<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, 1999

                                       OR

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

For the transition period from _____________________ to _____________________

                         Commission file number: 1-8645




                              MEGO FINANCIAL CORP.
             (Exact name of registrant as specified in its charter)

                New York                                     13-5629885
    (State or other jurisdiction of                      (I. R. S. Employer
     incorporation or organization)                      Identification No.)

                   4310 Paradise Road, Las Vegas, Nevada 89109
               (Address of principal executive offices) (Zip Code)

                                 (702) 737-3700
              (Registrant's telephone number, including area code)


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



                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         As of April 12, 1999, there were 21,009,506 shares of Common Stock,
$.01 par value per share, of the Registrant outstanding.

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

<PAGE>   2

                      MEGO FINANCIAL CORP. AND SUBSIDIARIES



                                      INDEX



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

Item 1.      Condensed Financial Statements (unaudited)

             Condensed Consolidated Balance Sheets at February 28, 1999 and August 31, 1998...................  1

             Condensed Consolidated Statements of Operations for the Three and Six Months Ended
                February 28, 1999 and 1998....................................................................  2

             Condensed Consolidated Statements of Stockholders' Equity for the Six Months Ended
                February 28, 1999.............................................................................  3

             Condensed Consolidated Statements of Cash Flows for the Six Months Ended
                February 28, 1999 and 1998....................................................................  4

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

Item 2.      Management's Discussion and Analysis of Financial Condition
             and Results of Operations........................................................................  7

Item 3.      Quantitative and Qualitative Disclosures About Market Risk....................................... 16

PART II      OTHER INFORMATION

Item 1.      Legal Proceedings................................................................................ 17

Item 5.      Other Events..................................................................................... 17


Item 6.      Exhibits and Reports on Form 8-K................................................................. 17

SIGNATURE    ................................................................................................. 20
</TABLE>



                                       i

<PAGE>   3

PART I     FINANCIAL INFORMATION
ITEM 1.    CONDENSED FINANCIAL STATEMENTS

                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (thousands of dollars, except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                            FEBRUARY 28,      AUGUST 31,
ASSETS                                                                                          1999             1998
                                                                                            ------------     -----------  
<S>                                                                                          <C>             <C>      
Cash and cash equivalents                                                                    $   1,575       $   1,813
Restricted cash                                                                                  1,773           1,694
Notes receivable, net of allowance for cancellations and discounts of $12,917 at
    February 28, 1999 and $12,403 at August 31, 1998                                            55,393          47,789
Interest only receivables, at fair value                                                         3,047           3,367
Timeshare interests held for sale                                                               34,091          35,798
Land and improvements inventory                                                                  7,314           7,965
Other investments                                                                                4,262           4,395
Property and equipment, net of accumulated depreciation of $15,245 at February 28,
    1999 and $14,119 at August 31, 1998                                                         23,840          23,950
Deferred selling costs                                                                           4,029           3,719
Prepaid debt expenses                                                                            1,544           1,431
Other assets                                                                                    12,504          10,155
                                                                                             ---------       ---------

              TOTAL ASSETS                                                                   $ 149,372       $ 142,076
                                                                                             =========       =========


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Notes and contracts payable                                                              $  92,671       $  81,986
    Accounts payable and accrued liabilities                                                    19,780          19,098
    Reserve for notes receivable sold with recourse                                              5,432           6,620
    Deposits                                                                                     3,951           4,877
    Accrued income taxes                                                                         3,685           4,468
                                                                                             ---------       ---------

              Total liabilities before subordinated debt                                       125,519         117,049
                                                                                             ---------       ---------

Subordinated debt                                                                                4,403           4,348


Stockholders' equity:
    Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding)                --              --
    Common stock, $.01 par value (authorized--50,000,000 shares);  21,009,506
      shares issued and outstanding                                                                210             210
    Additional paid-in capital                                                                  12,822          12,789
    Retained earnings                                                                            6,418           7,680
                                                                                             ---------       ---------

              Total stockholders' equity                                                        19,450          20,679
                                                                                             ---------       ---------

              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $ 149,372       $ 142,076
                                                                                             =========       =========
</TABLE>



                See notes to consolidated financial statements.


                                       1
<PAGE>   4

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


<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED              SIX MONTHS ENDED
                                                               FEBRUARY 28,                   FEBRUARY 28,
                                                     ----------------------------    ----------------------------
                                                        1999            1998             1999            1998
                                                     ------------    ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>             <C>         
REVENUES
    Timeshare interest sales, net                    $      8,559    $      8,458    $     17,609    $     17,293
    Land sales, net                                         3,518           3,558           7,009           6,584
    Gain on sale of investments                                --              --             513              --
    Interest income                                         1,952           1,693           3,944           3,317
    Financial income                                          400             986             709           2,004
    Incidental operations                                     586             660           1,276           1,421
    Other                                                     871             573           1,691           1,396
                                                     ------------    ------------    ------------    ------------
              Total revenues                               15,886          15,928          32,751          32,015
                                                     ------------    ------------    ------------    ------------

COSTS AND EXPENSES Direct cost of:
      Timeshare interest sales                              1,680           1,604           3,434           3,451
      Land sales                                              682             414           1,262             813
    Incidental operations                                     461             597           1,112           1,297
    Marketing and sales                                     7,782           7,806          16,615          15,596
    General and administrative                              3,411           4,465           6,971           8,886
    Interest expense                                        2,173           1,762           4,261           3,478
    Depreciation                                              488             563           1,008           1,142
                                                     ------------    ------------    ------------    ------------
              Total costs and expenses                     16,677          17,211          34,663          34,663
                                                     ------------    ------------    ------------    ------------


LOSS BEFORE INCOME TAXES                                     (791)         (1,283)         (1,912)         (2,648)

INCOME TAXES (BENEFIT)                                       (269)             --            (650)             --
                                                     ------------    ------------    ------------    ------------


NET LOSS APPLICABLE TO COMMON STOCK                  $       (522)   $     (1,283)     $   (1,262)   $     (2,648)
                                                     ============    ============    ============    ============

LOSS PER COMMON SHARE
    Basic:
      Net loss applicable to common stock            $      (0.02)   $      (0.06)   $      (0.06)   $      (0.13)
                                                     ============    ============    ============    ============


      Weighted-average number of common shares         21,009,506      21,009,506      21,009,506      21,009,506
                                                     ============    ============    ============    ============

    Diluted:
      Net loss applicable to common stock            $      (0.02)   $      (0.06)   $      (0.06)   $      (0.13)
                                                     ============    ============    ============    ============

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



                See notes to consolidated financial statements.

                                       2
<PAGE>   5

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


<TABLE>
<CAPTION>
                                         COMMON STOCK         
                                         $.01 PAR VALUE       ADDITIONAL
                                    -----------------------    PAID-IN      RETAINED
                                      SHARES       AMOUNT      CAPITAL      EARNINGS       TOTAL
                                    ----------   ----------   ----------   ----------    ----------

<S>                                 <C>          <C>          <C>          <C>           <C>       
Balance at August 31, 1998          21,009,506   $      210   $   12,789   $    7,680    $   20,679

Warrants issued                                                       33                         33

Net loss for the six months ended
   February 28, 1999                        --           --           --       (1,262)       (1,262)
                                    ----------   ----------   ----------   ----------    ----------

Balance at February 28, 1999        21,009,506   $      210   $   12,822   $    6,418    $   19,450
                                    ==========   ==========   ==========   ==========    ==========
</TABLE>


                See notes to consolidated financial statements.

                                       3
<PAGE>   6

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

<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED 
                                                                                                FEBRUARY 28,
                                                                                            ---------------------
                                                                                              1999         1998
                                                                                            --------     --------
<S>                                                                                         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss                                                                                $ (1,262)    $ (2,648)
                                                                                            --------     --------
    Adjustments to reconcile net loss to net cash used in operating activities:
      Amortization of negative goodwill                                                           --          (20)
      Charges to allowance for cancellations                                                  (3,280)      (3,288)
      Provision for cancellations                                                              2,276        2,309
      Gain on sale of other investments                                                         (513)          --
      Provision for uncollectible Owners' Association advances                                    --         (403)
      Cost of sales                                                                            4,697        4,264
      Depreciation                                                                             1,008        1,142
      Amortization of interest only receivables                                                  320          187
      Repayments on notes receivable                                                          20,485       18,503
      Additions to notes receivable                                                          (27,085)     (25,872)
      Purchase of land and timeshare interests                                                (2,339)      (5,794)
      Additions to other receivables                                                              --       (3,485)
      Decreases in other receivables                                                              --        6,545
      Changes in operating assets and liabilities:
         Increase in restricted cash                                                             (79)        (214)
         Increase in other assets                                                             (3,617)      (4,337)
         Increase in deferred selling costs                                                     (310)        (130)
         Increase (decrease) in accounts payable and accrued liabilities                         682         (211)
         Increase (decrease) in deposits                                                        (926)         833
         Decrease in accrued income taxes                                                       (783)          --
                                                                                            --------     --------

           Total adjustments                                                                  (9,464)      (9,971)
                                                                                            --------     --------

              Net cash used in operating activities                                          (10,726)     (12,619)
                                                                                            --------     --------


CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of property and equipment                                                          (898)      (1,544)
    Proceeds from the sale of property and equipment                                              --          360
    Proceeds from the sale of other investments                                                  597           --
    Additions to other investments                                                              (101)      (6,529)
    Payments on other investments                                                                150           --
                                                                                            --------     --------

              Net cash used in investing activities                                             (252)      (7,713)
                                                                                            --------     --------

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from borrowings                                                                  27,022       24,956
    Reduction of debt                                                                        (16,337)     (11,926)
    Payments on subordinated debt                                                               (252)        (424)
    Increase in subordinated debt                                                                307          324
                                                                                            --------     --------

              Net cash provided by financing activities                                       10,740       12,930
                                                                                            --------     --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                                       (238)      (7,402)

CASH AND CASH EQUIVALENTS-- BEGINNING OF PERIOD                                                1,813       10,376
                                                                                            --------     --------

CASH AND CASH EQUIVALENTS-- END OF PERIOD                                                   $  1,575     $  2,974
                                                                                            ========     ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
      Interest, net of amounts capitalized                                                  $  4,167     $  3,496
                                                                                            ========     ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
    Issuance of warrants related to debt                                                    $     33     $     --
    Reduction of additional paid-in capital due to Spin-off of Mego Mortgage Corporation          --      (21,735)
    Reduction of retained earnings due to Spin-off of Mego Mortgage Corporation                   --      (21,441)
    Adjustment of receivable from Mego Mortgage Corporation                                       --       (5,283)
</TABLE>


                See notes to consolidated financial statements.

                                       4
<PAGE>   7

                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
          FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
                                   (unaudited)


1.  FINANCIAL STATEMENTS

         In the opinion of management, when read in conjunction with the audited
Consolidated Financial Statements, contained in the Form 10-K of Mego Financial
Corp. (Mego Financial) filed with the Securities and Exchange Commission for the
year ended August 31, 1998, the accompanying unaudited Condensed Consolidated
Financial Statements contain all of the information necessary to present fairly
the financial position of Mego Financial and Subsidiaries at February 28, 1999,
the results of its operations for the three and six months ended February 28,
1999 and 1998, the change in stockholders' equity for the six months ended
February 28, 1999 and the cash flows for the six months ended February 28, 1999
and 1998. All intercompany accounts between the parent and its subsidiaries have
been eliminated.

         The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all material adjustments necessary for the fair
presentation of these statements have been included herein which are normal and
recurring in nature. The results of operations for the three and six months
ended February 28, 1999 are not necessarily indicative of the results to be
expected for the full year.

2.  NATURE OF OPERATIONS

         Mego Financial is a premier developer of timeshare properties and a
provider of consumer financing to purchase timeshare intervals and land parcels
through its wholly-owned subsidiary, Preferred Equities Corporation (PEC),
established in 1970. PEC is engaged primarily in originating, selling, servicing
and financing consumer receivables generated through timeshare and land sales.
Mego Financial and its subsidiaries are herein collectively referred to as the
Company as the context requires. Mego Financial was incorporated under the laws
of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed
its name to Mego Financial Corp.

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

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

RECENT EVENTS

         On October 6, 1998, the Company announced that it has retained
Friedman, Billings, Ramsey & Co., Inc. to review strategic alternatives
available to the Company, including potential offers, mergers and financing
transactions. This effort is continuing.

         On December 24, 1998, Finova Capital Corporation (FINOVA) agreed to
make a loan in the amount of $5,662,000 to PEC, guaranteed by the Company, with
a maturity date of June 30, 1999. On that date, FINOVA advanced $3,000,000, less
fees, secured by a pledge of the stock of Central Nevada Utilities Company, a
wholly-owned subsidiary of PEC. In consideration of FINOVA making the advance,
Mego Financial granted to FINOVA a warrant to purchase 150,000 shares of common
stock of the Company at an exercise price of $1.00 per share, exercisable within
a five-year period commencing


                                       5
<PAGE>   8
January 1, 1999. The remaining advance of up to $2,662,000 is available through
May 31, 1999. As of April 12, 1999, no further amounts have been drawn on this
remaining advance. When, and if, further amounts are drawn, additional
collateral will be pledged. As a condition for further advances, a warrant to
purchase up to an additional 350,000 shares of common stock of the Company at an
exercise price of $1.00 per share will be issued to Finova, pro rata to the
advances.

3.  RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 established
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. There are no additional
items that would be reported as Comprehensive Income that are not included in
the Company's Statements of Operations for any of the three and six months ended
February 28, 1999 and 1998.

         In June 1997, FASB issued SFAS No. 131, "Disclosures and Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
of reporting by publicly-held business enterprises and disclosure of information
about operating segments in annual financial statements and, to a lesser extent,
in interim financial reports issued to shareholders. SFAS 131 is effective for
fiscal years beginning after December 15, 1997, and, will thus be adopted for
year ending August 31, 1999 and subsequent interim financial statement periods.
As SFAS 131 deals with financial statement disclosure, the Company does not
anticipate the adoption of this new standard will have a material impact on its
financial position, results of operations or cash flows.

 4.  STOCKHOLDERS' EQUITY

         Mego Financial's stock option plan (Stock Option Plan), which was
amended and restated as of September 16, 1998 upon the approval of Mego
Financial's shareholders, provides for non-qualified and qualified incentive
options to officers, key employees and directors. On September 23, 1998, an
additional 111,000 incentive and non-incentive stock options were granted under
the Stock Option Plan by the Stock Option Committee to employees at $1.00 per
share being the fair value. In addition, the exercise prices of 304,500 of
options issued on September 2, 1997 were revised from $3.125 per share to $1.00
per share. Options for 363,500 shares were outstanding as of April 12, 1999.





                                       6
<PAGE>   9

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

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

         The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains certain forward-looking
statements and information relating to Mego Financial Corp. (Mego Financial)
(Mego Financial and it subsidiaries are referred to herein collectively as the
Company as the context requires) that are based on the beliefs of management as
well as assumptions made by and information currently available to management.
Such forward-looking statements include, without limitation, the Company's
expectation and estimates as to the Company's business operations, including the
introduction of new timeshare and land sales programs and future financial
performance, including growth in revenues and net income and cash flows. Such
forward-looking statements also include, without limitation, the Company's
expectations and beliefs as to the projected costs and anticipated timetable to
address Year 2000 compliance issues, the adequacy of its plans to address such
issues and the impact on the Company's operations in the event that certain or
all of its plans or the plans of its lenders and other third parties in respect
of such compliance issues prove to be inadequate. In addition, included herein
the words "anticipates," "believes," "estimates," "expects," "plans," "intends"
and similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company's management with respect to future events and are
subject to certain risks, uncertainties and assumptions. In addition, the
Company specifically advises readers that the factors listed under the caption
"Liquidity and Capital Resources" could cause actual results to differ
materially from those expressed in any forward-looking statement. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
         The following discussion and analysis should be read in conjunction
with the Condensed Consolidated Financial Statements, including the notes
thereto, contained elsewhere herein and in the Company's Form 10-K for the
fiscal year ended August 31, 1998.

GENERAL

         The business of the Company is primarily the marketing, financing and
sale of timeshare interests, retail lots and land parcels, and servicing the
related notes receivable. The Company, through its subsidiary Preferred Equities
Corporation (PEC), provides financing to purchasers of its timeshare interests
and land. This financing is generally evidenced by notes secured by deeds of
trust and mortgages as well as non-recourse installment sale contracts. These
notes receivable are generally payable over a period ranging from two to twelve
years, bear interest at rates ranging from 12.5% to 15.5% and generally require
equal monthly payments of principal and interest.

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
periodically 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 six to ten months of closing, and sales of timeshare
interests typically meet these requirements at the time of sale. The sales
price, less a provision for cancellation, is recorded as revenue and the
allocated cost related to such net revenue of the timeshare interest or land
parcel is recorded as expense in the year that revenue is recognized. When
revenue related to land sales is recognized, the portion of the sales price
attributable to uncompleted required improvements, if any, is deferred.

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


                                       7
<PAGE>   10
         Gain on sale of notes receivable includes the present value of the
differential between contractual interest rates charged to borrowers on notes
receivable sold by PEC and the interest rates to be received by the purchasers
of such notes receivable, after considering the effects of estimated prepayments
and a normal servicing fee. PEC retains certain participations in cash flows
from the sold notes receivable and generally retains the associated servicing
rights. PEC generally sells its notes receivable at par value.

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

         In discounting cash flows related to notes receivable sales, PEC defers
servicing income at an annual rate of 1% and discounts cash flows on its sales
at the rate it believes a purchaser would require as a rate of return. Earned
servicing income is included under the caption of financial income. The cash
flows were discounted to present value using a discount rate of 15% for the six
months ended February 28, 1999 and 1998. PEC has developed its assumptions based
on experience with its own portfolio, available market data and ongoing
consultation with its financial advisors.

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

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

         Fees for servicing notes receivable originated or acquired by PEC and
sold with servicing rights retained are generally based on a stipulated
percentage of the outstanding principal balance of such notes receivable and are
recognized when earned. Interest received on notes receivable sold, less amounts
paid to investors, is reported as financial income. Interest only receivables
are amortized systematically to reduce notes receivable servicing income to an
amount representing normal servicing income and the present value discount. Late
charges and other miscellaneous income are recognized when collected. Costs to
service notes receivable are recorded to expense as incurred. Interest income
represents the interest received on loans held in PEC's portfolio, the accretion
of the discount on the interest only receivables and interest on cash funds.

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


                                       8
<PAGE>   11
         PEC has entered into financing arrangements with certain purchasers of
timeshare interests and land whereby 5% interest per annum is charged on those
sales where the aggregate down payment is at least 50% of the purchase price and
the balance is payable in 36 or fewer monthly payments (PEC discontinued,
effective during the quarter ended August 31, 1998, a 0% arrangement). Notes
receivable of $6.3 million and $7.3 million at February 28, 1999 and August 31,
1998, respectively, were made under these (5% and 0%) arrangements.

         Land sales as of February 28, 1999 exclude $14.4 million of sales not
yet recognized under generally accepted accounting principles (GAAP) since the
requisite payment amounts have not yet been received. If ultimately recognized,
revenues from these sales would be reduced by a related provision for
cancellations of $2.0 million, deferred selling costs of $4.1 million and cost
of sales of $2.0 million.

RESULTS OF OPERATIONS

Three Months Ended February 28, 1999 Compared to Three Months Ended February 28,
1998

PEC

         Gross sales of timeshare interests increased to $9.4 million during the
three months ended February 28, 1999 from $9.3 million during the three months
ended February 28, 1998, an increase of .9%. Net sales of timeshare interests
increased to $8.6 million from $8.5 million, an increase of 1.2%. The provision
for cancellations represented 8.8% and 9.1%, respectively, of gross sales of
timeshare interests for the three months ended February 28, 1999 and 1998. The
percentage decrease in the provision for cancellations for timeshare interests
and land was primarily due to lower cancellation experience during the second
quarter of fiscal 1999 compared to the second quarter of fiscal 1998 and to an
analysis of the required allowances, including the reserve for notes receivable
sold with recourse, as of February 28, 1999. PEC's Preferred Client Services
group, which was instituted to work with the portfolio and develop better
relationships with customers, has served to reduce otherwise potential
cancellations. There continues to be a greater focus on working with the
purchasers and their individual problems rather than merely demanding repayment
of debt.

         Gross sales of land decreased to $3.8 million during the three months
ended February 28, 1999 from $3.9 million during the three months ended February
28, 1998, a decrease of 1.8%. Net sales of land decreased to $3.5 million during
the three months ended February 28, 1999 from $3.6 million during the three
months ended February 28, 1998, a decrease of 1.1%. The provision for
cancellations decreased to 7.0% of gross sales of land for the three months
ended February 28, 1999 from 7.6% for the three months ended February 28, 1998,
primarily due to lower cancellation experience during the second quarter of
fiscal 1999 compared to the second quarter of fiscal 1998 and to an analysis of
the required allowances, including the reserve for notes receivable sold with
recourse, as of February 28, 1999.

         No gain on sale of receivables was recorded for the three months ended
February 28, 1999 and 1998 as there were no receivable sales. PEC periodically
sells receivables to reduce the outstanding balances under its lines of credit.

         Interest income increased 16.4% to $2.0 million for the three months
ended February 28, 1999 from $1.7 million for the three months ended February
28, 1998, primarily due to the increased average notes receivable balances for
the current period.

         Financial income decreased to $400,000 during the three months ended
February 28, 1999 from $986,000 during the three months ended February 28, 1998,
a decrease of 59.4%. The decrease was primarily a result of the termination by
agreement of loan servicing for a company previously affiliated with Mego
Financial.

         Other income increased 55.8%, or $312,000, to $871,000 for the three
months ended February 28, 1999 from $559,000 for the three months ended February
28, 1998, primarily due to the loss on a disposal of a sales office during the
second quarter of fiscal 1998.



                                       9
<PAGE>   12
         As a result of the foregoing, total PEC revenues were $15.9 million
during the three months ended February 28, 1999 and 1998.

         Total costs and expenses for PEC decreased to $16.3 million for the
three months ended February 28, 1999 from $16.9 million for the three months
ended February 28, 1998. The decrease resulted primarily from a decrease in
general and administrative expenses to $3.2 million from $4.3 million, a
decrease of 25.4%. The decrease in general and administrative expenses is due to
the reductions in salaries and benefits, professional services and property
taxes.

         As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses relating thereto decreased to 59.1% during the
three months ended February 28, 1999 from 59.3% during the three months ended
February 28, 1998, and cost of sales increased to 17.9% during the three months
ended February 28, 1999 from 15.3% during the three months ended February 28,
1998. For the month of February 1999, such marketing and sales percentage
decreased to 52.7% and the Company believes that this trend should continue.
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.
Subsequent to November 30, 1998, the Company has restructured its marketing and
sales programs, which restructuring has included the closing of unprofitable
sales locations, the elimination of certain marketing programs and the layoff of
related personnel.

         Interest expense of PEC increased to $2.0 million during the three
months ended February 28, 1999 from $1.6 million during the three months ended
February 28, 1998, an increase of 24.0%. The increase is a result of an increase
in the average outstanding balance of notes and contracts payable during the
three months ended February 28, 1999 compared to the three months ended February
28, 1998.

         A pre-tax loss of $427,000 was recorded by PEC during the three months
ended February 28, 1999 compared to a pre-tax loss of $991,000 during the three
months ended February 28, 1998. The decrease in the pre-tax loss is primarily
due to the $1.1 million decrease in general and administrative expenses, which
was partially offset by the $586,000 decrease in financial income, during the
three months ended February 28, 1999.

         No income tax provision or benefit for PEC was recorded for the three
months ended February 28, 1999 and 1998, since, as part of an arrangement
between PEC and the Company, regarding payment of taxes, PEC generally does not
recognize a tax benefit for periods in which it records a loss. As a result of
the foregoing, PEC reported a net loss of $427,000 during the three months ended
February 28, 1999 compared to a net loss of $991,000 during the three months
ended February 28, 1998.

 COMPANY (consolidated)

         Loss before income taxes decreased $492,000 to a loss of $791,000
during the three months ended February 28, 1999 compared to a loss of $1.3
million during the three months ended February 28, 1998. The reduction in the
loss is primarily attributable to the decrease in general and administrative
expenses, which was partially offset by the decrease in financial income.

         On a consolidated basis, the decrease in the pre-tax loss is largely
due to the increases in interest income and other income, and the decrease in
general and administrative expenses, which were offset by the decrease in
financial income. Total costs and expenses during the three months ended
February 28, 1999 were $16.7 million, a decrease of 3.1% from $17.2 million
during the three months ended February 28, 1998. General and administrative
expenses decreased 23.6% for the three months ended February 28, 1999 compared
to the three months ended February 28, 1998.

         The income tax benefit for the three months ended February 28, 1999 was
$269,000 compared to no income tax benefit for the three months ended February
28, 1998. For the three months ended February 28, 1998, there was no provision
or benefit as the facts and circumstances related to the Company's income tax
liability reserves were under extensive review and analysis, which was
subsequently completed during fiscal 1998.



                                       10
<PAGE>   13
         Net loss applicable to common stock was $522,000 during the three
months ended February 28, 1999 compared to net loss applicable to common stock
of $1.3 million during the three months ended February 28, 1998, due to the
reduction in the PEC pre-tax consolidated loss and an income tax benefit of
$269,000 recognized during the three months ended February 28, 1999, compared to
no income tax benefit recognized during the three months ended February 28,
1998. See prior discussion for PEC.

Six Months Ended February 28, 1999 Compared to Six Months Ended February 28,
1998

PEC

         Total revenues for PEC increased 2.4%, or $771,000, to $32.7 million
during the six months ended February 28, 1999 from $31.9 million during the six
months ended February 28, 1998. The increase was primarily due to an increase in
timeshare sales, net, to $17.6 million during the six months ended February 28,
1999 from $17.3 million during the six months ended February 28, 1998, an
increase in land sales, net, to $7.0 million during the six months ended
February 28, 1999 from $6.6 million during the six months ended February 28,
1998, an increase in interest income to $3.9 million during the six months ended
February 28, 1999 from $3.2 million during the six months ended February 28,
1998, and an increase in other income to $1.7 million during the six months
ended February 28, 1999 from $1.4 million during the six months ended February
28, 1998, partially offset by a decrease in financial income to $700,000 during
the six months ended February 28, 1999 from $2.0 million during the six months
ended February 28, 1998.

         Gross sales of timeshare interests were $19.4 million during the six
months ended February 28, 1999 compared to $19.3 million during the six months
ended February 28, 1998, an increase of .7%. Net sales of timeshare interests
increased to $17.6 million from $17.3 million, an increase of 1.8%. The
provision for cancellations represented 9.3% and 10.3%, respectively, of gross
sales of timeshare interests for the six months ended February 28, 1999 and
1998. The percentage decrease in the provision for cancellations for timeshare
interests was primarily due to lower cancellation experience during the first
half of fiscal 1999 compared to the first half of fiscal 1998 and to an analysis
of the required allowances, including the reserve for notes receivable sold with
recourse as of February 28, 1999.

         Gross sales of land increased to $7.5 million during the six months
ended February 28, 1999 from $7.2 million during the six months ended February
28, 1998, an increase of 4.2%. Net sales of land increased to $7.0 million
during the six months ended February 28, 1999 from $6.6 million during the six
months ended February 28, 1998, an increase of 6.5%. The provision for
cancellations decreased to 6.3% of gross sales of land for the six months ended
February 28, 1999 from 8.2% for the six months ended February 28, 1998,
primarily due to lower cancellation experience during the first half of fiscal
1999 compared to the first half of fiscal 1998 and to an analysis of the
required allowances, including the reserve for notes receivable sold with
recourse as of February 28, 1999.

         No gain on sale of receivables was recorded for the six months ended
February 28, 1999 and 1998, as there were no receivable sales. PEC periodically
sells receivables to reduce the outstanding balances under its lines of credit.

         A gain on sale of investments of $513,000 was recorded for the six
months ended February 28, 1999. In October 1998, PEC sold a vacant parcel of
land containing approximately 40 acres, in Pahrump, Nevada, for $597,000.

         Interest income increased 21.8% to $3.9 million for the six months
ended February 28, 1999 from $3.2 million for the six months ended February 28,
1998 primarily due to increased average notes receivable balances for the
current period.

         Financial income decreased to $709,000 during the six months ended
February 28, 1999 from $2.0 million during the six months ended February 28,
1998, a decrease of 64.6%. The decrease was primarily a result of the
termination by agreement of loan servicing for a company previously affiliated
with Mego Financial.



                                       11
<PAGE>   14
         Other income increased 20.0% to $1.7 million for the six months ended
February 28, 1999 from $1.4 million for the six months ended February 28, 1998,
primarily due to the loss on a disposal of a sales office during the second
quarter of fiscal 1998.

         As a result of the foregoing, total PEC revenues increased to $32.7
million during the six months ended February 28, 1999 from $31.9 million during
the six months ended February 28, 1998.

         Total costs and expenses for PEC increased to $33.8 million for the six
months ended February 28, 1999 from $33.5 million for the six months ended
February 28, 1998, an increase of .9%. The increase resulted primarily from an
increase in direct costs of land sales to $1.3 million from $813,000, an
increase of 55.2%; an increase in marketing and sales expenses to $16.6 million
from $15.6 million, an increase of 6.5%; and an increase in interest expense to
$4.0 million from $3.1 million, an increase of 24.2%; partially offset by a
decrease of $1.6 million in general and administrative expenses. The increase in
direct costs of land is attributable to increased sales of higher cost lots sold
during the current fiscal period compared to the same period last fiscal year.
The increase in marketing and sales expenses is due primarily to the expansion
of timeshare marketing efforts by PEC and higher gross sales. The increase in
interest expense is due to the increase in the average outstanding balance of
notes and contracts payable. The decrease in general and administrative expenses
is due to the reduction in salaries and benefits; professional services and
property taxes.

         As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses relating thereto increased to 61.8% during the six
months ended February 28, 1999 from 59.0% during the six months ended February
28, 1998, and cost of sales increased to 17.5% during the six months ended
February 28, 1999 from 16.1% during the six months ended February 28, 1998.
Sales prices of timeshare interests are typically lower than those of land,
while selling costs per sale, other than commissions, are approximately the same
in amount for timeshare interests and land; accordingly, PEC generally realizes
lower profit margins from sales of timeshare interests than from sales of land.

         Interest expense of PEC increased to $4.0 million during the six months
ended February 28, 1999 from $3.2 million during the six months ended February
28, 1998, an increase of 24.2%. The increase is a result of an increase in the
average outstanding balance of notes and contracts payable during the six months
ended February 28, 1999 compared to the six months ended February 28, 1998.

         A pre-tax loss of $1.1 million was recorded by PEC during the six
months ended February 28, 1999 compared to a pre-tax loss of $1.6 million during
the six months ended February 28, 1998. The decrease in the pre-tax loss is
largely due to the $1.9 million decrease in general and administrative expenses,
partially offset by the $1.3 decrease in financial income.

         No income tax provision or benefit for PEC was recorded for the six
months ended February 28, 1999 and 1998. As part of an arrangement between PEC
and the Company, regarding payment of taxes, PEC generally does not recognize a
tax benefit for periods in which it records a loss. As a result of the
foregoing, PEC reported a net loss of $1.1 million during the six months ended
February 28, 1999 compared to a net loss of $1.6 million during the six months
ended February 28, 1998.

COMPANY (consolidated)

         Loss before income taxes decreased $736,000 to a loss of $1.9 million
during the six months ended February 28, 1999 compared to a loss of $2.6 million
during the six months ended February 28, 1998, due primarily to a decrease in
general and administrative expenses of $1.9 million.

         Total costs and expenses were $34.7 million during the six months ended
February 28, 1999 and 1998. General and administrative expenses decreased 21.6%
for the six months ended February 28, 1999 compared to the six months ended
February 28, 1998 due primarily to PEC's efforts to lower expenses. Mego
Financial (parent only) 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.



                                       12
<PAGE>   15
         An income tax benefit of $650,000 was recorded for the six months ended
February 28, 1999 and was based on the statutory rate. For the six months ended
February 28, 1998, there was no provision as the facts and circumstances related
to the Company's income tax liability reserves were under extensive review and
analysis, which was subsequently completed during the third quarter of fiscal
1998.

         Net loss applicable to common stock was $1.3 million during the six
months ended February 28, 1999 compared to net loss applicable to common stock
of $2.6 million during the six months ended February 28, 1998, due to the
reduction in the PEC pre-tax consolidated loss and an income tax benefit of
$650,000 recognized during the six months ended February 28, 1999 compared to no
income tax benefit recognized during the six months ended February 28, 1998. See
prior discussion for PEC.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents for the Company was $1.6 million at February
28, 1999 compared to $1.8 million at August 31, 1998. On December 24, 1998,
FINOVA agreed to make a loan in the amount of $5.7 million to PEC, guaranteed by
the Company, with a maturity date of June 30, 1999. On that date, FINOVA
advanced $3.0 million, less fees, secured by a pledge of the stock of Central
Nevada Utilities Company, a wholly-owned subsidiary of PEC. In consideration of
FINOVA making the advance, the Company granted FINOVA a warrant to purchase
150,000 shares of common stock of the Company at an exercise price of $1.00 per
share, exercisable within a five-year period commencing January 1, 1999. The
remaining advance of up to $2.7 million is available through May 31, 1999. As of
April 12, 1999, no further amounts have been drawn on this remaining advance.
When, and if, further amounts are drawn, additional collateral will be pledged.
As a condition for further advances, a warrant to purchase up to an additional
350,000 shares of common stock of the Company at an exercise price of $1.00 per
share will be issued to Finova, pro rata to the advances.

         The Company has experienced certain cash flow pressures and has taken
the following steps, beginning in December 1998, to alleviate this situation. In
addition to the short-term funding from FINOVA discussed above, subsequent to
November 30, 1998, the Company reduced its work force by 180 employees,
resulting in an estimated savings of $4.85 million of salaries and related
benefits on an annualized basis. Also, activities in certain unprofitable sales
office locations were curtailed and PEC is actively pursuing the sale of certain
non-producing properties which are not deemed to be part of the core business.
PEC turned profitable in the month of February 1999 and, as noted, has available
the additional FINOVA credit line to May 31, 1999. Therefore, these actions have
improved the Company's cash flow and should continue to return it to
profitability; however, there can be no assurance that these continuing efforts
will be successful in maintaining a continued profitability trend.

PEC

         PEC's cash requirements arise from the acquisition of timeshare
properties and land, payments of operating expenses, payments of principal and
interest on debt obligations and payments of marketing and sales expenses in
connection with sales of timeshare interests and land. Marketing and sales
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 and hypothecations of
receivables, PEC's lines of credit in the aggregate amount of $137.5 million and
cash flows from operations. At February 28, 1999, no commitments existed for
material capital expenditures.

         At February 28, 1999, PEC had arrangements with 5 institutional lenders
under 6 agreements for the financing of receivables in connection with sales of
timeshare interests and land and the acquisition of timeshare properties and
land, which provide for 6 lines of credit of up to an aggregate of $137.5
million. Such lines of credit are secured by timeshare and land receivables and
mortgages. At February 28, 1999, an aggregate of $88.1 million was outstanding
under such lines of credit, and $49.4 million was available for borrowing. Under
the terms of these lines of credit, PEC may borrow 70% to 90% of the balances of
the pledged timeshare and land receivables. PEC is required to comply with
certain covenants under these agreements, which, among other things, require PEC
to meet certain minimum tangible net worth requirements. The most stringent of
such requirements provides that PEC maintain a minimum tangible net worth of $25
million. At February 28, 1999, PEC's net worth was $26.2 million. Necessary
waivers of compliance with certain covenants related to these and


                                       13
<PAGE>   16

other agreements have been received. Summarized lines of credit information and
accompanying notes relating to these six lines of credit outstanding at February
28, 1999, consist of the following (thousands of dollars):



<TABLE>
<CAPTION>
     BORROWING            MAXIMUM
     AMOUNT AT           BORROWING             REVOLVING
 FEBRUARY 28, 1999         AMOUNT         EXPIRATION DATE (f)         MATURITY DATE             INTEREST RATE
------------------     -------------      -------------------         --------------         --------------------
<S>                    <C>                <C>                         <C>                    <C>
$       54,665         $   75,000(a)        May 15, 2000              Various                Prime  + 2.0 - 2.25%
         3,488             15,000(b)        April 30, 1999            Various                Prime  + 2.0%
        12,745             15,000(c)        April 30, 1999            Various                LIBOR  + 4.0 - 4.25%
         6,619             15,000(c)        May 1, 1999               Various                LIBOR  + 4.0 - 4.25%
         4,253             10,000(d)        August 1, 2000            August 1, 2003         Prime  + 2.0 - 2.25%
         6,378              7,500(e)        April 30, 1999            Various                Prime  + 2.0 - 3.00%
</TABLE>
---------------------------               

(a)      Restrictions include PEC's requirement to maintain a minimum tangible
         net worth of $20.0 million with such amount increasing each fiscal
         quarter after August 31, 1997 by an amount equal to 50% of PEC's
         consolidated net income for each quarter up to a maximum requirement of
         $25 million. New restrictions, commencing with the fiscal quarter ended
         November 30, 1998, include: PEC's requirement to maintain costs and
         expenses for marketing and sales, and general and administrative
         expenses relating to net processed sales for each fiscal quarter; and,
         PEC's requirement to maintain a minimum net processed sales requirement
         for each fiscal quarter. At February 28, 1999, $35.8 million of loans
         secured by receivables were outstanding related to financings at prime
         +2%, of which $26.5 million of loans secured by land receivables mature
         May 15, 2010 and $9.3 million of loans secured by timeshare receivables
         mature May 15, 2007. The outstanding borrowing amount includes $.5
         million in acquisition and development (A&D) financing maturing May 20,
         1999 and $6.4 million maturing July 1, 2003 for the financing of
         corporate office buildings, both of which are amortizing loans, and a
         real estate loan with an outstanding balance of $1.2 million maturing
         March 20, 2000, all bearing interest at prime +2.25%. The remaining A&D
         loans, receivables loans, and a resort lobby loan outstanding of $10.8
         million are at prime +2% and mature at various dates through February
         20, 2001.

(b)      Restrictions include PEC's requirement to maintain a minimum tangible
         net worth of $25 million during the life of the loan. These credit
         lines include available financing for A&D and receivables. At February
         28, 1999, $1.1 million was outstanding under the A&D loan which matures
         in September 1999, and $2.4 million maturing June 1, 2002 was
         outstanding under the receivables loan. Management has obtained a
         verbal commitment from the lender to extend this revolving line of
         credit for a period of 18 months on substantially the same terms.

(c)      Restrictions include PEC's requirement to maintain a minimum tangible
         net worth of $17 million during the life of the loan. These credit
         lines include available financings for A&D and receivables. At February
         28, 1999, $3.4 million was outstanding under the A&D loans which have
         maturity dates of December 31, 2000 and June 30, 2001, and bears
         interest at the 90-day London Interbank Offering Rate (LIBOR) +4.25%.
         The available receivable financings, of which $9.3 million was
         outstanding at February 28, 1999, are at 90 day LIBOR +4% and have
         maturity dates of June 5, 2005 and August 5, 2005.

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

(e)      Restrictions include PEC's requirement to maintain a minimum tangible
         net worth of $15 million. This credit line is for the purpose of
         financing receivables, of which $2.4 million was outstanding at
         February 28, 1999 in respect to the receivable debt, and a real estate
         loan of $4.0 million with a maturity date of August 31, 1999. The
         maturity date for the receivable debt is May 31, 2002. Management has
         obtained a verbal commitment from the lender to extend this revolving
         line of credit for a period of 18 months on substantially the same
         terms.

(f)      Revolving expiration dates represent the expiration of the revolving
         features of the lines of credit, at which time the credit lines become
         loans with fixed maturities. The Company is presently negotiating for
         extension of the revolving periods expiring in 1999.


                                       14
<PAGE>   17
         A schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated is set forth below (thousands of
dollars):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                  FEBRUARY 28,                    FEBRUARY 28,
                                                          ----------------------------    ---------------------------
                                                              1999            1998            1999           1998
                                                          ------------    ------------    ------------   ------------
<S>                                                       <C>             <C>             <C>            <C>         
Marketing and selling expenses
   attributable to recognized and unrecognized sales      $      7,931    $      7,811    $     16,927   $     15,726
Less:  Down payments                                            (4,654)         (3,147)         (9,679)        (6,263)
                                                          ------------    ------------    ------------   ------------
Cash Shortfall                                            $      3,277    $      4,664    $      7,248   $      9,463
                                                          ============    ============    ============   ============
</TABLE>

         During the six month periods ended February 28, 1999 and 1998, PEC did
not sell any notes receivable.

         PEC sells notes receivable subject to recourse provisions as contained
in each agreement. PEC is obligated under these agreements to replace or
repurchase accounts that become over 90 days delinquent or are otherwise subject
to replacement or repurchase in either cash or receivables generally at the
option of the purchaser. At February 28, 1999, PEC was contingently liable to
replace or repurchase notes receivable sold with recourse totaling $63.5
million. The repurchase provisions provide for substitution of receivables as
recourse for $47.9 million of sold notes receivable and cash payments for
repurchase relating to $15.6 million of sold notes receivable. At February 28,
1999 and 1998, the undiscounted amounts of the recourse obligations on such
notes receivable were $6.5 million and $7.1 million, respectively. PEC
periodically reviews the adequacy of this liability. These reviews take into
consideration changes in the nature and level of the portfolio, current and
future economic conditions which may affect the obligors' ability to pay,
changes in collateral values, estimated value of inventory that may be
reacquired and overall portfolio quality.

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

<TABLE>
<CAPTION>
                                                                    FEBRUARY 28,        AUGUST 31,
                                                                        1999               1998
                                                                  ----------------   ----------------
<S>                                                               <C>                <C>             
Notes collateralized by receivables                               $         52,991   $         42,793
Mortgages collateralized by real estate properties                          38,165             37,393
Installment contracts and other notes payable                                1,515              1,800
                                                                  ----------------   ----------------
         Total                                                    $         92,671   $         81,986
                                                                  ================   ================
</TABLE>

FINANCIAL CONDITION

February 28, 1999 Compared to August 31, 1998

         Cash and cash equivalents decreased 13.1% to $1.6 million at February
28, 1999 from $1.8 million at August 31, 1998.

         Notes receivable, net, increased 15.9% to $55.4 million at February 28,
1999 from $47.8 million at August 31, 1998 primarily as a result of new
receivables exceeding reductions while no receivable sales occurred during the
six months ended February 28, 1999.

         Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for the six
months ended February 28, 1999, consist of the following (thousands of dollars):

<TABLE>
<S>                                                                                    <C>      
Balance at beginning of period                                                         $  18,488
   Provision for cancellations                                                             2,276
   Amounts charged to allowance for  cancellations  and reserve for notes
     receivable sold with recourse                                                        (2,955)
                                                                                       ----------
Balance at end of period                                                               $  17,809
                                                                                       =========
</TABLE>


                                       15
<PAGE>   18
         The allowance for cancellations and the reserve for notes receivable
sold with recourse consisted of the following at these dates (thousands of
dollars):

<TABLE>
<CAPTION>
                                                                               FEBRUARY 28,     AUGUST 31,
                                                                                  1999            1998
                                                                              -------------   -------------
<S>                                                                           <C>             <C>          
Allowance for cancellations, excluding discounts                              $      12,377   $      11,868
Reserve for notes receivable sold with recourse                                       5,432           6,620
                                                                              -------------   -------------
   Total                                                                      $      17,809   $      18,488
                                                                              =============   =============
</TABLE>

         Statement of Financial Accounting Standards No. 125 (SFAS 125) requires
the reclassification of excess servicing rights as interest only receivables
which are carried at fair value. Interest only receivables decreased 9.5% to
$3.0 million at February 28, 1999 from $3.4 million at August 31, 1998 due to
normal amortization and no receivable sales this fiscal year.

         Notes and contracts payable increased 13.0% to $92.7 million at
February 28, 1999 from $82.0 million at August 31, 1998. There were increased
borrowings and no receivable sales, the proceeds of which are usually used to
pay down debt, during the six months ended February 28, 1999.

         Reserve for notes receivable sold with recourse decreased 18.0% to $5.4
million at February 28, 1999 from $6.6 million at August 31, 1998 due to the
reduced balance of the sold notes receivable. Recourse to PEC on sales of notes
receivable is governed by the agreements between the purchasers and PEC.

         Accrued income taxes decreased 17.5% to $3.7 million at February 28,
1999 from $4.5 million at August 31, 1998 due primarily to the fiscal 1999 tax
benefit. The changes in certain income tax liability reserves are a result of
facts and circumstances determined in an extensive review and analysis of the
Company's federal income tax liability completed during fiscal 1998 and
reevaluated on an ongoing basis.

         Stockholders' equity decreased 6.0% to $19.5 million at February 28,
1999 from $20.7 million at August 31, 1998.

YEAR 2000 COMPLIANCE

         The status of the Year 2000 compliance issue is substantially the same
as reported in the Company's 1998 Form 10-K.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         There was no material change for the three and six months ended
February 28, 1999 in the information about the Company's "Quantitative and
Qualitative Disclosures About Market Risk" as disclosed in it's Form 10-K for
the fiscal year ended August 31, 1998.






                                       16
<PAGE>   19
PART II   OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         Except as hereinafter set forth, and as set forth in the Company's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1998, there
have been no material changes in the status of the litigation reported in the
Company's Annual Report on Form 10-K for the year ended August 31, 1998.

         On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia, Civil Action No. 1:98CV0593-CAM by
Robert J. Feeney, plaintiff, as a purported class action against Mego Mortgage
Corporation, a former subsidiary of the Company (MMC), and Jeffrey S. Moore, the
former President and Chief Executive Officer of MMC. The complaint alleged,
among other things, that the defendants violated the federal securities laws in
connection with the preparation and issuance of certain of MMC's financial
statements. The named plaintiff sought to represent a class consisting of
purchasers of the common stock of MMC between April 11, 1997 and December 18,
1997, and sought such other relief as the Court deemed proper. An amended
complaint was filed in such matter on or about June 29, 1998, which amended
complaint, among other things, added Mego Financial as a defendant, added John
Cole, Trent Hildebrand, Burt W. Price and Frank J. Murphy as plaintiffs and
alleged an expansion of the purported class to certain purchasers of MMC's
common stock from April 11, 1997 through May 20, 198. On April 9, 1999, the
court granted the defendants' motions to dismiss the complaint with leave to
refile within 30 days.

         In the general course of business the Company, at various times, has
been named in other lawsuits. The Company believes that it has meritorious
defenses to these lawsuits and that resolution of these matters will not have a
material adverse affect on the business or financial condition of the Company.

ITEM 5.  OTHER EVENTS

         The Company has received a notice from The Nasdaq Stock Market, Inc.
that its common stock will be delisted from the Nasdaq National Market as a
result of the failure to maintain a minimum closing bid price of $1.00 unless
the closing bid price of the common stock equals or exceeds $1.00 for a period
of ten consecutive trading days prior to April 30, 1999. The Company has
determined that it will request an oral hearing before the Nasdaq Listing
Qualifications Committee which request will stay any adverse action by Nasdaq
until after such hearing. The purpose of the hearing is to attempt to obtain an
exception to the minimum price listing requirement of the Nasdaq National
Market.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
         EXHIBIT 
         NUMBER                                              DESCRIPTION
         ------                                              -----------
         <S>         <C>
          10.152     First Amended and Restated and Consolidated Promissory Note dated as of November 5, 1998 between
                     FINOVA Capital Corporation and Preferred Equities Corporation relating to Aloha Bay Phase I.

          10.153     Third Amended and Restated Promissory Note dated as of September 29, 1998 by and between FINOVA
                     Capital Corporation and Preferred Equities Corporation relating to the Headquarters and FCFC
                     Property.

          10.154     Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated
                     as of November 6, 1998 between Finova Capital Corporation and Preferred Equities Corporation.

          10.155     Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated
                     as of November 6, 1998 between Finova Capital Corporation and Preferred Equities Corporation.

          10.156     Amended and Restated Guarantee and Subordination Agreement dated as of September 29, 1998 between
                     Greyhound Real Estate Finance Company and Mego Financial Corporation relating to the Headquarters
                     Re-advance.

          10.157     First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital
                     Corporation and Preferred Equities Corporation relating to the IDA Building Addition.

          10.158     Letter Agreement dated as of September 29, 1998 between FINOVA Capital Corporation and Preferred
                     Equities Corporation relating to the Headquarters Re-advance.

          10.159     Additional Advance Note dated as of November 6, 1998 between FINOVA Capital Corporation and
                     Preferred Equities Corporation relating to Aloha Bay Phase II.

          10.160     Request for Advance and Disbursement Instructions dated as of November 11, 1998 between FINOVA
                     Capital Corporation and Preferred Equities Corporation.

          10.161     First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital
                     Corp. and Preferred Equities Corporation relating to the Winnick Building Addition.

          10.162     Fourth Amendment to Assignment and Assumption Agreement dated as of February 26, 1999 by and
                     between RER Corp, COMAY Corp., Growth Realty Inc. and H & H Financial, Inc. and Mego Financial
                     Corporation.
</TABLE>


                                       17
<PAGE>   20

<TABLE>
         <S>         <C>
          10.163     Amended and Restated Stock Option Plan dated September 16, 1998 for Mego Financial Corporation.

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


No reports on Form 8-K were filed during the period.







                                       18
<PAGE>   21

                                    SIGNATURE


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


                                 MEGO FINANCIAL CORP.


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







Date:    April 14, 1999





                                       19