<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: FEBRUARY 28, 1997
 
                                       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)
 
<TABLE>
<S>                                           <C>
                   NEW YORK                                     13-5629885
(STATE OR OTHER JURISDICTION OF INCORPORATION                (I.R.S. EMPLOYER
               OR ORGANIZATION)                            IDENTIFICATION NO.)
</TABLE>
 
                  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 April 11, 1997, there were 18,733,121 shares of Common Stock, $.01
par value per share, of the Registrant outstanding.
 
================================================================================
<PAGE>   2
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
                                     INDEX
 
                          PART I FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                                                           PAGE
                                                                                           ----
<S>       <C>                                                                              <C>
Item 1.   Financial Statements...........................................................
 
          Consolidated Statements of Financial Condition at February 28, 1997 and August
          31, 1996 (Unaudited)...........................................................    1
 
          Consolidated Statements of Operations for the Three and Six Months Ended
          February 28, 1997 and February 29, 1996 (Unaudited)............................    2
 
          Consolidated Statements of Stockholders' Equity for the Six Months Ended
          February 28, 1997 (Unaudited)..................................................    3
 
          Consolidated Statements of Cash Flows for the Six Months Ended February 28,
          1997 and February 29, 1996 (Unaudited).........................................    4
 
          Notes to Consolidated Financial Statements.....................................    6
 
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
          Operations.....................................................................   10
 
PART II OTHER INFORMATION
Item 1.   Legal Proceedings..............................................................   28
 
Item 6.   Exhibits and Reports on Form 8-K...............................................   29
 
          SIGNATURE......................................................................   30
</TABLE>
<PAGE>   3
 
PART I FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                (thousands of dollars, except per share amounts)
                                  (unaudited)
 
<TABLE>
<CAPTION>
                                                                        FEBRUARY 28,     AUGUST 31,
                                                                            1997            1996
                                                                        ------------     ----------
<S>                                                                     <C>              <C>
ASSETS
Cash and cash equivalents.............................................    $ 19,183        $   3,185
Restricted cash.......................................................       7,402            6,657
Notes receivable, net of allowances for cancellations, valuation
  discounts, and credit losses of $14,494 at February 28, 1997 and
  $16,794 at August 31, 1996..........................................      49,166           40,485
Mortgage related securities, at fair value............................      67,103           22,944
Excess servicing rights...............................................          --           14,268
Mortgage servicing rights.............................................       5,805            3,827
Timeshare interests held for sale.....................................      36,835           36,890
Land and improvements inventory.......................................       3,686            3,721
Other investments.....................................................       1,852            1,972
Property and equipment, net of accumulated depreciation of $14,690 at
  February 28, 1997 and $13,550 at August 31, 1996....................      24,322           20,262
Deferred selling costs................................................       3,206            2,901
Prepaid debt expenses.................................................       3,805            1,003
Prepaid commitment fee................................................       2,886               --
Other assets..........................................................      11,832            7,482
                                                                          --------         --------
          TOTAL ASSETS................................................    $237,083        $ 165,597
                                                                          ========         ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Notes and contracts payable.........................................    $ 80,665        $  84,449
  Accounts payable and accrued liabilities............................      24,338           19,662
  Payable to assignors................................................          --            2,579
  Future estimated contingency for notes receivable sold with
     recourse.........................................................      12,090            9,332
  Deposits............................................................       2,694            2,971
  Negative goodwill...................................................          68               82
  Income taxes payable................................................      16,792           10,980
                                                                          --------         --------
          Total liabilities before minority interest, subordinated
            debt and redeemable preferred stock.......................     136,647          130,055
                                                                          --------         --------
Minority interest of consolidated subsidiary..........................       8,267               --
                                                                          --------         --------
Subordinated debt.....................................................      49,898            9,691
                                                                          --------         --------
Redeemable preferred stock, Series A, 12% cumulative preferred stock,
  $.01 par value, $10 redemption value, 0 shares issued and
  outstanding at February 28, 1997 and August 31, 1996................          --               --
                                                                          --------         --------
Stockholders' equity:
  Preferred stock, $.01 par value (authorized -- 5,000,000 shares)....          --               --
  Common stock, $.01 par value (authorized -- 50,000,000 shares;
     issued and outstanding -- 18,733,121 at February 28, 1997 and
     18,433,121 at August 31, 1996)...................................         187              184
  Additional paid-in capital..........................................      17,974            6,504
  Retained earnings...................................................      24,110           19,163
                                                                          --------         --------
          Total stockholders' equity..................................      42,271           25,851
                                                                          --------         --------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................    $237,083        $ 165,597
                                                                          ========         ========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                        1
<PAGE>   4
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (thousands of dollars, except per share amounts)
                                  (unaudited)
 
<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED                 SIX MONTHS ENDED
                                        -----------------------------     -----------------------------
                                        FEBRUARY 28,     FEBRUARY 29,     FEBRUARY 28,     FEBRUARY 29,
                                            1997             1996             1997             1996
                                        ------------     ------------     ------------     ------------
<S>                                     <C>              <C>              <C>              <C>
REVENUES
  Timeshare interest sales, net.......   $     7,573      $     5,482      $    15,129      $    12,194
  Land sales, net.....................         4,383            5,677            7,774           10,758
  Gain on sale of notes receivable....        10,869            4,884           20,919           11,281
  Net unrealized gain on mortgage
     related securities...............         3,143               --            2,908               --
  Interest income.....................         3,791            1,561            6,428            3,191
  Financial income....................           958            1,223            1,870            2,453
  Amortization of negative goodwill...             7               13               14               35
  Incidental operations...............           717              488            1,443            1,232
  Other...............................           445              (18)             490              236
                                         -----------      -----------      -----------      -----------
     Total revenues...................        31,886           19,310           56,975           41,380
                                         -----------      -----------      -----------      -----------
COSTS AND EXPENSES
  Direct cost of:
     Timeshare interest sales.........         1,188              836            2,512            1,851
     Land sales.......................           424              551              734            1,045
     Incidental operations............           718              416            1,408            1,120
  Commissions and selling.............         8,358            7,206           16,051           14,532
  Depreciation and amortization.......           610              620            1,229            1,075
  Provision for credit losses.........         3,805              200            5,516              497
  Interest expense....................         3,670            1,286            6,513            2,924
  General and administrative..........         9,081            5,799           16,685           11,470
                                         -----------      -----------      -----------      -----------
     Total costs and expenses.........        27,854           16,914           50,648           34,514
                                         -----------      -----------      -----------      -----------
INCOME BEFORE INCOME TAXES AND
  MINORITY INTEREST...................         4,032            2,396            6,327            6,866
                                         -----------      -----------      -----------      -----------
INCOME TAXES (BENEFIT)................          (380)             918              686            2,590
                                         -----------      -----------      -----------      -----------
MINORITY INTEREST.....................           631               --              694               --
                                         -----------      -----------      -----------      -----------
NET INCOME............................         3,781            1,478            4,947            4,276
                                         -----------      -----------      -----------      -----------
CUMULATIVE PREFERRED STOCK
  DIVIDENDS...........................            --               60               --              140
                                         -----------      -----------      -----------      -----------
NET INCOME APPLICABLE TO COMMON
  STOCK...............................   $     3,781      $     1,418      $     4,947      $     4,136
                                         ===========      ===========      ===========      ===========
EARNINGS PER COMMON SHARE:
  Primary:
     Net income.......................   $      0.19      $      0.08      $      0.25      $      0.23
                                         ===========      ===========      ===========      ===========
     Weighted average number of common
       shares and common share
       equivalents outstanding........    19,662,582       18,087,556       19,619,912       18,087,556
                                         ===========      ===========      ===========      ===========
  Fully Diluted:
     Net income.......................   $      0.19      $      0.07      $      0.25      $      0.21
                                         ===========      ===========      ===========      ===========
     Weighted average number of common
       shares and common share
       equivalents outstanding........    19,662,582       19,463,556       19,619,912       19,463,556
                                         ===========      ===========      ===========      ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                        2
<PAGE>   5
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
                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, 1996.............  18,433,121      $184        $ 6,504       $19,163     $25,851
 
Gain on sale of stock of subsidiary,
  net of taxes of $4,972...............          --        --          8,113            --       8,113
 
Issuance of warrants in connection with
  commitment received..................          --        --          3,000            --       3,000
 
Issuance of common stock in connection
  with the exercise of common stock
  warrants.............................     300,000         3            357            --         360
 
Net income for the six months ended
  February 28, 1997....................          --        --             --         4,947       4,947
                                         ----------      ----        -------       -------     -------
Balance at February 28, 1997...........  18,733,121      $187        $17,974       $24,110     $42,271
                                         ==========      ====        =======       =======     =======
</TABLE>
 
                See notes to consolidated financial statements.
 
                                        3
<PAGE>   6
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (thousands of dollars)
                                  (unaudited)
 
<TABLE>
<CAPTION>
                                                                          SIX MONTHS ENDED
                                                                    -----------------------------
                                                                    FEBRUARY 28,     FEBRUARY 29,
                                                                        1997             1996
                                                                    ------------     ------------
<S>                                                                 <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income......................................................    $   4,947        $  4,276
                                                                      ---------        --------
  Adjustments to reconcile net income to net cash used in
     operating activities:
     Undistributed minority interest..............................          694              --
     Amortization of negative goodwill............................          (14)            (35)
     Charges to allowance for cancellation and credit losses......       (7,137)         (3,792)
     Provisions for cancellation and credit losses................       10,473           5,468
     Cost of sales................................................        3,246           2,896
     Depreciation and amortization expense........................        1,229             873
     Additions to excess servicing rights.........................           --         (12,192)
     Amortization of excess servicing rights......................           --           1,619
     Accretion of residual interest on mortgage related
      securities..................................................       (1,306)             --
     Net unrealized gain on mortgage related securities...........       (2,908)             --
     Additions to mortgage related securities.....................      (27,317)             --
     Payments on mortgage related securities......................          503              --
     Amortization of mortgage related securities..................        1,079              --
     Additions to mortgage servicing rights.......................       (3,086)           (695)
     Amortization of mortgage servicing rights....................        1,108             164
     Payments on notes receivable, net............................       18,706           9,922
     Proceeds from sale of notes receivable.......................      177,598          63,066
     Purchase of land and timeshare interests.....................       (3,156)         (5,797)
     Changes in operating assets and liabilities:
       Increase in restricted cash................................         (745)           (704)
       Increase in notes receivable, net..........................     (200,149)        (77,231)
       Increase in other assets...................................      (14,831)           (694)
       Decrease (increase) in deferred selling costs..............         (305)            977
       Increase in accounts payable and accrued liabilities.......        4,676           1,629
       Decrease in deposits.......................................         (277)         (1,599)
       Increase in income taxes payable...........................        5,790           2,391
                                                                      ---------        --------
          Total adjustments.......................................      (36,129)        (13,734)
                                                                      ---------        --------
            Net cash used in operating activities.................      (31,182)         (9,458)
                                                                      ---------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment..............................       (5,200)         (2,169)
  Proceeds from the sale of property and equipment................            8              --
  Additions to other investments..................................         (626)           (860)
  Decreases in other investments..................................          746             150
                                                                      ---------        --------
            Net cash used in investing activities.................       (5,072)         (2,879)
                                                                      ---------        --------
</TABLE>
 
                See notes to consolidated financial statements.
 
                                        4
<PAGE>   7
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                             (thousands of dollars)
                                  (unaudited)
 
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                      -----------------------------
                                                                      FEBRUARY 28,     FEBRUARY 29,
                                                                          1997             1996
                                                                      ------------     ------------
<S>                                                                   <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings...........................................  $  145,452        $ 73,402
  Payments on borrowings.............................................    (149,236)        (62,365)
  Preferred stock dividends..........................................          --            (140)
  Redemption of preferred stock......................................          --          (1,000)
  Payments on payable to assignors...................................      (2,579)             --
  Payments on subordinated debt......................................        (500)           (500)
  Interest accrued on subordinated debt..............................         707             664
  Issuance of subordinated debt......................................      37,750              --
  Proceeds from sale of Mego Mortgage Corporation common stock.......      20,658              --
                                                                        ---------        --------
          Net cash provided by financing activities..................      52,252          10,061
                                                                        ---------        --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................      15,998          (2,276)
                                                                        ---------        --------
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD.....................       3,185           7,338
                                                                        ---------        --------
CASH AND CASH EQUIVALENTS -- END OF PERIOD...........................  $   19,183        $  5,062
                                                                        =========        ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for:
     Interest, net of amounts capitalized............................  $    5,226        $  3,477
                                                                        =========        ========
     Income taxes....................................................  $    1,241        $     25
                                                                        =========        ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Issuance of 1,000,000 common stock warrants in connection with
     commitment received.............................................  $    3,000        $     --
                                                                        =========        ========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                        5
<PAGE>   8
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
                                  (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, 1996 and 1995,
contained in Mego Financial Corp.'s (Mego) Form 10-K filed for the year ended
August 31, 1996, the accompanying unaudited Consolidated Financial Statements
contain all of the information necessary to present fairly the financial
position of Mego Financial Corp. and Subsidiaries at February 28, 1997 and the
results of its operations for the three and six months ended February 28, 1997
and February 29, 1996, and the cash flows for the six months ended February 28,
1997 and February 29, 1996. All intercompany accounts between Mego and its
subsidiaries have been eliminated. Certain reclassifications have been made to
conform prior periods with the current period presentation. 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. The results of operations for the three and six
months ended February 28, 1997, are not necessarily indicative of the results to
be expected for the full year.
 
 2. NATURE OF OPERATIONS
 
     Mego 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. Mego
is a specialty financial services company that, through its subsidiaries, Mego
Mortgage Corporation (MMC) and Preferred Equities Corporation (PEC), is engaged
primarily in originating, selling and servicing consumer receivables generated
through home improvement and other consumer loans, and timeshare and land sales.
Mego Financial Corp. and its subsidiaries are herein collectively referred to as
the Company.
 
 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 services. In February 1988,
Mego acquired PEC, pursuant to an assignment by the assignors (Comay Corp., GRI,
RRE 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 and its interest in certain notes receivable to the trustees.
 
 4. MEGO MORTGAGE CORPORATION
 
     MMC originates Title I home improvement loans (Title I Loans) insured by
the Federal Housing Administration (FHA) of the Department of Housing and Urban
Development (HUD) through a network of loan correspondents and home improvement
contractors. In May 1996, MMC commenced the origination of conventional home
improvement, debt consolidation, and home equity loans through its network of
loan correspondents and dealers. Mego's ownership in MMC declined from 100% at
August 31, 1996 to 81.3% in November 1996, when MMC issued 2,300,000 shares of
its common stock in an underwritten public offering at $10.00 per share. Mego
continues to have voting control on all matters submitted to the stockholders of
MMC, including the election of directors and approval of extraordinary corporate
transactions. Concurrently with the common stock offering, MMC issued $40
million of 12.5% Senior Subordinated Notes due in 2001 in an underwritten public
offering. The proceeds from the offerings received by MMC have been and will be
used to repay borrowings and provide funds for future originations and
securitizations of loans. The proceeds
 
                                        6
<PAGE>   9
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
                                  (unaudited)
 
received from the public stock offering in excess of the book value of Mego's
investment in MMC ($13.1 million, less income taxes of $5 million), has been
recorded as additional paid-in capital of Mego. The undistributed minority
interest of MMC reflected on the Company's Consolidated Statements of Financial
Condition was $8.3 million at February 28, 1997. See Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
discussion.
 
 5. SUBSEQUENT EVENT
 
     On March 10, 1997, $89.7 million of loans were repurchased, securitized and
sold by MMC, comprised of $21.9 million of Title I Loans and $67.8 million of
conventional loans. Pursuant to this securitization, asset-backed notes secured
by the loans were sold in a public offering. MMC continues to service the sold
loans and is entitled to receive from payments with respect to interest on the
sold loans, a servicing fee equal to 1.00% per annum on the remaining principal
balance of each loan. MMC received certificates and contractual rights which
will be recorded as mortgage related securities on the Consolidated Statements
of Financial Condition, representing the interest differential, after payment of
servicing and other fees, between the interest paid by the obligors of the sold
loans and the yield on the sold notes. MMC may be required to repurchase loans
that do not conform to the representations and warranties made by MMC in the
securitization agreements. As of February 28, 1997, the gain on certain whole
loan sales during the quarter has been recorded which approximates the gain on
this securitization sale.
 
 6. RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
(SFAS 125) which 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. The statement requires the Company's existing and
future excess servicing rights be measured at fair market value and reclassified
as interest only strip receivables, carried as mortgage related securities, and
accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
 
     As required by the statement, the Company adopted the new requirements
effective January 1, 1997 and applied them prospectively. The book value of the
Company's mortgage related securities approximates fair value. The adoption of
SFAS 125 caused PEC to begin recognizing servicing rights and notes receivable
held for sale, similar to the method currently used by MMC for mortgage
servicing rights under SFAS No. 122, "Accounting for Mortgage Servicing Rights,
an amendment of SFAS No. 65." This increases the gain on sale of notes at the
time of sale and reduces future servicing fee income on PEC generated
receivables sold after January 1, 1997. No material impact resulted from the
implementation of SFAS 125.
 
                                        7
<PAGE>   10
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
                                  (unaudited)
 
     The following table reflects the components of mortgage related securities
as required by SFAS 125, at February 28, 1997:
 
<TABLE>
            <S>                                                          <C>
            Interest only receivables (formerly excess servicing
              rights)..................................................  $15,438
            Interest only strip securities.............................    7,300
            Residual interest securities...............................   44,365
                                                                         -------
              Total mortgage related securities........................  $67,103
                                                                         =======
</TABLE>
 
     All mortgage related securities are classified as trading securities and
are recorded at their estimated fair value. Changes in the estimated fair values
are recorded in current operations.
 
     The FASB issued SFAS No. 128, "Earnings per Share" (SFAS 128) in March
1997, effective for financial statements issued after December 15, 1997. The
statement 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 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.
 
     Data utilized in calculating proforma earnings per share under the SFAS 128
statement are as follows:
 
<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED           SIX MONTHS ENDED
                                              -------------------------   -------------------------
                                               FEBRUARY      FEBRUARY      FEBRUARY      FEBRUARY
                                                  28,           29,           28,           29,
                                                 1997          1996          1997          1996
                                              -----------   -----------   -----------   -----------
<S>                                           <C>           <C>           <C>           <C>
Basic:
  Net income................................  $ 3,781,000   $ 1,418,000   $ 4,947,000   $ 4,136,000
                                              ===========   ===========   ===========   ===========
  Weighted average number of common
     shares.................................   18,579,788    18,087,556    18,506,049    18,087,556
                                              ===========   ===========   ===========   ===========
Diluted:
  Net income................................  $ 3,781,000   $ 1,418,000   $ 4,947,000   $ 4,136,000
                                              ===========   ===========   ===========   ===========
  Weighted average number of common shares
  and common share equivalents
  outstanding...............................   19,662,582    18,995,013    19,619,912    19,102,457
                                              ===========   ===========   ===========   ===========
</TABLE>
 
                                        8
<PAGE>   11
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
                                  (unaudited)
 
     The following tables reconcile the net income applicable to common
stockholders, basic and diluted shares, and EPS for the following periods:
 
<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED                      THREE MONTHS ENDED
                                       FEBRUARY 28, 1997                       FEBRUARY 29, 1996
                              -----------------------------------     -----------------------------------
                                                        PER-SHARE                               PER-SHARE
                                INCOME       SHARES      AMOUNT         INCOME       SHARES      AMOUNT
                              ----------   ----------   ---------     ----------   ----------   ---------
<S>                           <C>          <C>          <C>           <C>          <C>          <C>
Net income..................  $3,781,000                              $1,478,000
Less: Preferred stock
  dividends.................          --                                  60,000
                              ----------                              ----------
BASIC EPS
Income applicable to common
  stockholders..............   3,781,000   18,579,788     $0.20        1,418,000   18,087,556     $0.08
                                                          =====                                   =====
Effect of dilutive
  securities:
  Warrants..................          --      806,653                         --      660,463
  Stock options.............          --      276,141                         --      246,994
                              ----------   ----------                 ----------   ----------
DILUTED EPS
Income applicable to common
  stockholders and assumed
  conversions...............  $3,781,000   19,662,582     $0.19       $1,418,000   18,995,013     $0.07
                              ==========   ==========     =====       ==========   ==========     =====
</TABLE>
 
<TABLE>
<CAPTION>
                                       SIX MONTHS ENDED                        SIX MONTHS ENDED
                                       FEBRUARY 28, 1997                       FEBRUARY 29, 1996
                              -----------------------------------     -----------------------------------
                                                        PER-SHARE                               PER-SHARE
                                INCOME       SHARES      AMOUNT         INCOME       SHARES      AMOUNT
                              ----------   ----------   ---------     ----------   ----------   ---------
<S>                           <C>          <C>          <C>           <C>          <C>          <C>
Net income..................  $4,947,000                              $4,276,000
Less: Preferred stock
  dividends.................          --                                 140,000
                              ----------                              ----------
BASIC EPS
Income available to common
  stockholders..............   4,947,000   18,506,049     $0.27        4,136,000   18,087,556     $0.23
                                                          =====                                   =====
Effect of dilutive
  securities:
  Warrants..................          --      841,497                         --      748,180
  Stock options.............          --      272,366                         --      266,721
                              ----------   ----------                 ----------   ----------
DILUTED EPS
Income available to common
  stockholders and assumed
  conversions...............  $4,947,000   19,619,912     $0.25       $4,136,000   19,102,457     $0.22
                              ==========   ==========     =====       ==========   ==========     =====
</TABLE>
 
 7. PAYMENTS TO ASSIGNORS
 
     In January 1997, the outstanding balance of payable to assignors of $2.6
million, including accrued interest of $45,000, was paid in full. The assignors
are affiliates of certain officers and directors of the Company. See Note 3 of
Notes to Consolidated Financial Statements for further discussion. Additionally,
effective March 1, 1997, the assignors began receiving the first of 7 equal
semi-annual payments of $1,429,000 plus interest related to the repayment of the
subordinated debt. These payments are collateralized by a pledge of PEC's
outstanding stock. See Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources
 -- "Company Liquidity" for additional information.
 
                                        9
<PAGE>   12
 
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
                                  (unaudited)
 
 8. INCOME TAX PROVISION
 
     Based on a review of prior years' federal income tax returns, the Company
has determined that an unrecognized net operating loss carryforward (NOL) exists
for federal income tax purposes. The provision for federal income taxes has been
reduced, due to partial utilization of a portion of this NOL. The complete
analysis of the taxes is not yet complete, so the entire amount of the NOL has
not yet been determined. The reduction for fiscal 1997 has been accomplished
based on a portion of the NOL that has been identified.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the notes thereto, contained
elsewhere herein.
 
GENERAL
 
     The business of the Company is primarily the generation of consumer
receivables by marketing timeshare interests, retail lots and land parcels,
generating home improvement and equity loans, and servicing the related notes
receivable and loans.
 
     The Company, through its subsidiary, PEC, provides financing to the
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 sales contracts. These notes receivable are generally
payable over a period of up to 10 years, bear interest at rates ranging from 0%
to 16% and require equal monthly installments of principal and interest. MMC
originates, purchases, sells, securitizes and services consumer loans consisting
primarily of home improvement, home equity, and debt consolidation loans,
generally secured by liens on improved property, through its network of
correspondents and dealers. The conventional loans are purchased or originated
by MMC in amounts up to a maximum of $75,000 with fixed rates and up to 25 year
maturities, and are generally secured by a lien on the respective primary
residence. The Title I Loans are purchased or originated by MMC in amounts up to
a maximum of $25,000 with maturities up to 20 years. During the first quarter of
fiscal 1997, MMC began offering conventional home improvement loans through its
dealer division and debt consolidation loans to its borrowers through both its
correspondent and dealer divisions. Since MMC began offering conventional loans
in May 1996, conventional loans have accounted for an increasing portion of loan
originations.
 
                                       10
<PAGE>   13
 
     The following table sets forth certain data regarding loans originated,
sold, securitized and serviced by MMC and PEC during the three months ended
February 28, 1997 and February 29, 1996 (thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                        -----------------------------------------
                                                        FEBRUARY 28, 1997      FEBRUARY 29, 1996
                                                        ------------------     ------------------
<S>                                                     <C>          <C>       <C>          <C>
Loan Originations:
Principal amount of loans:
  Correspondents:
     Title I........................................... $ 11,346       9.2%    $ 14,317      45.9%
     Conventional......................................   87,911      71.5           --        --
                                                        --------     -----     --------     -----
Total Correspondents...................................   99,257      80.7       14,317      45.9
                                                        --------     -----     --------     -----
  Dealers:
     Title I...........................................   10,186       8.3        8,061      25.8
     Conventional......................................    1,817       1.5           --        --
                                                        --------     -----     --------     -----
Total Dealers..........................................   12,003       9.8        8,061      25.8
                                                        --------     -----     --------     -----
Notes receivable additions through sales of timeshare
  interests and land...................................   11,742       9.5        8,823      28.3
                                                        --------     -----     --------     -----
Total.................................................. $123,002     100.0%    $ 31,201     100.0%
                                                        ========     =====     ========     =====
Number of Loans Originated:
  Correspondents:
     Title I...........................................      551       9.8%         997      39.5%
     Conventional......................................    2,884      51.0           --        --
                                                        --------     -----     --------     -----
Total Correspondents...................................    3,435      60.8          997      39.5
                                                        --------     -----     --------     -----
  Dealers:
     Title I...........................................      873      15.4          561      22.2
     Conventional......................................       83       1.5           --        --
                                                        --------     -----     --------     -----
Total Dealers..........................................      956      16.9          561      22.2
                                                        --------     -----     --------     -----
Notes receivable additions through sales of timeshare
  interests and land...................................    1,260      22.3          967      38.3
                                                        --------     -----     --------     -----
Total..................................................    5,651     100.0%       2,525     100.0%
                                                        ========     =====     ========     =====
Loans Serviced at end of period (including notes
securitized, sold to investors, and held for sale):
Title I................................................ $237,633      49.2%    $139,138      55.0%
Conventional...........................................  130,736      27.0           --        --
Timeshare and land.....................................  114,964      23.8      113,916      45.0
                                                        --------     -----     --------     -----
Total.................................................. $483,333     100.0%    $253,054     100.0%
                                                        ========     =====     ========     =====
</TABLE>
 
     The Company 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 $6.6 million and
$6 million at February 28, 1997 and August 31, 1996, respectively, made under
this arrangement are included in the table above. A valuation discount is
established to provide for an effective interest rate (currently 10%) on notes
receivable bearing no stated interest rate at the time of sale, and is applied
to the principal balance and amortized over the term of the note. The effective
interest rate is based upon the economic interest rate environment and similar
industry data.
 
     Land sales as of February 28, 1997, exclude $14.3 million in sales not yet
recognized under GAAP due to pending receipt of the requisite payment amounts.
If ultimately recognized, revenues from these sales will be reduced by a related
estimated provision for cancellations of $2.2 million, estimated deferred
selling costs of $3.2 million and cost of sales of $1.2 million.
 
                                       11
<PAGE>   14
 
     The Company is obligated under certain agreements for the sale of notes
receivable and certain loan agreements to maintain various minimum net worth
requirements. The most restrictive of these agreements requires PEC to maintain
a minimum tangible net worth of $25 million and MMC to maintain a minimum
tangible net worth requirement of $12.5 million plus any issuance of capital
stock or other capital instruments since August 31, 1995 plus 50% of MMC's
cumulative net income since May 1, 1996. At February 28, 1997, MMC's minimum
tangible net worth requirement was $37.1 million. Additionally, MMC is required
to maintain a minimum level of profitability of at least $500,000 per rolling 6
month period.
 
     At February 28, 1997, and August 31, 1996, receivables aggregating $48.5
million and $54.2 million, respectively, were pledged to lenders to
collateralize certain of the Company's indebtedness. Receivables which qualify
for the lenders' criteria may be pledged as collateral whether or not such
receivables have been recognized for accounting purposes.
 
     On December 17, 1996, $67.3 million of loans were repurchased, securitized
and sold by MMC, comprised of $36.7 million of Title I Loans and $30.6 million
of conventional loans. Pursuant to this securitization, pass-through
certificates evidencing interests in the pools of loans were sold in a public
offering. MMC continues to service the sold loans and is entitled to receive
from payments with respect to interest on the sold loans, a servicing fee equal
to 1.00% per annum on the balance of each loan. MMC received certificates and
contractual rights which have been recorded as mortgage related securities on
the Consolidated Statements of Financial Condition, representing the interest
differential, after payment of servicing and other fees, between the interest
paid by the obligors of the sold loans and the yield on the sold certificates.
MMC may be required to repurchase loans that do not conform to the
representations and warranties made by MMC in the securitization agreements. See
Note 5 of Notes to Consolidated Financial Statements for a description of a
securitization which took place on March 10, 1997.
 
  MMC
 
     MMC recognizes revenue from the gain on sale of loans, unrealized gain on
mortgage related securities, interest income and servicing income. Interest
income, net, represents the interest received on loans in MMC's portfolio prior
to their sale, net of interest paid under its debt agreements. MMC continues to
service all loans sold to date. Net loan servicing income represents servicing
fee income and other ancillary fees received for servicing loans less the
amortization of capitalized mortgage servicing rights and excess servicing
rights through January 1, 1997 which was the date of adoption of SFAS 125.
Mortgage servicing rights and excess servicing rights were amortized over the
estimated lives of the loans.
 
     The following tables set forth the principal balance of loans sold or
securitized and related gain on sale data for the three and six months ended
February 28, 1997 and February 29, 1996 (thousands of dollars):
 
<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED                 SIX MONTHS ENDED
                                             -----------------------------     -----------------------------
                                             FEBRUARY 28,     FEBRUARY 29,     FEBRUARY 28,     FEBRUARY 29,
                                                 1997             1996             1997             1996
                                             ------------     ------------     ------------     ------------
<S>                                          <C>              <C>              <C>              <C>
MMC Loans Sold:
  Title I Loans............................    $ 22,277         $ 21,395         $ 55,665         $ 56,421
  Conventional.............................      84,655               --          111,776               --
                                                -------           ------          -------           ------
     Total.................................    $106,932         $ 21,395         $167,441         $ 56,421
                                                =======           ======          =======           ======
Gain on sale of loans......................    $ 10,428         $  4,845         $ 20,029         $ 10,810
                                                =======           ======          =======           ======
Gain on sale of loans as a percentage of
  principal balance of loans sold..........         9.8%            22.6%            12.0%            19.2%
                                                =======           ======          =======           ======
Net unrealized gain on mortgage related
  securities...............................    $  3,143         $     --         $  2,908         $     --
                                                =======           ======          =======           ======
Gain on sale of loans plus net unrealized
  gain on mortgage related securities as a
  percentage of principal balance of loans
  sold.....................................        12.7%            22.6%            13.7%            19.2%
                                                =======           ======          =======           ======
</TABLE>
 
                                       12
<PAGE>   15
 
     The combined gain on sale and net unrealized gain on mortgage related
securities for the 3 month period ended February 28, 1997, was $15,220,000, or
14.23% of loans sold during the period, before adjustments totaling $1,649,000
relating to FHA Title I Loans originated prior to March 1, 1996. The adjustment
was approximately 1.1% of the original principal balances of such loans.
 
     MMC sells its loans through whole loan sales to third party purchasers,
retaining the right to service the loans and to receive any amounts in excess of
the guaranteed yield to the purchasers. In addition, MMC sells loans through
securitizations. Certain of the regular interests of the related securitizations
are sold, with the interest only and residual interest securities retained by
MMC.
 
     As a holder of residual interest securities, the Company is entitled to
receive certain excess cash flows. These excess cash flows are calculated as the
difference between (a) principal and interest paid by borrowers and (b) the sum
of (i) pass-through interest and principal to be paid to the holders of the
regular securities and interest only securities, (ii) trustee fees, (iii)
third-party credit enhancement and FHA insurance fees, (iv) servicing fees and
(v) estimated loan pool losses. The Company's right to receive the excess of
cash flows is subject to the satisfaction of certain overcollateralization or
reserve requirements which are specific to each securitization and are used as a
means of credit enhancement.
 
     Delinquencies -- The following table sets forth the delinquency and Title I
insurance claims experience of loans serviced by MMC at the dates indicated
(thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                FEBRUARY 28,     AUGUST 31,
                                                                    1997            1996
                                                                ------------     ----------
        <S>                                                     <C>              <C>
        Delinquency period(1)
          31-60 days past due.................................        2.46%            2.17%
          61-90 days past due.................................        1.06             0.85
          91 days and over past due(2)........................        3.86             4.53
          91 days and over past due, net of claims filed(3)...        2.03             1.94
        Outstanding claims filed with HUD(4)..................        1.83             2.59
        Outstanding number of Title I insurance claims........         394              255
        Total servicing portfolio.............................    $368,368        $ 214,189
        Title I Loans serviced................................     237,633          202,766
        Amount of FHA insurance available(5)..................      23,342           21,205
        Amount of FHA insurance available as a percentage of
          Title I Loans serviced..............................        9.82%(5)        10.46%
        Losses on liquidated loans(6).........................    $     58        $      32
</TABLE>
 
------------------------------------------------------------------------------
 
(1) Represents the dollar amount of delinquent loans as a percentage of the
    total dollar amount of loans serviced by MMC (including loans owned by MMC)
    as of the dates indicated.
 
(2) During the year ended August 31, 1996 and the quarter ended February 28,
    1997, the processing and payment of claims filed with HUD was delayed.
 
(3) Represents the dollar amount of delinquent loans net of delinquent Title I
    Loans for which claims have been filed with HUD and payment is pending as a
    percentage of the total dollar amount of total loans serviced by MMC
    (including loans owned by MMC) as of the dates indicated.
 
(4) Represents the dollar amount of delinquent Title I Loans for which claims
    have been filed with HUD and payment is pending as a percentage of the total
    dollar amount of total loans serviced by MMC (including loans owned by MMC)
    as of the dates indicated.
 
(5) If all claims filed with HUD had been processed as of February 28, 1997, the
    amount of FHA insurance available would have been reduced to $16.9 million,
    which as a percentage of Title I Loans serviced would have been 7.3%.
 
(6) On Title I Loans, a loss is recognized upon receipt of payment of a claim or
    final rejection thereof. Claims paid in a period may relate to a claim filed
    in an earlier period. Since MMC commenced its Title I lending operations in
    March 1994, there has been no final rejection of a claim by the FHA.
    Aggregate losses on liquidated Title I Loans relates to 290 Title I
    insurance claims made by MMC, as servicer, since
 
                                       13
<PAGE>   16
 
    commencing operations through February 28, 1997. Losses on Title I Loans
    liquidated will increase as the balance of the claims are processed by HUD.
    MMC has received an average payment from HUD equal to 90% of the outstanding
    principal balance of such Title I Loans, plus appropriate interest and
    costs.
 
     Pooling and servicing agreements and sales and servicing agreements
relating to MMC's securitization transactions contain provisions with respect to
the maximum permitted loan delinquency rates and loan default rates, which, if
exceeded, would allow the termination of MMC's right to service the related
loans. At February 28, 1997, the rolling three month average annual default rate
on the pool of loans sold in the March 1996 securitization transaction, which
exceeded 6.5%, the permitted limit set forth in the related pooling and
servicing agreement. Accordingly, this condition could result in the termination
of MMC's servicing rights with respect to that pool of loans by the trustee, the
master servicer or the insurance company providing credit enhancement for that
transaction. Although the insurance company has indicated that it, and to its
knowledge, the trustee and the master servicer have no present intention to
terminate MMC's servicing rights related to that pool of loans, no assurance can
be given that one or more of such parties will not exercise its right to
terminate. In the event of such termination, there would be a material adverse
effect on the valuation of the Company's mortgage servicing rights and the
results of operations in the amount of such mortgage servicing rights ($1.2
million before tax at February 28, 1997) on the date of termination.
 
     The pooling and servicing agreements and sales and servicing agreements
also require that certain delinquency and default rates not exceed certain
thresholds. When these thresholds are exceeded, higher levels of
overcollaterialization are required which can cause a delay in cash receipts to
the residual interest holders, causing an adverse valuation adjustment to the
residual security.
 
     Delinquencies of loans serviced by MMC have also decreased the amount of
loan servicing income recorded during the 6 months ended February 28, 1997, as
MMC's loan servicing income has been reduced by the amount of interest advanced
to the owners of these loans.
 
     Delinquencies have increased during the six months ended February 28, 1997
from the August 31, 1996 levels. Since MMC began originating loans in 1994, an
increasing level of delinquencies appear as expected on loans less than two
years old. After this initial period, the level of delinquencies is not
anticipated to increase. Management has transferred its entire MMC loan
collection function to Atlanta, Georgia to improve efficiency and coordination
of collection efforts and to ensure consistent collection strategies with
borrowers. MMC's loan collection functions are organized into two areas of
operations: routine collections and management of nonperforming loans. Routine
collection personnel are responsible for collecting loan payments that are less
than 60 days contractually past due and providing prompt and accurate responses
to all customer inquiries and complaints. Borrowers are contacted on the due
date for each of the first six payments in order to encourage continued prompt
payment. Generally, after six months of seasoning, collection activity will
commence if the loan payment has not been made within five days of the due date.
Borrowers usually will be contacted by telephone at least once every five days
and also by written correspondence before the loan becomes 60 days delinquent.
With respect to loan payments that are less than 60 days late, routine
collection personnel utilize a system of mailed notices and telephonic
conferences for reminding borrowers of late payments and encouraging borrowers
to bring their accounts current. Installment payment invoices and return
envelopes are mailed to each borrower on a monthly basis.
 
     Once a loan becomes 30 days past due, a collection supervisor generally
analyzes the account to determine the appropriate course of remedial action. On
or about the 45th day of delinquency, the supervisor determines if the property
needs immediate inspection to determine if it is occupied or vacant. Depending
upon the circumstances surrounding the delinquent account, a temporary
suspension of payments or a repayment plan to return the account to current
status may be authorized. It is MMC's policy to work with the delinquent
customer to resolve the past due balance before Title I claim processing or
legal action is initiated.
 
     Nonperforming loan management personnel are responsible for collection of
severely delinquent loan payments (over 60 days late), filing Title I insurance
claims or initiating legal action for foreclosure and recovery. Collection and
Title I insurance claim personnel are responsible for collecting delinquent loan
 
                                       14
<PAGE>   17
 
payments and seeking to mitigate losses by providing various alternatives for
further actions, including modifications, managing Title I insurance claims, and
utilizing a claim management system designed to track insurance claims for Title
I Loans, so that all required conditions precedent to claim perfection are met.
A foreclosure coordinator will review all previous collection activity for
conventional loans, evaluate the lien and equity position and obtain any
additional information as necessary. Foreclosure regulations and practices and
the rights of the owner in default vary from state to state, but generally
procedures may be initiated if: (i) the loan is 90 days (120 days under
California law) or more delinquent; (ii) a notice of default on a senior lien is
received; or (iii) MMC discovers circumstances indicating potential for loss
exposure.
 
  PEC
 
     PEC recognizes revenue primarily from sales of timeshare interests and land
sales in resort areas, gain on sale of receivables and interest income. PEC also
sells its consumer receivables while 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 from 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 cancellation. 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
year the revenue is recognized is accounted for as a reversal of the revenue.
Cancellation of a note receivable subsequent to the year the revenue was
recognized is charged to the allowance for cancellation.
 
     Interest only strip receivables, which were formerly named excess servicing
rights, are included in mortgage related securities, and are carried at fair
market value.
 
     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 generally retains the servicing rights and
participation in certain cash flows from the sold notes receivable. PEC
generally sells its notes receivable at par value.
 
RESULTS OF OPERATIONS
 
THREE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THREE MONTHS ENDED FEBRUARY 29,
1996
 
  MMC
 
     MMC originated $111.3 million of loans during the 3 months ended February
28, 1997 compared to $22.4 million of loans during the 3 months ended February
29, 1996, an increase of 397.2%. The increase is a result of the overall growth
in MMC's business, including an increase in the number of active Correspondents
and an increase in the number of states served. At February 28, 1997, MMC had
approximately 484 active Correspondents and 467 active Dealers, compared to
approximately 212 active Correspondents and 469 active Dealers at February 29,
1996. Of the $111.3 million of loans originated in the 3 months ended February
28, 1997, $89.7 million were conventional loans. MMC did not originate
conventional loans during the three months ended February 29, 1996.
 
     Total revenues increased 156.6% to $14.7 million for the 3 months ended
February 28, 1997 from $5.7 million for the 3 months ended February 29, 1996.
The increase was primarily the result of the increased volume of loans
originated and the gain on sale of such loans.
 
                                       15
<PAGE>   18
 
     Loan servicing income decreased 35.6% to $560,000 for the 3 months ended
February 28, 1997 from $870,000 for the 3 months ended February 29, 1996. The
decrease was primarily the result of increased amortization of excess servicing
rights and mortgage servicing rights, and interest advances and reduced
servicing fees related to $27.2 million in delinquencies at February 28, 1997
compared to $9 million at February 29, 1996.
 
     Interest income on loans held for sale and mortgage related securities, net
of interest expense, increased to $526,000 during the 3 months ended February
28, 1997 from a negative $3,000 during the 3 months ended February 29, 1996. The
increase was primarily the result of the increase in the average size of the
portfolio of loans held for sale and the increase in the mortgage related
securities portfolio to $64.5 million at February 28, 1997 from $0 at February
29, 1996.
 
     The provision for credit losses increased to $3.8 million for the 3 months
ended February 28, 1997 from $200,000 for the 3 months ended February 29, 1996
as a result of the increased ratio of conventional loans to Title I Loans. The
increase in the provision was directly related to the increase in volume and mix
of loans originated in the three months ended February 28, 1997 compared to the
three months ended February 29, 1996. The provision for credit losses is based
upon periodic analysis of the portfolio, economic conditions and trends,
historical credit loss experience, borrowers' ability to repay, collateral
values, and estimated FHA insurance recoveries on loans originated and sold. As
MMC increased its conventional loan originations as compared to Title I Loan
originations, the provision for credit losses as a percentage of loans
originated increased due to the greater risk of loss associated with
conventional loans, which are not FHA insured.
 
     Total general and administrative expenses increased 99.2% to $5.2 million
for the 3 months ended February 28, 1997 compared to $2.6 million for the 3
months ended February 29, 1996. The increase was primarily a result of increased
payroll related to the hiring of additional underwriting, loan processing,
administrative, loan quality control and other personnel as a result of the
expansion of MMC's business and costs related to the opening of additional
offices.
 
     Payroll and benefits expense increased 114% to $2.5 million for the 3
months ended February 28, 1997 from $1.2 million for the 3 months ended February
29, 1996. The number of employees increased to 277 at February 28, 1997 from 147
at February 29, 1996, due to increased staff necessary to support the business
expansion and improve quality control.
 
     Commissions and selling expenses increased 28.9% to $651,000 for the 3
months ended February 28, 1997 from $505,000 for the 3 months ended February 29,
1996 while loan originations increased by $88.9 million to $111.3 million during
the period. The sales network has now expanded to substantially all states,
adding new personnel and offices to further the loan origination growth
strategy.
 
     Professional services increased to $195,000 for the 3 months ended February
28, 1997 from $41,000 for the 3 months ended February 29, 1996 due primarily to
increased audit and legal fees as MMC expands its operations.
 
     FHA insurance decreased 27.2% to $75,000 for the 3 months ended February
28, 1997 from $103,000 for the 3 months ended February 29, 1996 due primarily to
a decrease in Title I Loan originations.
 
     Other general and administrative expenses increased 78.7% to $604,000 for
the 3 months ended February 28, 1997 from $338,000 for the 3 months ended
February 29, 1996 due primarily to added expenses related to the ongoing
expansion of facilities and increased communications costs.
 
     Income before income taxes increased to $5.4 million for the 3 months ended
February 28, 1997 from $2.6 million for the 3 months ended February 29, 1996.
 
     As a result of the foregoing, MMC's net income increased 116.2% to $3.4
million for the 3 months ended February 28, 1997 from $1.6 million for the 3
months ended February 29, 1996.
 
                                       16
<PAGE>   19
 
  PEC
 
     Total revenues for PEC increased 16.1% or $2.2 million to $15.8 million
during the 3 months ended February 28, 1997 compared to $13.6 million for the 3
months ended February 29, 1996 primarily due to an increase in net sales of
timeshares of $2.1 million as PEC continues to focus more on timeshare sales,
partially offset by a decrease in net land sales of $1.3 million. Additionally,
income from incidental operations, financial income, gain on sale of notes
receivable, and interest income increased during the second quarter of fiscal
1997.
 
     Timeshare interests and land sales, net, increased to $12 million in the 3
months ended February 28, 1997 from $11.2 million in the 3 months ended February
29, 1996, or 7.1%. Gross sales of timeshare interests increased to $9.5 million
in the 3 months ended February 28, 1997 from $6.4 million in the 3 months ended
February 29, 1996, an increase of 47%. Net sales of timeshare interests
increased to $7.6 million in the 3 months ended February 28, 1997 from $5.5
million in the 3 months ended February 29, 1996, an increase of 38.1%. The
provision for cancellation represented 20.1% and 14.9% of gross sales of
timeshare interests for the 3 months ended February 28, 1997 and February 29,
1996, respectively. The increase in the provision for cancellations was
primarily due to an increase of cancellations during the current quarter. During
the first quarter of fiscal 1997, the Aloha Bay resort in Indian Shores, Florida
was completed and 81 timeshare interests in that resort were sold as of February
28, 1997.
 
     Gross sales of land decreased to $5.1 million in the 3 months ended
February 28, 1997 from $6.6 million in the 3 months ended February 29, 1996, a
decrease of 21.8%. Net sales of land decreased to $4.4 million in the 3 months
ended February 28, 1997 from $5.7 million in the 3 months ended February 29,
1996, a decrease of 22.8%. The provision for cancellation represented 14.4% and
13.3% of gross sales of land for the 3 months ended February 28, 1997 and
February 29, 1996, respectively. The increase in the provision for cancellation
was primarily due to an increase in cancellations, resulting in a slightly
higher allowance requirement for the quarter. The decrease in land sales is the
result of PEC's emphasis shift, as part of its strategic plan, from sales of
land to sales of timeshare interests due primarily to its diminishing inventory
of land available for sale.
 
     Gain on sale of notes receivable increased to $441,000 from $40,000 for the
3 months ended February 28, 1997 compared to February 29, 1996 due to loan sales
of $5.4 million during the second quarter of 1997 while no similar sale
transactions occurred in the second quarter of 1996. There were normal post sale
adjustments of $40,000 in the 1996 period.
 
     PEC's interest income increased slightly to $1.7 million in the 3 months
ended February 28, 1997 from $1.5 million for the 3 months ended February 29,
1996 primarily due to a relatively flat interest rate environment combined with
a slight increase in the average balance of notes receivable outstanding during
the current quarter.
 
     Financial income increased to $770,000 in the 3 months ended February 28,
1997 from $225,000 in the 3 months ended February 29, 1996, an increase of
242.2%. The increase is primarily due to growth in the serviced loan portfolio.
 
     Revenues from incidental operations increased to $717,000 in the 3 months
ended February 28, 1997 from $488,000 in the 3 months ended February 29, 1996,
an increase of 46.9%, primarily due to an increase in the amount of utility fees
and an increase in golf course revenues. As a result of the foregoing, total PEC
revenues increased to $15.8 million during the 3 months ended February 28, 1997
from $13.6 million during the 3 months ended February 29, 1996, or 16.1%.
 
     Total costs and expenses increased to $16.2 million for the 3 months ended
February 28, 1997 from $13.3 million for the 3 months ended February 29, 1996,
an increase of 21.8%. The increase resulted primarily from an increase in
commission and selling expenses to $8.4 million from $7.2 million, an increase
of 16%; an increase in general and administrative costs to $3.3 million from
$2.6 million, an increase of 26.9%; an increase in interest expense of $412,000
to $1.7 million, or 31%, due to a higher level of borrowings; and an increase in
direct costs of timeshare interest sales to $1.2 million from $837,000, an
increase of 41.9%, resulting from increased timeshare interest sales during the
current quarter. PEC's selling expenses increased primarily as a result of costs
relating to the establishment of new marketing programs during the first and
second quarters of
 
                                       17
<PAGE>   20
 
1997, and strategies designed to increase sales of timeshare interests, market
research costs, additional staffing, increased advertising costs, and additional
sales offices. The increase in general and administrative costs is primarily due
to increases in payroll related to hiring of additional administrative
personnel, and maintenance fees and owners' association costs related to a
higher level of unsold timeshare inventory.
 
     As a percentage of gross sales of timeshare interests and land, commission
and selling expenses relating thereto increased to 57.3% in the 3 months ended
February 28, 1997 from 55.5% in the 3 months ended February 29, 1996, and cost
of sales increased to 11% in the 3 months ended February 28, 1997 from 10.7% in
the 3 months ended February 29, 1996. 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.
 
     Depreciation expense increased to $454,000 in the 3 months ended February
28, 1997 from $347,000 in the 3 months ended February 29, 1996, an increase of
30.8%. The increase is a result of additions made to property and equipment.
 
     Interest expense increased to $1.7 million in the 3 months ended February
28, 1997 from $1.3 million in the 3 months ended February 29, 1996, an increase
of 31%. The increase is a result of an increased outstanding balance of notes
payable from $52.7 million at February 29, 1996 to $69.7 million at February 28,
1997.
 
     Income before income taxes decreased to a loss of $414,000 for the 3 months
ended February 28, 1997 from income of $292,000 for the three months ended
February 29, 1996. As a result of the foregoing, PEC's net loss amounted to
$273,000 for the 3 months ended February 28, 1997 compared to net income of
$193,000 for the 3 months ended February 29, 1996.
 
  Company
 
     Net income applicable to common stock increased $2.4 million to $3.8
million for the 3 months ended February 28, 1997 from $1.4 million for the 3
months ended February 29, 1996 due principally to an increase of $1.8 million in
MMC net income, a reduction of income tax expense of $1.3 million due to
utilization of a NOL, offset partially by a decrease of $706,000 in PEC pre-tax
income as a result of increased expenses related to the expansion of selling
operations. See prior discussion for MMC and PEC.
 
     Total costs and expenses during the 3 months ended February 28, 1997 were
$27.9 million, an increase of 64.7% over $16.9 million in the 3 months ended
February 29, 1996. Commissions and selling expenses increased 16% to $8.4
million for the 3 months ended February 28, 1997 compared to $7.2 million the 3
months ended February 29, 1996 due primarily to the expansion of timeshare
marketing efforts by PEC. General and administrative expenses increased 56.6% to
$9.1 million for the 3 months ended February 28, 1997 compared to $5.8 million
for the period ended February 29, 1996 primarily due to the expansion of the
operating staff of MMC. Provision for credit losses increased $3.6 million due
to the increase in the ratio of conventional loan originations by MMC compared
to Title I originations. Additionally, Mego Financial incurred interest expense
on amounts payable to assignors and continues to incur interest on subordinated
debt. Total general and administrative expenses for Mego Financial (parent only)
were primarily comprised of professional services, external financial reporting
expenses, and regulatory and other public company corporate expenses.
 
     Based on a review of prior years' federal income tax returns, the Company
has determined that an unrecognized net operating loss carry forward (NOL)
exists for federal income tax purposes. The provision for federal income taxes
has been reduced, due to partial utilization of a portion of this NOL. The
complete analysis of the taxes is not yet complete, so the entire amount of the
NOL has not yet been determined. The reduction for fiscal 1997 has been
accomplished based on a portion of the NOL that has been identified. See Note 8
of Notes to Consolidated Financial Statements.
 
                                       18
<PAGE>   21
 
RESULTS OF OPERATIONS
 
SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO SIX MONTHS ENDED FEBRUARY 29,
1996
 
  MMC
 
     MMC originated $173.7 million of loans during the 6 months ended February
28, 1997 compared to $56.1 million of loans during the 6 months ended February
29, 1996, an increase of 209.7%. The increase is a result of the overall growth
in MMC's business, including an increase in the number of active Correspondents
and an increase in the number of states served. At February 28, 1997, MMC had
approximately 484 active Correspondents and 467 active Dealers, compared to
approximately 212 active Correspondents and 469 active Dealers at February 29,
1996. Of the $173.7 million of loans originated in the 6 months ended February
28, 1997, $120.8 million were conventional loans. MMC did not originate
conventional loans during the six months ended February 29, 1996.
 
     Total revenues increased 96.9% to $25 million for the 6 months ended
February 28, 1997 from $12.7 million for the 6 months ended February 29, 1996.
The increase was primarily the result of the increased volume of loans
originated and the gain on sale of such loans.
 
     Loan servicing income decreased 32% to $1.2 million for the 6 months ended
February 28, 1997 from $1.8 million for the 6 months ended February 29, 1996.
The decrease was primarily the result of increased amortization of excess
servicing rights and mortgage servicing rights, and interest advances and
reduced servicing fees related to $27.2 million in delinquencies at February 28,
1997 compared to $9 million at February 29, 1996.
 
     Interest income on loans held for sale and mortgage related securities, net
of interest expense, increased 552.6% to $881,000 during the 6 months ended
February 28, 1997 from $135,000 during the 6 months ended February 29, 1996. The
increase was primarily the result of the increase in the average size of the
portfolio of loans held for sale, and the increased mortgage related securities
portfolio.
 
     The provision for credit losses increased to $5.5 million for the 6 months
ended February 28, 1997 from $497,000 for the 6 months ended February 29, 1996.
The increase in the provision was directly related to the increase in volume and
mix of loans originated in the six months ended February 28, 1997 compared to
the six months ended February 29, 1996 from the increased ratio of conventional
loans to Title I Loans. The provision for credit losses is based upon periodic
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay, collateral values, and estimated
FHA insurance recoveries on loans originated and sold. As MMC increased its
conventional loan originations as compared to Title I Loan originations, the
provision for credit losses as a percentage of loans originated increased due to
the greater risk of loss associated with conventional loans, which are not FHA
insured.
 
     Total general and administrative expenses increased 81.5% to $9.6 million
for the 6 months ended February 28, 1997 compared to $5.3 million for the 6
months ended February 29, 1996. The increase was primarily a result of increased
payroll related to the hiring of additional underwriting, loan processing,
administrative, loan quality control and other personnel as a result of the
expansion of MMC's business and costs related to the opening of additional
offices.
 
     Payroll and benefits expense increased 91.6% to $4.3 million for the 6
months ended February 28, 1997 from $2.3 million for the 6 months ended February
29, 1996. The number of employees increased to 277 at February 28, 1997 from 147
at February 29, 1996, due to increased staff necessary to support the business
expansion and improve quality control.
 
     Commissions and selling expenses increased 21.3% to $1.2 million for the 6
months ended February 28, 1997 from $1 million for the 6 months ended February
29, 1996 while loan originations increased by $117.6 million or 209.7% to $173.7
million at February 28, 1997. The sales network expanded to substantially all
states, adding new personnel and offices to further the loan origination growth
strategy.
 
     Professional services increased 111.7% to $307,000 for the 6 months ended
February 28, 1997 from $145,000 for the 6 months ended February 29, 1996 due
primarily to increased audit and legal fees attributable to continued growth.
 
                                       19
<PAGE>   22
 
     FHA insurance decreased 16.8% to $278,000 for the 6 months ended February
28, 1997 from $334,000 for the 6 months ended February 29, 1996 due primarily to
a decrease in Title I Loan originations.
 
     Other general and administrative expenses increased 102.6% to $1.4 million
for the 6 months ended February 28, 1997 from $685,000 for the 6 months ended
February 29, 1996 due primarily to increased expenses related to the ongoing
expansion of facilities and increased communications costs.
 
     Income before income taxes increased to $9.5 million for the 6 months ended
February 28, 1997 from $6.4 million for the 6 months ended February 29, 1996.
 
     As a result of the foregoing, MMC's net income increased 51.3% to $5.9
million for the 6 months ended February 28, 1997 from $3.9 million for the 6
months ended February 29, 1996.
 
  PEC
 
     Total revenues for PEC increased 6% or $1.7 million to $30.4 million during
the 6 months ended February 28, 1997 from $28.7 million for the 6 months ended
February 29, 1996 mostly due to an increase in financial income, interest
income, incidental operations and gain on sale of notes receivable.
 
     Timeshare interests and land sales, net, decreased slightly to $22.9
million in the 6 months ended February 28, 1997 from $23 million in the 6 months
ended February 29, 1996. Gross sales of timeshare interests increased to $18.9
million in the 6 months ended February 28, 1997 from $15.1 million in the 6
months ended February 29, 1996, an increase of 25%. Net sales of timeshare
interests increased to $15.1 million in the 6 months ended February 28, 1997
from $12.2 million in the 6 months ended February 29, 1996, an increase of
24.1%. The provision for cancellation represented 20% and 19.4% of gross sales
of timeshare interests for the 6 months ended February 28, 1997 and February 29,
1996, respectively. During the first quarter of fiscal 1997, the Aloha Bay
resort in Indian Shores, Florida was completed and 81 timeshare interests in
that resort were sold as of February 28, 1997.
 
     Gross sales of land decreased to $8.9 million in the 6 months ended
February 28, 1997 from $12.8 million in the 6 months ended February 29, 1996, a
decrease of 30.1%. Net sales of land decreased to $7.8 million in the 6 months
ended February 28, 1997 from $10.8 million in the 6 months ended February 29,
1996, a decrease of 27.7%. The provision for cancellation represented 13% and
15.9% of gross sales of land for the 6 months ended February 28, 1997 and
February 29, 1996, respectively. The decrease in the provision for cancellation
for land was primarily due to a decrease in cancellations, resulting in a lower
allowance requirement. The decrease in land sales is the result of PEC shifting
its emphasis as part of its strategic plan from sales of land, to sales of
timeshare interests due primarily to its diminishing inventory of land available
for sale.
 
     Gain on sale of notes receivable increased to $890,000 for the 6 months
ended February 28, 1997 from $471,000 in the 6 months ended February 29, 1996,
an increase of 89%. The increase is due to loan sales of $10.1 million for the 6
months ended February 28, 1997 compared to loan sales of $6.7 million for the 6
months ended February 29, 1996.
 
     PEC's interest income increased slightly to $3.3 million in the 6 months
ended February 28, 1997 from $3 million for the 6 months ended February 29, 1996
primarily due to a relatively flat interest rate environment combined with a
slight increase in the average balance of notes receivable outstanding.
 
     Financial income increased to $1.3 million in the 6 months ended February
28, 1997 from $692,000 in the 6 months ended February 29, 1996, an increase of
92.1%. The increase is primarily due to increased loan volume in the serviced
loan portfolio.
 
     Revenues from incidental operations increased slightly to $1.4 million in
the 6 months ended February 28, 1997 from $1.2 million in the 6 months ended
February 29, 1996, an increase of 17.1%, primarily due to the increased amount
of utility fees and an increase in golf course revenues. As a result of the
foregoing, total PEC revenues increased to $30.4 million during the 6 months
ended February 28, 1997 from $28.7 million during the 6 months ended February
29, 1996.
 
                                       20
<PAGE>   23
 
     Total costs and expenses increased to $31.7 million for the 6 months ended
February 28, 1997 from $26.9 million for the 6 months ended February 29, 1996,
an increase of 17.9%. The increase resulted primarily from an increase in
commission and selling expenses to $16.1 million from $14.5 million, an increase
of 10.5%; an increase in general and administrative costs to $6.6 million from
$5.1 million, an increase of 29%; and an increase in interest expense to $3.5
million from $2.5 million, an increase of 37.7%. PEC's selling expenses
increased primarily as a result of costs relating to the establishment of new
marketing programs and strategies designed to increase sales of timeshare
interests, market research costs, additional staffing, increased advertising
costs, and additional sales offices. The increase in general and administrative
costs is primarily due to increases in payroll related to hiring of additional
administrative personnel, and maintenance fees and owners' association costs
related to a higher level of unsold timeshare inventory.
 
     As a percentage of gross sales of timeshare interests and land, commission
and selling expenses relating thereto increased to 57.6% in the 6 months ended
February 28, 1997 from 52% in the 6 months ended February 29, 1996, and cost of
sales increased to 11.7% in the 6 months ended February 28, 1997 from 10.4% in
the 6 months ended February 29, 1996. 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.
 
     Depreciation expense increased to $933,000 in the 6 months ended February
28, 1997 from $701,000 in the 6 months ended February 29, 1996, an increase of
33.1%. The increase is a result of the additions made to property and equipment.
 
     Interest expense increased to $3.5 million in the 6 months ended February
28, 1997 from $2.5 million in the 6 months ended February 29, 1996, an increase
of 37.7%. The increase is a result of an increased outstanding balance of notes
payable from $52.7 million at February 29, 1996 to $69.7 million at February 28,
1997.
 
     Income before income taxes decreased to a loss of $1.3 million for the 6
months ended February 28, 1997 from income of $1.8 million for the 6 months
ended February 29, 1996.
 
     As a result of the foregoing, PEC's net loss amounted to $856,000 for the 6
months ended February 28, 1997 compared to net income of $1.2 million for the 6
months ended February 29, 1996.
 
  Company
 
     Net income applicable to common stock increased $811,000 to $4.9 million in
the 6 months ended February 28, 1997 from $4.1 million in the 6 months ended
February 29, 1996 due to a decrease in the federal tax provision for Mego
Financial. See prior discussion for MMC and PEC and Note 8 of Notes to
Consolidated Financial Statements.
 
     Total costs and expenses during the 6 months ended February 28, 1997 were
$50.6 million, an increase of 46.7% over $34.5 million in the 6 months ended
February 29, 1996. Commissions and selling expenses increased 10.5% to $16.1
million for the 6 months ended February 28, 1997 from $14.5 million in the 6
months ended February 29, 1996 due primarily to the expansion of timeshare
marketing efforts by PEC. General and administrative expenses increased 45.5% to
$16.7 million for the 6 months ended February 28, 1997, compared to $11.5
million for the 6 months ending February 29, 1996 primarily due to the expansion
of the operating staff of MMC. Additionally, Mego Financial incurred interest
expense on amounts payable to assignors and continues to incur interest on
subordinated debt. Total general and administrative expenses for Mego Financial
(parent only) were primarily comprised of professional services, external
financial reporting expenses, regulatory and other public company corporate
expenses.
 
     Based on a review of prior years' federal income tax returns, the Company
has determined that a NOL exists for federal income tax purposes. The provision
for federal income taxes has been reduced, due to partial utilization of a
portion of this NOL. The complete analysis of the taxes is not yet completed, so
the entire amount of the NOL has not yet been determined. The reduction for
fiscal 1997 has been accomplished based on a portion of the NOL that has been
identified. See Note 8 of Notes to Consolidated Financial Statements.
 
                                       21
<PAGE>   24
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Cash and cash equivalents for the Company was $19.2 million at February 28,
1997 compared to $3.2 million at August 31, 1996. The increase was primarily due
to proceeds received from the common stock and debt offerings of MMC. The
Company's principal cash requirements relate to loan originations, the
acquisition of timeshare properties and land, and the payment of commissions and
selling expenses in connection with timeshare and land sales. MMC and PEC each
require continued access to sources of debt financing and sales in the secondary
market of loans and receivables, respectively.
 
  MMC -- Negative Cash Flow
 
     As a result of the substantial growth in loan originations, MMC has
operated since March 1994, and expects to continue to operate for the
foreseeable future, on a negative operating cash flow basis. During the 6 months
ended February 28, 1997, MMC operated on a negative operating cash flow basis
due primarily to an increase in loans originated and sold, using $28.4 million
in operations that was funded primarily from borrowings and the proceeds of its
stock and debt public offerings. In connection with whole loan sales and
securitizations, MMC recognizes a gain on sale of the loans upon the closing of
the transaction and the delivery of the loans, but does not receive the cash
representing such gain until it receives the excess servicing spread, which is
payable over the actual life of the loans sold. MMC incurs significant expenses
in connection with securitizations and incurs tax liabilities as a result of the
gain on sale. MMC must maintain external sources of cash to fund its operations
and pay its taxes and therefore must maintain warehouse lines of credit and
other external funding sources. If the capital sources of MMC were to decrease,
the rate of growth of MMC would be negatively affected.
 
     In November 1996, MMC issued 2,300,000 shares of its common stock in an
underwritten public offering at $10.00 per share. As a result of this
transaction, the Company's ownership in MMC declined from 100% at August 31,
1996 to 81.3%. The Company continues to have voting control on all matters
submitted to stockholders of MMC, including the election of directors and
approval of extraordinary corporate transactions. Concurrently with the common
stock offering, MMC issued $40 million of 12.5% Senior Subordinated Notes due in
2001 in an underwritten public offering. MMC used approximately $13.9 million of
the aggregate net proceeds received from the offerings to repay amounts due to
Mego Financial and an affiliate and approximately $21.5 million to reduce the
amounts outstanding under MMC's warehouse and revolving lines of credit. The
revolving line of credit has been repaid. Additionally, MMC repaid $3 million
under a repurchase agreement. Funds of $2.7 million received by Mego Financial
and PEC are being used in their respective operations and by MMC to provide
capital to originate and securitize loans.
 
     The pooling and servicing agreements and sale and servicing agreements
relating to MMC's securitizations require MMC to build over-collateralization
levels through retention within each securitization trust of excess servicing
distributions and application thereof to reduce the principal balances of the
senior interests issued by the related trust or cover interest shortfalls. This
retention causes the aggregate principal amount of the loans in the related pool
to exceed the aggregate principal balance of the outstanding investor
certificates. Such over-collateralization amounts serve as credit enhancement
for the related trust and therefore are available to absorb losses realized on
loans held by such trust. MMC continues to be subject to the risks of default
and foreclosure following the sale of loans through securitizations to the
extent excess servicing distributions are required to be retained or applied to
reduce principal or cover interest shortfalls from time to time. Such retained
amounts are predetermined by the entity insuring the related senior interests
and are a condition to obtaining insurance and an AAA/Aaa rating thereon. In
addition, such retention delays cash distributions that otherwise would flow to
MMC through its retained interests, thereby adversely affecting the flow of cash
to MMC.
 
     MMC's cash requirements arise from loan originations, payments of operating
and interest expenses and deposits to reserve accounts related to loan sale
transactions. Loan originations are initially funded principally through MMC's
$20 million warehouse line of credit pending the sale of loans in the secondary
market. Substantially all of the loans originated by MMC are sold. Net cash used
in MMC's operating activities was funded primarily from the reinvestment of
proceeds from the sale of loans in the secondary market totaling
 
                                       22
<PAGE>   25
 
approximately $167.4 million for the 6 months ended February 28, 1997. The loan
sale transactions required the subordination of certain cash flows payable to
MMC to the payment of scheduled principal and interest due to the loan
purchasers. In connection with certain of such sale transactions, a portion of
amounts payable to MMC from the excess interest spread is required to be
maintained in a reserve account to the extent of the subordination requirements.
The subordination requirements generally provide that the excess interest spread
is payable to the reserve account until a specified percentage of the principal
balances of the sold loans is accumulated therein.
 
     Excess interest spread payable to MMC is subject to being utilized first to
replenish cash paid from the reserve account to fund shortfalls in collections
of interest from borrowers who default on the payments on the loans until MMC's
deposits into the reserve account equal the specified percentage. The excess
interest required to be deposited and maintained in the respective reserve
accounts is not available to support the cash flow requirements of MMC. At
February 28, 1997, amounts on deposit in such reserve accounts totaled $5.6
million.
 
     Adequate credit facilities and other sources of funding, including the
ability of MMC to sell loans in the secondary market, are essential for the
continuation of MMC's loan origination operations. At February 28, 1997, MMC had
a $20 million warehouse line of credit (warehouse line) for the financing of
loan originations which expires in August 1997. MMC is presently negotiating a
$60 million warehouse line from 3 banking institutions to replace this existing
warehouse line. There is no assurance that the proposed warehouse line will be
obtained. At February 28, 1997, $9.3 million was outstanding under the warehouse
line and $10.7 million was available due to the repayment of the outstanding
balance from the proceeds of the MMC common stock and debt offerings. The
warehouse line bears interest at the prime rate plus 1% per year and is secured
by loans prior to sale. The agreement with the lender requires MMC to maintain a
minimum tangible net worth of $12.5 million plus any issuance of capital stock
or other capital instruments since August 31, 1995, plus 50% of MMC's cumulative
net income after May 1, 1996, and a minimum level of profitability of at least
$500,000 per rolling 6 month period. At February 28, 1997, MMC's minimum
tangible net worth requirement was $37.1 million and its tangible net worth was
$44.2 million. While MMC believes that it will be able to maintain its existing
credit facilities and obtain replacement financing as its credit arrangements
mature and additional financing, if necessary, there can be no assurance that
such financing will be available on favorable terms, or at all.
 
     MMC also sells loans through whole loan sales. MMC has entered into
agreements with 3 financial institutions to which an aggregate of $397.3 million
in principal amount of loans had been sold at February 28, 1997, for an amount
equal to their remaining principal balances and accrued interest. Pursuant to
the agreements, the purchasers are entitled to receive interest at various
rates. MMC retained the right to service the loans and the right to receive the
difference (excess interest) between the sold loans' stated interest rate and
the yield to the purchasers. MMC is required to maintain reserve accounts
ranging from 1% to 2% of the declining principal balance of the loans sold
pursuant to the agreement funded from the excess interest received by MMC, less
its servicing fee, to fund shortfalls in collections from borrowers who default
in the payment of principal or interest.
 
     In November 1996, MMC entered into an agreement with a financial
institution, providing for the purchase of up to $2 billion of loans over a 5
year period. Pursuant to the agreement, Mego Financial issued to the financial
institution four-year warrants to purchase 1,000,000 shares of Mego Financial's
common stock at an exercise price of $7.125 per share. The agreement also
provides (i) that so long as the aggregate principal balance of loans purchased
by the financial institution and not resold to third parties exceeds $100
million, the financial institution shall not be obligated to purchase, and MMC
shall not be obligated to sell, loans under the agreement and (ii) that the
percentage of conventional loans owned by the financial institution at any one-
time and acquired pursuant to the agreement, shall not exceed 65% of the total
amount of loans owned by the financial institution at such time and acquired
pursuant to the agreement which provision has been waived from time to time. The
value of the warrants of $3 million (0.15% of the commitment amount) as of the
commitment date, was charged to MMC and is being amortized as the commitment for
the purchase of loans is utilized. At February 28, 1997, $1.8 billion remained
available to be sold under the commitment. These warrants were recorded as
additional paid-in capital of the Company. The financial institution has also
agreed
 
                                       23
<PAGE>   26
 
to provide MMC a separate one-year facility of up to $11 million for the
financing of the interest only and residual certificates from securitizations.
 
     During the 6 months ended February 28, 1997 and February 29, 1996, MMC used
net cash of $28.4 million and $6.9 million, respectively, in operating
activities. During the 6 months ended February 28, 1997 and February 29, 1996,
MMC used net cash of $1.2 million and $468,000, respectively, in investing
activities, which was substantially expended for office equipment and
furnishings and data processing equipment. During the 6 months ended February
28, 1997 MMC provided net cash of $43.9 million from financing activities,
primarily due to the issuance of subordinated debt and common stock, compared to
$7.7 million during the 6 months ended February 29, 1996.
 
  PEC -- Liquidity
 
     PEC's cash requirements arise from the acquisition of timeshare properties
and land, payments of operating expenses, payments of taxes to the parent,
payments of principal and interest on debt obligations, and payments of
commissions and selling expenses in connection with the sale 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. 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 $109.5 million and cash flows from operations.
 
     At February 28, 1997, PEC had arrangements with 4 institutional lenders in
5 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 5 lines of credit of up to an aggregate of $109.5
million. such lines of credit are secured by timeshare and land receivables and
mortgages. At February 28, 1997, an aggregate of $65.8 million was outstanding
under such lines of credit, and $43.7 million was available for borrowing. At
February 28, 1997 and August 31, 1996, $65.8 million and $65.9 million,
respectively, had been borrowed under these lines. Under the terms of these
lines of credit, PEC may borrow up to a range of 75% to 85% of the balances of
the pledged timeshare and land receivables. Summarized lines of credit
information and accompanying notes relating to these five lines of credit
outstanding at February 28, 1997, consist of the following (thousands of
dollars):
 
<TABLE>
<CAPTION>
 BORROWING
 AMOUNT AT
 FEBRUARY        MAXIMUM
    28,         BORROWING            REVOLVING
   1997           AMOUNT        EXPIRATION DATE(D)          MATURITY DATE        INTEREST RATE
-----------     ----------     ---------------------     -------------------     -------------
<C>             <C>            <S>                       <C>                     <C>
  $48,648        $ 57,000      (a) April 15, 1997        September 22, 2003      Prime + 2.25%
    4,382          15,000      (b) May 30, 1998          June 1, 2002            Prime +  2.0%
    5,946          15,000      (c) June 27, 1998         June 27, 2005           LIBOR + 4.25%
    3,404          15,000      (c) February 6, 1998      August 6, 2005          LIBOR + 4.25%
    3,459           7,500      (b) April 30, 1998        May 31, 2002            Prime +  2.0%
</TABLE>
 
          (a) Restrictions include PEC's requirement to maintain a tangible net
     worth of at least $25 million during the borrowing term. Thereafter this
     requirement is permitted to decrease to $15 million depending on the loan
     balance. A commitment letter was signed in March 1997 to increase the
     credit line to $75 million, reduce the rate to prime plus 2%, and extend
     the revolving expiration date to May 1, 2001 or 36 months after the first
     advance, whichever is sooner.
 
          (b) Restrictions include PEC's requirement to maintain a tangible net
     worth of $25 million during the life of the loan.
 
          (c) Restrictions include PEC's requirement to maintain a tangible net
     worth of $17 million during the life of the loan.
 
          (d) Revolving expiration date represents the expiration of the
     revolving features of the lines of credit, at which time the credit lines
     assume fixed maturity.
 
                                       24
<PAGE>   27
 
     Set forth below is a schedule of the cash shortfall arising from recognized
and unrecognized sales for PEC for the periods indicated (thousands of dollars):
 
<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED                 SIX MONTHS ENDED
                                             -----------------------------     -----------------------------
                                             FEBRUARY 28,     FEBRUARY 29,     FEBRUARY 28,     FEBRUARY 29,
                                                 1997             1996             1997             1996
                                             ------------     ------------     ------------     ------------
<S>                                          <C>              <C>              <C>              <C>
Commissions and selling expenses
  attributable to recognized and
  unrecognized sales.......................    $  8,371         $  6,706         $ 16,412         $ 13,557
Less: Down payments........................      (3,227)          (2,676)          (6,742)          (6,172)
                                                -------          -------          -------          -------
Cash shortfall.............................    $  5,144         $  4,030         $  9,670         $  7,385
                                                =======          =======          =======          =======
</TABLE>
 
     During the 3 months ended February 28, 1997, PEC sold notes receivable of
$5.4 million to a financial institution from which $4.5 million of the proceeds
were used to pay down debt . The receivables which have interest rates of 12.9%
were sold to yield a return of 9% to the purchasers, with any excess interest
payable to PEC from the obligors.
 
     At February 28, 1997, PEC was contingently liable to replace or repurchase
notes receivable sold with recourse totaling $72.6 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 otherwise subject to replacement or repurchase. The
repurchase provisions provide for substitution of receivables as recourse for
$70.6 million of sold notes receivable and cash payments for repurchase relating
to $2 million of sold notes receivable. At February 28, 1997, the undiscounted
amount of the recourse obligations on such notes receivable were $11.9 million.
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,
collateral values and overall portfolio quality.
 
     During the 6 months ended February 28, 1997 and February 29, 1996, PEC used
net cash of $335,000 and $3.2 million, respectively in operating activities.
During the 6 months ended February 28, 1997 and February 29, 1996, PEC provided
net cash of $924,000 and used net cash of $7.3 million, respectively, in
investing activities. During the 6 months ended February 28, 1997 and February
29, 1996, PEC used net cash of $1 million and provided net cash of $9.4 million,
respectively from financing activities.
 
  Company -- Liquidity
 
     At January 31, 1995, when accrual of payments to assignors ceased, $13.3
million was payable to the assignors. On March 2, 1995, the assignors agreed to
defer payment of $10 million (subordinated debt) of the amounts due to them
pursuant to an amendment to the Assignment and Assumption Agreement providing
for the subordination of such amounts to payment of debt for money borrowed by
the Company or obligations of the Company's subsidiaries guaranteed by the
Company. In January 1997, the outstanding balance of payable to assignors of
$2.6 million (including interest of $45,000) was paid in full. Additionally,
effective March 1, 1997, the assignors received the first of 7 equal semi-annual
payments of $1,429,000 plus interest related to the repayment of the
subordinated debt. These payments are collateralized by a pledge of PEC's
outstanding stock. Interest of $218,000 was paid during the first half of fiscal
1997 related to payable to assignors and interest on subordinated debt of
$500,000 was paid during the first half of fiscal 1997.
 
     During the 6 months ended February 28, 1997 and February 29, 1996, the
Company used cash of $31.2 million and $9.5 million, respectively, in operating
activities. During the 6 months ended February 28, 1997 and February 29, 1996,
the Company used cash of $5.1 million and $2.9 million, respectively, in
investing activities. During the 6 months ended February 28, 1997 and February
29, 1996, the Company provided cash of $52.3 million and $10.1 million,
respectively, from financing activities, which was substantially from the MMC
stock and debt offerings during the 1997 time period.
 
     The Company believes that its capital requirements will be met from the
recent stock and debt offering proceeds, cash balances, internally generated
cash, existing lines of credit, sales and securitizations of loans, and the
modification, replacement or addition to its credit lines.
 
                                       25
<PAGE>   28
 
     The components of the Company's debt, including lines of credit consist of
the following (thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                FEBRUARY 28,     AUGUST 31,
                                                                    1997            1996
                                                                ------------     ----------
        <S>                                                     <C>              <C>
        Notes collateralized by receivables....................   $ 38,369        $ 41,568
        Mortgages collateralized by real estate properties.....     29,793          31,078
        Notes collateralized by excess servicing rights and
          mortgage related securities..........................         --          10,000
        Installment contracts and other notes payable..........     12,503           1,803
                                                                   -------         -------
             Total.............................................   $ 80,665        $ 84,449
                                                                   =======         =======
</TABLE>
 
FINANCIAL CONDITION
 
February 28, 1997 compared to August 31, 1996
 
     Cash and cash equivalents increased 502.3% to $19.2 million at February 28,
1997 from $3.2 million at August 31, 1996, primarily as a result of the use of
proceeds from the MMC common stock and debt offerings to acquire short term
investments after repayment of debt.
 
     Restricted cash deposits increased 11.2% to $7.4 million at February 28,
1997 from $6.7 million at August 31, 1996 primarily due to an increase in the
level of securitizations.
 
     Notes receivable, net, increased 21.4% to $49.2 million at February 28,
1997 from $40.5 million at August 31, 1996 primarily as a result of MMC loan
originations increasing and the timing of loan sales.
 
     The Company provides an allowance for cancellation and credit losses, in an
amount which in the Company's judgment will be adequate to absorb losses on
notes receivable and loans after FHA insurance recoveries on the loans, that may
become uncollectible. The Company's judgment in determining the adequacy of this
allowance is based on its continual review of its portfolio which utilizes
historical experience and current economic factors. These reviews take into
consideration changes in the nature and level of the portfolio, historical
rates, collateral values, and current and future economic conditions which may
affect the obligors' ability to pay, collateral values and overall portfolio
quality. Changes in the allowance for cancellation
 
                                       26
<PAGE>   29
 
and credit losses for notes receivable for the three and six months ended
February 28, 1997 consist of the following (thousands of dollars):
 
<TABLE>
        <S>                                                                  <C>
        Balance at November 30, 1996.......................................  $27,114
        Provisions for credit losses and cancellations.....................    3,805
        Amounts charged to allowance for cancellations.....................   (4,811)
                                                                             -------
                  Balance at February 28, 1997.............................  $26,108
                                                                             =======
        Balance at August 31, 1996.........................................  $26,253
        Provisions for credit losses and cancellations.....................    5,516
        Amounts charged to allowance for cancellations.....................   (5,661)
                                                                             -------
                  Balance at February 28, 1997.............................  $26,108
                                                                             =======
        Allowance for cancellations and credit losses excluding valuation
          discount.........................................................  $14,018
        Future estimated contingency for notes receivable sold with
          recourse and valuation discount..................................   12,090
 
                  Total....................................................  $26,108
                                                                             =======
</TABLE>
 
     Excess servicing rights decreased to $0 at February 28, 1997 from $14.3
million at August 31, 1996 due to the implementation of SFAS 125, which requires
the reclassification of excess servicing rights as mortgage related securities
which are carried at fair market value. The excess cash flow created through
securitization which had been recognized as excess servicing rights on loans
reacquired and securitized are included in the cost basis of the mortgage
related securities. Mortgage related securities were $67.1 million at February
28, 1997 and $22.9 million at August 31, 1996. The increase is due to the
increased value of loans originated and securitized and the reclassification of
excess servicing rights. See Note 6 of Notes to Consolidated Financial
Statements.
 
     Mortgage servicing rights increased 51.7% to $5.8 million at February 28,
1997 from $3.8 million at August 31, 1996 as a result of additional sales of
loans and the resulting increase in sales of loans serviced to $167.4 million
during the first half of fiscal 1997 from $56.4 million during the first half of
fiscal 1996.
 
     Property and equipment, net, increased 20% to $24.3 million at February 28,
1997 from $20.3 million at August 31, 1996 due to increased purchases of office
equipment related to facility expansion and building, water, and sewer
improvements.
 
     Notes and contracts payable decreased 4.5% to $80.7 million at February 28,
1997 from $84.4 million at August 31, 1996 due to the paydown of debt from the
proceeds from the MMC stock and debt offerings.
 
     Accounts payable and accrued liabilities increased to $24.3 million at
February 28, 1997 from $19.7 million at August 31, 1996 primarily as a result of
the timing of accruals and payments.
 
     Future estimated contingency for notes receivable sold with recourse
increased 29.6% to $12.1 million at February 28, 1997 from $9.3 million at
August 31, 1996. Loans sold with recourse which were reacquired and included in
the 1996 securitizations decreased the amount needed for this allowance while
increased loan sales increased the allowance requirements. Recourse to the
Company on sales of loans is limited to sales made by PEC and is governed by the
agreements between the purchasers and the Company. Mego Financial is a guarantor
of PEC's recourse obligations. Recourse on some of the whole loan sales made by
MMC is limited to the future excess spread MMC will receive. The allowance for
credit losses on loans sold with recourse represents the Company's estimate of
its probable future credit losses to be incurred over the lives of the loans
considering estimated future FHA insurance recoveries on Title I Loans. No
allowance for credit losses on loans sold with recourse is established on loans
sold through securitizations, as the Company has no recourse obligation, other
than for customary representations and warranties, under those securitization
agreements. Estimated credit losses on loans sold through securitizations are
considered in MMC's valuation of its residual interest securities.
 
                                       27
<PAGE>   30
 
     Income taxes payable increased 52.7% to $16.8 million at February 28, 1997
from $11 million at August 31, 1996 due to taxable income for the period and
taxes on the sale of MMC stock. See Note 4 of Notes to Consolidated Financial
Statements for further discussion. Based on a review of the prior years' federal
income tax returns, the Company has determined that an unrecognized net
operating loss carry forward (NOL) exists for federal income tax purposes. The
provision for federal income taxes has been reduced, due to partial utilization
of a portion of this NOL. The complete analysis of the taxes is not yet
complete, so the entire amount of the NOL has not yet been determined. The
reduction for fiscal 1997 has been accomplished based on a portion of the NOL
that has been identified. See Note 8 of Notes to Consolidated Financial
Statements.
 
     Stockholders' equity increased 63.6% to $42.3 million at February 28, 1997
from $25.9 million at August 31, 1996 as a result of the sale of MMC stock, the
issuance of a warrant, valued at $3 million for the purchase of 1 million shares
of Mego Financial common stock, the exercise of warrants to purchase 300,000
shares of Mego common stock for an exercise price of $360,000, and net income
applicable to common stock of $5 million during the 6 months ended February 28,
1997. In February 1997, warrants outstanding to purchase 300,000 shares of the
Company's common stock at an exercise price of $1.20 per share were exercised in
full for $360,000 and 300,000 shares of the Company's common stock was
subsequently issued in March 1997.
 
CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
 
     The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations and beliefs concerning future events, including the
sufficiency of the Company's cash flow for the Company's future liquidity and
capital resource needs. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, including, without
limitation, the following: decline in demand for home improvement and debt
consolidation loans; decline in demand for timeshare interests; increases in the
level of delinquencies on the Company's loans and receivables; the effect of
general economic conditions generally and specifically changes in interest
rates; the effect of competition; the Company's dependence on the ability to
sell its loans and receivables; and the regulation of the Company by federal,
state and local regulatory authorities. Actual events or results may differ as a
result of these and other factors.
 
PART II OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
     On December 26, 1996, in the matter of "In re Mego Financial Corp.
Securities Litigation," Master File No. CV-9-95-01082-LDG (RLH), in the United
States District court for the District of Nevada (the "Court"), which matter was
described in the Company's Form 10-K for the fiscal year ended August 31, 1996
(the "1996 10-K"), Michael Nadler ("Nadler") filed a purported class action
complaint against the Company, certain of the Company's officers and directors,
and the Company's independent auditors. On January 2, 1997, Nadler withdrew his
"Class Member's Motion to be Included as a Class Representative," which had been
pending. On January 9, 1997, Nadler filed a "Plaintiff's Motion for Relief from
Certain Portions of Pre-Trial Order No. 1 Entered in Related Litigation." The
Company opposed that motion. On February 13, 1997, defendants moved to dismiss
Nadler's complaint. On March 13, 1997, Nadler filed a "Motion for the Filing of
a Consolidated Complaint and a Class Certification Motion, the Holding of a
Pretrial Conference and the Suspension of Briefing on Defendants' Motions to
Dismiss." The Company opposed that motion. On March 31, 1997 the Court denied
Nadler's motion to be included as a putative class representative and denied,
without prejudice to refiling after either the filing of a consolidated
complaint or a ruling on Nadler's motion for the filing of a consolidated
complaint, Nadler's motion for relief from certain portions of Pretrial Order
No. 1, Nadler's motion to consolidate and defendants' motions to dismiss
Nadler's complaint. The Company believes that it has substantial defenses to the
Nadler complaint; however, the Company presently cannot predict the outcome of
this matter.
 
                                       28
<PAGE>   31
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                                    DESCRIPTION
        ------     --------------------------------------------------------------------------
        <S>        <C>
        10.103     Subdivision Improvement Agreement dated March 7, 1995 between Preferred
                   Equities Corporation and the Board of County Commissioners of the County
                   of Nye, State of Nevada.
        10.104     Subdivision Improvement Agreement dated February 20, 1996 between
                   Preferred Equities Corporation and the Board of County Commissioners of
                   the County of Nye, State of Nevada.
        10.105     Subdivision Improvement Agreement dated February 20, 1996 between
                   Preferred Equities Corporation and the Board of County Commissioners of
                   the County of Nye, State of Nevada.
        10.106     Subdivision Improvement Agreement dated December 17, 1996 between
                   Preferred Equities Corporation and the Board of County Commissioners of
                   the County of Nye, State of Nevada.
        10.107     Subdivision Improvement Agreement dated December 17, 1996 between
                   Preferred Equities and the Board of County Commissioners of the County of
                   Nye, State of Nevada.
        10.108     Subdivision Improvement Agreement dated December 17, 1996 between
                   Preferred Equities Corporation and the Board of County Commissioners of
                   the County of Nye, State of Nevada.
        10.109     Subdivision Improvement Agreement dated December 17, 1996 between
                   Preferred Equities Corporation and the Board of County Commissioners of
                   the County of Nye, State of Nevada.
        10.110     Subdivision Improvement Agreement dated December 17, 1996 between
                   Preferred Equities Corporation and the Board of County Commissioners of
                   the County of Nye, State of Nevada.
        10.111     Commitment letter between Preferred Equities Corporation and Finova
                   Capital Corporation dated March 3, 1997.
        10.112     Employment Agreement between Mego Financial Corp. and Irving J. Steinberg.
        27.1       Financial Data Schedule (for SEC use only).
</TABLE>
 
---------------
 
No reports on Form 8-K were filed during the period.
 
                                       29
<PAGE>   32
 
                                   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/ HERBERT B. HIRSCH
                                          --------------------------------------
                                          Herbert B. Hirsch
                                          Senior Vice President,
                                          Chief Financial Officer and Treasurer
Date: April 14, 1997
 
                                       30