<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-Q

(MARK ONE)

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

                  FOR THE QUARTERLY PERIOD ENDED: MAY 31, 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 July 13, 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
             May 31, 1999 and August 31, 1998..............................................1

           Condensed Consolidated Statements of Operations for the Three and Nine
             Months Ended May 31, 1999 and 1998............................................2

           Condensed Consolidated Statements of Stockholders' Equity for the Nine
             Months Ended May 31, 1999.....................................................3

           Condensed Consolidated Statements of Cash Flows for the Nine Months
             Ended May 31, 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..............................................................16

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

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

SIGNATURE ................................................................................18
</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>
                                                                                            MAY 31,         AUGUST 31,
ASSETS                                                                                       1999             1998
                                                                                          -----------      -----------
<S>                                                                                       <C>              <C>
Cash and cash equivalents                                                                 $     1,944      $     1,813
Restricted cash                                                                                 1,552            1,694
Notes receivable, net of allowance for cancellations and discounts of $13,915 at
    May 31, 1999 and $12,403 at August 31, 1998                                                62,050           47,789
Interest only receivables, at fair value                                                        2,788            3,367
Timeshare interests held for sale                                                              31,798           35,798
Land and improvements inventory                                                                 7,003            7,965
Other investments                                                                               4,982            4,395
Property and equipment, net of accumulated depreciation of $15,797 at May 31,
    1999 and $14,119 at August 31, 1998                                                        23,825           23,950
Deferred selling costs                                                                          3,876            3,719
Prepaid debt expenses                                                                           1,561            1,431
Other assets                                                                                   13,070            9,830
                                                                                          -----------      -----------

            TOTAL ASSETS                                                                  $   154,449      $   141,751
                                                                                          ===========      ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Notes and contracts payable                                                           $    97,768      $    81,986
    Accounts payable and accrued liabilities                                                   20,583           18,773
    Reserve for notes receivable sold with recourse                                             4,953            6,620
    Deposits                                                                                    2,456            4,877
    Accrued income taxes                                                                        3,685            4,468
                                                                                          -----------      -----------

            Total liabilities before subordinated debt                                        129,445          116,724
                                                                                          -----------      -----------

Subordinated debt                                                                               4,335            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                                                                 12,898           12,789
    Retained earnings                                                                           7,561            7,680
                                                                                          -----------      -----------

            Total stockholders' equity                                                         20,669           20,679
                                                                                          -----------      -----------

            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $   154,449      $   141,751
                                                                                          ===========      ===========
</TABLE>


           See notes to condensed consolidated financial statements.



                                       1
<PAGE>   4

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


<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                 MAY 31,                          MAY 31,
                                                      ----------------------------     -----------------------------
                                                          1999            1998             1999             1998
                                                      ------------    ------------     ------------     ------------
<S>                                                   <C>             <C>              <C>              <C>
REVENUES
    Timeshare interest sales, net                     $     10,885    $      9,579     $     28,494     $     26,872
    Land sales, net                                          4,869           3,530           11,878           10,114
    Gain on sale of investments                                 --              --              513               --
    Interest income                                          2,672           1,931            6,616            5,248
    Financial income                                           321             769            1,030            2,773
    Incidental operations                                      694             821            1,970            2,242
    Other                                                      886             881            2,577            2,277
                                                      ------------    ------------     ------------     ------------
            Total revenues                                  20,327          17,511           53,078           49,526
                                                      ------------    ------------     ------------     ------------

COSTS AND EXPENSES
    Direct cost of:
      Timeshare interest sales                               2,483           1,755            5,917            5,206
      Land sales                                               777             421            2,039            1,234
    Incidental operations                                      549             652            1,661            1,949
    Marketing and sales                                      9,014           9,143           25,629           24,739
    General and administrative                               3,502           4,675           10,473           13,561
    Interest expense                                         2,374           2,157            6,635            5,635
    Depreciation                                               485             549            1,493            1,691
                                                      ------------    ------------     ------------     ------------
            Total costs and expenses                        19,184          19,352           53,847           54,015
                                                      ------------    ------------     ------------     ------------


INCOME (LOSS) BEFORE INCOME TAXES                            1,143          (1,841)            (769)          (4,489)

INCOME TAXES (BENEFIT)                                          --          (1,728)            (650)          (1,728)
                                                      ------------    ------------     ------------     ------------


NET INCOME (LOSS) APPLICABLE TO COMMON STOCK          $      1,143    $       (113)    $       (119)    $     (2,761)
                                                      ============    ============     ============     ============

EARNINGS (LOSS) PER COMMON SHARE
    Basic:

      Net income (loss) applicable to common stock    $       0.05    $      (0.01)    $      (0.01)    $      (0.13)
                                                      ============    ============     ============     ============

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

    Diluted:
      Net income (loss) applicable to common stock    $       0.05    $      (0.01)    $      (0.01)    $      (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 condensed consolidated financial statements.



                                       2
<PAGE>   5

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


<TABLE>
<CAPTION>
                                              COMMON STOCK
                                             $.01 PAR VALUE             ADDITIONAL
                                        --------------------------       PAID-IN         RETAINED
                                          SHARES          AMOUNT         CAPITAL         EARNINGS           TOTAL
                                        ----------      ----------      ----------      ----------       ----------
<S>                                     <C>             <C>             <C>             <C>              <C>
Balance at August 31, 1998              21,009,506      $      210      $   12,789      $    7,680       $   20,679

Warrants issued                                                                109                             109

Net loss for the nine months ended
   May 31, 1999                                 --              --              --            (119)            (119)
                                        ----------      ----------      ----------      ----------       ----------

Balance at May 31, 1999                 21,009,506      $      210      $   12,898      $    7,561       $   20,669
                                        ==========      ==========      ==========      ==========       ==========
</TABLE>



           See notes to condensed consolidated financial statements.



                                       3
<PAGE>   6

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

<TABLE>
<CAPTION>
                                                                                                 NINE MONTHS ENDED MAY 31,
                                                                                                 -------------------------
                                                                                                    1999           1998
                                                                                                 ---------       ---------
<S>                                                                                              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss                                                                                      $   (119)      $ (2,761)
                                                                                                  --------       --------
    Adjustments to reconcile net loss to net cash  used in operating activities:
       Amortization of negative goodwill                                                                --            (36)
       Charges to allowance for cancellations                                                       (4,662)        (5,152)
       Provision for cancellations                                                                   4,186          3,760
       Gain on sale of notes receivable                                                               (513)            --
       Provision for uncollectible Owners' Association advances                                         --           (403)
       Cost of sales                                                                                 7,956          6,440
       Depreciation                                                                                  1,493          1,691
       Amortization of interest only receivables                                                       579            341
       Repayments on notes receivable                                                               29,849         27,548
       Additions to notes receivable                                                               (43,634)       (40,096)
       Purchase of land and timeshare interests                                                     (2,994)       (14,232)
       Additions to other receivables                                                                   --         (4,193)
       Decreases in other receivables                                                                   --          6,769
       Changes in operating assets and liabilities:
         Decrease in restricted cash                                                                   142             34
         Increase in other assets                                                                   (4,928)        (4,253)
         Increase in deferred selling costs                                                           (157)           (73)
         Increase in accounts payable and accrued liabilities                                        1,810          2,561
         Increase (decrease) in deposits                                                            (2,421)         1,564
         Decrease in accrued income taxes                                                             (783)        (1,527)
                                                                                                  --------       --------

            Total adjustments                                                                      (14,077)       (19,257)
                                                                                                  --------       --------

              Net cash used in operating activities                                                (14,196)       (22,018)
                                                                                                  --------       --------


CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of property and equipment                                                              (1,368)        (1,826)
    Proceeds from the sale of property and equipment                                                    --            359
    Proceeds from the sale of other investments                                                        747             --
    Additions to other investments                                                                    (821)        (2,015)
                                                                                                  --------       --------

              Net cash used in investing activities                                                 (1,442)        (3,482)
                                                                                                  --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from borrowings                                                                        40,906         35,745
    Reduction of debt                                                                              (25,124)       (18,057)
    Payments on subordinated debt                                                                     (466)          (639)
    Increase in subordinated debt                                                                      453            492
                                                                                                  --------       --------

              Net cash provided by financing activities                                             15,769         17,541
                                                                                                  --------       --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                   131         (7,959)

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

CASH AND CASH EQUIVALENTS-- END OF PERIOD                                                         $  1,944       $  2,417
                                                                                                  ========       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Cash paid during the period for:
       Interest, net of amounts capitalized                                                       $  6,342       $  5,656
                                                                                                  ========       ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
    Issuance of warrants related to debt                                                          $    109       $     --
    Reduction of additional paid-in capital due to spin-off of previously affiliated company            --        (21,735)
    Reduction of retained earnings due to spin-off of previously affiliated company                     --        (21,441)
    Adjustments of receivable from previously affiliated company                                        --         (6,153)
</TABLE>



            See notes to condensed consolidated financial statements.


                                       4
<PAGE>   7

                      MEGO FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE AND NINE MONTHS ENDED MAY 31, 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 May 31, 1999, the
results of its operations for the three and nine months ended May 31, 1999 and
1998, the change in stockholders' equity for the nine months ended May 31, 1999
and the cash flows for the nine months ended May 31, 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 nine months
ended May 31, 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 and operator of timeshare
properties and a provider of consumer financing to purchasers of timeshare
intervals and land parcels through its wholly-owned subsidiary, Preferred
Equities Corporation (PEC) established in 1970. PEC is engaged in originating,
selling, servicing and financing consumer receivables generated through
timeshare and land sales. Mego Financial and its subsidiaries are also herein
collectively referred to as the Company as the context requires. Mego Financial
was incorporated under the laws of the state of New York in 1954 under the name
Mego Corp. and, in 1992, changed its name to Mego Financial Corp.

        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

        In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego
Financial entered into a Forbearance Agreement dated as of December 24, 1998.
Under the agreement, FINOVA agreed to make a loan in the amount of $5,662,000 to
PEC with a maturity date of June 30, 1999, since extended to September 1, 1999.
At that time, the Company agreed to guarantee the loan and, if all of the
$5,662,000 was advanced to PEC, to issue to FINOVA warrants to purchase a total
of 500,000 shares of common stock of Mego Financial at an exercise price of
$1.00 per share, exercisable within a five-year period commencing January 1,
1999. On December 24, 1998, FINOVA advanced to PEC a first tranche of
$3,000,000, less fees, secured by a pledge of stock of Central Nevada Utilities
Company, a wholly-owned subsidiary of PEC. In accordance with the agreement,
Mego Financial granted to FINOVA a warrant to purchase 150,000 shares of common
stock of Mego Financial.



                                       5
<PAGE>   8

        Of the second tranche of $2,662,000, FINOVA advanced $1,000,000 to PEC
on May 7, 1999. In accordance with the agreement, Mego Financial granted to
FINOVA a warrant to purchase 131,480 shares of common stock of Mego Financial.

        The following table sets forth information regarding the advances from
FINOVA to PEC under the Forbearance Agreement for the nine months ended May 31,
1999:

<TABLE>
<CAPTION>
                                                     MAXIMUM NUMBER OF
                                                      SHARES OF MEGO
                                                      FINANCIAL CORP.
                                                       COMMON STOCK
                                                       AVAILABLE FOR
                                       FINOVA          PURCHASE UNDER
                                        LOAN          WARRANTS GRANTED
                                     ----------      ------------------
<S>                                  <C>             <C>
First Tranche
-------------
December 24, 1998                    $3,000,000             150,000

Second Tranche
--------------
May 7, 1999                           1,000,000             131,480
                                     ----------          ----------
Balances as of May 31, 1999          $4,000,000             281,480
                                     ==========          ==========
</TABLE>


        Subsequent to May 31, 1999, FINOVA advanced an additional $1,000,000 of
the second tranche. In accordance with the agreement, Mego Financial granted to
FINOVA a warrant to purchase 131,480 shares of common stock of Mego Financial.
The remaining $662,000 of the second tranche is available for borrowing until
September 1, 1999. If the remaining amount is advanced in full under the
agreement, FINOVA would be entitled to receive a five-year warrant to purchase
an additional 87,040 shares of Mego Financial common stock at an exercise price
of $1.00 per share, which would make the total of warrants covering 500,000
shares of Mego Financial common stock.

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 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 nine months ended
May 31, 1999 and 1998.

        In June 1997, FASB issued SFAS No. 131, "Disclosures and Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 established 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
the fiscal 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 grants of 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 July
13, 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 its subsidiaries are referred to herein collectively as the
Company as the text 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, such as 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, servicing the related
receivables and operating and managing timeshare properties. 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



                                       7
<PAGE>   10

recognized is not deemed to represent a sale and is accounted for as a reversal
of the revenue with an adjustment to cost of sales. Cancellation of a note
receivable subsequent to the quarter the revenue was recognized is charged to
the allowance for cancellations.

        Gain on sale of notes receivable includes the present value of the
differential between contractual interest rates charged to borrowers on notes
receivable sold by PEC and the interest rates to be received by the purchasers
of such notes receivable, after considering the effects of estimated prepayments
and a normal servicing fee. PEC retains certain participations in cash flows
from the sold notes receivable and generally retains the associated servicing
rights. PEC generally sells its notes receivable at par 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 nine
months ended May 31, 1999 and 1998. PEC has developed its assumptions based on
experience with its own portfolio, available market data and ongoing
consultations 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
a provision for cancellations at the time revenue is recognized, based on
historical experience and current economic factors. The related allowance for
cancellations represents PEC's estimate of the amount of the future credit
losses to be incurred over the lives of the notes receivable. The allowance for
cancellations is reduced by actual cancellations experienced, including
cancellations related to previously sold notes receivable which were reacquired
pursuant to the recourse obligations discussed herein. Such allowance is also
reduced to establish the separate liability for reserve for notes receivable
sold with recourse. PEC's judgment in determining the adequacy of this allowance
is based upon a periodic review of its portfolio of notes receivable. These
reviews take into consideration changes in the nature and level of the
portfolio, historical cancellation experience, current economic conditions which
may affect the purchasers' ability to pay, changes in collateral values,
estimated value of inventory that may be reacquired and overall portfolio
quality. Changes in the allowance as a result of such reviews are included in
the provision for cancellations.

        Fees for servicing notes receivable originated 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.



                                       8
<PAGE>   11

        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.

        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% interest arrangement).
Notes receivable of $6.1 million and $7.3 million at May 31, 1999 and August 31,
1998, respectively, were outstanding under this arrangement.

        Land sales as of May 31, 1999 exclude $13.9 million of sales not yet
recognized under generally accepted accounting principles (GAAP) since the
requisite payment amounts have not yet been received. If ultimately recognized,
revenues from these sales would be reduced by a related provision for
cancellations of $1.9 million, deferred selling costs of $3.9 million and cost
of sales of $2.0 million.

RESULTS OF OPERATIONS

Three Months Ended May 31, 1999 Compared to Three Months Ended May 31, 1998

PEC

        Total revenues for PEC increased 16.2%, or $2.8 million, to $20.3
million during the three months ended May 31, 1999 from $17.5 million during the
three months ended May 31, 1998. The increase was primarily due to a 13.6%
increase in timeshare interest sales, net (hereinafter, "net" refers to gross
sales, less current cancellations and a provision for possible future
cancellations), of $1.3 million, a 37.9% increase in land sales, net, of $1.3
million and an increase in interest income of $766,000, partially offset by a
decrease of $448,000 in financial income.

        Gross sales of timeshare interests increased to $12.5 million during the
three months ended May 31, 1999 from $10.4 million during the three months ended
May 31, 1998, an increase of 19.3%. The provision for cancellations represented
12.7% and 8.3%, respectively, of gross sales of timeshare interests for the
three months ended May 31, 1999 and 1998. The percentage increase in the
provision for cancellations for timeshare interests was primarily due to a
downward adjustment recorded in the quarter ended May 31, 1998 based on a review
of the reserve adequacy at that time.

        Gross sales of land increased to $5.2 million during the three months
ended May 31, 1999 from $3.8 million during the three months ended May 31, 1998,
an increase of 35.2%. The provision for cancellations decreased to 6.4% of gross
sales of land for the three months ended May 31, 1999 from 8.2% for the three
months ended May 31, 1998 primarily due to lower cancellation experience of land
receivables during the third quarter of fiscal 1999 compared to the third
quarter of fiscal 1998.

        Interest income increased to $2.7 million during the three months ended
May 31, 1999 from $1.9 million during the three months ended May 31, 1998, an
increase of 40.2%. The increase was primarily due to increased average notes
receivable balances for the current period.

        Financial income decreased to $321,000 during the three months ended May
31, 1999 from $769,000 during the three months ended May 31, 1998, a decrease of
58.3%. The decrease was primarily a result of the termination by agreement of
loan servicing for a company previously affiliated with Mego Financial.

        Total costs and expenses for PEC were $18.8 million for the three months
ended May 31, 1999 and 1998.

        As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses relating thereto decreased to 51.0% during the
three months ended May 31, 1999 from 64.0% during the three months ended May 31,
1998, due primarily to cost-control measures discussed elsewhere herein. Cost of
sales as a percentage of gross sales increased to 18.5% during the three months
ended May 31, 1999 from 15.2% during the three months ended



                                       9
<PAGE>   12

May 31, 1998. The increase was primarily due to sales of higher cost timeshare
intervals in Orlando and higher cost lots in Hartsel, resulting in higher cost
of sales during the third quarter of fiscal 1999 compared to the third quarter
of fiscal 1998. Sales prices of timeshare interests are typically lower than
those of land, while marketing and sales costs per sale, other than commissions,
are approximately the same in amount for timeshare interests and land;
accordingly, PEC generally realizes lower profit margins from sales of timeshare
interests than from sales of land.

        Interest expense of PEC increased to $2.2 million during the three
months ended May 31, 1999 from $2.0 million during the three months ended May
31, 1998, an increase of 13.7%. The increase is a result of a higher average
outstanding balance of notes and contracts payable during the three months ended
May 31, 1999 compared to the three months ended May 31, 1998 and is related to
the fact that there were no sales of receivables during the current fiscal year.

        Pretax income of $1.5 million was recorded by PEC during the three
months ended May 31, 1999 compared to pretax loss of $1.3 million during the
three months ended May 31, 1998. The change in the pretax income is primarily
due to the $1.1 million decrease in general and administrative expenses,
together with the increase of $2.6 million in net timeshare and land sales
during the comparative three month periods, with a related lower percentage of
marketing and sales expense as a percentage of sales.

        As a result of the foregoing, PEC reported net income of $1.5 million
during the three months ended May 31, 1999 compared to a net loss of $1.3
million during the three months ended May 31, 1998.

COMPANY (consolidated)

        Pretax income was $1.1 million during the three months ended May 31,
1999 compared to a pretax loss of $1.8 million during the three months ended May
31, 1998. The change in pretax income is primarily attributable to the 25.1%
decrease in general and administrative expenses, the increase in net timeshare
and land sales, with a related lower percentage of marketing and sales expenses,
as a percentage of sales which were partially offset by the decrease in
financial income. Total costs and expenses during the three months ended May 31,
1999 were $19.2 million, a decrease of .9% from $19.4 million during the three
months ended May 31, 1998.

        There was no income tax benefit recorded for the three months ended May
31, 1999 compared to an income tax benefit of $1.7 million for the three months
ended May 31, 1998. For the three months ended May 31, 1999, there was no tax
provision based on a review of the current facts and circumstances related to
the Company's income tax liability reserves.

        Net income applicable to common stock was $1.1 million during the three
months ended May 31, 1999 compared to a net loss applicable to common stock of
$113,000 during the three months ended May 31, 1998, due to the increase in the
PEC pretax consolidated income, with no income tax benefit recorded during the
three months ended May 31, 1999 compared to a income tax benefit of $1.7 million
recognized during the three months ended May 31, 1998.

Nine Months Ended May 31, 1999 Compared to Nine Months Ended May 31, 1998

PEC

        Total revenues for PEC increased 7.3%, or $3.6 million, to $53.0 million
during the nine months ended May 31, 1999 from $49.4 million during the nine
months ended May 31, 1998. The increase was primarily due to a 6.0% increase in
net timeshare sales of $1.6 million and a 17.4% increase in net land sales of
$1.8 million and a 28.7% increase in interest income of $1.5 million, offset by
a 62.9% decrease in financial income of $1.7 million.

        Gross sales of timeshare interests were $31.9 million during the nine
months ended May 31, 1999 compared to $29.7 million during the nine months ended
May 31, 1998, an increase of 7.2%. The provision for cancellations represented
10.6% and 9.6%, respectively, of gross sales of timeshare interests for the nine
months ended May 31, 1999 and 1998. The percentage increase in the provision for
cancellations for timeshare interests



                                       10
<PAGE>   13

was primarily due to a downward adjustment recorded in the quarter ended May 31,
1998 based on a review of the reserve adequacy at that time.

        Gross sales of land increased to $12.7 million during the nine months
ended May 31, 1999 from $11.0 million during the nine months ended May 31, 1998,
an increase of 15.1%. The provision for cancellations decreased to 6.3% of gross
sales of land for the nine months ended May 31, 1999 from 8.2% for the nine
months ended May 31, 1998, primarily due to lower cancellation experience of
land receivables during the first nine months of fiscal 1999 compared to the
first nine months of fiscal 1998.

        Interest income increased to $6.6 million during the nine months ended
May 31, 1999 from $5.1 million during the nine months ended May 31, 1998, an
increase of 28.7% primarily due to increased average notes receivable balances
for the current period.

        Financial income decreased to $1.0 million during the nine months ended
May 31, 1999 from $2.8 million during the nine months ended May 31, 1998, a
decrease of 62.9%. The decrease was primarily a result of the termination by
agreement of loan servicing for a company previously affiliated with Mego
Financial.

        Total costs and expenses for PEC increased to $52.7 million for the nine
months ended May 31, 1999 from $52.3 million for the nine months ended May 31,
1998, an increase of .6%. The increase resulted primarily from an increase in
direct costs of land sales to $2.0 million from $1.2 million, an increase of
65.2%; an increase in marketing and sales expense to $25.6 million from $24.8
million, an increase of 3.6%; and, an increase in interest expense to $6.2
million from $5.1 million, an increase of 20.2%, partially offset by a decrease
of $2.6 million, or 21.3%, 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 in fiscal
1998. The increase in marketing and sales expenses is due primarily to the
higher gross sales; however, as noted herein, the increase in dollars was
accompanied by a related lower percentage of marketing and sales expenses. 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.

        As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses relating thereto decreased to 57.5% during the nine
months ended May 31, 1999 from 60.7% during the nine months ended May 31, 1998,
and cost of sales increased to 17.9% during the nine months ended May 31, 1999
from 15.8% during the nine months ended May 31, 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. Subsequent to
November 30, 1998, the Company 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. Therefore, the results of operations for the three months ended May
31, 1999 are more indicative of the Company's expectations than the nine months
ended May 31, 1999.

        Interest expense of PEC increased to $6.2 million during the nine months
ended May 31, 1999 from $5.1 million during the nine months ended May 31, 1998,
an increase of 20.2%. The increase is a result of a higher average outstanding
balance of notes and contracts payable during the nine months ended May 31, 1999
compared to the nine months ended May 31, 1998 and is related to the fact that
there were no sale of receivables during the current fiscal year.

        Pretax income of $350,000 was recorded by PEC during the nine months
ended May 31, 1999 compared to a pretax loss of $2.9 million during the nine
months ended May 31, 1998. The increase in the pretax income was primarily due
to the $2.6 million decrease in general and administrative expenses, together
with an increase of $1.6 million and $1.8 million, respectively, in net
timeshare and land sales with a related lower percentage of marketing and sales
expenses as a percentage of sales, and an increase of $1.5 million in interest
income partially offset by a $1.7 million decrease in financial income and an
increase of $1.0 million in interest expense.

        As a result of the foregoing, PEC reported net income of $350,000 during
the nine months ended May 31, 1999 compared to a net loss of $2.9 million during
the nine months ended May 31, 1998.



                                       11
<PAGE>   14

COMPANY (consolidated)

        Loss before income taxes decreased $3.7 million to a loss of $769,000
during the nine months ended May 31, 1999 compared to a loss of $4.5 million
during the nine months ended May 31, 1998, due primarily to a decrease in
general and administrative expenses of $3.1 million, an increase of $1.6 million
and a $1.8 million, respectively, in timeshare and land sales, with a related
lower percentage of marketing and sales expenses as a percentage of sales and an
increase of $1.4 million in interest income, partially offset by an increase of
$1.0 million in interest expense.

        Total costs and expenses during the nine months ended May 31, 1999 were
$53.8 million, a decrease of .3% compared to $54.0 million during the nine
months ended May 31, 1998. General and administrative expenses decreased 22.8%
for the nine months ended May 31, 1999 compared to the nine months ended May 31,
1998 due primarily to PEC's efforts to lower expenses. 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. Mego Financial (parent
only) continues to incur interest on subordinated debt.

        An income tax benefit of $650,000 was recorded for the nine months ended
May 31, 1999 compared to an income tax benefit of $1.7 million for the nine
months ended May 31, 1998. The change in accrued income taxes for the nine
months ended May 31, 1999 and 1998 was based on a review of the current facts
and circumstances relating to the Company's income tax liability reserves.

        Net loss applicable to common stock was $119,000 during the nine months
ended May 31, 1999 compared to a net loss applicable to common stock of $2.8
million during the nine months ended May 31, 1998, due to a $2.6 million
increase in the PEC pretax consolidated income, with an income tax benefit of
$650,000 recognized during the nine months ended May 31, 1999 compared to an
income tax benefit of $1.7 million recognized during the nine months ended May
31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

        Cash and cash equivalents for the Company were $1.9 million at May 31,
1999 compared to $1.8 million at August 31, 1998.

        In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego
Financial entered into a Forbearance Agreement dated as of December 24, 1998.
Under the agreement, FINOVA agreed to make a loan in the amount of $5,662,000 to
PEC with a maturity date of June 30, 1999, since extended to September 1, 1999.
At that time, the Company agreed to guarantee the loan and, if all of the
$5,662,000 was advanced to PEC, to issue to FINOVA warrants to purchase a total
of 500,000 shares of common stock of Mego Financial at an exercise price of
$1.00 per share, exercisable within a five-year period commencing January 1,
1999. On December 24, 1998, FINOVA advanced to PEC a first tranche of
$3,000,000, less fees, secured by a pledge of stock of Central Utilities
Company, a wholly-owned subsidiary of PEC. In accordance with the agreement,
Mego Financial granted to FINOVA a warrant to purchase 150,000 shares of common
stock of Mego Financial.

        Of the second tranche of $2,662,000, FINOVA advanced $1,000,000 to PEC
on May 7, 1999. In accordance with the agreement, Mego Financial granted to
FINOVA a warrant to purchase 131,480 shares of common stock of Mego Financial.

        Subsequent to May 31, 1999, FINOVA advanced an additional $1,000,000 of
the second tranche. In accordance with the agreement, Mego Financial granted to
FINOVA a warrant to purchase 131,480 shares of common stock of Mego Financial.
The remaining $662,000 of the second tranche is available for borrowing until
September 1, 1999. If advanced in full, FINOVA under the agreement would be
entitled to receive a five-year warrant to purchase an additional 87,040 shares
of Mego Financial common stock at an exercise price of $1.00 per share, which
would make the total of warrants covering 500,000 shares of Mego Financial
common stock.



                                       12
<PAGE>   15
        The Company experienced certain cash flow pressures and took 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. In addition, activities in certain unprofitable
sales office locations were curtailed. PEC is also actively pursuing the sale of
certain non-core properties. PEC has been profitable since the month of February
1999 and has available substantial open credit lines as discussed below. These
actions have improved the Company's cash flow and results of operations;
however, there can be no assurance that these efforts will be successful in
sustaining the improvement in the Company's cash flow.

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 May 31, 1999, no commitments existed for material
capital expenditures.

        At May 31, 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 May 31, 1999, an aggregate of $94.3 million was outstanding under
such lines of credit, and $43.2 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 May 31, 1999, PEC's net worth was $27.8 million. Necessary waivers
of compliance with certain covenants related to these and other agreements have
been received. Summarized lines of credit information and accompanying notes
relating to these six lines of credit outstanding at May 31, 1999 consist of the
following (thousands of dollars):

<TABLE>
<CAPTION>
   BORROWING         MAXIMUM
   AMOUNT AT        BORROWING         REVOLVING
  MAY 31, 1999        AMOUNT     EXPIRATION DATE (a)     MATURITY DATE        INTEREST RATE
-----------------  ------------- --------------------  ------------------  --------------------
<S>                 <C>           <C>                     <C>                <C>
   $ 59,263         $ 75,000     (b) May 15, 2000         Various            Prime + 2.0 - 2.25%
      3,700           15,000     (c) May 31, 2000         Various            Prime + 2.0%
     14,327           15,000     (d) July 1, 1999 *       Various            LIBOR + 4.0 - 4.25%
      6,692           15,000     (d) July 1, 1999 *       December 31, 2000  LIBOR + 4.0 - 4.25%
      4,128           10,000     (e) August 1, 2000       August 1, 2003     Prime + 2.0 - 2.25%
      6,173           11,500     (f) June 30, 2000        Various            Prime + 2.0 - 3.00%

-------------------------------------------------------------------------------------------------
</TABLE>

*    The lender has agreed to continue the revolver during negotiations for
     renewal-see Note (a).

(a)     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. As is customary, the Company is negotiating
        for extension of the revolving periods expiring in calendar 1999 and for
        extension of the other loan amounts maturing in 1999.

(b)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $20.0 million with such amount increasing each fiscal
        quarter after August 31, 1997 by an amount equal to 50% of PEC's
        consolidated net income for each quarter up to a maximum requirement of
        $25 million. At May 31, 1999, $39.3 million of loans secured by
        receivables were outstanding related to financings at prime +2%, of
        which $28.5 million of loans secured by land receivables mature May 15,
        2010 and $10.8 million of loans secured by timeshare receivables mature
        May 15, 2007. The outstanding borrowing amount includes



                                       13
<PAGE>   16

        $128,000 in acquisition and development (A&D) financing maturing
        September 1, 1999 and $6.4 million maturing July 1, 2003 for the
        financing of corporate office buildings, both of which are amortizing
        loans, and 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 $12.3 million are at prime +2% and mature at various
        dates through February 20, 2001.

(c)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $25.0 million during the life of the loan. These credit
        lines include available financing for A&D and receivables. At May 31,
        1999, $1.0 million was outstanding under the A&D loan which matures on
        June 30, 2004, and $2.7 million maturing May 31, 2004 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.

(d)     Restrictions include PEC's requirement to maintain a minimum tangible
        net worth of $17.0 million during the life of the loan. These credit
        lines include available financings for A&D and receivables. At May 31,
        1999, $1.9 million was outstanding under the A&D loans which have
        maturity dates of December 31, 2000 and June 30, 2001, and bear interest
        at the 90-day London Interbank Offering Rate (LIBOR) +4.25%. The
        available receivable financings, of which $12.4 million was outstanding
        at May 31, 1999, are all at 90-day LIBOR +4% and have maturity dates of
        June 5, 2005 and August 5, 2005.

(e)     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.

(f)     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 $2.2 million was outstanding at May 31,
        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, 2004.

        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                      NINE MONTHS
                                               ENDED MAY 31,                    ENDED MAY 31,
                                        -------------------------         -------------------------
                                          1999             1998             1999             1998
                                        --------         --------         --------         --------
<S>                                     <C>              <C>              <C>              <C>
Marketing and sales expenses
  attributable to recognized and
  unrecognized sales                    $ 11,479         $  9,085         $ 25,788         $ 24,811
Less: Down payments                       (3,488)          (3,004)          (8,890)          (9,267)
                                        --------         --------         --------         --------
Cash shortfall                          $  7,991         $  6,081         $ 16,898         $ 15,544
                                        ========         ========         ========         ========
</TABLE>


        During the nine months ended May 31, 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 May 31, 1999, PEC was contingently liable to replace
or repurchase notes receivable sold with recourse totaling $58.2 million. The
repurchase provisions provide for substitution of receivables as recourse for
$21.3 million of sold notes receivable and cash payments for repurchase related
to $36.9 million of sold notes receivable. At May 31, 1999 and 1998, the
undiscounted amounts of the recourse obligations on such notes receivable were
$6.0 million and $6.1 million, respectively. PEC continually 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.



                                       14
<PAGE>   17

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

<TABLE>
<CAPTION>
                                                          MAY 31,       AUGUST 31,
                                                           1999            1998
                                                          -------       ----------
<S>                                                       <C>           <C>
Notes collateralized by receivables                       $59,932        $42,793
Mortgages collateralized by real estate properties         36,477         37,393
Installment contracts and other notes payable               1,359          1,800
                                                          -------        -------
        Total                                             $97,768        $81,986
                                                          =======        =======
</TABLE>

FINANCIAL CONDITION

May 31, 1999 Compared to August 31, 1998

        Cash and cash equivalents increased 7.2% to $1.9 million at May 31, 1999
from $1.8 million at August 31, 1998.

        Notes receivable, net, increased 30.0% to $62.1 million at May 31, 1999
from $47.8 million at August 31, 1998, primarily as a result of net new
receivables added during the nine months ended May 31, 1999.

        Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for the nine
months ended May 31, 1999 consisted of the following (thousands of dollars):

<TABLE>
<S>                                                         <C>
Balance at beginning of period                              $ 18,488
  Provision for cancellations                                  4,186
  Amounts charged to allowance for cancellations and
    reserve for notes receivable sold with recourse           (4,173)
                                                            --------
Balance at end of period                                    $ 18,501
                                                            ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                        MAY 31,       AUGUST 31,
                                                         1999            1998
                                                        -------       ----------
<S>                                                     <C>           <C>
Allowance for cancellations, excluding discounts        $13,548        $11,868
Reserve for notes receivable sold with recourse           4,953          6,620
                                                        -------        -------
  Total                                                 $18,501        $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 17.2% to
$2.8 million at May 31, 1999 from $3.4 million at August 31, 1998 due to
amortization and the fact that there were no sale of receivables during the
current fiscal year.

        Notes and contracts payable increased 19.3% to $97.8 million at May 31,
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 nine months ended May 31, 1999.

        Reserve for notes receivable sold with recourse decreased 25.2% to $5.0
million at May 31, 1999 from $6.6 million at August 31, 1998 primarily 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.



                                       15
<PAGE>   18

        Accrued income taxes decreased 17.5% to $3.7 million at May 31, 1999
from $4.5 million at August 31, 1998, due primarily to the fiscal 1999 tax
benefit. The change in certain income tax liability reserves was a result of a
review of the current facts and circumstances.

YEAR 2000 COMPLIANCE

        The Company is now Year 2000 compliant. To our knowledge, there has been
no material change with respect to vendors and lenders from that set forth 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 nine months ended May 31,
1999 in the information about the Company's "Quantitative and Qualitative
Disclosures About Market Risk" as disclosed in the Form 10-K for the fiscal year
ended August 31, 1998.


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 quarters ended February 28, 1999 and
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.

        As previously reported in the Company's 1998 Form 10-K, on August 27,
1998, an action was filed by Robert and Jocelyn Henry, husband and wife
individually and on behalf of all others similarly situated. On December 17,
1998, counsel for the plaintiffs filed an amended class action complaint which
was served on PEC on December 21, 1998. The Company filed a Motion to Dismiss
Plaintiffs' Amended Complaint on January 20, 1999. The Court entered an Order on
May 6, 1999 granting Defendants' motion and dismissing Plaintiffs' Amended
Complaint without prejudice based upon Plaintiffs' failure to exhaust their
administrative remedies by pursuing their allegations regarding the provision of
sewer and water services before the Public Utilities Commission of Nevada. On
May 18, 1999, the Plaintiffs filed a Motion for Reconsideration of the Court's
Order Dismissing the Amended Complaint and the Company filed an opposition to
the Motion on May 27, 1999. The Motion was denied and Plaintiffs have appealed
the issue to the Nevada Supreme Court. A settlement conference is scheduled for
August, 1999.

        On February 23, 1998, an action was filed by Robert J. Feeney, 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. On April 8, 1999, the court conditionally dismissed
the Amended Complaint and ordered plaintiffs to move the Court for leave to file
a second amended complaint. On May 10, 1999, Plaintiff filed a Motion for Leave
to Serve and File Second Amended Class Action Complaint. In response, Defendants
filed a Response to Plaintiffs' Motion for Leave to File Second Amended
Complaint which preserved Defendants' right to challenge whether this case may
properly be certified as a class action and challenged issues raised in
Plaintiffs' Second Amended Class Action Complaint.

        On May 10, 1999, an action was filed in the Supreme Court of the State
of New York, County of New York, No. 99-109707, by Mo Yossin, as a purported
class action against the Company and certain of its officers and directors. The
Complaint alleged that the defendants are breaching or have breached their
fiduciary duty by acting to put their interests ahead of the interests of the
Company's public shareholders, specifically by failing and refusing to attempt
to maximize stockholder value and failing to seek a purchaser of the Company
and/or any and all of its various assets or divisions at the best price
obtainable. The Complaint seeks preliminary and permanent injunctive and
declaratory relief preventing Defendants from depriving Plaintiff of his right
to realize the full and fair value of his stock and unspecified monetary
damages.

        The Company believes that it has substantial defenses to all of the
complaints that have been filed against it described above. However, the Company
presently cannot predict the outcome of these matters. The Company



                                       16
<PAGE>   19

does not believe that any judgment obtained will have a material adverse effect
on the Company's or PEC's business or financial condition.

        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

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

        The Company received a notice from The Nasdaq Stock Market, Inc. that
its common stock would 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 equaled or exceeded $1.00 for a period of
ten consecutive trading days prior to April 30, 1999. The minimum closing bid
price of the common stock did not satisfy such requirement prior to that date.
On June 10, 1999, the Company attended an oral hearing before the Nasdaq Listing
Qualifications Committee ("Committee") at which the Company requested an
exception to the minimum price listing requirement of the Nasdaq National
Market. The Company has not received a response from the Committee regarding its
request for an exception.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
     EXHIBIT
     NUMBER                               DESCRIPTION
     ------                               -----------
<S>               <C>
     10.164       Amendment No.2 to Interval Receivables Loan and Security
                  Agreement dated as of March 28, 1999 between Heller Financial,
                  Inc. and Preferred Equities Corporation.

     10.165       Sales Agreement dated as of March 8, 1999 between Great Escape
                  Marketing, Inc. and Preferred Equities Corporation relating to
                  6950 Villa de Costa Dr. Orlando, Florida.

     10.166       Sales Agreement dated as of March 10, 1999 between D&D
                  Marketing, Inc. and Preferred Equities Corp and Brigantine
                  Preferred Properties.

     10.167       Forbearance and Modification Agreement dated as of May 7, 1999
                  by and between Preferred Equities Corporation and Heller
                  Financial, Inc.

     10.168       Management Agreement dated May 20, 1999 by and between Hotel
                  Maison Pierre Lafitte, LTD. Owners Association, Inc. and
                  Preferred Equities Corporation.

     10.169       Fifth Amendment to Assignment and Assumption Agreement dated
                  May 28, 1999 by and between RER Corp, COMAY Corp., Growth
                  Realty Inc. and H&H Financial, Inc. and Mego Financial Corp.

     10.170       Amendment No. 2 to Severance Agreement, and Consulting
                  Agreement dated June 18, 1999 between Don A. Mayerson and Mego
                  Financial Corp.

     10.171       First Amendment to Forbearance Agreement and Amendment No. 6
                  to Second Amended and Restated and Consolidated Loan and
                  Security Agreement dated May 7, 1999 by and among Finova
                  Capital Corporation, Preferred Equities Corporation and Mego
                  Financial Corp.

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



                                       17
<PAGE>   20

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

                                    SIGNATURE


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


                                        MEGO FINANCIAL CORP.


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



Date:   July 13, 1999
      ----------------------



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