacquired
pursuant to the recourse obligations discussed herein. Such allowance is also
reduced to establish the separate liability for reserve for notes receivable
sold with recourse. PEC's judgment in determining the adequacy of this allowance
is based upon a periodic review of its portfolio of notes receivable. These
reviews take into consideration changes in the nature and level of the
portfolio, historical cancellation experience, current economic conditions which
may affect the purchasers' ability to pay, changes in collateral values,
estimated value of inventory that may be reacquired and overall portfolio
quality. Changes in the allowance as a result of such reviews are included in
the provision for cancellations.

        Recourse to PEC on sales of notes receivable is governed by the
agreements between the purchasers and PEC. The reserve for notes receivable sold
with recourse represents PEC's estimate of the fair value of future credit
losses to be incurred over the lives of the notes receivable. Fees for servicing
notes receivable originated or acquired by PEC and sold with servicing rights
retained are generally based on a stipulated percentage of the outstanding
principal balance of such notes receivable and are recognized when earned.

        Total costs and expenses consist primarily of commissions and selling
expenses, general and administrative expenses, direct costs of sales of
timeshare interests and land, interest expense and depreciation. Commissions and
selling costs directly attributable to unrecognized sales are accounted for as
deferred selling costs until such time as the sale is recognized.

        PEC has entered into financing arrangements with certain purchasers of
timeshare interests and land whereby no stated interest rate is charged if the
aggregate down payment is at least 50% of the purchase price and the balance is
payable in 24 or fewer monthly payments. Notes receivable of $7.2 million and
$7.0 million at May 31, 1998 and August 31, 1997, respectively, were made under
this arrangement.

        Land sales as of May 31, 1998 exclude $11.6 million of sales not yet
recognized under generally accepted accounting principles (GAAP) since the
requisite payment amounts have not yet been received. If ultimately recognized,
revenues from these sales would be reduced by a related provision for
cancellations of $1.7 million, deferred selling costs of $3.2 million and cost
of sales of $1.1 million.

RESULTS OF OPERATIONS

Three Months Ended May 31, 1998 Compared to Three Months Ended May 31, 1997

PEC

        Total revenues for PEC decreased 4.3%, or $783,000, to $17.5 million
during the three months ended May 31, 1998 from $18.3 million during the three
months ended May 31, 1997. The decrease was primarily due to a decrease in land
sales, net, to $3.5 million during the three months ended May 31, 1998 from $4.7
million during the three months ended May 31, 1997 and no gain on sale of
receivables during the three months ended May 31, 1998 compared to a gain on
sale of receivables of $503,000 during the three months ended May 31, 1997.
These decreases were partially offset by an increase of $1.1 million in
timeshare interest sales, net.

        Timeshare interest and land sales, net, decreased to $13.1 million
during the three months ended May 31, 1998 from $13.2 million during the three
months ended May 31, 1997, a decrease of $93,000. Gross sales of timeshare
interests decreased to $10.4 million during the three months ended May 31, 1998
from $11.1 million during the three months ended May 31, 1997, a decrease of
5.9%. Net sales of timeshare interests increased to $9.6 million from $8.5
million, an increase of 13.1%. The provision for cancellations represented 8.3%
and 23.7% of gross sales of timeshare interests for the three months ended May
31, 1998 and 1997, respectively. The decrease in the provision for cancellations
for timeshare interests was primarily due to lower cancellation experience
during the 


                                       14


<PAGE>   17
third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 and to
an analysis of the required allowances, including the reserve for notes
receivable sold with recourse, as of May 31, 1998.

        Gross sales of land decreased to $3.8 million during the three months
ended May 31, 1998 from $5.6 million during the three months ended May 31, 1997,
a decrease of 31.2%. Net sales of land decreased to $3.5 million during the
three months ended May 31, 1998 from $4.7 million during the three months ended
May 31, 1997, a decrease of 25.5%. The provision for cancellations decreased to
8.2% of gross sales of land for the three months ended May 31, 1998 from 15.3%
for the three months ended May 31, 1997, primarily due to lower cancellation
experience during the third quarter of fiscal 1998 compared to the third quarter
of fiscal 1997 and to an analysis of the required allowances, including the
reserve for notes receivable sold with recourse, as of May 31, 1998. The
decrease in gross land sales was the result of PEC's diminishing inventory of
land available for sale and its increasing inventory of timeshare interests from
the opening of new timeshare resorts. During the third quarter of fiscal 1998,
PEC acquired developed lots in Colorado to add to its land inventory. PEC began
selling these lots in the last month of the third quarter of fiscal 1998.

        No gain on sale of receivables was recorded for the three months ended
May 31, 1998 compared to $503,000 for the three months ended May 31, 1997. There
were no receivable sales during the three months ended May 31, 1998 while there
were $9.8 million in receivable sales during the three months ended May 31,
1997. PEC periodically sells receivables to reduce the outstanding balances
under its lines of credit.

        Financial income increased to $769,000 during the three months ended May
31, 1998 from $726,000 during the three months ended May 31, 1997, an increase
of 5.9%. The increase was a result of the increased number of loans serviced by
PEC for an unrelated party, generating increased servicing fees.

        As a result of the foregoing, total PEC revenues decreased to $17.5
million during the three months ended May 31, 1998 from $18.3 million during the
three months ended May 31, 1997.

        Total costs and expenses for PEC increased to $18.8 million for the
three months ended May 31, 1998 from $17.5 million for the three months ended
May 31, 1997. The increase resulted primarily from an increase in direct costs
of timeshare interest sales to $1.8 million from $1.4 million, an increase of
29.6%, and an increase in general and administrative expense to $4.3 million
from $3.9 million, an increase of 12.8%. In September 1997, 1,122 new upscale,
luxury timeshare interests in PEC's Las Vegas, Nevada resort became available
for sale. The increase in direct costs of timeshare sales is generally
attributable to the sale of this higher cost timeshare inventory. The increase
in general and administrative expenses is primarily due to increases in payroll,
group medical insurance and association costs related to a higher level of
unsold timeshare inventory.

        As a percentage of gross sales of timeshare interests and land,
commissions and selling expenses relating thereto increased to 64.0% during the
three months ended May 31, 1998 from 53.3% during the three months ended May 31,
1997, and cost of sales increased to 15.2% during the three months ended May 31,
1998 from 10.5% during the three months ended May 31, 1997. Sales prices of
timeshare interests are typically lower than those of land, while selling costs
per sale, other than commissions, are approximately the same in amount for
timeshare interests and land; accordingly, PEC generally realizes lower profit
margins from sales of timeshare interests than from sales of land.

        Interest expense of PEC increased to $2.0 million during the three
months ended May 31, 1998 from $1.8 million during the three months ended May
31, 1997, an increase of 9.7%. The increase is a result of a higher average
outstanding balance of notes payable, partially offset by lower interest rates,
during the three months ended May 31, 1998 compared to the three months ended
May 31, 1997.

        A pre-tax loss of $1.3 million was recorded by PEC during the three
months ended May 31, 1998 compared to pre-tax income of $797,000 during the
three months ended May 31, 1997. The pre-tax loss is primarily due to the
decrease in land sales and the absence of gain on sale of receivables during the
three months ended May 31, 1998, together with an increase in general and
administrative expenses and direct cost of timeshare interest sales.


                                       15


<PAGE>   18
        No income tax provision or benefit for PEC was recorded for the three
months ended May 31, 1998 and 1997. As part of an arrangement between PEC and
the Company regarding payment of taxes PEC generally does not recognize a tax
benefit for periods in which it records a loss.

        As a result of the foregoing, PEC reported a net loss of $1.3 million
during the three months ended May 31, 1998 compared to net income of $797,000
during the three months ended May 31, 1997.

COMPANY (consolidated)

        Loss from continuing operations was $113,000 during the three months
ended May 31, 1998 compared to income of $2.2 million during the three months
ended May 31, 1997, due primarily to a decrease in total revenues of $744,000
while total costs and expenses increased by $1.2 million because of higher costs
of timeshare sales and increased general and administrative expenses.. See prior
discussion for PEC.

        Total costs and expenses during the three months ended May 31, 1998 were
$19.4 million, an increase of 6.6% from $18.2 million during the three months
ended May 31, 1997. Combined commissions and selling expenses and general and
administrative expenses increased 5.2% for the three months ended May 31, 1998
compared to the three months ended May 31, 1997 due to the expansion of
timeshare marketing efforts by PEC. Total general and administrative expenses
for Mego Financial (parent only) were primarily comprised of professional
services, including those related to the Merger Agreement, external financial
reporting expenses and regulatory and other public company corporate expenses.

        The income tax benefit for the three months ended May 31, 1998 was $1.7
million compared to an income tax benefit of $2.1 million for the three months
ended May 31, 1997. The change in accrued income taxes for the three months
ended May 31, 1998 resulted from a review of the Company's tax position and was
based on what the expected net operating loss will be for the entire year ending
August 31, 1998; therefore, it was deemed appropriate to recognize that benefit
on an interim basis. The change in accrued income taxes for the three months
ended May 31, 1997 was a result of facts and circumstances determined in an
extensive review and analysis of the Company's federal income tax liability
completed during fiscal 1997.

        Net loss applicable to common stock was $113,000 during the three months
ended May 31, 1998 compared to net income applicable to common stock of $5.1
million during the three months ended May 31, 1997, primarily due to the
foregoing and due to income from discontinued operations of $2.9 million during
the three months ended May 31, 1997 while no income from discontinued operations
was recorded during the three months ended May 31, 1998 because of the Spin-off
of MMC.

Nine months Ended May 31, 1998 Compared to Nine months Ended May 31, 1997

PEC

        Total revenues for PEC decreased 0.7%, or $339,000, to $49.4 million
during the nine months ended May 31, 1998 from $49.7 million during the nine
months ended May 31, 1997. The decrease was primarily due to a decrease in land
sales, net, to $10.1 million during the nine months ended May 31, 1998 from
$12.5 million during the nine months ended May 31, 1997 and no gain on sale of
receivables during the nine months ended May 31, 1998 compared to a gain on sale
of receivables of $1.4 million during the nine months ended May 31, 1997. These
decreases were partially offset by an increase of $1.1 million in timeshare
interest sales, net.

        Timeshare interest and land sales, net, increased to $37.0 million
during the nine months ended May 31, 1998 from $36.1 million during the nine
months ended May 31, 1997, an increase of 2.4%. Gross sales of timeshare
interests decreased 2.2% to $29.7 million during the nine months ended May 31,
1998 from $30.4 million during the nine months ended May 31, 1997. Net sales of
timeshare interests increased for the nine months ended May 31, 1998 to $26.9
million from $23.6 million for the nine months ended May 31, 1997, an increase
of 13.9%. The provision for cancellations represented 9.6% and 22.3% of gross
sales of timeshare interests for the nine months ended May 31, 1998 and 1997,
respectively. The decrease in the provision for cancellations for timeshare
interests was primarily due to lower cancellation experience during the first


                                       16


<PAGE>   19
nine months of fiscal 1998 compared to the first nine months of fiscal 1997 and
to an analysis of the required allowances, including the reserve for notes
receivable sold with recourse as of May 31, 1998.

        Gross sales of land decreased to $11.0 million during the nine months
ended May 31, 1998 from $14.5 million during the nine months ended May 31, 1997,
a decrease of 24.1%. Net sales of land decreased to $10.1 million during the
nine months ended May 31, 1998 from $12.5 million during the nine months ended
May 31, 1997, a decrease of 19.2%. The provision for cancellations decreased to
8.2% of gross sales of land for the nine months ended May 31, 1998 from 13.9%
for the nine months ended May 31, 1997, primarily due to lower cancellation
experience during the first nine months of fiscal 1998 compared to the first
nine months of fiscal 1997 and to an analysis of the required allowances,
including the reserve for notes receivable sold with recourse as of May 31,
1998. The decrease in gross land sales was the result of PEC's diminishing
inventory of land available for sale and its increasing inventory of timeshare
interests from the opening of new timeshare resorts. During the third quarter of
fiscal 1998, PEC acquired developed lots in Colorado to add to its land
inventory. PEC began selling these lots in the last month of the third quarter
of fiscal 1998.

        No gain on sale of receivables was recorded for the nine months ended
May 31, 1998 compared to $1.4 million for the nine months ended May 31, 1997.
There were no receivable sales during the nine months ended May 31, 1998 while
there were $19.9 million in receivable sales during the nine months ended May
31, 1997. PEC periodically sells receivables to reduce the outstanding balances
under its lines of credit.

        Financial income increased to $2.8 million during the nine months ended
May 31, 1998 from $2.1 million during the nine months ended May 31, 1997, an
increase of 34.9%. The increase was a result of the increased number of loans
serviced by PEC for an unrelated third party, generating increased servicing
fees.

        As a result of the foregoing, total PEC revenues decreased to $49.4
million during the nine months ended May 31, 1998 from $49.7 million during the
nine months ended May 31, 1997.

        Total costs and expenses for PEC increased to $52.3 million for the nine
months ended May 31, 1998 from $50.2 million for the nine months ended May 31,
1997, an increase of 4.2%. The increase resulted primarily from an increase in
direct costs of timeshare interest sales to $5.2 million from $3.9 million, an
increase of 34.7%; an increase in general and administrative expense to $12.4
million from $11.5 million, an increase of 7.6%; and, an increase in
depreciation expense to $1.7 million from $1.4, an increase of 20.6%. In
September 1997, 1,122 new upscale, luxury timeshare interests in PEC's Las
Vegas, Nevada resort became available for sale. The increase in direct costs of
timeshare sales is generally attributable to the sale of this higher cost
timeshare inventory. The increase in direct costs of land is attributable to
increased sales of higher cost lots sold during the current fiscal period
compared to the same period in fiscal 1997. The increase in general and
administrative expense is due to increased payroll, professional services and
group medical insurance. The increase in depreciation expense is due to the
increase in property and equipment, net of accumulated depreciation, to $24.0
million at May 31, 1998 from $23.2 million at May 31, 1997.

        As a percentage of gross sales of timeshare interests and land,
commissions and selling expenses relating thereto increased to 60.7% during the
nine months ended May 31, 1998 from 55.6% during the nine months ended May 31,
1997, and cost of sales increased to 15.8% during the nine months ended May 31,
1998 from 11.1% during the nine months ended May 31, 1997. Sales prices of
timeshare interests are typically lower than those of land, while selling costs
per sale, other than commissions, are approximately the same in amount for
timeshare interests and land; accordingly, PEC generally realizes lower profit
margins from sales of timeshare interests than from sales of land.

        Interest expense of PEC decreased to $5.1 million during the nine months
ended May 31, 1998 from $5.3 million during the nine months ended May 31, 1997,
a decrease of 2.2%. The decrease is a result of the refinancing of certain notes
and contracts payable to lower interest rates, which more than offset the
average balance increase, during the nine months ended May 31, 1998 compared to
the nine months ended May 31, 1997.

        A pre-tax loss of $2.9 million was recorded by PEC during the nine
months ended May 31, 1998 compared to a pre-tax loss of $500,000 during the nine
months ended May 31, 1997. The increase in the pre-tax loss is largely 


                                       17


<PAGE>   20
due to the decrease in land sales and the absence of gain on sale of receivables
during the current period, together with an increase in general and
administrative expenses and direct costs of timeshare interest sales.

        No income tax provision or benefit for PEC was recorded for the nine
months ended May 31, 1998 or 1997. As part of an arrangement between PEC and the
Company regarding payment of taxes PEC generally does not recognize a tax
benefit for periods in which it records a loss.

        As a result of the foregoing, PEC reported a net loss of $2.9 million
during the nine months ended May 31, 1998 compared to a net loss of $500,000
during the nine months ended May 31, 1997.

COMPANY (consolidated)

        Loss from continuing operations was $2.8 million during the nine months
ended May 31, 1998 compared to income of $2.5 during the nine months ended May
31, 1997, due primarily to an income tax benefit of $1.7 million during the nine
months ended May 31, 1998 compared to $5.0 million recognized during the nine
months ended May 31, 1997 and a decrease in total revenues of $287,000 while
total costs and expenses increased by $1.7 million because of higher costs of
timeshare sales and increased general and administrative expenses.

        Total costs and expenses during the nine months ended May 31, 1998 were
$54.0 million, an increase of 3.2% compared to $52.3 million during the nine
months ended May 31, 1997. Combined commissions and selling expenses and general
and administrative expenses increased 2.2% for the nine months ended May 31,
1998 compared to the nine months ended May 31, 1997 due to the expansion of
timeshare marketing efforts by PEC. Total general and administrative expenses
for Mego Financial (parent only) were primarily comprised of professional
services, including those related to the Merger Agreement, external financial
reporting expenses and regulatory and other public company corporate expenses.

        The income tax benefit for the nine months ended May 31, 1998 was $1.7
million compared to an income tax benefit of $5.0 million for the nine months
ended May 31, 1997. The change in accrued income taxes for the nine months ended
May 31, 1998 resulted from a review of the Company's tax position and was based
on what the expected net operating loss will be for the entire year ending
August 31, 1998; therefore, it was deemed appropriate to recognize that benefit
on an interim basis. The change in accrued income taxes for the nine months
ended May 31, 1997 was a result of facts and circumstances determined in an
extensive review and analysis of the Company's federal income tax liability
completed during fiscal 1997.

        Net loss applicable to common stock was $2.8 million during the nine
months ended May 31, 1998 compared to net income applicable to common stock of
$10.1 million during the nine months ended May 31, 1997, primarily due to the
foregoing and due to income from discontinued operations of $7.6 million during
the nine months ended May 31, 1997 while no income from discontinued operations
was recorded during the nine months ended May 31, 1998 because of the Spin-off
of MMC.

LIQUIDITY AND CAPITAL RESOURCES

        Cash and cash equivalents for the Company were $2.4 million at May 31,
1998 compared to $10.4 million at August 31, 1997. The decrease was primarily
due to PEC's acquisition and improvement of timeshare properties, no sale of
notes receivable occurring during the first three quarters of fiscal 1998, the
payment of commissions and selling expenses in connection with timeshare and
land sales and Mego Financial's payment of interest on subordinated debt. PEC
requires continued access to sources of debt financing and sales in the
secondary market for receivables.

PEC

        PEC's cash requirements arise from the acquisition of timeshare
properties and land, payments of operating expenses, payments of taxes and
dividends to Mego Financial, payments of principal and interest on debt
obligations and payments of commissions and selling expenses in connection with
sales of timeshare interests and land. Commissions and selling expenses payable
by PEC in connection with sales of timeshare interests and land typically exceed
the down payments received at the time of sale, as a result of which PEC
generates a cash shortfall. 


                                       18


<PAGE>   21
This cash shortfall and PEC's other cash requirements are funded primarily
through sales of receivables, PEC's lines of credit in the aggregate amount of
$137.5 million and cash flows from operations. At May 31, 1998, no commitments
existed for material capital expenditures.

        At May 31, 1998, PEC had arrangements with 5 institutional lenders under
6 agreements for the financing of receivables in connection with sales of
timeshare interests and land and the acquisition of timeshare properties and
land, which provide for 6 lines of credit with an aggregate availability of up
to $137.5 million. Such lines of credit are secured by timeshare and land
receivables and mortgages. At May 31, 1998, an aggregate of $78.2 million was
outstanding under such lines of credit, and $59.3 million was available for
borrowing. Under the terms of these lines of credit, PEC may borrow 70% to 85%
of the balances of the pledged timeshare and land receivables. PEC is required
to comply with certain covenants under these agreements, which, among other
things, require PEC to meet certain minimum tangible net worth requirements. The
most stringent of such requirements provides that PEC maintain a minimum
tangible net worth of $25.0 million. At May 31, 1998, PEC's tangible net worth
was $25.3 million. Necessary waivers of compliance with certain covenants
related to these and other agreements have been received. Summarized lines of
credit information and accompanying notes relating to these six lines of credit
outstanding at May 31, 1998, consist of the following (thousands of dollars):


<TABLE>
<CAPTION>
   BORROWING         MAXIMUM
   AMOUNT AT        BORROWING           REVOLVING
  MAY 31, 1998        AMOUNT       EXPIRATION DATE (f)     MATURITY DATE        INTEREST RATE
-----------------  -------------   -------------------     ----------------   -------------------
<S>                <C>            <C>                      <C>                <C>
$       50,200      $    75,000   (a) May 15, 2000         Various            Prime +  2.0 - 2.25%
         6,232           15,000   (b) June 30, 1998        Various            Prime +  2.0%
         8,985           15,000   (c) February 28, 1999    Various            LIBOR +  4.0 - 4.25%
         5,539           15,000   (c) July 31, 1998        December 31, 2000  LIBOR +  4.25%
         4,437           10,000   (d) August 1, 2000       August 1, 2003     Prime +  2.0 - 2.25%
         2,809            7,500   (e) June 30, 1998        May 31, 2002       Prime +  2.0%
</TABLE>
---------------
(a)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $20.0 million with such amount increasing each fiscal
        quarter after August 31, 1997 by an amount equal to 50% of PEC's
        consolidated net income for each quarter up to a maximum requirement of
        $25 million. At May 31, 1998, $33.7 million of loans secured by
        receivables were outstanding related to financings at prime +2%, of
        which $21.3 million of loans secured by land receivables mature May 15,
        2010 and $12.4 million of loans secured by timeshare receivables mature
        May 15, 2007. The outstanding borrowing amount includes $2.1 million in
        acquisition and development (A&D) financing which mature March 20, 1999
        and May 20, 1999 and $5.3 million maturing July 1, 2003 for the
        financing of corporate office buildings, both of which are amortizing
        loans and bear interest at prime +2.25%. The remaining A&D and
        receivables loans, land acquisition loan and a resort lobby loan
        outstanding of $9.1 million are at prime +2% and mature between November
        30, 1998 and February 20, 2001.

(b)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $25.0 million during the life of the loan. These credit
        lines include available financing for A&D and receivables. At May 31,
        1998, $1.5 was outstanding under the A&D loan which matures in September
        1999, and $4.8 million maturing June 1, 2002 was outstanding under the
        receivables loan.

(c)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $17.0 million during the life of the loan. These credit
        lines include available financings for A&D and receivables. At May 31,
        1998, $6.6 million was outstanding under the A&D loans, bearing interest
        at the 90-day London Interbank Offering Rate (LIBOR) +4.25% and maturing
        between March 1999 and August 1999. At May 31, 1998, $2.4 million was
        outstanding under the receivables loan, bearing interest at the 90-day
        LIBOR +4% and maturing in June 2005.

(d)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $25 million. This credit line is for the purpose of
        financing receivables and costs of remodeling.

(e)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $15 million. This credit line is for the purpose of
        financing receivables.

(f)     Revolving expiration dates represent the expiration of the revolving
        features of the lines of credit, at which time the credit lines become
        loans with fixed maturities.


                                       19


<PAGE>   22
        A schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated is set forth below (thousands of
dollars):


<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED MAY 31,  NINE MONTHS ENDED MAY 31,
                                      ---------------------------- ---------------------------
                                          1998           1997          1998          1997
                                      -------------  ------------- -------------  ------------
<S>                                   <C>            <C>           <C>            <C>        
Commissions and selling expenses
  attributable to recognized and
  unrecognized sales                  $      9,085   $      8,643  $     24,811   $    25,055
Less:  Down payments                        (3,004)        (3,606)       (9,267)      (10,348)
                                      ------------   ------------  ------------   -----------
Cash Shortfall                        $      6,081   $      5,037  $     15,544   $    14,707
                                      ============   ============  ============   ===========
</TABLE>

        During the nine months ended May 31, 1998, PEC did not sell any notes
receivable. During the nine months ended May 31, 1997, PEC sold notes receivable
of $19.9 million from which $16.8 million of the sales proceeds were used to pay
down debt during the nine months ended May 31, 1997. The receivables sold during
the nine months ended May 31, 1997 had a weighted-average interest rate of 12.7%
and were sold to yield a return of 9.0% with any excess interest received from
the obligors being payable to PEC.

        At May 31, 1998, PEC was contingently liable to replace or repurchase
notes receivable sold with recourse totaling $70.9 million. PEC sells notes
receivable subject to recourse provisions as contained in each agreement. PEC is
obligated under these agreements to replace or repurchase accounts that become
over 90 days delinquent or are otherwise subject to replacement or repurchase.
The repurchase provisions provide for substitution of receivables as recourse
for $70.0 million of sold notes receivable and cash payments for repurchase
relating to $883,000 of sold notes receivable. At May 31, 1998 and 1997, the
undiscounted amounts of the recourse obligations on such notes receivable were
$6.1 million and $12.0 million, respectively. PEC periodically reviews the
adequacy of this liability. These reviews take into consideration changes in the
nature and level of the portfolio, current and future economic conditions which
may affect the obligors' ability to pay, changes in collateral values, estimated
value of inventory that may be reacquired and overall portfolio quality.

        The components of the Company's debt, including lines of credit, consist
of the following (thousands of dollars):


<TABLE>
<CAPTION>
                                                                     MAY 31,       AUGUST 31,
                                                                      1998            1997
                                                                  --------------  --------------
<S>                                                               <C>             <C>          
Notes collateralized by receivables                               $      44,055   $      31,489
Mortgages collateralized by real estate properties                       37,403          32,311
Installment contracts and other notes payable                             1,799           1,769
                                                                  -------------   -------------
        Total                                                     $      83,257   $      65,569
                                                                  =============   =============
</TABLE>


FINANCIAL CONDITION

May 31, 1998 Compared to August 31, 1997

        Cash and cash equivalents decreased 76.7% to $2.4 million at May 31,
1998 from $10.4 million at August 31, 1997, primarily as a result of PEC's
acquisition and improvement of timeshare properties, no sale of notes receivable
during the first nine months of fiscal 1998, the payment of commissions and
selling expenses in connection with timeshare and land sales and Mego
Financial's payment of interest on subordinated debt.

        Notes receivable, net, increased 40.7% to $48.2 million at May 31, 1998
from $34.3 million at August 31, 1997 primarily as a result of new receivables
added exceeding reductions while no receivable sales occurred during the nine
months ended May 31, 1998.


                                       20


<PAGE>   23
        Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for the nine
months ended May 31, 1998 consists of the following (thousands of dollars):


<TABLE>
<S>                                                                             <C>         
Balance at beginning of period                                                  $     19,527
  Provision for cancellations                                                          3,760
  Amounts charged to allowance for cancellations and
    reserve for notes receivable sold with recourse                                   (4,808)
                                                                                ------------
Balance at end of period                                                        $     18,479
                                                                                ============
</TABLE>


        The allowance for cancellations and the reserve for notes receivable
sold with recourse consisted of the following at these dates (thousands of
dollars):


<TABLE>
<CAPTION>
                                                                   MAY 31,       AUGUST 31,
                                                                     1998           1997
                                                                -------------   --------------
<S>                                                             <C>             <C>          
Allowance for cancellations, excluding discounts                $      12,902   $      10,824
Reserve for notes receivable sold with recourse                         5,577           8,703
                                                                -------------   -------------
  Total                                                         $      18,479   $      19,527
                                                                =============   =============
</TABLE>


        Statement of Financial Accounting Standard (SFAS) No. 125 (SFAS 125)
requires the reclassification of excess servicing rights as interest only
receivables which are carried at fair market value. Interest only receivables
decreased 10.3% to $3.0 million at May 31, 1998 from $3.3 million at August 31,
1997 due to normal amortization.

        Timeshare interests held for sale and land and improvements inventory
increased 20.9% to $45.1 million at May 31, 1998 from $37.3 million at August
31, 1997 primarily as a result of the completion of construction of additional
timeshare interests and the addition of land inventory in Colorado during the
nine months ended May 31, 1998.

        Other investments increased $2.0 million to $4.2 million at May 31, 1998
from $2.1 million at August 31, 1997 due to the recent acquisition of property
in Biloxi, Mississippi.

        Other receivables increased to $1.4 million at May 31, 1998 from $0 at
August 31, 1997, due to a receivable from MMC to PEC (subsequently paid in June
1998).

        Net assets of discontinued operations decreased to $0 at May 31, 1998
from $53.3 million at August 31, 1997 due to the completion of the Spin-off on
September 2, 1997. The $53.3 million at August 31, 1997 represented the net
assets of MMC of $53.1 million and the Company's receivable of $10.1 million
from MMC less the minority interest of $9.9 million. Of the $10.1 million, $9.7
million was due from MMC to the Company and $446,000 was due from MMC to PEC.
After the Spin-off, MMC was obligated to pay the debt due to the Company, $3.9
million of which was paid in October 1997 under the terms of an agreement and
$6.2 million of which was eliminated through adjustments in April and June 1998.

        Notes and contracts payable increased 27.0% to $83.3 million at May 31,
1998 from $65.6 million at August 31, 1997, due to increased borrowings and no
receivable sales occurring during the nine months ended May 31, 1998; the
proceeds of which are usually used to pay down debt.

        Reserve for notes receivable sold with recourse decreased 35.9% to $5.6
million at May 31, 1998 from $8.7 million at August 31, 1997 primarily due to no
receivable sales occurring during the nine months ended May 31, 1998 and the
reduced balance of the sold notes receivable. Recourse to PEC on sales of notes
receivable is governed by the agreements between the purchasers and PEC.

        Accrued income taxes decreased 24.5% to $4.7 million at May 31, 1998
from $6.2 million at August 31, 1997. The change in certain income tax liability
reserves was a result of facts and circumstances determined in an extensive
review and analysis of the Company's federal income tax liability completed
during fiscal 1997.


                                       21


<PAGE>   24
        Stockholders' equity decreased 71.1% to $21.1 million at May 31, 1998
from $73.2 million at August 31, 1997 primarily as a result of the distribution
by Mego Financial of all of its remaining shares of MMC common stock to
shareholders of Mego Financial pursuant to the Spin-off which resulted in a
distribution of $43.2 million in equity and the settlement of the $6.2 million
receivable MMC owed the Company. See Note 5 of Notes to Condensed Consolidated
Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

        Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," (SFAS 125) was issued by the Financial Accounting Standards Board
(FASB) in June 1996. SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
It requires that liabilities and derivatives incurred or obtained by transferors
as part of a transfer of financial assets be initially measured at fair value.
SFAS 125 also requires that servicing assets be measured by allocating the
carrying amount between the assets sold and retained interests based on their
relative fair values at the date of transfer. Additionally, this statement
requires that the servicing assets and liabilities be subsequently measured by
(a) amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values. SFAS 125 requires that the Company's excess
servicing rights be measured at fair market value and be reclassified as
interest only receivables and accounted for in accordance with SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." As required
by SFAS 125, the Company adopted the new requirements effective January 1, 1997.
Implementation of SFAS 125 did not have any material impact on the financial
statements of the Company, as the book value of the Company's interest only
receivables approximated fair value.

        SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB in
March 1997, effective for financial statements issued after December 15, 1997.
SFAS 128 provides simplified standards for the computation and presentation of
earnings per share (EPS), making EPS comparable to international standards. SFAS
128 requires dual presentation of "Basic" and "Diluted" EPS, by entities with
complex capital structures, replacing "Primary" and "Fully-diluted" EPS under
APB Opinion No. 15.

PART II   OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

        On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia, Civil Action No.1:98CV0593-CAM, by
Robert J. Feeney, plaintiff, as a purported class action against Mego Mortgage
Corporation and Jeffrey S. Moore, the former President and Chief Executive
Officer of Mego Mortgage Corporation. The complaint alleges, among other things,
that the defendants violated the federal securities laws in connection with the
preparation and issuance of certain of Mego Mortgage Corporation's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the common stock of Mego Mortgage Corporation between April 11,
1997 and December 18, 1997, and seeks such other relief as the Court may deem
just and proper. Although the Company has not been served in the above matter,
the Company has learned that an amended complaint was filed in such matter on or
about June 29, 1998, which amended complaint, among other things, adds Mego
Financial Corp. as a defendant, adds John Cole, Trent Hildebrand, Burt W. Price
and Frank J. Murphy as Plaintiffs and alleges an expansion of the purported
class to certain purchasers of Mego Mortgage Corporation's common stock from
April 11, 1997 through May 20, 1998. The Company's counsel have not completed
their review of the above matter.

        As reported in the Corporations' Form 10-K for the year ended August 31,
1997, and in prior reports, following the Company's restatement of certain of
its previously issued financial statements, including for the year ended August
31, 1994, upon which its auditors had rendered unqualified opinions, the
Securities and Exchange Commission (SEC) commenced a formal investigation to
determine, among other things, whether the Company, and/or its officers and
directors, violated applicable federal securities laws in connection with the
preparation and filing of the Company's previously issued financial statements
or certain trading in its common stock.


                                       22


<PAGE>   25
        In a letter from the SEC dated June 1, 1998, the Company was advised
that the staff inquiry had been terminated and that no enforcement action had
been recommended to the Commission. In addition, the letter referred to
Securities Act Release 5310 which provides that such letter should not be
construed to mean that any party has been exonerated or that no action may
ultimately result from the staff's investigation.

ITEM 5.  OTHER EVENTS

        On March 27, 1998, the Company announced that it had entered into the
Merger Agreement under which it was to be acquired by Sycamore. Sycamore was to
be financed by Blackacre Capital Group, L.P., a real estate investment fund.
Under the terms of the Merger Agreement, the Company shareholders are to receive
$6.00 per share of Common stock, in cash, less an adjustment related to a
receivable from MMC on the Company's financial statements. The adjustment was
expected to be at least $0.25 per share but not more than $0.29 per share so
that the per share price which was to be received by shareholders would have
been a minimum of $5.71 per share up to an estimated maximum of $5.75 per share.
See Note 5.

        On May 19, 1998, Sycamore announced that it was prepared to go forward
with the previously announced merger only if certain terms of the merger
agreement were modified, including a reduction of the purchase price to $4.50
per share of outstanding Common Stock. The Company has notified Sycamore that
Sycamore is in default under the Merger Agreement. Nevertheless, the Company
intends to maintain communications with Sycamore and to continue to negotiate so
long as it deems such negotiations to be in the best interest of the Company's
shareholders.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                                       DESCRIPTION
      ------                                       -----------
<S>               <C>
       10.139     Termination of Services and Consulting Agreement between Mego
                  Mortgage Corporation and Preferred Equities Corporation, dated
                  April 22, 1998.

       10.140     Settlement letter from Mego Financial Corp. to Mego Mortgage Corporation
                  dated June 26, 1998.

       10.141     Settlement letter from Preferred Equities Corporation to Mego Mortgage
                  Corporation dated June 26, 1998.

       27.1       Financial Data Schedule (for SEC use only).
</TABLE>

No reports on Form 8-K were filed during the period except as reported in the
Company's Form 10-K for the year ended August 31, 1997.


                                       23


<PAGE>   26
                                    SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                  MEGO FINANCIAL CORP.


                                  By:/s/ Charles G. Baltuskonis
                                     -------------------------------------
                                     Charles G. Baltuskonis
                                     Vice President and Chief Accounting
                                     Officer







Date:   July 15, 1998
     -------------------------------


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