<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K

[x]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended August
         31, 1996

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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                (IRS Employer
     incorporation or organization)               identification no.)

   4310 PARADISE ROAD, LAS VEGAS, NEVADA                89109
________________________________________________________________________________
   (Address of principal executive offices)           (Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:     NONE
                                                           ____________________

Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.01 PAR VALUE
________________________________________________________________________________
                                (Title of Class)

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]

As of November 8, 1996, 18,433,121  shares of the registrant's Common Stock
were outstanding.  The aggregate market value of Common Stock held by
non-affiliates of the registrant as of November 8, 1996 was approximately
$170,506,369,  based on a closing price of $9.25 for the Common Stock as
reported on the NASDAQ National Market on such date.  For purposes of the
foregoing computation, all executive officers, directors and 5 percent
beneficial owners of the registrant are deemed to be affiliates.  Such
determination should not be deemed to be an admission that such executive
officers, directors or 5 percent beneficial owners are, in fact, affiliates of
the registrant.

                      DOCUMENTS INCORPORATED BY REFERENCE

None.

<PAGE>   2

                                     PART I
ITEM 1.     BUSINESS

GENERAL

         The Company is a specialty financial services company that, through
its wholly-owned subsidiary, Preferred Equities Corporation (PEC), and its
81.1% owned subsidiary, Mego Mortgage Corporation (MMC), is engaged primarily
in originating, selling and servicing consumer receivables generated through
home improvement loans and timeshare and land sales.  MMC originates Title I
home improvement loans insured by the Federal Housing Administration (FHA) of
the Department of Housing and Urban Development (HUD) and conventional home
improvement and equity loans through a network of loan correspondents and home
improvement contractors.  PEC markets and finances timeshare interests in
select resort areas, as well as retail lots and land parcels.  By providing
financing to virtually all of its customers, PEC also originates consumer
receivables that it sells and services.  Timeshare and land sales have
historically accounted for most of the Company's revenues and profits; however,
since March 1994, when MMC commenced operations, originating, selling and
servicing home improvement loans have accounted for an increasing portion of
revenues and profits.

        As further described in Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Subsequent Event, in November
1996 MMC issued 2,300,000 shares of its common stock and $40 million of 12.5%
Senior Subordinated Notes due 2001 in public offerings.   As a result of these
transactions, the Company's ownership in MMC declined to 81.1% and consolidated
outstanding debt increased $40 million.

         The Company was incorporated under the laws of the state of New York
in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego
Financial Corp.  In January 1988, the Company sold a controlling interest in
the Company consisting of approximately 43% of the then outstanding common
stock after the sale to affiliates of the Assignors.  See "Item 13. Certain
Relationships and Related Transactions" and Note 2 of Notes to Consolidated
Financial Statements.  In February 1988, the Company acquired PEC, pursuant to
an assignment by the Assignors of their contract right to purchase PEC.  The
Company's executive offices are located at 4310 Paradise Road, Las Vegas,
Nevada, and its telephone number is (702) 737-3700.

MEGO MORTGAGE CORPORATION

         GENERAL

         MMC is a specialized consumer finance company that originates,
purchases, sells and services consumer loans consisting primarily of home
improvement loans secured by liens on the improved property. Through its
network of Correspondents and Dealers, MMC initially originated only Title I
Loans. The Title I program provides for insurance of 90% of the principal
balance of the loan, and certain other costs. MMC began offering Conventional
Loans through its Correspondents in May 1996.  The Company established MMC and
entered the home improvement lending market to take advantage of PEC's
servicing and collection capabilities, the experience of the Company's senior
executives in home improvement lending, the similar customer profile of home
improvement borrowers and purchasers of its time share interests and land
parcels, and relatively stable prepayment expectations.

         MMC's borrowers are individuals who own their home and have
appropriate verifiable income but may have limited access to traditional
financing sources due to insufficient home equity, limited credit history or
high ratios of debt service to income. These borrowers require or seek a high
degree of personalized service and prompt response to their loan applications.
As a result, MMC's borrowers generally are not averse to paying higher interest
rates that MMC charges for its loan programs as compared to the interest rates
charged by banks and other traditional financial institutions.  MMC has
developed a proprietary credit index profile that includes as a significant
component the credit evaluation score methodology developed by Fair, Isaac and
Company (FICO) to classify borrowers on the basis of likely future performance.
The other components of MMC's scoring system include debt to income ratio,
employment history and residence stability.  MMC charges varying rates of
interest based upon the borrower's credit profile and income. MMC quotes higher
interest rates for those borrowers exhibiting a higher degree of risk. The
borrowers' credit standing and/or lack of collateral may preclude them from
obtaining alternate funding. For the year ended August 31, 1996, the loans
originated by MMC had a weighted average interest rate of 14.03%.





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         The credit evaluation methodology developed by FICO takes into
consideration a number of factors in the borrower's credit history.  These
include, but are not limited to, (i) the length of time the borrower's credit
history has been on file with the respective credit reporting agency, (ii) the
number of open credit accounts, (iii) the amount of open revolving credit
availability, (iv) the payment history on the open credit accounts and (v) the
number of recent inquiries for the borrower's credit file which may indicate
additional open credit accounts not yet on file. Based on this information FICO
will assign a score to the borrower's credit file which is updated
periodically. Based on their statistical analysis, this score will indicate the
percentage of borrowers in that score range expected to become 90 days
delinquent on an additional loan. The score ascribed by FICO weighs heavily in
MMC's approval process; however its effects, whether positive or negative, can
be mitigated by the other factors described above.

         MMC's loan originations increased to $139.4 million during the fiscal
year ended August 31, 1996 from $87.8 million during the fiscal year ended
August 31, 1995 and $8.2 million during the six months in which it originated
loans in the fiscal year ended August 31, 1994. MMC's revenues increased to $25
million for the year ended August 31, 1996 from $13.6 million for the fiscal
year ended August 31, 1995 and $751,000 for the fiscal year ended August 31,
1994. For the year ended August 31, 1996, the Company had net income of $6.9
million compared to $3.6 million for the year ended August 31, 1995. As a
result of the substantial growth in loan originations, MMC has operated since
March 1994, and expects to continue to operate for the foreseeable future, on a
negative cash flow basis.

         MMC sells substantially all the loans it originates through either
whole loan sales to third party institutional purchasers or securitizations at
a yield below the stated interest rate on the loans, retaining the right to
service the loans and receive any amounts in excess of the guaranteed yield to
the purchasers. MMC completed its first two securitizations of Title I Loans in
March and August 1996 totalling $133 million and expects to sell a substantial
portion of its loan production through securitizations in the future. At August
31, 1996, MMC serviced $209.5 million of loans it had sold, and $4.7 million of
loans it owned.

         HOME IMPROVEMENT LOAN INDUSTRY

         According to data released by the Commerce Department's Bureau of the
Census, expenditures for home improvement and repairs of residential properties
have exceeded $100 billion per year since 1992 with 1995 expenditures estimated
at $112.6 billion. MMC targets the estimated $40 billion of those expenditures
which are for owner-occupied single-family properties where improvements are
performed by professional remodelers. As the costs of home improvements
escalate, home owners are seeking financing as a means to improve their
property and maintain and enhance its value. The National Association of Home
Builders Economics Forecast in 1995 estimates that home improvement
expenditures will exceed $200 billion by the year 2003. Two types of home
improvement financing are available to borrowers, the Title I program
administered by the FHA, which is authorized to partially insure qualified
lending institutions against losses, and uninsured loans where the lender
relies more heavily on the borrower's creditworthiness, debt capacity and the
underlying collateral. Both types of loans are generally secured with a real
estate mortgage lien on the property improved.

         The conventional home improvement financing market continues to grow
as many homeowners have limited access to traditional financing sources due to
insufficient home equity, limited credit history or high ratios of debt service
to income. Conventional loan proceeds can be used for a variety of improvements
such as large remodeling projects, both interior and exterior, kitchen and bath
remodeling, room additions and in-ground swimming pools.  Borrowers also have
the opportunity to consolidate a portion of their outstanding debt in order to
reduce their monthly debt service.

         According to the FHA, the amount of single family Title I Loans
originated has grown from $375 million during 1988 to $1.3 billion during 1995.
Based on FHA data, MMC estimates that it had an 8.6% market share of the
property improvement Title I Loan market in calendar 1995. Out of approximately
3,100 lenders participating in the program in 1995, according to FHA data, MMC
was the third largest originator of property improvement Title I Loans. Under
Title I, the payment of approximately 90% of the principal balance of a loan is
insured by the United States of America in the event of a payment default. The
Title I program generally limits the maximum amount of the loan to $25,000 and
restricts the type of eligible improvements and the use of the loan proceeds.
Under Title I, only property improvement loans to finance the alteration,
repair or improvement of existing single family, multifamily and
non-residential structures are allowed. The FHA does not review individual
loans at the time of approval.  In the case of a Title I Loan less than $7,500,
no equity is required in the property to be improved and the loan may be
unsecured.





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         BUSINESS STRATEGY

         MMC's strategic plan is to continue to expand its lending operations
while maintaining its credit quality. MMC's strategies include: (i) offering
new loan products; (ii) expanding its existing network of Correspondents and
Dealers; (iii) entering new geographic markets; (iv) realizing operational
efficiencies through economies of scale; and (v) using securitizations to sell
higher volumes of loans on more favorable terms. At August 31, 1996, MMC had
developed a nationwide network of approximately 310 active Correspondents and
approximately 435 active Dealers. MMC's Correspondents generally offer a wide
variety of loans and its Dealers typically offer home improvement loans in
conjunction with debt consolidation. By offering a more diversified product
line, including Conventional Loans, and maintaining its high level of service,
MMC has increased the loan production from its existing network of
Correspondents. MMC anticipates that as it expands its lending operations, it
will realize economies of scale thereby reducing its average loan origination
costs and enhancing its profitability. In addition, MMC intends to continue to
sell its loan production through securitizations as opportunities arise.
Through access to securitization, the Company believes that it has the ability
to sell higher volumes of loans on more favorable terms than in whole loan
sales.

         PRODUCT EXTENSION AND EXPANSION

         MMC intends to continue to review its loan programs and introduce new
loan products to meet the needs of its customers. MMC will also evaluate
products or programs that it believes are complementary to its current products
for the purpose of enhancing revenue by leveraging and enhancing MMC's value to
its existing network of Correspondents and Dealers. MMC believes that its
introduction of new loan products will enhance its relationship with its
Dealers and Correspondents and enable it to become a single source for their
various financing needs. Since it commenced operations, MMC has originated
Title I Loans from both its Dealers and Correspondents. In May 1996, MMC
broadened these activities to include non-FHA insured home improvement loans
and combination home improvement and debt consolidation loans. To date, these
non-FHA insured loans have been originated solely through Correspondents. All
of these loans, which permit loan amounts up to $60,000 with fixed rates and
20- year maturities, are secured by a lien, generally junior in priority, on
the respective primary residence. MMC intends to offer pure debt consolidation
loans in the first quarter of fiscal 1997. MMC also intends to offer non-FHA
insured loans through its Dealer division in the first quarter of 1997 and to
make direct debt consolidation loans to borrowers originated by the Dealer
division in conjunction with home improvement financing.

         EXPANSION OF CORRESPONDENT OPERATIONS

         MMC seeks to increase originations of loans from select
Correspondents. MMC has expanded its product line to include Conventional Loans
to meet the needs of its existing network of Correspondents. Prior to May 1996,
MMC originated only Title I Loans. This limited its ability to attract the more
sophisticated Correspondent that offered a multitude of loan products and,
accordingly, limited MMC's market penetration. The Company began offering
Conventional Loans to existing select Correspondents in May 1996. In order to
maintain MMC's customer service excellence, the Company has gradually increased
the number of Correspondents to which it has offered Conventional Loans. Since
MMC commenced offering Conventional Loans, the loan production of MMC's
Correspondent division has significantly increased. MMC believes that it is
well positioned to expand this segment without any material increase in
concentration or quality risks.

         EXPANSION OF DEALER OPERATIONS

         MMC seeks to expand its Dealer network and maximize loan originations
from its existing network by offering a variety of innovative products and
providing consistent and prompt service at competitive prices. The Company will
provide conventional products as well as its existing Title I product to its
Dealers in order to meet the needs of the diverse borrower market. MMC targets
Dealers that typically offer financing to their customers and attempts to
retain and grow these relationships by providing superior customer service,
personalized attention and prompt approvals and fundings. MMC has been unable
to fully meet the needs of its Dealers because of Title I program limits on the
amount and types of improvements which may be financed. MMC intends to meet the
needs of its Dealers with new Conventional Loan programs. These programs allow
for more expensive project financing such as in-ground swimming pools and
substantial remodeling as well as financing for creditworthy borrowers with
limited equity who are in need of debt consolidation and borrowers with
marginal creditworthiness and substantial equity in their property. With this
strategy, MMC believes it can achieve further market penetration of its
existing





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Dealer network and gain new Dealers and market share in areas in which the
Title I product is less successful because of its restrictions.

         NATIONWIDE GEOGRAPHIC EXPANSION

         MMC intends to continue to expand its Correspondent and Dealer network
on a nationwide basis and to enhance its value to its existing network. MMC's
strategy involves (i) focusing on geographic areas that the Company currently
underserves and (ii) tailoring MMC's loan programs to better serve its existing
markets and loan sources.

         MAXIMIZATION OF FLEXIBILITY IN LOAN SALES

         MMC employs a two-pronged strategy of disposing of its loan
originations primarily through securitizations and, to a lesser extent, through
whole loan sales. By employing this dual strategy, MMC has the flexibility to
better manage its cash flow, diversify its exposure to the potential volatility
of the capital markets and maximize the revenues associated with the gain on
sale of loans, given market conditions existing at the time of disposition. MMC
has recently been approved by Federal National Mortgage Association (FNMA) as a
seller/servicer of Title I Loans, as a result of which MMC is eligible to sell
such loans to FNMA on a servicing retained basis.

         LOAN PRODUCTS

         MMC originates Title I and Conventional Loans. Both types of loans are
typically secured by a first or junior lien on the borrower's principal
residence, although MMC occasionally originates and purchases unsecured loans
with borrowers that have an excellent credit history.  Borrowers use loan
proceeds for a wide variety of home improvement projects, such as
exterior/interior remodeling, structural additions, roofing and plumbing, as
well as luxury items such as in-ground swimming pools, and for debt
consolidation. MMC lends to borrowers of varying degrees of creditworthiness.
See "Loan Processing and Underwriting."

         CONVENTIONAL LOANS

         A Conventional Loan is a non-insured home improvement or home equity
loan typically undertaken to pay for a home improvement project, home
improvement and debt consolidation combination or a debt consolidation.
Substantially all of the Conventional Loans originated by MMC are secured by a
first or junior mortgage lien on the borrower's principal residence.
Underwriting for Conventional Loans varies according to MMC's evaluation of the
borrower's credit risk and income stability as well as the underlying
collateral. MMC will rely on the underlying collateral and equity in the
property for borrowers judged to be greater credit risks. MMC targets the
higher credit quality segment of borrowers. MMC has begun originating
Conventional Loans through its Correspondent Division and plans to begin
offering such loan products to its Dealer Division.


         MMC has focused its Conventional Loan program on that segment of the
marketplace with higher credit quality borrowers who may have limited equity in
their residence after giving effect to the amount of senior liens. The
portfolio of Conventional Loans generated through August 31, 1996 indicates on
average that the borrowers have received an "A" grade under MMC's proprietary
credit index profile, have an average debt-to-income ratio of 38% and the
subject properties are 100% owner occupied. On average, the market value of the
underlying property is $123,000 without added value from the respective home
improvement work, the amount of senior liens of $107,000 and the loan size is
$28,500.  Typically, there is not enough equity in the property to cover a
junior lien in the event that a senior lender forecloses on the property. More
than 99% of the loans comprising MMC's Conventional Loan portfolio are secured
by junior liens.

         TITLE I LOAN PROGRAM

         The National Housing Act of 1934 (Housing Act), Sections 1 and 2(a),
authorized the creation of the FHA and the Title I credit insurance program
(Title I). Under the Housing Act, the FHA is authorized to insure qualified
lending institutions against losses on certain types of loans, including loans
to finance the alteration, repair or improvement of existing single family,
multi-family and nonresidential real property structures. Under Title I, the
payment of approximately 90% of the principal balance of a loan and certain
other amounts is insured by the United States of America in the event of a
payment default.





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         Title I and the regulations promulgated thereunder establish criteria
regarding (i) who may originate, acquire, service and sell Title I Loans, (ii)
Title I Loan eligibility of improvements and borrowers, (iii) the principal
amounts, terms of, and security for Title I Loans, (iv) the use and
disbursement of loan proceeds, (v) verification of completion of improvements,
(vi) the servicing of Title I Loans in default and (vii) the processing of
claims for Title I insurance.

         The principal amount of a secured Title I Loan may not exceed $25,000,
in the case of a loan for the improvement of a single family structure, and
$60,000, in the case of a loan for the improvement of a multi-family structure.
Loans up to a maximum of $7,500 in principal amount may qualify as unsecured
Title I Loans.

         Title I Loans are required to bear fixed rates of interest and, with
limited exceptions, be fully amortizing with equal weekly, bi- weekly,
semi-monthly or monthly installment payments. Title I Loan terms may not be
less than 6 months nor more than 240 months in the case of secured Title I
Loans or 120 months in the case of unsecured Title I Loans. Subject to other
federal and state regulations, the lender may establish the interest rate to be
charged in its discretion.

         Title I generally provides for two types of Title I Loans, direct
loans (Direct Title I Loans) and dealer loans (Dealer Title I Loans).  Direct
Title I Loans are made directly by a lender to the borrower and there is no
participation in the loan process by the contractor, if any, performing the
improvements. In the case of Dealer Title I Loans, the Dealer, a contractor
performing the improvements, assists the borrower in obtaining the loan,
contracts with the borrower to perform the improvements, executes a retail
installment contract with the borrower and, upon completion of the
improvements, assigns the retail installment contract to the Title I lender.
Each Dealer must be approved by the Title I lender in accordance with HUD
requirements. Direct Title I Loans are closed by the lender in its own name
with the proceeds being disbursed directly to the borrower prior to completion
of the improvements. The borrower is generally required to complete the
improvements financed by a Direct Title I Loan within six months of receiving
the proceeds. In the case of Dealer Title I Loans, the lender is required to
obtain a completion certificate from the borrower certifying that the
improvements have been completed prior to disbursing the proceeds to the
Dealer.

         The FHA charges a lender an annual fee equal to 50 basis points of the
original principal balance of a loan for the life of the loan. A Title I lender
or Title I sponsored lender is permitted to require the borrower to pay the
insurance premium with respect to the loan. In general, the borrowers pay the
insurance premiums with respect to Title I Loans originated through the
Company's Correspondents but not with respect to Title I Loans originated
through MMC's Dealers. Title I provides for the establishment of an insurance
coverage reserve account for each lender. The amount of insurance coverage in a
lender's reserve account is equal to 10% of the original principal amount of
all Title I Loans originated or purchased and reported for insurance coverage
by the lender less the amount of all insurance claims approved for payment.
The amount of reimbursement to which a lender is entitled is limited to the
amount of insurance coverage in the lender's reserve account.

         LENDING OPERATIONS

         MMC has two principal divisions for the origination of loans, the
Correspondent Division and the Dealer Division. The Correspondent Division
represents MMC's largest source of loan originations. Through its Correspondent
Division, MMC originates loans through a nationwide network of Correspondents
including financial intermediaries, mortgage companies, commercial banks and
savings and loan institutions. MMC typically originates loans from
Correspondents on an individual loan basis, pursuant to which each loan is
pre-approved by MMC and is purchased immediately after the closing. The
Correspondent Division conducts operations from its headquarters in Atlanta,
Georgia, with a Vice President of Operations responsible for underwriting and
processing and five account executives supervised by the Vice
President-National Marketing responsible for developing and maintaining
relationships with Correspondents. At August 31, 1996, the Company had a
network of approximately 310 active Correspondents.

         In addition to purchasing individual Direct Title I Loans and
Conventional Loans, from time to time the Correspondent Division purchases
portfolios of loans from Correspondents. In March 1994, MMC purchased a
portfolio of Direct Title I Loans originated by another financial institution,
which consisted of 211 loans with an aggregate remaining principal balance of
$1.4 million.





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         The Dealer Division originates Dealer Title I Loans through a network
of Dealers, consisting of home improvement construction contractors approved by
the Company, by acquiring individual retail installment contracts (Installment
Contracts) from Dealers. An Installment Contract is an agreement between the
Dealer and the borrower pursuant to which the Dealer performs the improvements
to the property and the borrower agrees to pay in installments the price of the
improvements. Before entering into an Installment Contract with a borrower, the
Dealer assists the borrower in submitting a loan application to MMC.  If the
loan application is approved, the Dealer enters into an Installment Contract
with the borrower, the Dealer assigns the Installment Contract to MMC upon
completion of the home improvements and MMC, upon receipt of the requisite loan
documentation (described below) and completion of a satisfactory telephonic
interview with the borrower, pays the Dealer pursuant to the terms of the
Installment Contract. The Dealer Division maintains 13 branch offices located
in Montvale, New Jersey; Kansas City, Missouri; Las Vegas, Nevada; Austin,
Texas; Oklahoma City, Oklahoma; Seattle, Washington; Waterford, Michigan;
Columbus, Ohio; Elmhurst, Illinois; Philadelphia, Pennsylvania; Denver,
Colorado; Woodbridge, Virginia; and Bowie, Maryland through which it conducts
its marketing to Dealers in the state in which the branch is located as well as
certain contiguous states. The Dealer Division is operated with a Vice
President of Operations responsible for loan processing and underwriting, two
regional managers, and 13 field representatives supervised by the Vice
President-National Marketing who are responsible for marketing to Dealers. At
August 31, 1996, MMC had a network of approximately 435 active Dealers doing
business in 32 states. MMC intends to commence offering Conventional Loans
through its Dealer Division.

         Correspondents and Dealers qualify to participate in MMC's programs
only after a review by MMC's management of their reputations and expertise,
including a review of references and financial statements, as well as a
personal visit by one or more representatives of MMC. Title I requires MMC to
reapprove its Dealers annually and to monitor the performance of those
Correspondents that are sponsored by MMC. MMC's compliance function is
performed by a director of compliance and loan administration, whose staff
performs periodic reviews of portfolio loans and Correspondent and Dealer
performance and may recommend to senior management the suspension of a
Correspondent or a Dealer. MMC believes that its system of acquiring loans
through a network of Correspondents and Dealers and processing such loans
through a centralized loan processing facility has (i) assisted MMC in
minimizing its level of capital investment and fixed overhead costs and (ii)
assisted MMC in realizing certain economies of scale associated with evaluating
and acquiring loans. MMC does not believe that the loss of any particular
Correspondent or Dealer would have a material adverse effect upon MMC. See
"Loan Processing and Underwriting."

         MMC pays its Correspondents premiums on the loans it purchases based
on the credit score of the borrower and the interest rate on the respective
loan. Additional premiums are paid to Correspondents based on the volume of
loans purchased from such Correspondents in a monthly period. During fiscal
1996 MMC originated $94.2 million of loans from Correspondents and paid total
premiums of $2.8 million or 3% of such loans.

         None of MMC's arrangements with its Dealers or Correspondents is on an
exclusive basis. Each relationship is documented by either a Dealer Purchase
Agreement or a Correspondent Purchase Agreement. Pursuant to a Dealer Purchase
Agreement, MMC may purchase from a Dealer loans that comply with the Company's
underwriting guidelines at a price acceptable to MMC. With respect to each loan
purchased, the Dealer makes customary representations and warranties regarding,
among other things, the credit history of the borrower, the status of the loan
and its lien priority if applicable, and agrees to indemnify MMC with respect
to such representations and warranties. Pursuant to a Correspondent Purchase
Agreement, MMC may purchase loans through a Correspondent, subject to receipt
of specified documentation. The Correspondent makes customary representations
and warranties regarding, among other things, the Correspondent's corporate
status, as well as regulatory compliance, good title, enforceability and
payments and advances of the loans to be purchased. The Correspondent covenants
to, among other things, keep MMC information confidential, provide
supplementary information, maintain government approvals with respect to Title
I Loans and to refrain from certain solicitations of MMC's borrowers. The
Correspondent also agrees to indemnify MMC for misrepresentations or
non-performance of its obligations.

         MMC originates and acquires a limited variety of loan products,
including: (i) fixed rate, secured Title I Loans, secured by single family
residences, with terms and principal amounts ranging from 60 to 240 months and
approximately $3,000 to $25,000, respectively; and (ii) fixed rate, unsecured
Title I Loans with terms and principal amounts ranging from 36 to 120 months
and approximately $2,500 to $7,500, respectively. As part of MMC's strategic
plan, MMC has commenced originating non-FHA insured Conventional Loans
utilizing its established network of Correspondents.





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         The following table sets forth certain data regarding loan
applications processed and loans originated by MMC during the periods
indicated:


<TABLE>
<CAPTION>
                                                                    YEAR ENDED AUGUST 31,
                              -----------------------------------------------------------------------------------------------------
                                           1996                             1995                                  1994
                              ----------------------------     ----------------------------          ------------------------------
<S>                           <C>                   <C>        <C>                  <C>               <C>                 <C>
Loan Applications:
  Number processed                  42,236                          27,608                                 3,512
  Number approved                   20,910                          15,956                                 1,984
  Approval ratio                      49.5%                           57.8%                                 56.5%

Loan Originations:
  Principal amount of loans:
  Correspondents:
    Title I                    $82,596,197           59.3%     $63,792,680           72.7%            $5,251,647           64.3%
    Conventional                11,582,108            8.3                -            -                        -            -
                                                                         -            -                        -            -
                              ------------          -----      -----------          -----             ----------          -----
        Total Correspondents    94,178,305           67.6       63,792,680           72.7              5,251,647           64.3
                              ------------          -----      -----------          -----             ----------          -----

   Dealers                      45,188,721           32.4       23,957,829           27.3              1,492,318           18.3
  Bulk purchase                          -            -                  -            -                1,420,150           17.4
                                         -            -                  -            -                
                              ------------          -----      -----------          -----             ----------          -----
        Total                 $139,367,026          100.0%     $87,750,509          100.0%            $8,164,115          100.0%
                              ============          =====      ===========          =====             ==========          ===== 

Number of loans:
  Correspondents:
    Title I                          4,382           50.9%           3,437           59.1%                   338           47.4%
    Conventional                       392            4.6                -            -                        -            -
                                                                         -            -                        -            -
                              ------------          -----      -----------          -----             ----------          -----
        Total Correspondents         4,774           55.5            3,437           59.1                    338           47.4
                              ------------          -----      -----------          -----             ----------          -----

  Dealers                            3,836           44.5            2,381           40.9                    164           23.0
  Bulk purchase                          -            -                  -            -                      211           29.6
                              ------------          -----      -----------          -----             ----------          -----
        Total                        8,610          100.0%           5,818          100.0%                   713          100.0%
                              ============          =====      ===========          =====             ==========          =====

Average principal balance of
  loans                            $16,187                         $15,083                               $11,450
Weighted average interest
  rate on loans originated           14.03%                          14.55%                                14.18%
Weighted average term on
  loans originated (months)            198                             188                                   175
</TABLE>
         LOAN PROCESSING AND UNDERWRITING

         MMC's loan application and approval process generally is conducted
over the telephone with applications usually received at MMC's centralized
processing facility from Correspondents and Dealers by facsimile transmission.
Upon receipt of an application, the information is entered into MMC's system
and processing begins. All loan applications are individually analyzed by
employees of MMC at its loan processing headquarters in Atlanta, Georgia.

         MMC has developed a proprietary credit index profile (CIP) as a
statistical credit based tool to predict likely future performance of a
borrower. A significant component of this customized system is the credit
evaluation score methodology developed by FICO, a consulting firm specializing
in creating default predictive models through a high number of variable
components. The other components of the CIP include debt to income analysis,
employment stability, self employment criteria, residence stability and
occupancy status of the subject property. By utilizing both scoring models in
tandem, all applicants are considered on the basis of their ability to repay
the loan obligation while allowing MMC to maintain its risk based pricing for
each loan.

         Based upon FICO score default predictors and MMC's internal CIP score,
loans are classified by MMC into gradations of descending credit risks and
quality, from "A" credits to "D" credits, with subratings within those
categories.  Quality is a function of both the borrowers creditworthiness and
the extent of the value of the collateral, which is typically a second lien on
the borrower's primary residence. "A+" credits generally have a FICO score
greater than 680. An applicant with a FICO score of less than 620 would be
rated a "C" credit unless the loan-to-





                                       8
<PAGE>   9





value ratio was 75% or less which would raise the credit risk to MMC to a "B"
or better depending on the borrower's debt service capability.  Depending on
loan size, typical loan-to-value ratios for "A" and "B" credits range from 90%
to 125%, while loan-to-value ratios for "C" and "D" credits range from 60% up
to 90% with extraordinary compensating factors.

         MMC's underwriters review the applicant's credit history, based on the
information contained in the application as well as reports available from
credit reporting bureaus and MMC's CIP score, to determine the applicant's
acceptability under MMC's underwriting guidelines.  Based on the underwriter's
approval authority level, certain exceptions to the guidelines may be made when
there are compensating factors subject to approval from a corporate officer.
The underwriter's decision is communicated to the Correspondent or Dealer and,
if approved, fully explains the proposed loan terms. MMC endeavors to respond
to the Correspondent or Dealer on the same day the application is received.

         MMC issues a commitment to purchase a pre-approved loan upon the
receipt of a fully completed loan package. Commitments indicate loan amounts,
fees, funding conditions, approval expiration dates and interest rates. Loan
commitments are generally issued for periods of up to 45 days in the case of
Correspondents and 90 days in the case of Dealers. Prior to disbursement of
funds, all loans are carefully reviewed by funding auditors to ensure that all
documentation is complete, all contingencies specified in the approval have
been met and the loan is closed in accordance with Company and regulatory
procedures.

         CONVENTIONAL LOANS

         MMC has implemented policies for its Conventional Loan program that
are designed to minimize losses by adhering to high credit quality standards or
requiring adequate loan-to-value levels. MMC will only make Conventional Loans
to borrowers with an "A" or "B" credit grade using the CIP. Through August 31,
1996, MMC's portfolio of Conventional Loans originated through its
Correspondent Division had been evaluated as an "A" credit risk and had a
weighted average (i) FICO score of 661, (ii) gross debt to income ratio of 38%,
(iii) interest rate of 14% and (iv) loan-to-value ratio of 110%, as well as an
average loan amount of $28,569. Substantially all of the Conventional Loans
originated to date by MMC are secured by first or second mortgage liens on
single family, owner occupied properties.

         Terms of Conventional Loans made by MMC, as well as the maximum
loan-to-value ratios and debt service to income coverage (calculated by
dividing fixed monthly debt payments by gross monthly income), vary depending
upon the Company's evaluation of the borrower's creditworthiness.  Borrowers
with lower creditworthiness generally pay higher interest rates and loan
origination fees.

         As part of the underwriting process for Conventional Loans, MMC
generally requires an appraisal of the collateral property as a condition to
the commitment to purchase. MMC requires independent appraisers to be state
licensed and certified.  MMC requires that all appraisals be completed
within the Uniform Standards of Professional Appraisal Practice as adopted by
the Appraisal Standards Board of the Appraisal Foundation. Prior to originating
a loan, MMC audits the appraisal for accuracy and to insure that the appraiser
used sufficient care in analyzing data to avoid errors that would significantly
affect the appraiser's opinion and conclusion. This audit includes a review of
economic demand, physical adaptability of the real estate, neighborhood trends
and the highest and best use of the real estate. In the event the audit reveals
any discrepancies as to the method and technique that are necessary to produce
a credible appraisal, MMC will perform additional property data research or may
request a second appraisal to be performed by an independent appraiser selected
by MMC in order to substantiate further the value of the subject property.

         MMC also requires a title report on all subject properties securing
its loans to verify property ownership, lien position and the possibility of
outstanding tax liens or judgments. In the case of larger loan amounts or first
liens, MMC requires a full title insurance policy in compliance with the
American Land Title Association.

         TITLE I LOANS

         The Title I Loans originated by MMC are executed on forms meeting FHA
requirements as well as federal and state regulations. Loan applications and
Installment Contracts are submitted to MMC's processing headquarters for credit
verification. The information provided in loan applications is first verified
by, among other things, (i) written confirmations of the applicant's income
and, if necessary, bank deposits, (ii) a formal credit bureau report on





                                       9
<PAGE>   10

the applicant from a credit reporting agency, (iii) a title report, (iv) if
necessary, a real estate appraisal and (v) if necessary, evidence of flood
insurance. Appraisals for Title I Loans, when necessary, are generally prepared
by pre-approved independent appraisers that meet MMC's standards for
experience, education and reputation. Loan applications are also reviewed to
ascertain whether or not they satisfy MMC's underwriting criteria, including
loan-to-value ratios (if non-owner occupied), borrower income qualifications,
employment stability, purchaser requirements and necessary insurance and
property appraisal requirements. MMC will make Title I Loans to borrowers with
an "A" to "C" credit grade based on CIP score and lien position. Since the
implementation of the CIP scoring system in February 1996, through August
31,1996, MMC's portfolio of Title I Loans originated through its Correspondent
and Dealer Divisions had been evaluated as a "C+" and "B" credit risk,
respectively, and had a weighted average FICO score of 637 and 645,
respectively. MMC's underwriting guidelines for Title I Loans meet FHA's
underwriting criteria. Completed loan packages are sent to MMC's underwriting
department for predisbursement auditing and funding.

         Subject to underwriting approval of an application forwarded to MMC by
a Dealer, MMC issues a commitment to purchase an Installment Contract from a
Dealer upon MMC's receipt of a fully completed loan package and notice from the
borrower of satisfactory work completion.  Subject to underwriting approval of
an application forwarded to MMC by a Correspondent, MMC issues a commitment to
purchase a Title I Loan upon MMC's receipt of a fully completed and closed loan
package.

         MMC's underwriting personnel review completed loan applications to
verify compliance with MMC's underwriting standards, FHA requirements and
federal and state regulations. In the case of Title I Loans being acquired from
Dealers, MMC conducts a prefunding telephonic interview with the property owner
to determine that the improvements have been completed in accordance with the
terms of the Installment Contract and to the owner's satisfaction. MMC utilizes
a nationwide network of independent inspectors to perform on-site inspections
of improvements within the timeframes specified by the Title I program.

              Since MMC does not currently originate any Title I Loans with an
original principal balance in excess of $25,000, the FHA does not individually
review the Title I Loans originated by MMC.

         QUALITY CONTROL

         MMC employs various quality control personnel and procedures in order
to insure that loan origination standards are adhered to and regulatory
compliance is maintained while substantial growth is experienced in the
servicing portfolio.

         In accordance with MMC's policy, the quality control department
reviews a statistical sample of loans closed each month. This review is
generally completed within 60 days of funding and circulated to appropriate
department heads and senior management. Finalized reports are maintained in
MMC's files for a period of two years from completion. Typical review
procedures include reverification of employment and income, re-appraisal of the
subject property, obtaining separate credit reports and recalculation of
debt-to-income ratios. The statistical sample is intended to cover 10% of all
new loan originations with particular emphasis on new Correspondents and
Dealers. Emphasis will also be placed on those loan sources where higher levels
of delinquency are experienced, physical inspections reveal a higher level of
non-compliance, or payment defaults occur within the first six months of
funding. On occasion, the quality control department may review all loans
generated from a particular loan source in the event an initial review
determines a higher than normal number of exceptions. The account selection of
the quality control department is also designed to include a statistical sample
of loans by each underwriter and each funding auditor and thereby provide
management with information as to any aberration from Company policies and
procedures in the loan origination process.

         Under the direction of the Vice President of Credit Quality and
Regulatory Compliance, a variety of review functions are accomplished.  On a
daily basis, a sample of recently approved loans are reviewed to insure
compliance with underwriting standards. Particular attention is focused on
those underwriters who have developed a higher than normal level of exceptions.
In addition to this review, MMC has developed a staff of post-disbursement
review auditors which reviews 100% of recently funded accounts, typically
within two weeks of funding. All credit reports are analyzed, debt-to-income
ratios recalculated, contingencies monitored and loan documents inspected.
Exception reports are forwarded to the respective Vice Presidents of Production
as well as senior management. MMC also employs a Physical Inspection Group that
is responsible for monitoring the inspection of all homes





                                       10
<PAGE>   11





which are the subject of home improvement loans. Non-compliance is tracked by
loan source and serves as another method of evaluating a loan source
relationship.

         MMC has expended substantial amounts in developing its quality control
and compliance department. MMC recognizes the need to monitor its operations
continually as it experiences substantial growth. Feedback from these
departments provides senior management with the information necessary to take
corrective action when appropriate, including the revision and expansion of its
operating policies and procedures.

         LOAN PRODUCTION TECHNOLOGY SYSTEMS

         MMC utilizes a sophisticated computerized loan origination tracking
system that allows it to monitor the performance of Dealers and Correspondents
and supports the marketing efforts of the Dealer and Correspondent Divisions by
tracking the marketing activities of field sales personnel. The system
automates various other functions such as Home Mortgage Disclosure Act and HUD
reporting requirements and routine tasks such as decline letters and the flood
certification process. The system also affords management access to a wide
range of decision support information such as data on the approval pipeline,
loan delinquencies by source, and the activities and performance of
underwriters and funders. MMC uses intercompany electronic mail, as well as an
electronic-mail link with its affiliate, PEC, to facilitate communications and
has an electronic link to PEC that allows for the automated transfer of
accounts to PEC's servicing system.

         MMC is enhancing this system to provide for the automation of the loan
origination process as well as loan file indexing and routing.  These
enhancements will include electronic routing of loan application facsimile
transmissions, automated credit report inquiries and consumer credit scoring
along with on-screen underwriting and approval functions. Where feasible the
system will interface with comparable systems of MMC's Dealers and
Correspondents. MMC expects that these enhancements will (i) increase loan
production efficiencies by minimizing manual processing of loan documentation,
(ii) enhance the quality of loan processing by use of uniform electronic images
of loan files and (iii) facilitate loan administration and collections by
providing easier access to loan account information. The implementation of
these enhancements is expected to be substantially completed prior to December
1996. These enhancements to improve loan production systems are expected to
cost approximately $50,000 and will be funded from MMC's normal operating cash
flows.

         LOAN SERVICING

         MMC's strategy has been to retain the servicing rights associated with
the loans it originates. MMC's loan servicing activities include responding to
borrower inquiries, processing and administering loan payments, reporting and
remitting principal and interest to the whole loan purchasers who own interests
in the loans and to the trustee and others with respect to securitizations,
collecting delinquent loan payments, processing Title I insurance claims,
conducting foreclosure proceedings and disposing of foreclosed properties and
otherwise administering the loans. MMC's various loan sale and securitization
agreements allocate a portion of the difference between the stated interest
rate and the interest rate passed through to purchasers of its loans to
servicing revenue. Servicing fees are collected by MMC out of monthly loan
payments.  Other sources of loan servicing revenues include late charges and
miscellaneous fees. MMC uses a sophisticated computer based mortgage servicing
system that it believes enables it to provide effective and efficient
administering of Conventional and Title I Loans. The servicing system is an
on-line real time system developed and maintained by MMC's affiliate, PEC. It
provides payment processing and cashiering functions, automated payoff
statements, on-line collections, statement and notice mailing along with a full
range of investor reporting requirements. MMC has entered into a subservicing
agreement with PEC for the use of the system and continuous support. The
monthly investor reporting package includes a trial balance, accrued interest
report, remittance report and delinquency reports. Formal written procedures
have been established for payment processing, new loan set-up, customer
service, and tax and insurance monitoring.

         MMC is a HUD approved lender and a FNMA approved seller/servicer. As
such, it is subject to a thorough due diligence review of its policies,
procedures, and business, and is qualified to underwrite, sell and service
Title I Loans on behalf of the FHA and FNMA.

         MMC's loan collection functions are organized into two areas of
operation: routine collections and management of nonperforming loans.





                                       11
<PAGE>   12





         Routine collection personnel are responsible for collecting loan
payments that are less than 60 days contractually past due and providing prompt
and accurate responses to all customer inquiries and complaints. These
personnel report directly to MMC's Vice President of Loan Administration.
Borrowers are contacted on the due date for each of the first six payments in
order to encourage continued prompt payment.  Generally, after six months of
seasoning, collection activity will commence if a loan payment has not been
made within five days of the due date. Borrowers usually will be contacted by
telephone at least once every five days and also by written correspondence
before the loan becomes 60 days delinquent. With respect to loan payments that
are less than 60 days late, routine collections personnel utilize a system of
mailed notices and telephonic conferences for reminding borrowers of late
payments and encouraging borrowers to bring their accounts current.
Installment payment invoices and return envelopes are mailed to each borrower
on a monthly basis. MMC has bilingual customer service personnel available.

         Once a loan becomes 30 days past due, a collection supervisor
generally analyzes the account to determine the appropriate course of remedial
action. On or about the 45th day of delinquency, the supervisor determines if
the property needs immediate inspection to determine if it is occupied or
vacant. Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments or a repayment plan to return the account to
current status may be authorized by the Vice President of Loan Administration.
In any event, it is MMC's policy to work with the delinquent customer to
resolve the past due balance before Title I claim processing or legal action is
initiated.


         Nonperforming loan management personnel are responsible for collecting
severely delinquent loan payments (over 60 days late), filing Title I insurance
claims or initiating legal action for foreclosure and recovery. Operating from
MMC's headquarters in Atlanta, Georgia, collection personnel are responsible
for collecting delinquent loan payments and seeking to mitigate losses by
providing various alternatives to further actions, including modifications,
special refinancing and indulgence plans. Title I insurance claim personnel are
responsible for managing Title I insurance claims, utilizing a claim management
system designed to track insurance claims for Title I Loans so that all
required conditions precedent to claim perfection are met. In the case of
Conventional Loans, a foreclosure coordinator will review all previous
collection activity, evaluate the lien and equity position and obtain any
additional information as necessary. The ultimate decision to foreclose, after
all necessary information is obtained, is made by an officer of MMC.
Foreclosure regulations and practices and the rights of the owner in default
vary from state to state, but generally procedures may be initiated if: (i) the
loan is 90 days (120 days under California law) or more delinquent; (ii) a
notice of default on a senior lien is received; or (iii) MMC discovers
circumstances indicating potential loss exposure.

         Net loan servicing income was $3.3 million and $873,000  for the years
ended August 31, 1996 and 1995, respectively, constituting 13.4% and 6.4%,
respectively, of MMC's total revenues in such periods. As of August 31, 1996,
MMC had increased the size of the loan portfolio it services to approximately
$214.2 million from approximately $92.3 million as of August 31, 1995, an
increase of approximately $121.9 million or 132.1%. MMC's loan servicing
portfolio is subject to reduction by normal amortization, prepayment of
outstanding loans and defaults.

         The following table sets forth certain information regarding MMC's
loan servicing for the periods indicated (thousands of dollars):

<TABLE>
<CAPTION>
                                                                YEAR ENDED AUGUST 31,              
                                                   ------------------------------------------------

                                                        1996             1995           1994 (1)   
                                                   --------------   --------------   --------------
<S>                                                      <C>               <C>               <C>
Servicing portfolio at beginning of year                $92,286           $8,026               $-
Additions to servicing portfolio                        139,367           87,751            8,164
Reductions in servicing portfolio (2)                   (17,464)          (3,491)            (138)
                                                 --------------   --------------   --------------
Servicing portfolio at end of year                     $214,189          $92,286           $8,026
                                                 ==============   ==============   ==============

  Servicing portfolio (end of year):
    Company-owned loans                                  $4,698           $3,720           $1,471
    Sold loans                                          209,491           88,566            6,555
                                                 --------------   --------------   --------------
        Total                                          $214,189          $92,286           $8,026
                                                 ==============   ==============   ==============
</TABLE>
------------------
(1)      MMC commenced its Title I lending operations in March 1994.

(2)      Reductions result from scheduled payments, prepayments and write-offs
         during the period.





                                       12
<PAGE>   13



         The following table sets forth the delinquency and Title I insurance
claims experience of loans serviced by MMC as of the dates indicated (thousands
of dollars):

<TABLE>
<CAPTION>
                                                                YEAR ENDED AUGUST 31,              
                                                   ------------------------------------------------

                                                        1996             1995           1994 (1)   
                                                   --------------   --------------   --------------
<S>                                                   <C>               <C>               <C>     
Delinquency period (2)
  31-60 days past due                                   2.17%            2.58%            2.06%
  61-90 days past due                                   0.85             0.73             0.48
  91 days and over past due                             4.53 (3)         0.99             0.36
  91 days and over past due, net of
    claims filed (4)                                    1.94             0.61             0.26
Claims filed with HUD (5)                               2.59             0.38             0.10
Number of Title I insurance claims                       255               23                1
Total servicing portfolio at end of period          $214,189          $92,286           $8,026
Amount of FHA insurance available (6)                $21,205           $9,552             $813
Amount of FHA insurance available as a
  percentage of loans serviced (end of year)            9.90% (6)       10.35%           10.13%
                                                       
Losses on liquidated loans (7)                       $    32            $16.8             $-
</TABLE>

___________________________________________

(1)      MMC commenced originating loans in March 1994.

(2)      Represents the dollar amount of delinquent loans as a percentage of
         total dollar amount of loans serviced by MMC (including loans owned by
         MMC) as of the date indicated.

(3)      During the year ended August 31, 1996, the processing and payment of
         claims filed with HUD was delayed.

(4)      Represents the dollar amount of delinquent loans net of delinquent
         Title I Loans for which claims have been filed with HUD and payment is
         pending as a percentage of total dollar amount of loans serviced by
         MMC (including loans owned by MMC) as of the date indicated.

(5)      Represents the dollar amount of delinquent Title I Loans for which
         claims have been filed with HUD and payment is pending as a percentage
         of total dollar amount of loans serviced by MMC (including loans owned
         by MMC) as of the date indicated.

(6)      If all claims with HUD had been processed as of period end, the amount
         of FHA insurance available would have been reduced to $16,215,000,
         which as a percentage of loans serviced would have been 7.8%.

(7)      A loss is recognized upon receipt of payment of a claim or final
         rejection thereof. Claims paid in a period may relate to a claim filed
         in an earlier period. Since MMC commenced its Title I lending
         operations in March 1994, there has been no final rejection of a claim
         by the FHA. Aggregate losses on liquidated Title I Loans related to 83
         of the 338 Title I insurance claims made by MMC since commencing
         operations through August 31, 1996. Losses on liquidated loans will
         increase as the balance of the claims are processed by HUD.  MMC has
         received an average payment from HUD equal to 90% of the outstanding
         principal balance of such Title I Loans, plus appropriate interest and
         costs.

         MMC has received an average amount equal to 96.9% of the outstanding
principal balance of Title I Loans for which claims have been made, each
payment including certain interest and costs. The processing and payment of
claims filed with HUD have been delayed for a number of reasons including (i)
furloughs experienced by HUD personnel in December 1995 and January 1996, (ii)
the growth in the volume of Title I Loans originated from approximately $750
million in 1994 to $1.3 billion in 1995 without a corresponding increase in HUD
personnel to service claims and (iii) the transition of processing operations
to regional centers during the second and third quarters of 1996. It is
expected that once appropriate staffing and training have been completed at HUD
regional centers, the timeframe for payment of HUD claims will be significantly
shortened.





                                       13
<PAGE>   14



         SALE OF LOANS

         MMC customarily sells the loans it originates to third party purchasers
or, in the case of a third party purchaser not eligible to own a Title I Loan,
sells Title I Loan participation certificates backed by Title I Loans. Whether
MMC sells a loan or a loan participation, MMC typically retains the right to
service the loans for a servicing fee. MMC typically sells loans for an amount
approximating the then remaining principal balance. The purchasers are entitled
to receive interest at yields below the stated interest rates of the loans. In
connection with such sales, MMC is typically required to deposit into a reserve
account the excess servicing spread received by it, less its servicing fee, up
to a specified percentage of the principal balance of the loans, to fund
shortfalls in collections that may result from borrower defaults. To date, the
purchasers in whole loan sales have been two banks and another financial
institution  The following table sets forth certain data regarding Title I Loans
sold by MMC during the periods indicated (thousands of dollars):

<TABLE>
<CAPTION>
                                                                         YEAR ENDED AUGUST 31,              
                                                            ------------------------------------------------

                                                                 1996             1995           1994 (1)   
                                                            --------------   --------------   --------------
 <S>                                                                <C>            <C>              <C>
 Principal amount of loans sold to third party purchasers        $137,908 (2)    $85,363           $6,555
 Gain on sales of loans to third party purchasers                  17,994         12,233              579
 Net unrealized gain on mortgage related securities                 2,697            -                -
 Weighted average stated interest rate on loans sold to third
   party purchasers                                                 14.09%         14.53%           14.15%
 Weighted average pass-through interest rate on loans sold to
   third party purchasers                                            7.50%          8.36%            8.54%
 Weighted average excess spread retained on loans sold               6.59%          6.17%            5.61%
</TABLE>

___________________________________________________________

(1)      MMC commenced originating loans in March 1994.

(2)      Includes $10.5 million of Conventional Loans.

         At August 31, 1996 and 1995, MMC's Statement of Financial Condition
reflected excess servicing rights of approximately $12.1 million and $14.5
million, respectively. MMC also retains mortgage related securities through
securitization transactions. At August 31, 1996, MMC's Statement of Financial
Condition reflected $22.9 million of mortgage related securities. MMC derives a
significant portion of its income by realizing gains upon the sale of loans and
loan participations due to the excess servicing rights associated with such
loans. Excess servicing rights represent the excess of the interest rate
payable by a borrower on a loan over the interest rate passed through to the
purchaser of an interest in the loan, less MMC's normal servicing fee and other
applicable recurring fees. Mortgage related securities consist of certificates
representing the excess of the interest rate payable by an obligor on a sold
loan over the yield on pass-through certificates sold pursuant to a
securitization transaction, after payment of servicing and  other fees. When
loans are sold, MMC recognizes as current revenue the present value of the
excess servicing rights expected to be realized over the anticipated average
life of the loans sold less future estimated credit losses relating to the
loans sold. The capitalized excess servicing rights and valuation of mortgage
related securities are computed using prepayment, default and interest rate
assumptions that MMC believes are reasonable based on experience with its own
portfolio, available market data and ongoing consultation with industry
participants. The amount of revenue recognized by the Company upon the sale of
loans or loan participations will vary depending on the assumptions utilized.
The weighted average discount rate used to determine the present value of the
balance of capitalized excess servicing rights reflected on MMC's Statement of
Financial Condition at August 31, 1996 and 1995 was approximately 12%.

         Capitalized excess servicing rights are amortized over the lesser of
the estimated or actual remaining life of the underlying loans as an offset
against the excess servicing rights component of servicing income actually
received in connection with such loans. Although MMC believes that it has made
reasonable estimates of the excess servicing rights likely to be realized, the
rate of prepayment and the amount of defaults utilized by MMC are estimates and
experience may vary from its estimates. The gain recognized by the Company upon
the sale of loans will have been overstated if prepayments or defaults are
greater than anticipated. Higher levels of future prepayments would result in
capitalized excess servicing rights amortization expense exceeding realized
excess servicing rights, thereby adversely affecting MMC's servicing income and
resulting in a charge to earnings in the





                                       14
<PAGE>   15





period of adjustment. Similarly, if delinquencies or liquidations were to be
greater than was initially assumed, capitalized excess servicing rights
amortization would occur more quickly than originally anticipated, which would
have an adverse effect on servicing income in the period of such adjustment.
MMC periodically reviews its prepayment assumptions in relation to current
rates of prepayment and, if necessary, reduces the remaining asset to the net
present value of the estimated remaining future excess servicing income. Rapid
increases in interest rates or competitive pressures may result in a reduction
of future excess servicing income, thereby reducing the gains recognized by MMC
upon the sale of loans or loan participations in the future.

         At August 31, 1996 and 1995, MMC's Statement of Financial Condition
reflected mortgage servicing rights of approximately $3.8 million and $1.1
million, respectively. The fair value of capitalized mortgage servicing rights
was estimated by taking the present value of expected net cash flows from
mortgage servicing using assumptions MMC believes market participants would use
in their estimates of future servicing income and expense, including
assumptions about prepayment, default and interest rates. Capitalized mortgage
servicing rights are amortized in proportion to and over the period of
estimated net servicing income. The estimate of fair value was based on a range
of 100 to 125 basis points per year servicing fee, reduced by estimated costs
of servicing, and using a discount rate of 12% in the years ended August 31,
1996 and 1995.  MMC has developed its assumptions based on experience with its
own portfolio, available market data and ongoing consultation with industry
participants.

         In furtherance of MMC's strategy to sell loans through
securitizations, in March 1996 and August 1996, MMC completed its first two
securitizations pursuant to which it sold pools of $84.2 million and $48.8
million, respectively, of Title I Loans. MMC previously reacquired at par $77.7
million and $36.2 million of such loans, respectively. Pursuant to these
securitizations, pass-through certificates evidencing interests in the pools of
loans were sold in a public offering. MMC continues to subservice the sold
loans and is entitled to receive from payments in respect of interest on the
sold loans, a servicing fee equal to 1.25% of the balance of each loan with
respect to the March transaction and 1% with respect to the August transaction.
In addition, with respect to both transactions, MMC received certificates
(carried as mortgage related securities on MMC's statements of financial
condition), representing the interest differential, after payment of servicing
and other fees, between the interest paid by the obligors of the sold loans and
the yield on the sold certificates. MMC may be required to repurchase loans
that do not conform to the representations and warranties made by MMC in the
securitization agreements.

         MMC typically earns net interest income during the "warehouse" period
between the closing or assignment of a loan and its delivery to a purchaser. On
loans held for sale, MMC earns interest at long-term rates, financed by lines
of credit which bear interest at short-term interest rates. Normally,
short-term interest rates are lower than long-term interest rates and MMC earns
a positive spread on its loans held for sale. The average warehouse period for
a loan ranges from 6 to 90 days, and the balance of loans in warehouse was
approximately $4.6 million and $3.7 million as of August 31, 1996 and 1995,
respectively. MMC's interest income, net of interest expense was $988,000 and
$473,000 for the years ended August 31, 1996 and 1995, respectively.

         INTEREST RATE RISKS

         Changes in interest rates affect MMC's business in a variety of ways,
including decreased demand for loans during periods of higher interest rates,
fluctuations in profits derived from the difference between short-term and
long-term interest rates and increases in prepayment rates during periods of
lower interest rates. The profits realized by MMC from home improvement loans
are, in part, a function of the difference between fixed long-term interest
rates, at which MMC originates its home improvement loans, and adjustable
short-term interest rates, at which MMC finances such loans until the closing
of the sale of such loans. Generally, short-term rates are lower than long-term
rates and MMC benefits from the positive interest rate differentials during the
time the loans are held by MMC pending the closing of the sale of such loans.
During the period from 1994 through the present, the interest rate differential
was high and this fact contributed significantly to MMC's net interest income.
The interest rate differential may not continue at such favorable levels in the
future.

         Changes in interest rates during the period between the time an
interest rate is established on a loan and the time such loan is sold affect
the revenues realized by MMC from loans. In connection with the origination of
loans, MMC issues loan commitments for periods of up to 45 days in the case of
Correspondents and 90 days in the case of Dealers. Furthermore, the period of
time between the closing on a loan and the sale of such loan generally ranges
from 10 to 90 days. Increases in interest rates during these periods will
result in lower gains (or even losses) on sales of loans than would be recorded
if interest rates had remained stable or had declined. Changes in interest
rates after





                                       15
<PAGE>   16





the sale of loans also affect the profits realized by MMC with respect to loan
sale transactions in which the yield to the purchaser is based on an adjustable
rate. During the years ended August 31, 1996 and 1995, MMC sold loans under an
agreement which provides for the yield to the purchaser to be adjusted monthly
to a rate equal to 200 basis points over the one-month London Interbank Offered
Rate (LIBOR). An increase in LIBOR would result in a decrease in MMC's future
income from such sold loans resulting in a charge to earnings in the period of
adjustment.

         Interest rate levels also affect MMC's excess servicing spread. MMC
generally retains the servicing rights to the loans it sells. The yield to the
purchaser is generally lower than the average stated interest rates on the
loans, as a result of which MMC earns an excess servicing spread on the loans
it sells. Increases in interest rates or competitive pressures may result in
reduced servicing spreads, thereby reducing or eliminating the gains recognized
by MMC upon the sale of loans in the future.

         SEASONALITY

         Home improvement loan volume tracks the seasonality of home
improvement contract work. Volume tends to build during the spring and early
summer months, particularly with regard to pool installations. A decline is
typically experienced in late summer and early fall until temperatures begin to
drop. This change in seasons precipitates the need for new siding, window and
insulation contracts. Peak volume is experienced in November and early December
and declines dramatically from the holiday season through the winter months.
Debt consolidation and home equity loan volume are not impacted by seasonal
climate changes and, with the exclusion of the holiday season, tend to be
stable throughout the year.

PREFERRED EQUITIES CORPORATION

         GENERAL

         PEC acquires, develops and converts rental and condominium apartment
buildings and hotels for sale as timeshare interests and engages in the retail
sale of land.  PEC's strategy is to acquire properties in desirable destination
resort areas that offer a range of recreational activities and amenities.  PEC
markets and sells timeshare interests in its resorts in Las Vegas and Reno
Nevada; Honolulu, Hawaii; Brigantine, New Jersey;  Steamboat Springs, Colorado;
and Indian Shores near St. Petersburg, Florida; as well as land in Nevada and
Colorado.  PEC recently acquired properties in Orlando, Florida; Steamboat
Springs, Colorado; and Las Vegas, Nevada to be converted and sold as timeshare
interests.  In recent years, several major lodging, hospitality and
entertainment companies, including The Walt Disney Company, Hilton Hotels
Corporation, Marriott Ownership Resorts, Inc. and Hyatt Corporation, among
others, have commenced developing and marketing timeshare interests in resort
properties.  The Company believes that the entry into the timeshare industry of
certain of these large and well-known lodging, hospitality and entertainment
companies has contributed to the growth and acceptance of the industry.  In
order to enhance its competitive position, in April 1995 PEC entered into a
strategic alliance with Hospitality Franchise Systems, Inc. (HFS) pursuant to
which PEC was granted a ten-year (including a renewal option) exclusive license
to operate both its existing and future timeshare properties under the name
"Ramada Vacation Suites."  The American Resort Development Association estimates
that approximately 1.65 million families in the United States own timeshare
interests in resorts worldwide and that sales of timeshare interests in the
United States aggregated approximately $1.8 billion in 1994.

         TIMESHARE PROPERTIES AND SALES

         PEC acquires, develops and converts rental and condominium apartment
buildings and hotels for sale as timeshare interests.  PEC's strategy is to
acquire properties in desirable destination resort areas that offer a range of
recreational activities and amenities.  The timeshare interests offered by PEC
in its resorts other than in Hawaii generally consist of undivided fee
interests in the land and facilities comprising the property or an undivided
fee interest in a particular unit, pursuant to which the owner acquires the
perpetual right to weekly occupancy of a residence unit each year.  In its
resort in Hawaii, PEC offers "right-to-use" interests, pursuant to which the
owner has occupancy rights for one week each year until December 31, 2009, the
last full year of the underlying land lease for the resort property.  During
fiscal 1996, 1995, and 1994, PEC sold  6,982, 5,365, and 5,441 timeshare
interests, respectively, at prices ranging from $3,950 to $23,950.

         In order to enhance its competitive position, in April 1995, PEC
entered into a strategic alliance pursuant to which PEC was granted a ten-year
(including a renewal option) exclusive license to operate both its existing and
future timeshare properties under the name "Ramada Vacation Suites."  PEC has
renamed its timeshare resorts.





                                       16
<PAGE>   17

The Company believes that this affiliation will enable it to capitalize on the
Ramada reputation, name recognition and customer profile, which closely matches
PEC's customer profile. The arrangement provides for the payment by PEC of an
initial access fee of $1 million, which has been paid, and monthly recurring
fees equal to 1% of PEC's Gross Sales (as defined) each month through January
1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996.  The
initial term of the arrangement is 5 years and PEC has the option to renew the
arrangement for an additional term of 5 years, if PEC has met certain
conditions, including the addition of at least 20,000 timeshare interests
during the initial term and the payment of minimum annual fees.  In addition to
the grant of the license, the arrangement provides for the establishment of
joint marketing programs.

         PEC currently operates timeshare resorts in Las Vegas and Reno,
Nevada; Honolulu, Hawaii; Brigantine, New Jersey;  Steamboat Springs, Colorado;
and Indian Shores, Florida; and recently purchased an additional property in
Orlando,  Florida and Steamboat Springs, Colorado.  PEC is considering the
purchase of additional properties for use in its timeshare operations.

         PEC's Ramada Vacation Suites at Las Vegas, formerly known as The Grand
Flamingo Club, includes 30 buildings with a total of 429 studio units and 1 and
2 bedroom units which have been converted for sale as 21,879 timeshare
interests, of which 4,212 remained available for sale as of August 31, 1996. The
resort is in close proximity to the strip in Las Vegas and features swimming
pools and other amenities.  PEC is in the process of converting additional
adjacent properties it owns.  PEC has recently completed the expansion of the
common areas to include an expanded lobby, convenience store and expanded sales
facilities.  At August 31, 1996, a total of 5 buildings containing 64 units were
under conversion to timeshare interests.

         The Ramada Vacation Suites at Reno, formerly known as the Reno Spa
Resort, consists of a 95-unit hotel that has been converted for sale as 4,845
timeshare interests, of which 626 remained available for sale as of August 31,
1996.  The resort features an indoor swimming pool, exercise facilities, sauna,
jacuzzi and sundeck.

         PEC's White Sands Waikiki is an 80-unit hotel consisting of three
buildings that have been converted for sale as 4,160 timeshare interests, of
which 467 remained available for sale as of August 31, 1996.  The hotel is
currently being renamed Ramada Vacation Suites at Honolulu.  The resort is
within walking distance of a public beach and features a swimming pool and
jacuzzi.  PEC holds the buildings, equipment and furnishings under a land lease
expiring in March 2010, under which PEC makes annual rental payments of
approximately $192,000.

         The Ramada Vacation Suites on Brigantine Beach consists of a 91-unit
hotel and a 17-unit three story building, formerly known as the Brigantine Inn
and the Brigantine Villas, respectively, that have been converted for sale as
5,508 timeshare interests, of which 519 remained available for sale as of
August 31, 1996.  The resort is situated on beachfront property in close
proximity to Atlantic City, New Jersey and features an enclosed swimming pool,
cocktail lounge, bar and restaurant.

         The Ramada Vacation Suites at Steamboat Springs consists of 60 one and
two bedroom units, which have been converted for sale as 3,060 timeshare
interests.  Of these, 1,813 remained available for sale as of August 31, 1996.
PEC acquired this condominium resort in 1994 and completed the conversion in
1995.   PEC has constructed a 5,500-square foot amenities building at this
facility which features a lobby, front desk, spa and sauna.

         The Ramada Vacation Suites at Indian Shores, formerly known as the
Aloha Bay Apartments, consists of a two building complex, that has been
recently converted into a total of 32  one and two  bedroom units to be sold as
1,632 timeshare interests.  The Resort is located on the intercoastal waterway
and is in close proximity to Tampa, Florida.  The timeshare interests became
available for sale upon completion of improvements and registration with the
state of Florida, which occurred  in September, 1996.

         The Ramada Vacation Suites of Orlando, formerly known as Ramada Suites
at Tango Bay, consists of a 7 building complex, that upon conversion will
consist of a total of 102 units to be sold as 5,202 timeshare interests.  The
resort is in Orlando, Florida.  The timeshare interests will be available for
sale upon completion of  the first phase of improvements and registration with
the state of Florida, which is expected to be completed by the summer of  1997.

         The Ramada Vacation Suites - Hilltop, formerly known as The Overlook
Lodge, is a 117-room complex complete with indoor swimming pool, restaurant,
cocktail lounge and meeting room facilities.  Upon conversion, the complex will
consist of 56 one and two-bedroom units to be sold as 2,856 timeshare
interests.  The resort is located in Steamboat Springs, Colorado, in close
proximity to the area's ski slopes and attractions.  The timeshare interests
will be





                                       17
<PAGE>   18





available for sale upon completion of improvements and registration with the
state of Colorado, which is expected to be completed by the fall of 1997.

         The following table set forth certain information regarding the
timeshare interests at the Company's resort properties:

<TABLE>
<CAPTION>
                                                                                       
                                                                                                      STEAMBOAT          
                                     LAS VEGAS         RENO        WAIKIKI          BRIGANTINE         SPRINGS     TOTAL
                                     ---------      ----------     -------          ----------        ---------   -------
 <S>                                          <C>           <C>         <C>           <C>           <C>             <C>
 Maximum number of timeshare
   interests                           21,879        4,845         4,160               5,508         3,060        39,452
 Net number of timeshare
   interests sold through
   August 31, 1996                     17,667        4,219         3,693               4,989(1)      1,247        31,815

 Number of timeshare
   interests available for
   sale at August 31, 1996              4,212          626           467                 519         1,813         7,637
 Percent sold through
   August 31, 1996                         81%          87%           89%                 91%           41%           81%

 Number of timeshare
  interests sold during
  the year ended August
  31, 1996                              4,068          585           648                  90         1,591         6,982

 Number of timeshare
  interests reacquired
  during the year ended
  August 31, 1996 through:
   Contract cancellations                694          213           122                   89            98         1,216

   Exchanges                           2,003          391           350                   81           480         3,305

   Acquired for unpaid
     maintenance fees                    173           44           160                   27             -           404
                                   ---------    ---------     ---------            ---------     ---------     ---------
     Total number of
       timeshare interests
       reacquired                      2,870          648           632                  197           578         4,925
                                   ---------    ---------     ---------            ---------     ---------     ---------
 Net number of timeshare
   interests sold
   (reacquired) during the
   year ended August 31, 1996          1,198          (63)           16                 (107)        1,013         2,057
 Additional timeshare
   interests under
   development (2)                     3,624            -             -                    -             -             -

 Sales prices of timeshare
   interests available at
   August 31, 1996 range
   From                           $    6,150        6,250         3,950                5,150         6,950           N/A
   To                             $   15,000        9,850         5,950               15,450        23,950           N/A
</TABLE>

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

(1)      4,823 timeshare interests were sold by the prior developer.

(2)      PEC recently purchased additional units to be converted to timeshare
         interests, and are not included above.  In Nevada, the addition was 64
         units to be converted into 3,264 timeshare interests.  In Florida, the
         addition was 134 units to be converted into 6,834 timeshare interests.
         In Colorado, the addition was 56 units to be converted into 2,856
         timeshare interests.





                                       18
<PAGE>   19



         For the fiscal years ended August 31, 1996, 1995, and 1994 PEC's
consolidated revenue from sales of timeshare interests was $27.8 million, $20.7
million and $19.5 million, respectively, representing approximately 47.5%,
37.7% and 43.1% of total revenues, respectively.

         RCI EXCHANGE NETWORK

         The attractiveness of timeshare interest ownership in resorts is
enhanced significantly by the availability of exchange networks allowing owners
to exchange their occupancy right in the resort in which they own an interest
for an occupancy right in another participating network resort.  Several
companies, including Resorts Condominiums International (RCI), provide broad
based timeshare interest exchange networks, and PEC has qualified its resort
properties for participation in the RCI network.

         RCI has a total of more than 2,983 participating resort facilities
located worldwide.  Approximately 41.8% of the participating facilities are
located in the United States and Canada.  The cost of the annual subscription
renewal fee in RCI, which is at the option and expense of PEC's customers, is
approximately $67 per year.  Membership in RCI entitles PEC's customers, based
upon availability, trading power and the payment of a variable exchange fee to
RCI, to exchange their occupancy right in the resort in which they own an
interest for an occupancy right at the same or a different time in another
participating resort of equal trading power.

         OWNERS' ASSOCIATIONS AND PROPERTY MANAGEMENT

         PEC's resort properties require ongoing management services.
Independent not-for-profit corporations known as Owners' Associations have been
established to administer each of PEC's resorts other than the resort in
Honolulu.  PEC's resort in Honolulu is administered by the White Sands Resort
Club, a division of PEC together with the Owners' Associations
(Associations).  Owners of timeshare interests in each of these resorts are
responsible for the payment of annual assessment fees to the respective
Association, which are intended to fund all of the operating expenses at the
resort facilities and accumulate reserves for replacement of furnishings,
fixtures and equipment, and building maintenance.  Annual assessment fees for
1996 ranged from $258 to $445.  PEC has in the past financed budget deficits of
the Associations, but is not obligated to do so in the future.

         If the owner of a timeshare interest defaults in the payments of the
annual assessment fee, the Association may impose a lien on the related
timeshare interest.  PEC has agreed to pay to the Associations the annual
assessment fees of timeshare interest owners who are delinquent with respect to
such fees, but have paid PEC in full for their timeshare interest.  In exchange
for the payment by PEC of such fees, the Associations assign their liens for
non-payment on the respective timeshare interests to PEC.  In the event the
timeshare interest holder does not satisfy the lien after having an opportunity
to do so, PEC typically acquires a quitclaim deed or forecloses on and acquires
the timeshare interest for the amount of the lien and any foreclosure costs.

         PEC has entered into management arrangements with the Associations
pursuant to which PEC receives annual management and administrative fees in
exchange for providing or arranging for various property management services,
such as bookkeeping, staffing, budgeting, maintenance, and housekeeping
services.  The management arrangements are typically for initial terms ranging
from three to five years, and automatically renew for successive additional one
year terms unless canceled by the Association.  No management arrangement has
been canceled to date.  The Company believes that proper management is
important for maintaining customer satisfaction and protecting PEC's investment
in its inventory of unsold timeshare interests.

         LAND SALES

         PEC is engaged in the retail sale of land in Nevada and Colorado for
residential, commercial, industrial and recreational use.  PEC acquires lots
and large tracts of unimproved land and then subdivides the land into lots and
parcels for retail sale.  Residential lots range in size from one-quarter acre
to one and one-half acres, while commercial and industrial lots vary in size.
PEC's residential lots range in price from $11,500 to $46,500, commercial lots
range in price from $17,000 to $76,500 and industrial lots range in price from
$16,750 to $45,750.  Improvements such as roads and utilities and, in some
cases, amenities are typically part of the development program in Nevada.
During fiscal 1996, 1995 and 1994, PEC sold 1,617, 1,467 and 1,699 residential
lots,  and 30, 51 and 61 commercial and industrial lots, respectively.  PEC has
a continuing program to plat the properties that it owns.  Purchasers of lots
and parcels frequently exchange their property after the initial purchase for
other property interests offered by PEC.  Additionally,





                                       19
<PAGE>   20





PEC is required from time to time to cancel the purchase of lots and parcels as
a result of payment defaults or customer cancellations following inspections of
the property and pursuant to contractual provisions.

         A substantial portion of PEC's sales of retail lots and land parcels
have been in its Calvada subdivisions, containing approximately 30,000 lots in
the Pahrump Valley, Nye County, Nevada, located approximately 60 miles from Las
Vegas.  The lots are designated single family residential, multiple family
residential, mobile home, hotel/motel, industrial or commercial.  PEC owns a
public utility company that provides water and sewer service to portions of the
subdivisions and two golf courses that are available to property owners and the
public.  The community of Pahrump has a population estimated at approximately
23,000 and contains an urgent care medical facility, shopping, fast food
restaurants, hotel/casino  facilities and several schools.

         The following table illustrates certain statistics regarding the
Pahrump Valley subdivisions:

<TABLE>
                 <S>                                                                                      <C>
                 Number of acres acquired since 1969                                                      18,614
                 Number of lots platted                                                                   29,246
                 Net number of lots sold through August 31, 1996                                          28,970
                 Percent of lots sold through August 31, 1996                                                 99%
                 Number of platted lots available for sale at August 31, 1996                                305
                 Number of acres available for platting                                                      205
                 Number of lots to be platted                                                                581

                 FOR THE YEAR ENDED AUGUST 31, 1996:
                 -----------------------------------
                 Number of lots sold                                                                       1,648
                 Number of lots canceled                                                                     452
                 Number of lots exchanged                                                                    710
                                                                                                       ---------
                 Number of lots sold, net of cancellations and exchanges                                     486
                                                                                                       =========
</TABLE>
         Central Nevada Utilities Company, a wholly-owned subsidiary of PEC,
operates a public sewer and water utility for portions of PEC's Nevada
subdivisions and certain other properties located within that subsidiary's
certificated service area (which is subject to the regulation of the Nevada
Public Service Commission).

         PEC also sells larger unimproved tracts of land in Colorado.  PEC has
acquired unimproved land in Huerfano County, Colorado, which is being sold for
recreational use in parcels of at least 35 acres and at prices ranging from
$11,000 to $42,750 depending on location and size.  These parcels are sold
without any planned improvements and without water rights, which have been
reserved by PEC. Substantially all of the parcels have been sold, with
approximately 120 parcels remaining in inventory.

         PEC has also acquired improved and unimproved land in Park County,
Colorado, which is being sold for recreational use in parcels typically ranging
in size from five to nine acres or larger and at prices ranging from $12,000 to
$29,995.  These parcels are sold without any planned improvements, except for a
recreational facility which includes a basketball court, baseball field and
picnic facilities.





                                       20
<PAGE>   21



         The following table illustrates certain statistics regarding the
parcels in Huerfano and Park Counties, Colorado:

<TABLE>
                 <S>                                                                                      <C>
                 Number of acres acquired since 1969                                                      51,474
                 Number of parcels platted                                                                 2,952
                 Net number of parcels sold through August 31, 1996                                        2,718
                 Percent of parcels sold through August 31, 1996                                              92%
                 Number of platted parcels available for sale at August 31, 1996                             234

                 FOR THE YEAR ENDED AUGUST 31, 1996:
                 -----------------------------------
                 Number of parcels sold                                                                      870
                 Number of parcels canceled                                                                  276
                 Number of parcels exchanged                                                                 454
                                                                                                       ---------
                 Number of lots sold, net of cancellations and exchanges                                     140
                                                                                                       =========
</TABLE>
         For the fiscal years ended August 31, 1996, 1995 and 1994, PEC's net
revenue from land sales was approximately $18 million, $20.8 million and $13.5
million, respectively, representing approximately 30.7%, 38% and 29.9% of total
revenues, respectively.

         TRUST ARRANGEMENTS

         Title to certain of PEC's resort properties and land parcels in
Huerfano County, Colorado is held in trust by trustees in order to meet
regulatory requirements applicable at the time of commencement of sales.
Trustees administer the collection of certain of PEC's notes receivable,
collect the proceeds generated by the sale of timeshare interests and the
annual assessment fees from timeshare interest owners and retain funds for the
payment of insurance, taxes and capital improvements.  The trustee pays the
balance of the collections on timeshare projects over to PEC on a regular
basis, after deducting certain impounds, provided that annual assessment fees
have been disbursed by PEC according to a budget submitted by PEC.  Under the
trust and management agreements, PEC has the exclusive rights to the control
and management of the facilities held in trust.

         CUSTOMER FINANCING

         PEC provides financing to virtually all the purchasers of its
timeshare interests, retail lots and land parcels, most of whom make a down
payment equal to at least 10% of the purchase price.  The financing is
generally evidenced by non-recourse installment sale contracts as well as notes
secured by deeds of trust.  The term of the financing generally ranges from two
to ten years with principal and interest payable monthly in level payments.
Interest rates are fixed and generally range from 0% to 16% per year based on
prevailing market rates and the amount of the down payment made relative to the
sales price.  PEC has a sales program whereby no stated interest is charged on
those sales where the aggregate down payment is at least 50% of the purchase
price and the balance is payable in 24 or fewer monthly payments.  PEC believes
its financing is attractive to purchasers who find it convenient to handle all
facets of the purchase through a single source.  At August 31, 1996, PEC had a
serviced  portfolio of           18,408 notes receivable relating to sales of
timeshare interests and land, which receivables had an aggregate outstanding
principal balance of $120.5 million, a weighted average maturity of
approximately 6.6 years and a weighted average interest rate of 11.5%.

         PEC has financing arrangements with four institutional lenders for the
financing of customer receivables, which provide for borrowings of up to an
aggregate of $109.5 million.  These lines of credit bear interest at variable
rates tied to the prime rate and are secured by timeshare and land receivables
and inventory.  At August 31, 1996, an aggregate of  $59.3 million was
outstanding under such lines of credit and $43.2 million was available for
borrowing.  PEC periodically sells its timeshare and land receivables to
various third party purchasers and uses a portion of the sales proceeds to
reduce the outstanding balances of its lines of credit, thereby increasing the
borrowing availability under such lines by the amount of prepayment.  The sales
have been for yields to the purchaser less than the weighted average yield on
the receivables, with PEC entitled to retain the difference.  The sales
agreements generally provide for PEC to continue servicing the sold
receivables, and require that PEC repurchase or replace accounts that have
become more than 90 days contractually delinquent, or as to which certain
warranties and representations are determined to be





                                       21
<PAGE>   22





incorrect.  In addition, the sales agreements generally require the maintenance
of cash reserve accounts for losses and contain minimum net worth requirements
and other covenants, the non-compliance with which would allow the purchaser to
replace PEC as the servicer.  The sales agreements for timeshare receivables
contain covenants that generally require PEC to use its best efforts to remain
the manager of the related resorts, and to cause the homeowners associations to
maintain appropriate insurance and pay real estate taxes.  Performance by PEC
of such covenants generally are guaranteed by the Company.  The following table
sets forth the principal balances of receivables sold by PEC in the periods
indicated (thousands of dollars):

<TABLE>
<CAPTION>
                                             YEAR ENDED AUGUST 31,  
                            -------------------------------------------------------
                                 1996                1995                1994    
                            --------------      --------------       --------------  
                                  <S>                <C>                 <C>
                               $16,003            $32,517                $23,993
</TABLE>
         At August 31, 1996, PEC was contingently liable to replace or
repurchase receivables sold with recourse in the aggregate amount of $69.6
million, if and as such receivables become delinquent.  PEC generally writes
off or fully reserves all receivables that are more than 90 days delinquent.
The following table sets forth information with respect to receivables owned
and sold  that were more than 60 but less than 90 days delinquent as of the
dates indicated (thousands of dollars):


<TABLE>
<CAPTION>
                                                                       AUGUST 31,                                        
                                           --------------------------------------------------------------------
                                               1996         1995         1994          1993          1992
                                           ------------ ------------- ------------  ------------ -------------
<S>                                        <C>           <C>           <C>           <C>          <C>
60-day delinquent                            $2,547       $2,330        $2,144       $2,930        $3,749
Total receivables                          $128,299     $120,675      $109,360     $103,280      $101,234
60-day delinquency percentage                  1.99%        1.93%         1.96%        2.84%         3.70%
</TABLE>


         PEC provides an allowance for cancellation at the time it recognizes
revenues from sales of timeshare interests, which PEC believes, based on its
experience and its analysis of economic conditions, will be adequate to absorb
losses on receivables that become uncollectible.  Upon the sale of the
receivables, the allowance related to those receivables is reduced and the
future estimated contingency for notes receivables sold with recourse is
appropriately increased.

          MARKETING

         PEC markets timeshare interests and land through on-site and off-site
sales offices.  PEC's sales staff of 339 persons receive commissions based on
net sales volume.  PEC maintains fully-staffed on-site sales offices at its
timeshare properties in Las Vegas and Reno, Nevada, and Steamboat Springs,
Colorado, as well as the Las Vegas principal offices, and at its land projects
in Nevada and Colorado.  At its other timeshare properties, PEC maintains
smaller on-site sales offices staffed with one to two sales persons.  PEC also
maintains off-site sales offices in West Covina, California; San Diego,
California; Dallas, Texas; and Denver, Colorado.  PEC is exploring additional
locations for off-site sales offices.  PEC's marketing efforts are targeted
primarily at tourists meeting its customer profile.  Currently, approximately
63% of sales are made through the Las Vegas sales office.  One of the principal
sales techniques utilized by PEC in Las Vegas is to offer pre- screened
potential customers a gift such as show tickets in exchange for attending PEC's
sales presentations.  The marketing techniques utilized at PEC's
sales offices at locations other than Las Vegas include (i) exhibition booths
located at shows, fairs and other attractions, that generate inquiries from
prospective customers, whom PEC then contacts by telephone, (ii) referrals from
existing customers, (iii) limited direct mail programs, and (iv) brokers
specializing in lead generation.  Various premiums and inducements are offered
to prospective customers to obtain their attendance at sales presentations,
primarily the offer of short term accommodations at certain of PEC's timeshare
resorts.

         As part of its marketing strategy, PEC maintains an internal exchange
program.  This program enables owners of PEC's timeshare interests to exchange
their occupancy right in the resort in which they own an interest for an
occupancy right at the same or a different time in another of PEC's timeshare
resorts.  In addition, PEC has a sales program pursuant to which purchasers of
its timeshare interests, retail lots and land may exchange their equity
interests in one property for an interest in another of PEC's properties.  For
example, a purchaser of a timeshare interest in one of PEC's timeshare resorts
may exchange his equity interest for an interest in a different unit within the
same resort, for an





                                       22
<PAGE>   23





interest in one of PEC's other resorts or for a retail lot or land parcel.

         The agreement of sale for a timeshare interest or land may be rescinded
within various statutory rescission periods.  For land sales made at a location
other than the property, the customer may generally cancel the contract within a
specified period, usually five months from the date of purchase, provided that
the contract is not in default, and provided the customer has completed a
developer guided inspection and tour of the subject property first, and then
requests the cancellation.  At August 31, 1996, $131,975 of recognized sales
remained subject to such cancellation.  If a customer defaults after all
rescission and cancellation periods have expired, all payments are generally
retained by PEC, and the customer forfeits all rights to the property.

COMPETITION

         The consumer finance, timeshare and real estate industries are highly
competitive.  Competitors in the home improvement and debt consolidation loan
business include mortgage banking companies, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies.  Competitors in
the timeshare and real estate business include hotels, other timeshare
properties and real estate properties.  Certain of the Company's competitors are
substantially larger and have more capital and other resources than the Company.

         MMC faces substantial competition within both the home improvement and
debt consolidation loan industry. The home improvement and debt consolidation
loan industry is dominated by widely diversified mortgage banking companies,
commercial banks, savings and loan institutions, credit card companies,
financial service affiliates of dealers and unregulated financial service
companies, many of which have substantially greater personnel and financial
resources than those of MMC. At present, these types of competitors dominate
the home improvement and debt consolidation loan industry; however, no one
lender or group of lenders dominates the industry. According to a report issued
by HUD, MMC was the fourth largest lender of Title I Loans, based on volume of
loans originated, for the quarter ended June 30, 1996. Due to the variance in
the estimates of the size of the conventional home improvement loan market, MMC
is unable to accurately estimate its competitive position in that market. MMC
believes that Greentree Financial Corp., The Money Store, First Plus Financial
Inc., Associates First Capital Corporation and Empire Funding Corp. are some of
its largest direct competitors. MMC competes principally by providing prompt,
professional service to its Correspondents and Dealers and, depending on
circumstances, by providing competitive lending rates.

         Competition can take many forms including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and term of
the loan, and interest rates. In addition, the current level of gains realized
by MMC and its existing competitors on the sale of loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales owing to increased loan origination competition.

         PEC's timeshare plans compete directly with many other timeshare
plans, some of which are in facilities located in Las Vegas, Reno, Lake Tahoe,
Honolulu, Atlantic City, Orlando, Tampa, and Steamboat Springs.  In recent
years, several major lodging, hospitality and entertainment companies have
begun to develop and market timeshare properties.  In addition, PEC competes
with condominium projects and with traditional hotel accommodations in these
areas.  Certain of these competing projects and accommodations are larger and
more luxurious than PEC's facilities.  There are currently available
approximately 95,000 hotel and motel rooms in Las Vegas, Nevada, 36,000 in
Honolulu, Hawaii, 20,600 in Washoe County, Nevada, which includes Reno and Lake
Tahoe, 23,400 in Atlantic City, New Jersey and 1,366 in Steamboat Springs,
Colorado.

ENVIRONMENTAL REGULATION

         Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or chemical
releases at such property, and may be held liable to a governmental entity or
to third parties for property damage, personal injury and investigation and
cleanup costs incurred by such parties in connection with the contamination.
Such laws typically impose cleanup responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and
the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility.  The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to





                                       23
<PAGE>   24





properly remediate such property, may adversely affect  the owner's ability to
sell or rent such property or to borrow using such property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not the facility
is owned or operated by such person.  In addition, the owner or former owners
of a site may be subject to common law claims by third parties based on damages
and costs resulting from environmental contamination emanating from a site.

GOVERNMENT REGULATION

         The Company's consumer finance, timeshare and real estate operations
are subject to extensive regulation, suspension and licensing by federal and
state authorities.  The following is a summary of the regulations applicable to
the Company.

         MMC's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), ECOA, the Fair Credit Reporting Act of 1970, as
amended, RESPA and Regulation X, the Home Mortgage Disclosure Act, the Federal
Debt Collection Practices Act and the Housing Act, as well as other federal and
state statutes and regulations affecting MMC's activities. Failure to comply
with these requirements can lead to loss of approved status, termination or
suspension of servicing contracts without compensation to the servicer, demands
for indemnifications or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcements
actions.

         TITLE I LOAN AND CONSUMER FINANCING

         MMC presently is subject to the rules and regulations of, and
examinations by, HUD, FHA and other federal and state regulatory authorities
with respect to originating, underwriting, funding, acquiring,  selling and
servicing consumer and mortgage loans. In addition, there are other federal and
state statutes and regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for loans, prohibit discrimination, provide for
inspection and appraisals of properties, require credit reports on prospective
borrowers, regulate payment features and, in some cases, fix maximum interest
rates, fees and loan amounts. MMC is required to submit annual audited
financial statements to various governmental regulatory agencies that require
the maintenance of specified net worth levels. MMC's affairs are also subject
to examination, at all times, by the Federal Housing Commissioner to assure
compliance with FHA regulations, policies and procedures. For more information
regarding regulation of MMC under Title I, see "Title I Loan Program."

         MMC is a HUD approved Title I mortgage lender and is subject to the
supervision of HUD. MMC is also a FNMA approved seller/servicer and is subject
to the supervision of FNMA. In addition, MMC's operations are subject to
supervision by state authorities (typically state banking or consumer credit
authorities), many of which generally require that MMC be licensed to conduct
its business. This normally requires state examinations and reporting
requirements on an annual basis.

         The Federal Consumer Credit Protection Act (FCCPA) requires a written
statement showing an annual percentage rate of finance charges and requires
that other information be presented to debtors when consumer credit contracts
are executed. The Fair Credit Reporting Act requires certain disclosures to
applicants concerning information that is used as a basis for denial of credit.
ECOA prohibits discrimination against applicants with respect to any aspect of
a credit transaction on the basis of sex, marital status, race, color,
religion, national origin, age, derivation of income from public assistance
program, or the good faith exercise of a right under the FCCPA.

         The interest rates which MMC may charge on its loans are subject to
state usury laws, which specify the maximum rate which may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that MMC disclose to its customers prior to execution of the loans, all
material terms and conditions of the financing, including the payment schedule
and total obligation under the loans. MMC believes that it is in compliance in
all material respects with such regulations.





                                       24
<PAGE>   25



         TIMESHARE REGULATION

         Nevada Revised Statutes Chapter 119A requires the Company to give each
customer a Public Offering Statement that discloses all aspects of the
timeshare program, including the terms and conditions of sale, the common
facilities, the costs to operate and maintain common facilities, the Company's
history and all services and facilities available to the purchasers. Section
514E of Hawaii Revised Statutes provides for similar information to be provided
to all prospective purchasers through the use of the Hawaii Disclosure
Statement. Section 11000, et seq., of the California Business and Professions
Code also provides for similar information to be provided to all prospective
purchasers through the use of an Out-of-State Time Share Permit issued by the
California Department of Real Estate. Section 45 of the New Jersey Statutes
Annotated provides for similar information to be provided to all prospective
purchasers through the use of a Public Offering Statement. Title 12, Article 61
of the Colorado Revised Statutes provides for similar information to be
provided to all prospective purchasers, in their contracts of sales or by
separate written documents. Nevada and Colorado require a five day rescission
period for all timeshare purchasers. The rescission period required by Hawaii
and New Jersey is seven days. The rescission period required by Florida is ten
days.  The rescission period in California for out-of-state sales is five days.
The Nevada, California, New Jersey, Hawaii, Colorado and Florida timeshare
statutes have stringent restrictions on sales and advertising practices and
require the Company to utilize licensed sales personnel.

         The Company believes that it has made all required filings with state,
city and county authorities and is in material compliance with all state and
local regulations governing sales of timeshare interests.  The Company believes
that such regulations have not had a material adverse effect on any phase of
the Company's operations, including the over-all cost of acquiring property.
Compliance with or changes in official interpretations of regulations might,
however, impose additional compliance costs on the Company that cannot be
predicted.

         REAL ESTATE REGULATION

         The real estate industry is subject to extensive regulation. The
Company is subject to compliance with various federal, state and local
environmental, zoning and other statutes and regulations regarding the
acquisition, subdivision, development and sale of real estate and various
aspects of its financing operations.  The Interstate Land Sales Full Disclosure
Act establishes strict guidelines with respect to the subdivision and sale of
land in interstate commerce.  HUD has enforcement powers with respect to this
statute. In many instances, (e.g., Huerfano County, Colorado land sales) the
Company has been exempt from HUD registration requirements because of the size
or number of the subdivided parcels and the limited nature or type of its
offerings. The Company registers its timeshare properties with various state
agencies.  The Company must disclose financial information concerning the
property, evidence of title, a description of the intended manner of offering,
proposed advertising materials, and must bear the costs of such registration,
which include legal and filing fees.

         The Company believes that it is in compliance in all material respects
with all applicable federal, state and local regulations. The Company believes
that such regulations have not had a material adverse effect on any phase of
its operations. Compliance with future changes in regulations might, however,
impose additional compliance costs on the Company that cannot be predicted.

         The city and county governments in areas where the Company operates
have enacted licensing and other ordinances that affect timeshare projects.

EMPLOYEES

         As of August 31, 1996, the Company had 1,433 employees, of whom 1,190
were full-time employees and 243 were part-time employees.  Of these, 166 were
employed full-time in consumer finance activities, including 6    executive
officers, 74 managerial and staff professional personnel,  13 marketing and
sales specialists and 73 general administrative and support personnel and loan
processors, and 1,256 were employed in timeshare and real estate activities,
including 661 sales and marketing officers and personnel, 213 general and
administrative officers, managers and support staff, 382 hotel personnel, and
11 utility company personnel.  None of the Company's employees are represented
by a collective bargaining unit.  The Company believes that its relations with
its employees are satisfactory.





                                       25
<PAGE>   26





ITEM 2.     PROPERTIES

         At August 31, 1996, the Company had 305 residential, commercial and
industrial lots, 234 recreational land parcels, 190 recreational vehicle pads,
and 7,637 timeshare interests in its inventory.  In addition, the Company
maintains the following properties:

         The Company's principal executive offices are located at 4310 Paradise
Road, Las Vegas, Nevada 89109, where it occupies approximately 31,000 square
feet of office space in a building it owns.  Title to the property is held by
the Company.

         The Company has acquired a second office building located in Las
Vegas, Nevada.  The building is approximately 60,000 square feet, of which the
Company initially intends to occupy approximately 30,000 square feet.  The
remaining approximately 30,000 square feet will be leased to tenants on a short
term basis.

         The Company leases an executive office at 1125 N.E. 125th Street in
North Miami, Florida, comprising approximately 3,200 square feet, at a rental
of $2,400 per month.  The lease expires in August 1998.

         MMC leases  45,950 square feet of office space at 1000 Parkwood
Circle, Atlanta, Georgia. This lease is for an initial six year term expiring
August 2002 with a conditional option to extend the term to August 2007 at a
monthly rental of  $73,711 with 2% annual increases.  MMC also leases 10,478
square feet of office space in Atlanta, Georgia, at a rental of $13,193 per
month, pursuant to a lease that expires in March 1999.

         The Company leases various other facilities on a short-term or month
to month basis for off-site sales offices and lending offices in various cities
throughout the United States.

ITEM 3.     LEGAL PROCEEDINGS

         In the matter of the PEC Apartment Subsidiaries litigation previously
reported upon, an order for judgment of  $3,346,000 was rendered against PEC on
its limited guaranty, in connection with the defendants' counterclaim. Pursuant
to a stipulation between the parties dated as of May 15, 1995, PEC paid the
amount of $2,900,000 on June 15, 1995 in full settlement of this matter.
Because the reserve recorded in the financial statements of the Company
exceeded the amount of the settlement, the Company recognized a gain on
discontinued operations of $1,323,000.

         On July 5, 1995, Pahrump Valley Vineyards, Inc. filed a complaint in
the 5th Judicial District Court, Nye County, Nevada, against CNUC, a subsidiary
of PEC. The plaintiff claimed compensatory damages in excess of $25,000 in each
of 4 counts alleging trespass, nuisance, negligence and breach of contract for
the alleged supplying of contaminated water by CNUC to the plaintiff, and also
prayed for punitive damages in excess of $25,000. Following discovery, PEC's
insurance carrier settled the case by payment of $35,000 to the plaintiffs.

         Following the Company's November 10, 1995 announcement disclosing
certain accounting adjustments, an action was filed on November 13, 1995, in
the United States District Court, District of Nevada by Christopher Dunleavy,
as a purported class action against the Company, certain of the Company's
officers and directors and the Company's independent auditors.  The complaint
alleges, among other things, that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with
the preparation and issuance of certain of the Company's financial reports
issued in 1994 and 1995, including certain financial statements reported on by
the Company's independent auditors.  The complaint also alleges that one of the
director defendants violated the federal securities laws by engaging in
"insider trading."  The named plaintiff seeks to represent a class consisting
of purchasers of the Company's Common stock between January 14, 1994 and
November 9, 1995, and seeks damages in an unspecified amount, costs, attorney's
fees and such other relief as the court may deem just and proper.  The Company
believes that it  has substantial defenses to the action, however, the Company
presently cannot predict the outcome of this matter.

         On November 16, 1995, a second action was filed in the United States
District Court for the District of Nevada by Alan Peyser as a purported class
action against the Company and certain of its officers and directors, which was
served on the Company on December 20, 1995.  The complaint alleges, among other
things, that the defendants violated the federal securities laws by making
statements and issuing certain financial reports in 1994 and 1995 that
overstated the Company's earnings and business prospects.  The named plaintiff
seeks to represent a class consisting of purchasers of the Company's common
stock between November 28, 1994 and November 9,





                                       26
<PAGE>   27





1995.  The complaint seeks damages in an unspecified amount, cost, attorney's
fees and such other relief as the Court may deem just and proper.  The Company
believes that it has substantial defenses to the action, however, the Company
presently cannot predict the outcome of this matter.

         On or about June 10, 1996, the Dunleavy Action and Peyser Action were
consolidated under the caption "In re Mego Financial Corp.  Securities
Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a stipulation
by the parties.  On or about July 26, 1996, Michael Nadler filed a motion in
the above matter requesting that he be added as a class representative and that
his attorney be added as additional counsel for the class.  On or about August
26, 1996, a Motion in Opposition to the motion to add a class representative
was filed by the Company and certain other defendants.  Neither motion has been
heard or decided by the court.

         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 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended August 31, 1996.





                                       27
<PAGE>   28



                                    PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS

MARKET INFORMATION

         The Company's common stock is traded in the over-the-counter market
and since April 1, 1994, prices have been quoted on the Nasdaq National Market,
under the symbol MEGO.  Prior to April 1, 1994, the common stock was quoted on
the Nasdaq Small Cap Market (the "NSCM") under the symbol MEGO and, prior to
May 1, 1994, was traded on the Boston Stock Exchange under the symbol MGO.  The
following table sets forth the high and low sales prices of the common stock as
reported on the Nasdaq National Market:

<TABLE>
<CAPTION>
                                                                                  High             Low      
                                                                             --------------   --------------
                 <S>                                                               <C>              <C>
                 FISCAL YEAR 1995:
                 -----------------
                   First Quarter                                                  $4 3/4           $3 1/4
                   Second Quarter                                                  4 5/8            3 3/4
                   Third Quarter                                                       7          3 11/16
                   Fourth Quarter                                                 10 3/8          6 11/16

                 FISCAL YEAR 1996:
                 -----------------
                   First Quarter                                                 $11 1/8           $4 1/2
                   Second Quarter                                                  8 5/8                6
                   Third Quarter                                                   9 3/4            7 3/4
                   Fourth Quarter                                                  9 3/8            5 3/8

                 FISCAL YEAR 1997:
                 -----------------
                   First Quarter (through November 8, 1996)                         $10            $5 5/8
</TABLE>


         As of November 8, 1996, there were 2,596 holders of record of the
18,433,121  outstanding shares of common stock.  The closing sales price for
the common stock on November 8, 1996 was $9.25.

         The Company did not pay any dividends on the common stock during the
fiscal years ended August 31, 1996 and 1995.  The Company intends to retain
future earnings for the operation and expansion of its business and does not
currently anticipate paying cash dividends on the common stock.  Any future
determination as to the payment of such cash dividends would depend on a number
of factors including future earnings, results of operations, capital
requirements, the Company's financial condition and any restrictions under
credit agreements existing from time to time, as well as such other factors as
the Board of Directors might deem relevant.  No assurance can be given that the
Company will pay any dividends in the future.





                                       28
<PAGE>   29



ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA

         The selected Income Statement Data and Balance Sheet Data set forth
below have been derived from the consolidated financial statements of the
Company.  The consolidated financial statements as of August 31, 1996, 1995,
and 1994 and for each of the three years in the period ended August 31, 1996
have been audited by Deloitte & Touche LLP, independent auditors, and are
included elsewhere herein.  The consolidated financial statements as of August
31, 1993 and  1992 and for each of the two years in the period ended August 31,
1993 have been audited by Deloitte & Touche LLP, independent auditors, and are
not included herein.

         The selected financial information set forth below should be read in
conjunction with the consolidated financial statements, the related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein (thousands of dollars):


<TABLE>
<CAPTION>
                                                                  YEAR ENDED AUGUST 31,      
                                            ---------------------------------------------------------------
                                              1996          1995        1994         1993          1992
                                            -------       -------     --------     ---------    -----------
 <S>                                        <C>           <C>          <C>          <C>           <C>
 OPERATING INCOME (LOSS) BY SUBSIDIARIES:
 MMC:
 Revenues:
 Gain on sale of loans                      $17,994       $12,233         $579      $      -      $      -
 Net unrealized gain on mortgage related
   securities                                 2,697             -            -             -             -
 Interest income, net of interest expense       988           473          172             -             -
 Loan servicing income                        3,348           873            -             -             -
                                          ---------     ---------    ---------     ---------     ---------    
 Total revenues                              25,027        13,579          751             -             -
 Total costs and expenses                    13,872         7,660        2,262             -             -
                                          ---------     ---------    ---------     ---------     ---------    
 Operating income (loss)                    $11,155        $5,919      $(1,511)     $      -      $      -
                                          =========     =========    =========     =========     =========    
 PEC:
 Revenues:
 Timeshare and land sales, net              $45,746       $41,494      $33,055       $34,933       $28,439
 Gain on sale of receivables                  1,116         1,586          875           631             -
 Interest income                              6,560         6,838        7,914         8,238         8,175
 Other                                        5,115         4,898        3,463         3,630         2,729
                                          ---------     ---------    ---------     ---------     ---------    
 Total revenues                              58,537        54,816       45,307        47,432        39,343
 Total costs and expenses                    57,200        46,510       39,756        41,844        36,188
                                          ---------     ---------    ---------     ---------     ---------    
 Operating income                            $1,337        $8,306       $5,551        $5,588        $3,155
                                          =========     =========    =========     =========     =========    
 INCOME STATEMENT DATA:
 Consolidated operating income from
   subsidiaries                             $12,492       $14,225       $4,040        $5,588        $3,155
 Payments to assignors                            -        (7,252)      (8,526)       (4,632)       (3,325)
 Other income (expense), net                 (4,474)       (2,786)        (527)          409         1,509
                                          ---------     ---------    ---------     ---------     ---------    
 Income (loss) from continuing operations
   before income taxes                        8,018         4,187       (5,013)        1,365         1,339
 Income taxes                                 3,167         3,293          761         2,218         2,382
                                          ---------     ---------    ---------     ---------     ---------    
 Income (loss) from continuing operations     4,851           894       (5,774)         (853)       (1,043)
 Income from discontinued operations              -           873            -             -             -
                                          ---------     ---------    ---------     ---------     ---------
 Income (loss) before minority interest       4,851         1,767       (5,774)         (853)       (1,043)
 Minority interest in income of 80%-owned
   subsidiary                                     -             -            -           126            63
                                          ---------     ---------    ---------     ---------     ---------    
 Net income (loss)                            4,851         1,767       (5,774)         (979)       (1,106)
 Cumulative preferred stock dividends           240           360          360             -             -
                                          ---------     ---------    ---------     ---------     ---------    
 Net income (loss) applicable to common
   stock                                     $4,611        $1,407      $(6,134)        $(979)      $(1,106)
                                          =========     =========    =========     =========     =========    
</TABLE>





                                       29
<PAGE>   30





<TABLE>
<CAPTION>
                                                                    YEAR ENDED AUGUST 31,                      
                                           --------------------------------------------------------------------
                                                1996         1995        1994         1993          1992
                                           ------------ ------------- ------------  ------------ --------------
 <S>                                          <C>           <C>          <C>           <C>           <C>   
 EARNINGS (LOSS) PER SHARE:
   Primary:
     Income (loss) from continuing
       operations, net of minority interest        $.24          $.03        $(.34)        $(.06)        $(.07)
     Income from discontinued operations              -           .05            -             -             -
                                              ---------     ---------    ---------     ---------     ---------    
     Net income (loss)                             $.24          $.08        $(.34)        $(.06)        $(.07)
                                              =========     =========    =========     =========     =========    
     Weighted average number of shares
       outstanding (thousands)                   19,087        18,087       17,820        17,145        16,701
                                              =========     =========    =========     =========     =========    
   Fully diluted:
     Income from continuing operations, net
       of minority interest                        $.24          $.02
     Income from discontinued operations           -              .05
                                              ---------     ---------  
     Net income                                    $.24          $.07
                                              =========     =========  
     Weighted average number of shares
       outstanding (thousands)                   19,087        18,939
                                              =========     =========  
</TABLE>


<TABLE>
<CAPTION>
                                                                       AUGUST 31,                                
                                           -------------------------------------------------------------------
                                              1996          1995         1994          1993          1992
                                           ------------ ------------- ------------  ------------ -------------
                                                                    (THOUSANDS OF DOLLARS)
 <S>                                       <C>           <C>           <C>           <C>           <C>
 BALANCE SHEET DATA:
   Total assets                            $165,597      $112,757      $88,302       $91,153       $88,937
   Total liabilities                        130,055        81,175       68,779        66,144        65,412
   Minority interest                              -             -            -             -         1,619
   Subordinated debt                          9,691         9,352            -             -             -
   Redeemable preferred stock                     -         3,000        3,000         3,000             -
   Total stockholders' equity                25,851        19,230       16,523        22,009        21,906
</TABLE>
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements, including the notes thereto,
contained elsewhere herein.

GENERAL

         The business of the Company, after the acquisition of PEC (see
"Business--Purchase of Preferred Equities Corporation") and the commencement of
operations of MMC (see "Business of MMC"), is primarily the business of
generating consumer receivables by marketing timeshare interests, retail lots
and land parcels and generating home improvement loans; and collecting the
related notes receivable and loans.

MMC

         MMC began originating loans on March 1, 1994 and, accordingly, MMC's
results of operations for the years ended August 31, 1996 and 1995 include full
years' of operations, while results for the year ended August 31, 1994 include
only six months of loan originations.

         MMC recognizes revenue from the gain on sale of loans, interest income
and servicing income. Interest income, net, represents the interest received on
loans in MMC's portfolio prior to their sale, net of interest paid under its
credit agreements. MMC continues to service all loans sold to date. Net loan
servicing income represents servicing fee income and other ancillary fees
received for servicing loans less the amortization of capitalized mortgage
servicing rights. Mortgage servicing rights are amortized over the estimated
life of the future net servicing fee income.





                                       30
<PAGE>   31

         MMC sells its loans through whole loan sales to third party
purchasers, retaining the right to service the loans and to receive any amounts
in excess of the guaranteed yield to the purchasers. In addition, MMC has
commenced the sale of loans through securitizations. Certain of the regular
interests of the related securitizations are sold, with the interest only and
residual class securities retained by MMC.

         Gain on sale of loans includes the gain on sale of mortgage related
securities and loans held for sale. The gain on sale of mortgage related
securities is determined by an allocation of the cost of the securities based
on the relative fair value of the securities sold and the securities retained.
MMC generally retains an interest only strip security and residual interest
security. The fair value of the interest only strip and residual interest
security is the present value of the estimated cash flows to be received after
considering the effects of estimated prepayments and credit losses, net of FHA
insurance recoveries. The net unrealized gain on mortgage related securities
represents the difference between the allocated cost basis of the securities
and the estimated fair value.

         As the holder of the residual securities, MMC is entitled to receive
certain excess cash flows. These excess cash flows are calculated as the
difference between (a) principal and interest paid by borrowers and (b) the sum
of (i) pass-through interest and principal to be paid to the holders of the
regular securities and interest only securities, (ii) trustee fees, (iii)
third-party credit enhancement fees, (iv) servicing fees and (v) estimated loan
pool losses. MMC's right to receive the excess cash flows is subject to the
satisfaction of certain reserve requirements which are specific to each
securitization and are used as a means of credit enhancement.

         MMC carries interest only and residual securities at fair value. As
such, the carrying value of these securities is affected by changes in market
interest rates and prepayment and loss experiences of these and similar
securities. MMC estimates the fair value of the interest only and residual
securities utilizing prepayment and credit loss assumptions MMC believes to be
appropriate for each particular securitization. To MMC's knowledge, there is no
active market for the sale of these interest only and residual securities. The
range of values attributable to the factors used in determining fair value is
broad. Although MMC believes that it has made reasonable estimates of the fair
value of the mortgage related securities, the rate of prepayments and default
rates utilized are estimates, and actual experience may vary from its
estimates.

         The present value of expected net cash flows from the sale of loans is
recorded at the time of sale as excess servicing rights and mortgage related
securities. Excess servicing rights are amortized as a charge to income, as
payments are received on the retained interest differential over the estimated
life of the underlying loans. The expected cash flows used to determine the
excess servicing rights asset and mortgage related securities have been reduced
for potential losses, net of FHA insurance recoveries, under recourse
provisions of the sales agreements. The allowance for credit losses on loans
sold with recourse represents MMC's estimate of losses to be incurred in
connection with the recourse provisions of the sales agreements.

         To determine the fair value of the mortgage servicing rights and
excess servicing rights, MMC projects net cash flows expected to be received
over the life of the loans. Such projections assume certain servicing costs,
prepayment rates and credit losses. These assumptions are similar to those used
by MMC to value the residual securities. As of August 31, 1996, mortgage
servicing rights totaled $3.8 million, excess servicing rights totaled $12.1
million and mortgage related securities totaled $22.9 million for MMC.

         There can be no assurance that MMC's estimates used to determine the
fair value of mortgage and excess servicing rights will remain appropriate for
the life of the loans. If actual loan prepayments or credit losses exceed MMC's
estimates, the carrying value of MMC's mortgage and excess servicing rights may
have to be written down through a charge against earnings. MMC will not write
up such assets to reflect slower than expected prepayments, although slower
prepayments may increase future earnings as MMC will receive cash flows in
excess of those anticipated.

         MMC discounts cash flows on its loan sales at the rate it believes an
independent third-party purchaser would require as a rate of return. The cash
flows were discounted to present value using discount rates which averaged 12%
for the years ended August 31, 1996, 1995, and 1994. MMC has developed its
assumptions based on experience with its own portfolio, available market data
and ongoing consultation with its financial advisors.

         The weighted average discount rate used to determine the present value
of the balance of capitalized excess servicing rights and capitalized mortgage
servicing rights reflected on MMC's Statement of Financial Condition at August
31, 1996 and 1995 was approximately 12%.  Capitalized excess servicing rights
are amortized over the lesser





                                       31
<PAGE>   32

of the estimated or actual remaining life of the underlying loans as an offset
against the excess servicing rights component of servicing income actually
received in connection with such loans.

         Although MMC believes that it has made reasonable estimates of the
fair value of the mortgage related securities, the excess servicing rights and
mortgage servicing rights likely to be realized, the rate of prepayment and the
amount of defaults utilized by MMC are estimates and actual experience may vary
from its estimates. The gain recognized by MMC upon the sale of loans and
unrealized gain on mortgage related securities will have been overstated if
prepayments or defaults are greater than anticipated.   Higher levels of future
prepayments could result in excess servicing rights and mortgage servicing
rights amortization expense exceeding realized excess servicing rights and
mortgage servicing rights, thereby adversely affecting MMC's servicing income
and resulting in a charge to earnings in the period of adjustment.  Similarly,
if delinquencies or liquidations were to be greater than initially assumed,
excess servicing rights and mortgage servicing rights amortization would occur
more quickly than originally anticipated, which would have an adverse effect on
loan servicing income in the period of such adjustment. MMC periodically
reviews its prepayment assumptions in relation to current rates of prepayment
and, if necessary, reduces the remaining asset to the net present value of the
estimated remaining future excess servicing rights. Rapid increases in interest
rates or competitive pressures may result in a reduction of excess servicing
income recognized by MMC upon the sale of loans in the future, thereby reducing
the gains recognized by MMC upon such sales. Higher levels of prepayments than
initially assumed would result in a charge to earnings in the period of
adjustment.

         Increases in interest rates or higher than anticipated rates of loan
prepayments or credit losses on the underlying loans of MMC's mortgage related
securities or similar securities may require MMC to write down the value of
such mortgage related securities and result in a material adverse impact on
MMC's results of operations and financial condition. MMC is not aware of an
active market for the mortgage related securities, excess servicing rights or
mortgage servicing rights

         MMC continues to implement its business growth strategy through both
product line and geographic diversification and expansion of its Correspondent
and Dealer operations, in an effort to increase both loan origination volume
and servicing volume.  Implementation of this strategy has increased MMC's
total assets through growth in excess servicing rights, mortgage servicing
assets and mortgage related securities and has been funded through increased
borrowings. While this growth has increased MMC's revenues through increased
gain on sales of loans, loan servicing income and net interest income, it has
also increased the general and administrative expense and provision for credit
losses associated with the growth in loans originated and serviced. Continued
increases in MMC's total assets and increasing earnings can continue only so
long as origination volumes continue to exceed paydowns of loans serviced and
previous period origination volumes. Additionally, the fair value of mortgage
related securities, mortgage servicing rights and excess servicing rights owned
by MMC may be adversely affected by changes in the interest rate environment
which could affect the discount rate and prepayment assumptions used to value
the assets. Any such adverse change in assumptions could have a material
adverse effect on MMC's results of operations and financial condition.

PEC

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

         Notes receivable with payment delinquencies of 90 days or more have
been considered in determining the allowance for cancellation.  Cancellations
occur when the note receivable is determined to be uncollectible and the
related collateral, if any, has been recovered.  Cancellation of a note
receivable in the year the revenue is recognized is accounted for as a reversal
of the revenue.  Cancellation of a note receivable subsequent to the year the
revenue was recognized is charged to the allowance for cancellation.





                                       32
<PAGE>   33

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

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

         In discounting cash flows related to notes receivable sales, PEC
defers servicing income at an annual rate of 1% and discounts cash flows on its
sales at the rate it believes a purchaser would require as a rate of return.
Earned servicing income is included in financial income.  The cash flows were
discounted to present value using discount rates which averaged 15% in both
fiscal 1996 and fiscal 1995.  PEC has developed its assumptions based on
experience with its own portfolio, available market data and ongoing
consultation with its investment bankers.

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

         Provision for cancellation 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.  PEC records a
provision for cancellations at the time revenue is recognized, based on
historical experience and current economic factors.  The related allowance for
cancellation represents PEC's estimate of the amount of its probable future
credit losses on the recognized notes receivable which may become
uncollectable.   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 liability
for future estimated cancellation as notes receivable are sold.  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, collateral values and overall
portfolio quality.  Changes in the allowance as a result of such reviews are
included in the provision for cancellations.

         Recourse to PEC on sales of notes receivable is governed by the
agreements between the purchasers and PEC.  The future estimated contingency
for notes receivable sold with recourse represents PEC's estimate of its
probable future credit losses to be incurred over the lives of the notes
receivable. A liability for future estimated contingency for notes receivable
sold with recourse was established at the time of each sale based upon PEC's
analysis of all probable losses resulting from PEC's recourse obligations under
each agreement of sale. For notes receivable sold after September 30, 1992, the
liability is determined in accordance with Emerging Issues Task Force (EITF)
Issue No. 92-2, on a "discounted to present value" basis using an interest rate
equivalent to the risk-free





                                       33
<PAGE>   34

market rate for securities with a duration similar to that estimated for the
underlying notes receivable.  For notes receivable sold prior to September 30,
1992, the liability remains on a non-discounted basis.

         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.  Capitalized excess
servicing rights 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 excess servicing
rights and interest on cash funds.

         Total costs and expenses consist primarily of commissions and selling
expenses, general and administrative expenses, direct costs of sales of
timeshare interests and land, depreciation and amortization and interest
expense.  Commissions and selling costs directly attributable to unrecognized
sales are accounted for as deferred selling costs until such time as the sale
is recognized.  The Company incurs a portion of operating expenses of the
timeshare owners' associations based on ownership of unsold timeshare interests
at each of the respective timeshare properties. These costs are referred to as
"association assessments" and are included in the Consolidated Statements of
Operations in general and administrative expense.

REAL ESTATE RISK

         Real estate development involves significant risks, including risks
that suitable properties will not be available at reasonable prices, that
acquisition, development and construction financing may not be available on
favorable terms or at all, that infrastructure and construction costs may
exceed original estimates, that construction may not be completed on schedule,
and that upon completion of construction and improvements, properties may not
be sold on favorable terms or at all.  In addition, PEC's timeshare activities,
as well as its ownership, improvement, subdivision and sale of land, are
subject to comprehensive federal, state and local laws regulating environmental
and health matters, protection of endangered species, water supplies, zoning,
land development, land use, building design and construction and other matters.
Such laws and difficulties in obtaining, or the failure to obtain, the
requisite licenses, permits, allocations, authorizations and other entitlements
pursuant to such laws can adversely impact the development and completion of
PEC's projects.  The enactment of "slow-growth" or "no-growth" initiatives in
any area where PEC sells land or timeshares could also delay or preclude
entirely the development of such properties.

RESTATEMENT AND SEC INVESTIGATION

         As previously reported, the Company has restated certain of its
previously issued financial statements, including for the year ended August 31,
1994, upon which its independent auditors had rendered unqualified opinions.  
As a result of the restatement of the Company's financial statements and 
certain trading in its common stock, the Securities and Exchange 
Commission has commenced a formal investigation to determine, among other 
things, whether the Company, and/or its officers and directors, violated 
applicable federal securities laws in connection with the preparation and 
filing of the Company's previously issued financial statements or such
trading.  Possible penalties for violation of federal securities laws include
civil remedies, such as fines and injunctions, as well as criminal sanctions.

CERTAIN PAYMENTS AND AMORTIZATION OF NEGATIVE GOODWILL

         In connection with the assignment to the Company in 1988 by affiliates
of certain officers and directors of the Company (Assignors) of the right to
acquire PEC, the Company became obligated to make quarterly payments to the
Assignors equal to 63% of the cash balances of PEC, during the 7 year period
ended January 31, 1995, that could be used to pay a dividend without violating
PEC's loan agreements.  Accrual of amounts owed under such assignment agreement
to the Assignors ended on January 31, 1995, when their right to the accrual
expired, at which time PEC owed the Assignors $13.3 million.  On March 2, 1995,
$10 million of such amount was converted to Subordinated debt.  See Note 22 of
Notes to the Consolidated Financial Statements for further discussion.  At the
time of the acquisition of PEC, the underlying book value of the net assets
acquired exceeded the purchase price paid by the Company by $42.3 million
resulting in the creation of negative goodwill in that amount (Revaluation
Adjustment).  Of this amount $20





                                       34
<PAGE>   35

million was not amortized but was instead reduced as additional payments were
accrued to the Assignors.  Amounts accrued to the Assignors in excess of $20
million were expensed as such accruals were made.  The amortization of the
remaining $22.3 million of the Revaluation Adjustment was directly affected by
the level of collections of the receivables of PEC included in the acquired
assets.  As proceeds of these receivables were collected, through installment
payments or sale, a portion of the Revaluation Adjustment included as a contra
account in notes receivable was recorded to income as amortization of negative
goodwill, which amortization was completed at February 28, 1995.  The Company
also amortizes over a five-year period ending February 1998, negative goodwill
related to the excess of the underlying book value over the purchase price paid
in 1993 for the acquisition of the minority interest of Vacation Spa Resorts,
Inc. (VSR), formerly an 80%-owned subsidiary.  The Consolidated Financial
Statements of the Company accordingly reflect amortization of a portion of the
Revaluation Adjustment (Revaluation Amortization), amortization of the negative
goodwill associated with the acquisition of the VSR minority interest and
accrual of payments to Assignors.

RESULTS OF OPERATIONS

Year Ended August 31, 1996 Compared to Year Ended August 31, 1995

MMC

         MMC originated $139.4 million of loans during fiscal 1996 compared to
$87.8 million of loans during fiscal 1995, an increase of 58.8%.  The increase
is a result of the overall growth in MMC's business, including an increase in
the number of active Correspondents and Dealers and an increase in the number
of states served. At August 31, 1996, MMC had approximately 310 active
Correspondents and 435 active Dealers, compared to approximately 150 active
Correspondents and 170 active Dealers at August 31, 1995. Of the $139.4 million
of loans originated in fiscal 1996, $11.6 million were conventional loans. MMC
did not originate conventional loans in fiscal 1995.

         The following table sets forth certain data regarding loans originated
by MMC during fiscal 1996 and 1995 (thousands of dollars):


<TABLE>
<CAPTION>
                                                                          YEAR ENDED AUGUST 31,                 
                                                          -------------------------------------------------------------
                                                                    1996                             1995        
                                                          ---------------------------       ---------------------------       
<S>                                                          <C>            <C>              <C>              <C>
 Loan Originations:
 Principal amount of loans:
 Correspondents:
 Title I                                                  $82,596,197        59.3%            $63,792,680        72.7%
 Conventional                                              11,582,108         8.3                       -         -
                                                        -------------      ------              ----------      ------   
Total Correspondents                                       94,178,305        67.6              63,792,680        72.7
                                                        -------------      ------              ----------      ------   
 Dealers - Title I                                         45,188,721        32.4              23,957,829        27.3
                                                        -------------      ------              ----------      ------   
         Total                                           $139,367,026       100.0%            $87,750,509       100.0%
                                                        =============      ======              ==========      ======   
 Number of loans:
 Correspondents:
 Title I                                                        4,382        50.9%                  3,437        59.1%
 Conventional                                                     392         4.6                       -         -
                                                        -------------      ------              ----------      ------   
Total Correspondents                                            4,774        55.5                   3,437        59.1
                                                        -------------      ------              ----------      ------   
 Dealers - Title I                                              3,836        44.5                   2,381        40.9
                                                        -------------      ------              ----------      ------   
         Total                                                  8,610       100.0%                  5,818       100.0%
                                                        =============      ======              ==========      ======   
</TABLE>
         See Notes  4 and 7 of Notes to Consolidated Financial Statements for
further discussion.





                                       35
<PAGE>   36



         Total revenues increased 84.3% to $25 million for fiscal 1996 from
$13.6 million for fiscal 1995. The increase was primarily the result of the
increased volume of loans originated and the sale of such loans. The following
table sets forth the principal balance of loans sold or securitized and related
gain on sale data for fiscal 1996 and 1995 (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED AUGUST 31,    
                                                                              -----------------------------

                                                                                  1996             1995    
                                                                              ------------     ------------
  <S>                                                                           <C>               <C>
  Loans Sold:
    Title I Loans                                                               $127,414          $85,363
    Conventional                                                                  10,494                -
                                                                            ------------     ------------

           Total                                                                $137,908          $85,363
                                                                            ============     ============
  Gain on sale of loans                                                          $17,994          $12,233
  Net unrealized gain on mortgage related securities                               2,697                -
                                                                            ------------     ------------
  Gain on sale of loans and unrealized gain on mortgage
    related securities                                                           $20,691          $12,233
                                                                            ============     ============

  Gain on sale of loans as a percentage of principal
    balance of loans sold                                                           13.0%            14.3%
                                                                            ============     ============

  Gain on sale of loans and unrealized gain on mortgage
    related securities as a percentage of principal
    balance of loans sold                                                           15.0%            14.3%
                                                                            ============     ============
</TABLE>
         See Note 4 of Notes to Consolidated Financial Statements for further
discussion.

         Loan servicing income increased 283.5% to $3.3 million for fiscal 1996
from $873,000 for fiscal 1995. The increase was primarily the result of a 61.6%
increase in the amount of loan sale activity in fiscal 1996 with the servicing
rights retained by MMC, to $137.9 million for fiscal 1996 from $85.4 million
for fiscal 1995.

         Interest income on loans held for sale and mortgage related
securities, net of interest expense, increased 108.9% to $988,000 during fiscal
1996 from $473,000 during fiscal 1995. The increase was primarily the result of
the increase in the average size of the portfolio of loans held for sale, and
the increased mortgage related securities portfolio.

         MMC intends to consider strategies to mitigate the interest rate risks
associated with the loan origination/warehousing function, funding its
portfolio of mortgage related securities, excess servicing rights, mortgage
servicing rights, and valuation of these assets.  Implementation of interest
rate risk management strategies may decrease spreads, decrease gain on sale of
loans, or otherwise decrease revenues from that which might otherwise occur in
a stable interest rate environment without such strategies in place. MMC
intends to thoroughly analyze the cost of such strategies compared to the risks
which would be mitigated prior to implementation of any strategy.

         The provision for credit losses increased 74.8% to $1.5 million for
fiscal 1996 from $864,000 for fiscal 1995. The increase in the provision was
directly related to the increase in volume of loans originated in fiscal 1996
compared to fiscal 1995. The provision for credit losses is based upon periodic
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay, collateral values, and estimated
FHA insurance recoveries on loans originated and sold. As MMC increases its mix
of conventional loan originations as compared to Title I loan originations, the
provision for credit losses as a percentage of loans originated can be expected
to increase due to the increased credit risk associated with conventional
loans. Servicing costs on a per loan basis may also increase as problem
conventional loans may require greater costs to service.

         Total general and administrative expenses increased 90.2% to $11.8
million for fiscal 1996 from $6.2 million for fiscal 1995. The increase was
primarily a result of increased payroll related to the hiring of additional
underwriting, loan processing, administrative, loan quality control and other
personnel in contemplation of the expansion of MMC's business and costs related
to the opening of additional offices.





                                       36
<PAGE>   37





          Payroll and benefits expense increased 39.3% to $5 million for fiscal
1996 from $3.6 million for fiscal 1995. The number of employees increased from
105 as of fiscal year end 1995 to 170 as of fiscal year end 1996, due to
increased staff necessary to support the business expansion and improve quality
control.

          Commissions and selling expenses increased 264.7% to $2 million for
fiscal 1996 from $552,000 for fiscal 1995 while loan originations increased by
$51.6 million from fiscal 1995 to 1996. The sales network expanded to
substantially all states, adding new personnel and offices to further the loan
origination growth strategy.

          Professional services increased 313.6% to $732,000 for fiscal 1996
from $177,000 for fiscal 1995 due primarily to increased audit and legal
services and consultation fees.

          FHA insurance increased 147.6% to $572,000 for fiscal 1996 from
$231,000 for fiscal 1995. The increase was primarily attributable to the
increased volume of loan originations and loans serviced.

          Other general and administrative expenses increased 190.7% to $2.1
million for fiscal 1996 from $713,000 for fiscal 1995 primarily due to
increased expenses related to expansion of facilities and increased
communications expense. MMC is enhancing its loan production systems.  These
enhancements are expected to cost approximately $50,000 and will be funded from
MMC's normal operating cash flow.

         Income before income taxes increased 88.5% to $11.2 million for fiscal
1996 from $5.9 million for fiscal 1995.

         As a result of the foregoing, MMC's net income increased 90% to $6.9
million for fiscal 1996 from $3.6 million for fiscal 1995.

PEC

         Total revenues for PEC increased 6.8% or $3.7 million during fiscal
1996 compared to fiscal 1995 primarily due to an increase in timeshare sales to
$27.8 million in fiscal 1996 from $20.7 million in fiscal 1995.

         Timeshare interests and land sales, net, increased to $45.7 million in
fiscal 1996 from $41.5 million in fiscal 1995, an increase of 10.2%.  Gross
sales of timeshare interests increased to $33.2 million in fiscal 1996 from
$26.3 million in fiscal 1995, an increase of  26.3%.  Net sales of timeshare
interests increased to $27.8 million from $20.7 million, an increase of 34.3%.
The provision for cancellation represented 16.3% and 21.3% of gross sales of
timeshare interests for the years ended August 31, 1996 and 1995, respectively.
The decrease in the provision for cancellation was primarily due to an
improvement in historical performance of cancellations, resulting in a lower
allowance requirement.

         Gross sales of land decreased to $22.3 million in fiscal 1996 from
$24.7 million in fiscal 1995, a decrease of 9.6%.  Net sales of land decreased
to $18 million in fiscal 1996 from $20.8 million in fiscal 1995, a decrease of
13.7%.  The provision for cancellation represented 19.6% and 15.8% of gross
sales of land for the years ended August 31, 1996 and 1995, respectively.  The
1996 decrease in land sales was the result of PEC shifting its emphasis as part
of its strategic plan from sales of  land to sales of timeshare interests due to
its diminishing inventory of land.

         PEC's gain on sale of receivables decreased to $1.1 million for fiscal
1996 from $1.6 million for fiscal 1995.   This decrease resulted from sales of
timeshare receivables and land receivables decreasing to $16 million in fiscal
1996 from $32.5 million in fiscal 1995.  PEC periodically sells receivables in
order to reduce the outstanding balances under its lines of credit.

         PEC's interest income decreased to $6.6 million in fiscal 1996 from
$6.8 million for fiscal 1995, primarily due to a relatively flat interest rate
environment combined with a decrease in the average balance of notes receivable
outstanding.

         Financial income increased to $544,000 in fiscal 1996 from $276,000 in
fiscal 1995, an increase of  97.1%.  The increase is a result of the increased
number of loans serviced by PEC, generating increased servicing fees.





                                       37
<PAGE>   38





         Revenues from incidental operations decreased to $3 million in fiscal
1996 from $3.6 million in fiscal 1995, a decrease of 17.3%, primarily due to a
decrease in utility fees partially offset by an increase in golf fee revenue.
Other revenues increased to $1.6 million in fiscal 1996 from $797,000 in fiscal
1995, an increase of 97.7%.

         As a result of the foregoing, total PEC revenues increased to $58.5
million during fiscal 1996 from $54.8 million during fiscal  1995.

         Total costs and expenses increased to $57.2 million for fiscal 1996
from $46.5 million for fiscal 1995, an increase of 23%.   The increase resulted
primarily from an increase in commission and selling expenses to $30.4 million
from $23.7 million, an increase of 28.1%; an increase in general and
administrative costs to $11.6 million from $9.3 million, an increase of 25.3%,
and an increase in direct costs of timeshare interest sales to $4 million from
$3 million, an increase of 34.3%.  PEC's selling expenses increased primarily
as a result of costs relating to the establishment of new marketing programs
and strategies designed to increase sales of timeshare interests, market
research costs, additional staffing, increased advertising costs, costs
associated with the re-naming of PEC's  timeshare resorts to Ramada Vacation
Suites and additional sales offices.   The increase in general and
administrative costs is primarily due to increases in payroll related to hiring
of additional administrative personnel, maintenance fees related to unsold
timeshare inventory, owners' association costs, and professional fees.  The
increase in direct costs of timeshare interest sales is primarily due to the
increased volume of sales.  As a percentage of  gross sales of timeshare
interests and land, commission and selling expenses relating thereto increased
to 54.7% in fiscal 1996 from 46.5% in fiscal 1995, and cost of sales increased
to 10.5% in fiscal 1996 from 10.1% in  fiscal 1995.  Sales prices of timeshare
interests are typically lower than those of land while selling costs are
generally the same for timeshare interests and land; accordingly, PEC generally
realizes lower profit margins from sales of timeshare interests than sales of
land.



         Depreciation expense increased to $1.5 million in fiscal 1996 from
$1.1 million in fiscal 1995, an increase of  34.9%.  The increase is a result
of the additions made to property and equipment during fiscal 1996.  Property
and equipment, net of accumulated depreciation increased to $19.4 million at
August 31, 1996 from $12.3 million at August 31, 1995, an increase of 58.3%.

         Interest expense increased to $5.6 million in fiscal 1996 from $4.7
million in fiscal 1995, an increase of  20.1%.  The increase is a result of an
increase in outstanding balances of notes payable including  two additional
lines of credit.

         As a result of the foregoing, PEC's income before income taxes
decreased to $1.3 million in fiscal 1996 from $8.3 million in fiscal 1995, a
decrease of 83.9%.  The decrease is largely due to the increase of  commissions
and selling expense and in general and administrative expense, together with a
decrease in land sales.

COMPANY

         Income from continuing operations increased $4 million to $4.9 million
in fiscal 1996 from $894,000 in fiscal 1995, due principally to an increase of
$3.3 million in MMC net income and a decrease in payments to assignors expense
to  $0 in 1996 compared to $7.3 million in 1995.  These were partially offset
by a decrease of $5.4 million in PEC net income, due to increased expenses
related to expansion of selling operations.  See prior discussion for MMC and
PEC.

         Total costs and expenses during fiscal 1996 were $76.7 million, an
increase of 17.3% over $65.4 million in fiscal 1995.  Increased commissions and
selling expenses and general and administrative expenses increased 37.9% for
fiscal 1996 compared to 1995 due primarily to the expansion of timeshare and
land marketing efforts in PEC.     Additionally, Mego Financial incurs interest
expense payable to assignors  and Subordinated debt.  Total general and
administrative expenses for Mego Financial Corp. (parent only) were primarily
comprised of professional services, external financial reporting expenses, and
regulatory and other public company corporate expenses.





                                       38
<PAGE>   39





Year Ended August 31, 1995 Compared to Year Ended August 31, 1994

MMC

         MMC commenced originating loans in March 1994. Total revenues
increased 1,708.1% to $13.6 million for fiscal 1995 from $751,000 for fiscal
1994. The increase was primarily the result of the increased volume of loans
originated and the sale of such loans. MMC originated $87.8 million of loans
during fiscal 1995 compared to $8.2 million of loans during fiscal 1994, an
increase of 974.9%. The increase was a result of the overall growth in
Company's business. At August 31, 1995, MMC had approximately 150 active
Correspondents and 170 active Dealers in 34 states, compared to approximately
14 active Correspondents and 30 active Dealers in 14 states at August 31, 1994.

         The following table sets forth certain data regarding Title I Loans
originated by MMC during fiscal 1994 and 1995 (thousands of dollars):


<TABLE>
<CAPTION>
                                                                          YEAR ENDED AUGUST 31,             
                                                         ---------------------------------------------------
                                                                      1995                       1994  
                                                         -------------------------      --------------------
 <S>                                                        <C>              <C>       <C>             <C>
 Principal amount of loans:
 Correspondents                                           $63,792,680        72.7%    $5,251,647        64.3%
 Dealers                                                   23,957,829        27.3      1,492,318        18.3
 Bulk purchase                                                      -         -        1,420,150        17.4
                                                         ------------  ----------   ------------  ---------- 
         Total                                            $87,750,509       100.0%    $8,164,115       100.0%
                                                         ============  ==========   ============  ========== 
 Number of loans:
 Correspondents                                                 3,437        59.1%           338        47.4%
 Dealers                                                        2,381        40.9            164        23.0
 Bulk purchase                                                      -         -              211        29.6
                                                         ------------  ----------   ------------  ---------- 
         Total                                                  5,818       100.0%           713       100.0%
                                                         ============  ==========   ============  ========== 
</TABLE>
         MMC sold $85.4 million in principal balance of loans during fiscal
1995, recognizing a gain on sale of loans of $12.2 million. MMC sold $6.6
million in principal balance of loans during fiscal 1994 recognizing a gain on
sale of loans of $579,000. As a percentage of loans sold, gain on sale of loans
was 14.3% during fiscal 1995 compared to 8.8% during fiscal 1994. The increase
in gain on sale was primarily a result of increased volume of loans sold and a
wider differential between the stated interest rate on the loans and the yield
to purchasers. The weighted average gross excess spread on sold loans was 6.2%
and 5.6%  for fiscal 1995 and 1994, respectively. The weighted average discount
rate used in the determination of the gain on sale for both periods was 12%.

         Loan servicing income was $873,000 during fiscal 1995. This income was
the result of the sale of $85.4 million of Title I Loans, with the right to
service the loans being retained by MMC. MMC had no loan servicing income in
fiscal 1994 because MMC did not sell any loans until August 31, 1994.

         Interest income, net of interest expense, increased 175% to $473,000
during fiscal 1995 from $172,000 during fiscal 1994. The increase was primarily
the result of the growth in the size of the portfolio of loans held for sale of
151.3% to $3.7 million at August 31, 1995 from $1.5 million at August 31, 1994.

         The provision for credit losses increased 800% to $864,000 for fiscal
1995 from $96,000 for fiscal 1994 due to increased loan originations. Provision
for credit losses relating to unsold loans is recorded as expense in amounts
sufficient to maintain the allowance at a level considered adequate to provide
for anticipated losses resulting from liquidation of outstanding loans. The
provision for credit losses is based upon periodic analysis of the portfolio,
economic conditions and trends, historical credit loss experience, borrowers'
ability to repay, collateral values, and estimated FHA insurance recoveries on
Title I Loans.

         Depreciation and amortization expense increased 196.3% to $403,000 for
fiscal 1995 from $136,000 for fiscal 1994 as a result of the purchase of
additional equipment, the expansion of MMC's facilities and additional software
development costs.





                                       39
<PAGE>   40



         Other interest expense increased 750% to $187,000 for fiscal 1995 from
$22,000 for fiscal 1994 as a result of increased capitalized lease obligations.

         Total general and administrative expenses increased 209.1% to $6.2
million for fiscal 1995 from $2 million for fiscal 1994. The increase was
primarily a result of increased payroll related to the hiring of additional
personnel in contemplation of the expansion and projected growth of MMC's
business and costs related to the opening of additional offices. Commissions
and selling expenses increased to $552,000 for fiscal 1995 from $13,000 for
fiscal 1994 due to the expansion of the sales network and facilities to support
increased loan origination growth. Included in general and administrative
expenses were servicing fees paid to PEC in the amount of $232,000 and $13,000
for fiscal 1995 and 1994, respectively, and management fees paid to PEC in the
amount of $690,000 and $442,000 for fiscal 1995 and 1994, respectively.  FHA
insurance expense increased to $231,000 for fiscal 1995 from $11,000 for fiscal
1994 due to increased volume of Title I Loan originations.

         Income (loss) before income taxes increased to income of $5.9 million
for fiscal 1995 from a loss of $1.5 million for its six months of operations in
fiscal 1994.

         Effective September 1, 1994, MMC adopted SFAS 122 which requires that
a mortgage banking enterprise recognize as separate assets the rights to
service mortgage loans for others, regardless of how those servicing rights are
acquired. The effect of adopting SFAS 122 on MMC's financial statements was to
increase income before income taxes by $1.1 million for fiscal 1995.

         As a result of the foregoing, net income (loss) increased to net
income of $3.6 million for fiscal 1995 from a net loss of $1.5 million for
fiscal 1994.

PEC

         Total revenues  of PEC increased 21% to $54.8 million for fiscal 1995
from $45.3 million for fiscal 1994.  The increase was primarily the result of
increased net land sales of $20.8 million during fiscal 1995 compared to $13.5
million during fiscal 1994, an increase of 53.8%, and an 80.4% increase in
incidental operations to $3.6 million for fiscal 1995 from $2 million in fiscal
1994.

         Timeshare interests and land sales, net, increased to $41.5 million
for fiscal 1995 from $33.1 million for fiscal 1994, an increase of 25.5%.
Gross sales of timeshare interests increased to $26.3 million in fiscal 1995
from $24.7 million in fiscal 1994, an increase of 6.5%.  Net sales of timeshare
interests increased to $20.7 million in fiscal 1995 from  $19.5 million in
fiscal 1994, an increase of 5.9%.  The provision for cancellation represented
21.3% and 20.9% of gross sales of timeshare interests for the years ended
August 31, 1995 and 1994, respectively.

         Gross sales of land increased to $24.7 million in fiscal 1995 from
$15.4 million in fiscal 1994, an increase of 60.1%.  Net sales of land
increased to $20.8 million from $13.5 million, an increase of 53.8%.  The
provision for cancellation represented 15.8% and 12.3% of gross sales of land
for the years ended August 31, 1995 and 1994, respectively.  The increase in
sales of timeshare interests and the increase in sales of land were primarily
the result of additional sales programs and new properties in Colorado.

         Gain on sale of notes receivables increased to $1.6 million for fiscal
1995 from $875,000 for fiscal 1994, an increase of 81.3%.  This increase
resulted from net sales of timeshare interest and land receivables increasing
to $41.5 million during fiscal 1995 from $33.1 million during fiscal 1994, an
increase of 25.5%.  PEC periodically sells receivables in order to reduce the
outstanding balances under its lines of credit.

         Interest income decreased to $6.8 million for fiscal 1995 from $7.9
million for fiscal 1994, a decrease of 13.6%.  This decrease resulted primarily
from a reduction in PEC's portfolio of receivables arising from sales of
receivables exceeding originations.

         Income from incidental operations increased to $3.6 million for fiscal
1995 from $2 million for fiscal 1994, an increase of 80.4%.  The increase was
primarily due to increased utility fees and golf fee revenue.

         Total costs and expenses increased to $46.5 million for fiscal 1995
from $39.8 million for fiscal 1994, an increase of 17%.  This increase resulted
primarily from an increase in commissions and selling expenses to $23.7 million
for fiscal 1995 from $18.9 million, an increase of 25%, and an increase in cost
of sales to $5.4 million in fiscal





                                       40
<PAGE>   41





1995 from $4.7 million in fiscal 1994, an increase of 16.3%.  As a percentage
of gross sales of timeshare interests, housing sales, land sales, and
commissions and expenses relating thereto decreased to 46.5% for fiscal 1995
from 47.2% for fiscal 1994, and cost of sales relating thereto decreased to
10.6% for fiscal 1995 from 11.4% for fiscal 1994.

         Timeshare costs of sales increased 10.9% to $3 million for fiscal 1995
from $2.7 million for fiscal 1994.  Land sale costs increased to $2.2 million
for fiscal 1995 from $1.4 million for fiscal 1994, an increase of 50.8%.  Cost
of housing sales decreased to $265,000 for fiscal 1995 from $531,000 for fiscal
1994, a decrease of 50.1%.

         General and administrative costs increased 9.5% to $9.3 million for
fiscal 1995 compared to $8.5 million for fiscal 1994, primarily due to
increased staffing and training for sales of land and timeshares and other
administrative related expansion costs.

         As a result of the foregoing, PEC's income from continuing operations,
excluding income from discontinued operations, increased to $5.4 million for
fiscal 1995 from $3.7 million for fiscal 1994, an increase of  44.9%.

COMPANY

         Income from continuing operations increased to $894,000 in fiscal 1995
from a loss of $5.8 million in fiscal 1994, due principally to an increase of
$5.2 million in MMC net income due to a full year of operation in 1995 compared
to 6 months of operations in 1994.  PEC's net income increased $2.5 million due
to increased land and timeshare sales activity.

         Net timeshare and land sales increased to $41.5 million for fiscal 1995
compared to $33.1 million for fiscal 1994, due to increased marketing efforts,
expansion of marketing areas and focus on increasing volume.  Net timeshare and
land inventories increased 50.8% or $8.5 million during fiscal 1995 compared to
fiscal 1994.  See prior discussion for MMC and PEC.

         Amortization of negative goodwill decreased to $216,000 for fiscal
1995, from $472,000 for fiscal 1994, a decrease of 54.2%.  Included in such
amortization was $170,000 and $420,000 in fiscal 1995 and 1994, respectively
relating to the purchase of PEC in 1988, with $50,000 in both fiscal 1995 and
fiscal 1994 relating to the acquisition of the minority interest in Vacation
Spa Resorts .

         As a result of the foregoing, total revenues increased to $69.6
million for fiscal 1995, from $46.8 million for fiscal 1994, an increase of
48.6%.

         Gain on discontinued operations occurred as a result of an order for
judgment against the Company in litigation involving certain subsidiaries of
PEC in the amount of $3.4 million, which amount was settled for $2.9 million in
May 1995 and paid in June 1995.  Excess of liability over assets of
discontinued operations (a provision for loss) had been provided in the amount
of $4.2 million, which was adjusted to reflect the actual loss, resulting in a
gain on discontinued operations of $1.3 million during fiscal 1995.

         Total costs and expenses increased to $65.4 million for fiscal 1995
from $51.8 million for fiscal 1994, an increase of 26.1%.  This increase is
primarily the result of an increase in the operations of MMC and an increase in
commissions and selling expenses resulting from a higher volume of sales of
timeshare interests and land during the   1995 period.

         Payments to assignors decreased to $7.3 million for fiscal 1995 from
$8.5 million for fiscal 1994, a decrease of 14.9%.  Accrual of amounts payable
to assignors ceased on January 31, 1995.

         As a result of the foregoing, net income from continuing operations
increased to $894,000 for fiscal 1995 from a net loss of $5.8 million for fiscal
1994.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents for the Company was $3.2 million at August
31, 1996 compared to $7.3 million at August 31, 1995.





                                       41
<PAGE>   42



         The Company's principal cash requirements relate to loan originations,
the acquisition of timeshare properties and land, and the payment of
commissions and selling expenses in connection with timeshare and land sales.
MMC and PEC each require continued access to sources of debt financing and
sales in the secondary market of loans and receivables, respectively.

         MMC -- Dependence On Securitization Transactions

         The values of and markets for the sale of MMC's loans are dependent
upon a number of factors, including general economic conditions, interest rates
and government regulations. Adverse changes in those factors may affect MMC's
ability to originate or sell loans in the secondary market for acceptable
prices within reasonable time frames. The ability of MMC to sell loans in the
secondary market is essential for continuation of MMC's loan origination
activities. A reduction in the size of the secondary market for home
improvement loans would adversely affect MMC's ability to sell its loans in the
secondary market with a consequent adverse impact on MMC's profitability and
future originations.


         MMC entered into its first two securitization transactions, which
involve the pooling and sale of loans, in March 1996 and August 1996 and
intends to continue to sell loans through securitization transactions from time
to time as opportunities arise. Pursuant to these securitizations, pass-through
certificates evidencing interests in the pools of loans were sold in public
offerings. There can be no assurance that MMC will be able to securitize its
loan production efficiently. Securitization transactions may be affected by a
number of factors, some of which are beyond MMC's control, including, among
other things, conditions in the securities markets in general, conditions in
the asset- backed securitization market, the conformity of loan pools to rating
agency requirements and, to the extent that monoline insurance is used, the
requirements of such insurers. Adverse changes in the securitization market
could impair MMC's ability to originate and sell loans through securitizations
on a favorable or timely basis. Any such impairment could have a material
adverse effect upon MMC's results of operations and financial condition.
Furthermore, MMC's quarterly operating results can fluctuate significantly as a
result of the timing and level of securitizations.

         MMC -- Negative Cash Flow

         As a result of the substantial growth in loan originations, MMC has
operated since March 1994, and expects to continue to operate for the
foreseeable future, on a negative cash flow basis. During the year ended August
31, 1996, MMC operated on a negative cash flow basis using $15.3 million in
operations that was funded primarily from borrowings, due primarily to an
increase in loans originated and MMC's sale of loans. In connection with whole
loan sales and securitizations, MMC recognizes a gain on sale of the loans upon
the closing of the transaction and the delivery of the loans, but does not
receive the cash representing such gain until it receives the excess servicing
spread, which is payable over the actual life of the loans sold. MMC incurs
significant expenses in connection with securitizations and incurs tax
liabilities as a result of the gain on sale. MMC must maintain external sources
of cash to fund its operations and pay its taxes and therefore must maintain
warehouse lines of credit and other external funding sources. If the capital
sources of MMC were to decrease, the rate of growth of MMC would be negatively
affected.

         The pooling and servicing agreements relating to MMC's securitizations
require MMC to build over-collateralization levels through retention within
each securitization trust of excess servicing distributions and application
thereof to reduce the principal balances of the senior interests issued by the
related trust or cover interest shortfalls. This retention causes the aggregate
principal amount of the loans in the related pool to exceed the aggregate
principal balance of the outstanding investor certificates. Such
over-collateralization amounts serve as credit enhancement for the related
trust and therefore are available to absorb losses realized on loans held by
such trust. MMC continues to be subject to the risks of default and foreclosure
following the sale of loans through securitizations to the extent excess
servicing distributions are required to be retained or applied to reduce
principal or cover interest shortfalls from time to time. Such retained amounts
are predetermined by the entity issuing the guarantee of the related senior
interests and are a condition to obtaining insurance and an AAA/Aaa rating
thereon. In addition, such retention delays cash distributions that otherwise
would flow to MMC through its retained interest, thereby adversely affecting
the flow of cash to MMC.

         MMC's cash requirements arise from loan originations, payments of
operating and interest expenses and deposits to reserve accounts related to
loan sale transactions. Loan originations are initially funded principally
through MMC's $20 million warehouse line of credit pending the sale of loans in
the secondary market.





                                       42
<PAGE>   43

Substantially all of the loans originated by MMC are sold. Net cash used in
MMC's operating activities for the years ended August 31, 1995 and 1996 was
approximately $11.8 million and $15.3 million, respectively. This use was
funded primarily from the reinvestment of proceeds from the sale of loans in
the secondary market totaling approximately $85 million and $135.5 million for
the years ended August 31, 1995 and 1996, respectively. The loan sale
transactions required the subordination of certain cash flows payable to MMC to
the payment of scheduled principal and interest due to the loan purchasers. In
connection with certain of such sale transactions, a portion of amounts payable
to MMC from the excess interest spread is required to be maintained in a
reserve account to the extent of the subordination requirements. The
subordination requirements generally provide that the excess interest spread is
payable to the reserve account until a specified percentage of the principal
balances of the sold loans is accumulated therein.

         Excess interest spread payable to MMC is subject to being utilized
first to replenish cash paid from the reserve account to fund shortfalls in
collections of interest from borrowers who default on the payments on the loans
until MMC's deposits into the reserve account equal the specified percentage.
The excess interest required to be deposited and maintained in the respective
reserve accounts is not available to support the cash flow requirements of MMC.
At August 31, 1996, amounts on deposit in such reserve accounts totaled $4.5
million.

         Adequate credit facilities and other sources of funding, including the
ability of MMC to sell loans in the secondary market, are essential for the
continuation of MMC's loan origination operations. At August 31, 1996, MMC had
a $20 million warehouse line of credit (Warehouse Line) for the financing of
loan originations which expires in August 1997. At August 31, 1996, $3.3
million was outstanding under the Warehouse Line and $16.7 million was
available. The Warehouse Line bears interest at the prime rate plus 1% per year
and is secured by loans prior to sale. The agreement with the lender requires
MMC to maintain a minimum tangible net worth of $12.5 million plus 50% of MMC's
cumulative net income after May 1, 1996, and a minimum level of profitability
of at least $500,000 per rolling six month period. In addition, MMC had a $10
million revolving credit facility from the same lender, with respect to which
$10 million was outstanding on that date. This facility was secured by a pledge
of MMC's excess servicing rights and the interest only and residual class
certificates (Certificates) relating to securitizations carried as mortgage
related securities on MMC's statements of financial condition, payable to MMC
pursuant to its securitization agreements. The revolving loan has an 18-month
revolving credit period followed by a 30-month amortization period, and
requires MMC to maintain a minimum tangible net worth of $12.5 million plus 50%
of MMC's cumulative net income after May 1, 1996, and a minimum level of
profitability of at least $500,000 per rolling six month period. Borrowings
under the revolving loan cannot exceed the lesser of (i) 40% of MMC's excess
servicing rights and Certificates or (ii) 6 times the aggregate of the excess
servicing rights and Certificate payments actually received by MMC over the
most recent 3-month period. While MMC believes that it will be able to maintain
its existing credit facilities and obtain replacement financing as its credit
arrangements mature and additional financing, if necessary, there can be no
assurance that such financing will be available on favorable terms, or at all.

         From time to time, MMC has sold loans through whole loan sales. In
August 1994, MMC entered into an agreement with a bank pursuant to which an
aggregate of $38.3 million in principal amount of loans had been sold at
December 31, 1995, for an amount equal to their remaining principal balance and
accrued interest. Pursuant to the agreement, the purchaser is entitled to
receive interest at a rate equal to the sum of 187.5 basis points and the yield
paid on 4 year Federal Government Treasury obligations at the time of the sale.
MMC retained the right to service the loans and the right to receive the
difference (Excess Interest) between the sold loans' stated interest rate and
the yield to the purchaser. MMC is required to maintain a reserve account equal
to 1% of the declining principal balance of the loans sold pursuant to the
agreement funded from the Excess Interest received by MMC less its servicing
fee to fund shortfalls in collections from borrowers who default in the payment
of principal or interest.

         In April 1995, MMC entered into a continuing agreement with a
financial institution pursuant to which an aggregate of approximately $175.8
million in principal amount of loans had been sold at August 31, 1996 for an
amount equal to their remaining principal balances.  Pursuant to the agreement,
the purchaser is entitled to receive interest at a variable rate equal to the
sum of 200 basis points and the one- month LIBOR rate as in effect from time to
time. MMC retained the right to service the loans and the right to receive the
Excess Interest. MMC is required to maintain a reserve account equal to 2.5% of
the proceeds received by MMC from the sale of loans pursuant to the agreement
plus the Excess Interest received by MMC less its servicing fee to fund
shortfalls in collections from borrowers who default in the payment of
principal or interest. In May 1995 and June 1995, MMC reacquired an aggregate
of approximately $25 million of such Title I Loans for an amount equal to their
remaining principal balance, which were sold to a financial institution. In
March 1996 and August 1996, MMC reacquired an additional $77.7 million and
$36.2 million, respectively, of the Title I Loans in connection with its first
two securitization





                                       43
<PAGE>   44

transactions. In September 1996, MMC entered into a repurchase agreement with
the financial institution pursuant to which MMC pledged the interest only
certificates from its two 1996 securitizations in exchange for a $3 million
advance.  In November 1996, MMC entered into an agreement with the same
financial institution, providing for the purchase of up to $2 billion of loans
over a 5 year period. Pursuant to the agreement, Mego Financial  issued to the
financial institution four-year warrants to purchase 1,000,000 shares of Mego
Financial's common stock at an exercise price of $7.125 per share. The
agreement also provides (i) that so long as the aggregate principal balance of
loans purchased by the financial institution and not resold to third parties
exceeds $100 million, the financial institution shall not be obligated to
purchase, and MMC shall not be obligated to sell, loans under the agreement and
(ii) that the percentage of conventional loans owned by the financial
institution at any one-time and acquired pursuant to the agreement shall not
exceed 65% of the total amount of loans owned by the financial institution at
such time and acquired pursuant to the agreement. The value of the warrants,
estimated at $3 million (0.15% of the commitment amount) as of the commitment
date, will be charged to MMC and amortized as the commitment for the purchase
of loans is utilized. The financial institution has also agreed to provide MMC
a separate one-year facility of up to $11 million, less any amounts advanced
under the repurchase agreement, for the financing of the interest only and
residual certificates from future securitizations.

         In May 1995, MMC entered into an agreement with a bank pursuant to
which an aggregate of $25 million in principal amount of loans had been sold at
June 30, 1995 for an amount equal to their remaining principal balance.
Pursuant to the agreement, the purchaser is entitled to receive interest at a
rate equal to the sum of 190 basis points and the yield paid on four-year
Federal Government Treasury obligations at the time of the sale. MMC retained
the right to service the loans and the right to receive the Excess Interest.
The agreement requires MMC to maintain a reserve account equal to 1% of the
declining principal balance of the loans sold pursuant to the agreement funded
from the Excess Interest received by MMC less its servicing fee to fund
shortfalls in collections from borrowers who default in the payment of
principal or interest.

         In furtherance of MMC's strategy to sell loans through
securitizations, in March 1996 and August 1996, MMC completed its first two
securitizations pursuant to which it sold pools of $84.2 million and $48.8
million, respectively, of Title I Loans. MMC previously reacquired at par $77.7
million and $36.2 million of such loans, respectively. Pursuant to these
securitizations, pass-through certificates evidencing interests in the pools of
loans were sold in a public offering. MMC continues to subservice the sold
loans and is entitled to receive from payments in respect of interest on the
sold loans, a servicing fee equal to 1.25% of the balance of each loan with
respect to the March transaction and 1% with respect to the August transaction.
In addition, with respect to both transactions, MMC certificates received  are
carried as mortgage related securities on MMC's Statement of Financial
Condition representing the interest differential, after payment of servicing
and other fees, between the interest paid by the obligors of the sold loans and
the yield on the sold certificates. MMC may be required to repurchase loans
that do not conform to the representations and warranties made by MMC in the
securitization agreements.

         As further described in Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Subsequent Event, in November
1996, MMC issued 2,300,000  shares of its common stock and $40 million  of 12.5%
Senior Subordinated Notes due 2001 in public offerings.  MMC currently intends
to use approximately $13.2 million of the aggregate net proceeds received from
the offerings to repay amounts due to Mego Financial Corp. and PEC and
approximately $17 million to reduce the amounts outstanding under MMC's
warehouse and revolving lines of credit which currently bear interest at rates
ranging from 1% to 2% over the prime rate and which expire in August 1997 and
December 1997, respectively and to repay $3 million under a repurchase
agreement.  Funds received by Mego Financial Corp. and PEC will be used in their
respective operations.  The remaining net proceeds will be used by MMC to
provide capital to originate and securitize loans.  Pending such use, the net
proceeds received by the Company will be invested in high quality, short term
interest-bearing investment and deposit accounts.

         PEC -- Liquidity

         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 commissions and selling expenses
in connection with the sale of timeshare interests and land.  Commissions and
selling expenses payable by PEC in connection with sales of timeshare interests
and land typically exceed the down payments received at the time of sale, as a
result of which PEC generates a cash shortfall.  This cash shortfall and PEC's
other cash requirements are funded primarily through sales of receivables,
PEC's lines of credit in the aggregate amount of $109.5 million and cash flows
from operations.





                                       44
<PAGE>   45





         At August 31, 1996, PEC had arrangements with 4  institutional lenders
for 5 agreements for the financing of receivables in connection with sales of
timeshare interests and land and the acquisition of timeshare properties and
land, which provide for 5 lines of credit of up to an aggregate of  $109.5
million. Such lines of credit are secured by timeshare and land receivables.
At August 31, 1996, an aggregate of $65.9 million was outstanding under such
lines of credit, and $43.6 million was available for borrowing.  At August 31,
1996 and 1995, $65.9 million and $38.1 million, respectively, had been borrowed
under these lines. Under the terms of these lines of credit, the Company may
borrow up to a range of 75% to 85% of the balances of the pledged timeshare and
land receivables. Summarized line of credit information and accompanying notes
relating to these five lines of credit outstanding at August 31, 1996, consist
of the following (thousands of dollars):

<TABLE>
<CAPTION>
   BORROWING
   AMOUNT AT      MAXIMUM
  AUGUST 31,     BORROWING          REVOLVING               MATURITY                   INTEREST
     1996          AMOUNT      EXPIRATION DATE (D)            DATE                       RATE
-------------   -------------  -------------------       -------------------      -------------------  
<S>                 <C>            <C>                       <C>                       <C>  
   $47,297       $57,000        (a) December 31, 1996    September 22, 2003       Prime      + 2.25%
     7,821        15,000        (b) December 31, 1996    August 1, 2000           Prime      +  2.5%
     4,865        15,000        (c) June 27, 1998        June 27, 2005            LIBOR      + 4.25%
     2,925        15,000        (c) February 6, 1998     August 6, 2005           LIBOR      + 4.25%
     2,967         7,500        (b) December 31, 1996    June 30, 2000            Prime      +  2.5%
</TABLE>
         (a) Restrictions include PEC's requirement to maintain a tangible net
             worth of at least $25 million  during the borrowing term, and
             thereafter this requirement is permitted to decrease to $15
             million depending on the loan balance.

         (b) Restrictions include PEC's requirement to maintain a tangible net
             worth of $25 million during the life of the loan.

         (c) Restrictions include PEC's requirement to maintain a tangible net
             worth of $17 million during the life of the loan.

         (d) Revolving expiration date represents the expiration of the
             revolving features of the lines of credit, at which time the
             credit lines assume fixed maturity.

Set forth below is a schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated (thousands of dollars):

<TABLE>
<CAPTION>
                                                                          YEAR ENDED AUGUST 31, 
                                                                 ----------------------------------------
                                                                    1996             1995         1994  
                                                                 ----------       ----------    ----------  
  <S>                                                           <C>              <C>              <C>
  Commissions and selling expenses
    attributable to recognized and
    unrecognized sales                                          $29,863          $23,969          $19,924
  Less:  Down payments                                           13,231           12,796           10,792
                                                           ------------     ------------     ------------ 
  Cash Shortfall                                                $16,632          $11,173           $9,132
                                                           ============     ============     ============ 
</TABLE>
         During the fiscal years ended August 31, 1996 and 1995, PEC sold notes
receivable of $16 million  and $32.5 million  to three major financial
institutions from which $9.7 million and $20.6 million  of the proceeds were
used to pay down debt for the fiscal years ended August 31, 1996 and 1995,
respectively.  The receivables which have interest rates depending on the
transaction, of 11.8% - 13.9% and 11.8% - 13.7% in 1996 and 1995, respectively,
were sold to yield returns of  8.3% - 10.6% and 8.8% - 11% in 1996 and 1995,
respectively, to the purchasers, with any excess interest received from the
obligors being payable to PEC.

         At August 31, 1996, PEC was contingently liable to replace or
repurchase notes receivable sold with recourse totalling $69.6 million.  PEC
sells notes receivable subject to recourse provisions as contained in each
agreement. PEC is obligated under these agreements to replace or repurchase
accounts that become over 90 days delinquent or otherwise subject to
replacement or repurchase. The repurchase provisions provides for substitution
of receivables as recourse for $67 million of sold notes receivable and cash
payments for repurchase relating to $2.5





                                       45
<PAGE>   46





million of sold notes receivable.  At August 31, 1996 and 1995, the
undiscounted amounts of the $8.4 million and $7.1 million recourse obligations
on such notes receivable were $9.6 million and $8.1 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,
collateral values and overall portfolio quality.

         Recourse to PEC on sales of notes receivable is governed by the
agreements between the purchasers and PEC.  The future estimated
contingency for notes receivable sold with recourse represents PEC's
estimate of its probable future credit losses to be incurred over the lives of
the notes receivable. Proceeds from the sale of notes receivable sold with
recourse were $17.1 million and $34.1 million for the years ended August 31,
1996 and 1995, respectively.  A liability for future estimated contingency for
notes receivable sold with recourse was established at the time of each sale
based upon PEC's analysis of all probable losses resulting from 
PEC's recourse obligations under each agreement of sale. For notes
receivable sold after September 30, 1992, the liability is determined in
accordance with Emerging Issues Task Force (EITF) Issue No. 92-2, on a
"discounted to present value" basis using an interest rate equivalent to the
risk-free market rate for securities with a duration similar to that estimated
for the underlying notes receivable.

         Company -- Liquidity

         During November 1994 and January 1995, payments aggregating $1.1
million were made to the Assignors to pay a portion of the accrued liability.
At January 31, 1995, when accruals ceased, $13.3 million was payable to the
Assignors.  On March 2, 1995, the Assignors agreed to defer payment of $10
million (Subordinated Debt) of the amounts due to them pursuant to an amendment
to the Assignment and Assumption Agreement providing for the subordination of
such amounts to payment of debt for money borrowed by the Company or
obligations of the Company's subsidiaries guaranteed by the Company.  Warrants
to purchase 1 million shares of common stock, at an exercise price of $4.25 per
share (the closing market price per share on March 2, 1995), were granted to
the Assignors in consideration of the payment deferral and subordination.  The
warrants contain restrictions on transfer and are exercisable after March 1,
1996 and until March 1, 2000.  Interest on the Subordinated Debt is to be paid
semi-annually at the rate of 10% per year starting September 1, 1995, and the
Subordinated Debt is to be repaid in seven equal semi-annual payments of $1.4
million plus interest commencing March 1, 1997.  On June 14, 1995, the Company
paid an aggregate of $809,000 to the Assignors, including interest in the
amount of $59,000.  At August 31, 1996, $2.6 million, other than the
Subordinated Debt, was payable to the Assignors, which amount also bears
interest at the rate of 10% per year.  Payments to Assignors are secured by a
pledge of all of PEC's outstanding stock.  During fiscal 1996, the Company paid
interest of  $1,196,000 to the Assignors on Subordinated debt and other amounts
payable.  See "Item 13. Certain Relationships and Related Transactions."

         During fiscal years 1996 and 1995, the Company used cash of $33.2
million and $5.1 million, respectively, in operating activities.  The increase
was due  primarily to increased loan fundings by MMC.

         During fiscal years 1996 and 1995, the Company used cash of $9.7
million and $3.7 million, respectively, in investing activities, which was
substantially expended for the purchase of property and equipment.

         During fiscal years 1996 and 1995, the Company provided cash of $38.8
million and $5.2 million, respectively, in financing activities as a result of
borrowings.

         Capital expenditures during fiscal years 1996 and 1995 were $21.1
million and $14 million, respectively, for the acquisition of inventory and
$9.3 million and $3.8 million, respectively, for the purchase of property and
equipment.  The Company made additional capital expenditures in 1996 for the
acquisition of inventory, renovation of future timeshare inventory,
refurbishment of present timeshare inventory, and the acquisition of
replacement equipment.  The Company believes that its capital requirements will
be met from cash balances, internally generated cash, existing lines of credit,
sales of receivables, and the modification, replacement or addition to its
lines of credit.





                                       46
<PAGE>   47





FINANCIAL CONDITION

August 31, 1996 Compared to August 31, 1995

         Cash decreased 56.6% to $3.2 million  at August 31, 1996 from $7.3
million at August 31, 1995 primarily as a result of the timing of loan
originations, sales, and borrowings.

         Restricted cash deposits increased 2.9% to $6.7 million at August 31,
1996 from $6.5 million at August 31, 1995 due to increased volume of loans
serviced for others pursuant to agreements which restrict a small percentage of
cash relative to the volume of loans serviced, as well as loan payments
collected from borrowers on accounts serviced for others.

         Notes receivable, net, increased 30.4% to $40.5 million at August 31,
1996 from $31.1 million at August 31, 1995 primarily as a result of MMC loan
originations increasing to $139.4 million for fiscal 1996 from $87.8 million
for fiscal 1995, and the timing of loan sales. The following table sets forth
certain data regarding loans originated by MMC during fiscal 1996 and 1995:


<TABLE>
<CAPTION>
                                                           1996                              1995       
                                               -----------------------------     ------------------------------
 <S>                                             <C>                   <C>         <C>                    <C>
 Principal amount of loans:
   Correspondents:
      Title I                                 $82,596,197               59.3%   $63,792,680               72.7%
      Conventional                             11,582,108                8.3              -                -
                                            -------------      -------------  -------------      -------------   

          Total Correspondent                  94,178,305               67.6     63,792,680               72.7
                                            -------------      -------------  -------------      -------------   

   Dealers - Title I                           45,188,721               32.4     23,957,829               27.3
                                            -------------      -------------  -------------      -------------   

          Total                              $139,367,026              100.0%   $87,750,509              100.0%
                                            =============      =============  =============      =============   
 Number of loans:
   Correspondents:
      Title I                                       4,382               50.9%         3,437               59.1%
      Conventional                                    392                4.6              -                -
                                            -------------      -------------  -------------      -------------   

          Total Correspondent                       4,774               55.5          3,437               59.1
                                            -------------      -------------  -------------      -------------   

   Dealers - Title I                                3,836               44.5          2,381               40.9
                                            -------------      -------------  -------------      -------------   

          Total                                     8,610              100.0%         5,818              100.0%
                                            =============      =============  =============      =============   
</TABLE>
         Net timeshare and land sales increased to $45.7 million at August 31,
1996 from $41.5 million at August 31, 1995 which increased net
notes receivable.  Net timeshare and land sales are set forth in the following
table (thousands of dollars).

<TABLE>
<CAPTION>
                                                         AUGUST 31,          
                                                 ----------------------------
                                                     1996             1995           $ CHANGE       % CHANGE    
                                                 -----------      -----------       -----------    -----------   
     <S>                                              <C>             <C>               <C>           <C>      
                                                                                 
      Timeshare sales, net                           $27,778          $20,682           $7,096            34.3%
      Land sales, net                                 17,968           20,812           (2,844)          (13.7)
                                                 -----------      -----------       ----------      
          Total  timeshare  and land  
            sales, net                               $45,746          $41,494           $4,252            10.2%
                                                 ===========      ===========       ==========       
</TABLE>

         Excess servicing rights decreased 13.9% to $14.3 million at August 31,
1996 from $16.6 million at August 31, 1995. Excess servicing rights are
calculated using prepayment, default and interest rate assumptions that the
Company believes market participants would use for similar rights. The Company
believes that the excess servicing rights recognized at the time of sale do not
exceed the amount that would be received if such rights were sold at fair
market value in the marketplace. The decrease in excess servicing rights was
primarily a result of loans sold with excess servicing rights recognized which
were reacquired and included in the fiscal 1996 securitizations as well as





                                       47
<PAGE>   48





normal amortization of such excess servicing rights. The excess cash flow
created through securitization which had been recognized as excess servicing
rights on loans reacquired and securitized are included in the cost basis of
the mortgage related securities.

         Mortgage related securities were $22.9 million at August 31, 1996 as a
result of MMC's securitization transactions during fiscal 1996.  There was no
corresponding asset at August 31, 1995. See Notes 8 and 9 of Notes to
Consolidated Financial Statements.

         Mortgage servicing rights increased 255.7% to $3.8 million at August
31, 1996 from $1.1 million at August 31, 1995 as a result of additional sales
of mortgage originations and the resulting increase in sales of loans serviced
to $137.9 million during fiscal 1996 from $85.4 million during fiscal 1995.

         Timeshare and land inventories increased 60.1% to $40.6 million at
August 31, 1996 from $25.4 million at August 31, 1995 primarily in Nevada, as a
result of additional inventory previously under construction and made available
for sale in fiscal 1996.

         Property and equipment, net, increased 59.8% to $20.3 million at
August 31, 1996 from $12.7 million at August 31, 1995 due to increased
purchases of office equipment related to facility expansion.

         Notes and contracts payable increased 88.9% to $84.4 million at August
31, 1996 from $44.7 million at August 31, 1995 due to increased levels of
excess mortgage servicing rights and mortgage related securities created
through loan securitization which were available for financing to meet the
Company's cash requirements.

         Accounts payable and accrued liabilities increased to $19.7 million at
August 31, 1996 from $14 million at August 31, 1995, primarily as a result of
increases in accrued payroll, interest and other unpaid operational costs.

         Future estimated contingency for notes receivable sold with recourse
increased 16.2% to $9.3 million at August 31, 1996 from $8 million at August 31,
1995. Loans sold with recourse which were reacquired and included in the 1996
securitizations decreased the amount needed for this allowance while increased
loan sales increased the allowance requirements. Recourse to the Company on
sales of loans is governed by the agreements between the purchasers and the
Company. The allowance for credit losses on loans sold with recourse represents
the Company's estimate of its probable future credit losses to be incurred over
the lives of the loans considering estimated future FHA insurance recoveries on
Title I Loans. No allowance for credit losses on loans sold with recourse is
established on loans sold through securitizations, as the Company has no
recourse obligation under those securitization agreements. Estimated credit
losses on loans sold through securitizations are considered in MMC's valuation
of its residual interest securities.

         Deferred income taxes payable increased 35.5% to $11 million at August
31, 1996 from $8.1 million at August 31, 1995 due to increased income.

         Stockholder's equity increased 34.4% to $25.9 million at August 31,
1996 from $19.2 million at August 31, 1995 as a result of net income applicable
to common stock of $4.6 million during fiscal 1996.

August 31, 1995 Compared to August 31, 1994

         Cash decreased 33.2% to $7.3 million at August 31, 1995 from $11
million at August 31, 1994 primarily as a result of the timing of loan
originations, sales and borrowings.

         Restricted cash deposits increased 760% to $6.5 million at August 31,
1995 from $752,000 at August 31, 1994,  due to activity on loans serviced
for others pursuant to agreements which restrict a small percentage of cash
relative to the volume of loans serviced, as well as loan payments collected
from borrowers

         Notes receivable, net, decreased 15% to $31.1 million at August 31,
1995 from $36.5 million at August 31, 1994 primarily due to sales of
receivables exceeding increases in newly recognized notes receivable.

         Excess servicing rights increased 671.9% to $16.6 million at August
31, 1995 from $2.1 million at August 31, 1994. Excess servicing rights are
calculated using prepayment, default and interest rate assumptions that the
Company believes market participants would use for similar rights. The Company
believes that the excess servicing





                                       48
<PAGE>   49


rights recognized at the time of sale do not exceed the amount that would be
received if such rights were sold at fair market value in the marketplace. The
increase in excess servicing rights was primarily a result of increases in
loans sold with excess servicing rights.

         Mortgage servicing rights were $1.1 million at August 31, 1995 as a
result of sales of loans which resulted in an increase in the principal balance
of sold loans serviced and implementation of SFAS No. 122. There was no
corresponding asset at August 31, 1994.

         Timeshare and land inventories increased to $25.4 million at August
31, 1995 from $16.8 million at August 31, 1994, an increase of 50.8%.  The
increase was primarily due to the acquisition and renovation of timeshare
interests.

         Notes and contracts payable increased 12.3% to $44.7 million at August
31, 1995 from $39.8 million at August 31, 1994 due to increased borrowings
under the Company's lines of credit and the timing of loan sales.

         Accounts payable and accrued liabilities increased 129.1% to $14
million at August 31, 1995 from $6.1 million at August 31, 1994, primarily as a
result of increases in accrued payroll, interest and other operational costs,
due to expansion and growth of the Company.

         Future estimated contingency for notes receivable sold with recourse
increased 117.6% to $8 million at August 31, 1995 from $3.7 million at August
31, 1994, primarily due to increased loans sold under recourse provisions.
Recourse to the Company on sales of loans is governed by the agreements between
the purchasers and the Company. The allowance for credit losses on loans sold
with recourse represents the Company's estimate of its probable future credit
losses to be incurred over the lives of the loans, considering estimated future
FHA insurance recoveries on Title I Loans and other factors.

         Payable to assignors decreased 63.8% to $2.6 million at August 31,
1995 from $7.1 million at August 31, 1994, as a result of accrued amounts
payable exceeding payments made and the reclassification of $10 million to
subordinated debt.

         Excess of liability over assets of discontinued operations decreased
to $0 at August 31, 1995 from $4.2 million at August 31, 1994, as a result of
an order for judgment against the Company in litigation involving certain
subsidiaries of PEC in the amount of $3.4 million, which amount was settled for
$2.9 million in May 1995 and paid in June 1995.

         Deposits, which represent the cash funds received on unrecognized land
sales, increased by 63% to $3.6   million at August 31, 1996 from $2.2 million
at August 31, 1994.

         Deferred income taxes payable increased 49.7% to $8.1 million at
August 31, 1995 from $5.4 million at August 31, 1994 due to increased income.

         Stockholder's equity increased 16.4% to $19.2 million at August 31,
1995 from $16.5 million at August 31, 1994 as a result of net income applicable
to common stock of $1.4 million and the issuance of 1,000,000 common stock
warrants valued at $1.3 million.

POSSIBLE TERMINATION OF SERVICING RIGHTS

         As described in Note 10 of Notes to Consolidated Financial Statements,
the pooling and servicing agreements relating to the Company's securitization
transactions contain provisions with respect to the maximum permitted loan
delinquency rates and loan default rates, which, if exceeded, would allow the
termination of the Company's right to service the related loans.  At September
30, 1996, the default rates on the pool of loans sold in the March 1996
securitization transaction exceeded the permitted limit set forth in the
related pooling and servicing agreement.  Accordingly, this condition could
result in the termination of the Company's servicing rights with respect to
that pool of loans by the trustee, the master servicer or the insurance company
providing credit enhancement for that transaction.  The mortgage servicing
rights on this pool of loans were approximately $1.4 million at August 31,
1996.  Although the insurance company has indicated that it, and to its
knowledge, the trustee and the master servicer has no present intention to
terminate the Company's servicing rights, no assurance can be given that one or
more of such parties will not exercise its right to terminate.  In the event of
such termination, there would be an adverse effect on the valuation of the
Company's mortgage servicing rights and the results of





                                       49
<PAGE>   50





operations in the amount of the mortgage servicing rights  ($1.4 million before
tax and $870,000 after tax at August 31, 1996) on the date of termination.

SUBSEQUENT EVENT

         In November 1996, MMC issued 2,300,000  shares of its common stock in
a public offering at $10.00 per share.  As a result of this transaction, the
Company's ownership in MMC declined from 100% at August 31, 1996 to 81.1%.  The
Company continues to have voting control on all matters submitted to
shareholders of MMC, including the election of directors and approval of
extraordinary corporate transactions.  Concurrently with the common stock
offering, MMC issued $40 million  of 12.5% Senior Subordinated Notes due in
2001 in a public offering .  MMC currently intends to use approximately $13.2
million of the aggregate net proceeds received from the offerings to repay
amounts due to Mego Financial Corp. and PEC and approximately $17 million to
reduce the amounts outstanding under MMC's warehouse and revolving lines of
credit which currently bear interest at rates ranging from 1% to 2% over the
prime rate and which expire in August 1997 and December 1997, respectively, and
to repay $3 million under a repurchase agreement. Funds received by Mego
Financial Corp. and PEC will be used in their respective operations.  The
remaining net proceeds will be used by MMC to provide capital to originate and
securitize loans.  Pending such use, the net proceeds received by the Company
will be invested in high quality, short term interest-bearing investment and
deposit accounts.

EFFECTS OF CHANGING PRICES AND INFLATION

         The Company's operations are sensitive to increases in interest rates
and to inflation.  Increased borrowing costs resulting from increases in
interest rates may not be immediately recoverable from prospective purchasers.
Inflationary increases are difficult to pass on to customers since increases in
sales prices often results in lower sales closing rates and higher
cancellations.  The Company's notes receivable consist primarily of fixed-rate
long term installment contracts that do not increase or decrease as a result of
changes in interest rates charged to the Company.  In addition, delinquency and
cancellation rates may be affected by changes in the national economy.

SEASONALITY

         Sales of timeshare interests and land are seasonal.  For the fiscal
years ended August 31, 1996, 1995 and 1994 quarterly sales as a percentage of
annual sales, for each of the fiscal quarters averaged: quarters ended November
30-25%, quarters ended February 28-20.3%, quarters ended May 31-28.9%, and
quarters ended August 31-25.9%.  The majority of the Company's customers are
tourists.  The Company's major marketing area, Las Vegas, Nevada, reaches peaks
of tourist activity at periods different from the Company's other major
marketing areas, Reno, Nevada, Southern California, Atlantic City, New Jersey,
Denver and Park and Huerfano Counties, Colorado, which are more active in
summer than in winter.  The Company's other major marketing area, Honolulu,
Hawaii, is not subject to seasonality as are the two new resorts opening in
fiscal 1997 in Florida.  The Company is not dependent upon a limited number of
customers whose loss would have a materially adverse effect on the Company.

         Home improvement loan volume tracks the seasonality of home
improvement contract work. Volume tends to build during the spring and early
summer months, particularly with regard to pool installations. A decline is
typically experienced in late summer and early fall until temperatures begin to
drop. This change in seasons precipitates the need for new siding, window and
insulation contracts. Peak volume is experienced in November and early December
and declines dramatically from the holiday season through the winter months.
Debt consolidation and home equity loan volume are not impacted by seasonal
climate changes and, with the exclusion of the holiday season, tend to be
stable throughout the year.

RECENT ACCOUNTING PRONOUNCEMENTS

         The Financial Accounting Standards Board (the FASB) has issued
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS 121).  SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  SFAS 121 is effective for
fiscal years beginning after December 15, 1995.  The Company does not
anticipate any material effect upon adoption on the results of operations or
financial condition.

         In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123), which establishes financial accounting and reporting
standards for stock-based employee compensation plans. This





                                       50
<PAGE>   51

statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. Those transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measurable. SFAS 123 is effective for fiscal years beginning December 15, 1995.
The Company intends to provide the pro forma and other additional disclosure
about stock-based employee compensation plans in its 1997 financial statements
as required by SFAS 123.

         SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (SFAS 125) was issued by FASB in
June 1996. SFAS 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. This
statement also provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. It
requires that liabilities and derivatives incurred or obtained by transferors
as part of a transfer of financial assets be initially measured at fair value.
SFAS 125 also requires that servicing assets be measured by allocating the
carrying amount between the assets sold and retained interests based on their
relative fair values at the date of transfer. Additionally, this statement
requires that the servicing assets and liabilities be subsequently measured by
(a) amortization in proportion to and over the period of estimated net
servicing income and (b) assessment for asset impairment or increased
obligation based on the fair values. The statement will require that the
Company's existing and future excess servicing receivables be measured at fair
market value and be reclassified as interest only strip securities and
accounted for in accordance with SFAS 115. As required by the statement, the
Company will adopt the new requirements effective January 1, 1997. It is not
anticipated that upon implementation, the statement will have any material
impact on the financial statements of the Company, as the book value of the
Company's excess servicing rights and mortgage related securities approximates
fair value.  Upon adoption of SFAS 125, the Company's subsidiary, PEC, will
begin recognizing servicing rights and notes receivable held for sale, similar
to the method currently used by MMC on mortgage servicing rights under SFAS
122. This will have the impact of increasing the gain on sale of notes at the
time of sale and reducing future servicing fee income on PEC generated
receivables sold after January 1, 1997.

CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS

        The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which represent the Company's expectations and beliefs concerning future
events, including the sufficiency of the Company's cash flow for the Company's
future liquidity and capital resource needs.  The Company cautions that these
statements are further qualified by important factors that could cause actual
results to differ materially from those in the forward-looking statements,
including, without limitation, the following: decline in demand for home
improvement and debt consolidation loans; decline in demand for timeshare
interests; the effect of general economic conditions generally and specifically
changes in interest rates; the effect of competition; the Company's dependence
on the availability of financing; the Company's ability to sell its loans and
receivables; and the regulation of the Company by federal, state and local
regulatory authorities.  Actual events or results may differ as a result of
these and other factors.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The following consolidated financial statements and supplementary data
of the Company and its subsidiaries are included herewith:


<TABLE>
<CAPTION>
                                                                                                       PAGE
                                                                                                       ----
<S>                                                                                                 <C>    
Independent Auditors' Report                                                                            F-2
Consolidated Statements of Financial Condition - August 31, 1996 and 1995                               F-3
Consolidated Statements of Operations for the years ended August 31, 1996, 1995, and 1994            F-4 - F-5
Consolidated Statements of Stockholders' Equity for the years ended August 31, 1996, 1995, and 1994     F-6
Consolidated Statements of Cash Flows for the years ended August 31, 1996, 1995, and 1994            F-7 - F-8
Notes to Consolidated Financial Statements for the years ended August 31, 1996, 1995, and 1994       F-9 - F-29
Independent Auditors' Report on Financial Statement Schedules                                           S-1
Valuation and Qualifying Accounts for the year ended August 31, 1996                                    S-2
Valuation and Qualifying Accounts for the year ended August 31, 1995                                    S-3
Valuation and Qualifying Accounts for the year ended August 31, 1994                                    S-4
All other schedules are omitted because of the absence of conditions under which they are required 
 or because the required information is included in the financial statements.
</TABLE>

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

         Not applicable.





                                       51
<PAGE>   52

                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

         The following table sets forth certain information with respect to the
directors, executive officers and key employees of the Company.



<TABLE>
<CAPTION>
                NAME                          AGE                               POSITION
---------------------------------           -------         -----------------------------------------------
 <S>                                          <C>           <C>
 Robert Nederlander                           63            Chairman of the Board, Chief Executive Officer
                                                            and Director
 Jerome J. Cohen                              68            President and Director
 Don A. Mayerson                              69            Executive Vice President, General Counsel and
                                                            Secretary
 Herbert B. Hirsch                            60            Senior Vice President, Chief Financial Officer,
                                                            Treasurer and Director
 Eugene I. Schuster                           59            Vice President and Director
 Jon A. Joseph, Jr.                           49            Vice President and Associate General Counsel
 Paul K. Sadler                               38            Vice President, Management Information Systems
 David A. Cleveland                           39            Vice President and Chief Accounting Officer
 John E. McConnaughy, Jr.                     67            Director
 Wilbur L. Ross, Jr.                          58            Director
 Jeff S. Moore                                38            President and Chief Operating Officer of MMC
 James  L. Belter                             53            Executive Vice President and Chief Financial 
                                                            of  MMC
 Frederick H. Conte                           44            Executive Vice President and Chief Operating Officer
                                                            of  PEC
 Stuart Harelik                               56            Senior Vice President Marketing and Sales of PEC
</TABLE>


         Robert Nederlander has been the Chairman of the Board and Chief
Executive Officer of the Company since January 1988, when affiliates of the
Assignors including Mr. Cohen acquired approximately 43% of the outstanding
Common stock of the Company (Share Acquisition).  See "Certain Relationships and
Related Transactions."  Mr. Nederlander is the Chairman of the Executive
Committee and a member of the Audit Committee.  Since July 1995, Mr. Nederlander
has served on the Board of Directors of HFS, which, together with its
subsidiary, entered into an agreement in April 1995 with the Company pursuant to
which the Company is licensed to use the "Ramada" name in its timeshare
operations.  Mr. Nederlander has been Chairman of the Board of Riddell Sports
Inc. since April 1988 and was Riddell Sports Inc.'s Chief Executive Officer from
April 1988 through March 1993.  From February 1992 until June 1992, Mr.
Nederlander was also Riddell Sports Inc.'s interim President and Chief Operating
Officer.  Since November 1981, Mr. Nederlander has been President and a Director
of the Nederlander Organization, Inc., owner and operator of one the world's
largest chains of legitimate theaters.  He served as the Managing General
Partner of the New York Yankees from August 1990 until December 1991, and has
been a limited partner since 1973.  Since October 1985, Mr. Nederlander has been
President of Nederlander Television and Film Productions, Inc.; Vice Chairman of
the Board from February 1988 to early 1993 of Vacation Spa Resorts, Inc., an
affiliate of Mego Financial; and Chairman of the Board of Allis-Chalmers Corp.
from May 1989 to 1993, and Vice Chairman from 1993 to October 1996.  He remains
a director. Mr. Nederlander was elected to the Board of Directors of Mego
Mortgage Corporation in September 1996.  In October 1996, Mr. Nederlander became
a director of News Communications Inc., a publisher of community oriented free
circulation newspapers.  Mr. Nederlander was a senior partner in the law firm
of Nederlander, Dodge and Rollins in Detroit, Michigan, from 1960 to 1989.
Mr. Nederlander does not currently serve on a full time basis in his capacities
with the Company.


         Jerome J. Cohen has been the President and a Director of the Company
since the Share Acquisition.  Mr. Cohen serves as a member of the Executive
Committee and is Chairman of the Board and Chief Executive Officer of MMC, and
is President and Chief Executive Officer of PEC.  Since April 1992, Mr. Cohen
has been a Director of Atlantic Gulf Communities Inc., formerly known as
General Development Corporation, a publicly held company engaged in land
development, land sales and utility operations in Florida and Tennessee.





                                       52
<PAGE>   53


         Don A. Mayerson has been the Secretary of the Company since the Share
Acquisition and the Executive Vice President and General Counsel of the Company
since April 1988.

         Herbert B. Hirsch has been the Senior Vice President, Chief Financial
Officer, Treasurer and a Director of the Company since the Share Acquisition.
Mr. Hirsch serves as a member of the Executive Committee.

         Eugene I. Schuster has been a Vice President and a Director of the
Company since the Share Acquisition.  Mr. Schuster is a member of the Stock
Option Committee.  Since July 1983, Mr. Schuster has been the President and
Chief Executive Officer and a director of Quest Bio Technology, Inc., a
publicly held biotechnology research and development firm.  Since September
1985, Mr. Schuster has been a director of Wavemat, Inc., a publicly held
company engaged in the manufacture and sale of microwave equipment for advanced
materials processing.  Since January 1988 and May 1988, respectively, Mr.
Schuster has been the Chief Executive Officer and Chairman, of Cellex
BioSciences, a publicly held manufacturer of automated cell culture systems.
Mr. Schuster is a director and executive officer of a number of privately held
venture capital, business development and biotechnology companies.  Mr.
Schuster does not currently serve on a full time basis in his capacities with
the Company.

         David A. Cleveland became Chief Accounting Officer of the Company in
September 1996.  Mr. Cleveland served as Senior Vice President and Controller
of PriMerit Bank from June 1990 to July 1996.  Prior to that, he was Chief
Financial Officer of Pacific Coast Savings and Loan Association.  Mr. Cleveland
is a Certified Public Accountant.

         John E. McConnaughy, Jr. has been a Director of the Company since
1984.  Mr. McConnaughy serves as Chairman of the Audit Committee and a member
of the Stock Option and Executive Incentive Compensation Committees.  Mr.
McConnaughy also served as Chairman of the Board and Chief Executive Officer of
GEO International Corporation (GEO), a privately held nondestructive testing,
screen printing and oil field services company, from 1981 until October 1992.
GEO filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
October 1993.  Mr. McConnaughy has served as a member of the Board of Directors
of Riddell Sports, Inc. since 1988.

         Wilbur L. Ross, Jr. has been a Director of the Company since 1984.
Mr. Ross serves as a member of the Audit, Stock Option and Executive Incentive
Compensation Committees.  Mr. Ross has been a Senior Managing Director of
Rothschild, Inc., an investment banking firm, since August 1976.  Mr. Ross was
a director of GEO from 1987 to January 1992.  Mr. Ross serves as a director of
Syms Corporation, a publicly held corporation.

KEY EMPLOYEES

         Jeff S. Moore has been a director of MMC since June 1992, at which
time he was elected its Executive Vice President.  He was elected as Chief
Operating Officer of MMC in December 1993 and as President in April 1995.  Mr.
Moore was the founder and served as President, Chief Executive Officer and a
director of Empire Funding Corp., a nationwide Title I Lender, from August 1985
until March 1992, at which time he sold his interest in the company.

         James L. Belter has been Executive Vice President of MMC since April
1995 and Chief Financial Officer since September 1996.  Prior to joining MMC,
from May 1989 to September 1993, Mr. Belter served as the President, Chief
Operating Officer and a director of Del-Val Capital Corporation, a commercial
finance company.  From April 1985 to April 1989, Mr. Belter served as Executive
Vice President of Security Capital Credit Corporation, a commercial finance
company, where he was responsible for the formation of the company's
installment receivable lending division.  From November 1976 to April 1985, Mr.
Belter served as a corporate Vice President of Barclays Business Credit, Inc.
where he managed a unit specializing in financing portfolios of consumer
contracts including residential second mortgages, home improvement contracts,
timeshare and land sales.

         Frederick H. Conte has been with PEC since 1978, and its Executive
Vice President and Chief Operating Officer since February 1988.

Stuart Harelik has been the Senior Vice President of Marketing and Sales of PEC
                               since March 1989.

         Jon A. Joseph has been a Vice President and Associate General Counsel
of the Company since July 1995.  Mr. Joseph was Executive Vice President of
Valley Bank of Nevada from 1984 to 1991.  In 1991, Valley Bank of Nevada was
acquired by Bank of America.  Mr. Joseph remained with the legal department of
Bank of America until June 1, 1995.





                                       53
<PAGE>   54




         Paul K. Sadler has been with PEC as manager of Management Information
Services since 1985 and was elected Vice President of the Company in June 1995.


ADDITIONAL INFORMATION CONCERNING OFFICERS AND DIRECTORS

         The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board of Directors.  The Company's directors
hold office until the next annual meeting of shareholders and until their
successors have been duly elected and qualified.  The Company reimburses all
directors for their expenses in connection with their activities as directors
of the Company.  Directors of the Company who are also employees of the Company
do not receive additional compensation for their services as directors.
Members of the Board of Directors of the Company who are not employees of the
Company receive an annual fee of $40,000.  Directors are also reimbursed for
their expenses incurred in attending meetings of the Board of Directors and its
committees.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's outstanding common stock, to file with the Securities
and Exchange Commission (SEC) initial reports of ownership and reports of
changes in ownership of common stock.  Such persons are required by SEC
regulation to furnish the Company with copies of all such reports they file.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports are required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners have been
satisfied.

ITEM 11.     EXECUTIVE COMPENSATION

         The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and each
of the five other most highly compensated executive officers whose annual
salary and bonus during the fiscal years presented exceeded $100,000 (Named
Executive Officers).  The Company did not grant any stock options to the Named
Executive Officers during the fiscal year ended August 31, 1996.

<TABLE>
<CAPTION>
                                                           SUMMARY COMPENSATION TABLE
                                                                                  
                                                                                    LONG-TERM
                                                ANNUAL COMPENSATION               COMPENSATION
                                   -------------------------------------------       AWARDS
                                                                                  ------------   
                                                                                    NUMBER OF
                                   FISCAL                         OTHER ANNUAL       OPTIONS        ALL OTHER
  NAME AND PRINCIPAL POSITION       YEAR    SALARY    BONUS(A)    COMPENSATION     GRANTED (B)  COMPENSATION (C)
------------------------------      ----  ---------   --------    ------------     -----------  ----------------
 <S>                                <C>    <C>        <C>          <C>             <C>          <C>
 Robert Nederlander                 1994   $100,000   $      -     $      -           35,000        $1,500
   Chairman of the Board and        1995    126,925          -            -                -         1,500
     Chief Executive Officer        1996    150,000      2,885        3,789                -         2,293

 Jerome J. Cohen                    1994   $300,000   $  5,769     $  1,437           35,000        $2,225
   President                        1995    300,000    120,369        3,227                -         2,250
                                    1996    300,000    216,666        6,279                -         2,250

 Don A. Mayerson                    1994   $200,000   $  3,846     $      -           35,000        $2,226
   Executive Vice President,        1995    200,000     49,686            -                -         2,250
     General Counsel and            1996    200,000     86,680        5,305                -         2,250
     Secretary

 Herbert B. Hirsch                  1994   $200,000   $  3,846     $      -           35,000        $2,226
   Senior Vice President, Chief     1995    200,000     49,686            -                -         2,250
     Financial Officer and          1996    200,000     86,680        1,512                -         2,250
     Treasurer

 Stuart Harelik                     1994   $125,000   $344,830     $      -           25,000        $2,302
   Senior Vice President            1995    125,000    438,064            -                -         2,250
     Marketing and Sales of PEC     1996    125,000    411,766            -                -         2,250

 Jeffrey S. Moore                   1994   $126,771   $      -     $  5,400           25,000        $    -
   President and Chief Operating    1995    200,003          -       13,963                -             -
     Officer of  MMC                1996    200,003     86,084       13,625                -             -
</TABLE>

_____________________________





                                       54
<PAGE>   55





(A)      Mr. Harelik receives a contingent bonus based on a percentage of the
         sales made in excess of specified sales levels as set forth in his
         contract of employment which expires August 31, 2000.  In 1994,
         Messrs. Cohen, Mayerson and Hirsch received bonuses equal to one
         week's salary at year end in accordance with the Company's Christmas
         bonus formula. In addition to those bonuses, on April 13, 1996,
         pursuant to contractual arrangements, incentive compensation
         attributable to the year ended August 31, 1995 was paid to Messrs.
         Cohen, Mayerson and  Hirsch  and is included in the above table as
         1995 compensation.  Incentive compensation attributable for the year
         ended August 31, 1996, but not yet paid,  is included in the above
         table as 1996 compensation.

(B)      The Company adopted the Stock Option Plan on November 17, 1993, and
         options were granted to certain executive officers on December 22,
         1993 and subsequently to other employees, subject to shareholder
         approval of the Stock Option Plan.  The Stock Option Plan was approved
         by the shareholders on February 9, 1994.  One-fifth of each grant to
         the named executive officers became exercisable on December 22, 1994
         and an additional one-fifth became exercisable on December 22, 1995.
         See "Aggregated Fiscal Year-End Option Table" and "Stock Option Plan."

(C)      Represents the Company's matching contributions of 25% of the
         employee's contribution to the Company's 401(k) Plan on behalf of the
         employee.

         The following table sets forth certain information concerning
unexercised stock options held by the Named Executive Officers as of August 31,
1996.  No stock options were exercised by the Named Executive Officers during
the fiscal year ended August 31, 1996.


                    AGGREGATED FISCAL YEAR-END OPTION TABLE

<TABLE>
<CAPTION>
                                                                                 VALUE OF UNEXERCISED IN-THE-MONEY
                                 NUMBER OF UNEXERCISED OPTIONS HELD AT                   OPTIONS HELD AT
                                            AUGUST 31, 1996                            AUGUST 31, 1996 (1)        
                                   ------------------------------------         -----------------------------------
                 NAME               EXERCISABLE          UNEXERCISABLE           EXERCISABLE          UNEXERCISABLE
                 ----               -----------          -------------           -----------          -------------
         <S>                          <C>                    <C>                 <C>                   <C>
         Robert Nederlander           14,000                 21,000              $   40,250            $    60,375
         Jerome J. Cohen              14,000                 21,000                  43,750                 65,625
         Don A. Mayerson              14,000                 21,000                  43,750                 65,625
         Herbert B. Hirsch            14,000                 21,000                  43,750                 65,625
         Stuart Harelik               10,000                 15,000                  31,250                 46,875
         Jeff S. Moore                10,000                 15,000                  31,250                 46,875
</TABLE>
-------------------------
(1) The closing sales price of the Company's common stock as reported as Nasdaq
National Market
on August 31, 1996 was $5.625.

         EMPLOYMENT AGREEMENTS

         The Company has entered into an employment agreement with Jerome J.
Cohen which expires on January 31, 2000.  The agreement provides for an annual
base salary of $300,000 plus 2.5% of Incentive Income as defined in the
Company's Incentive Plan (See "Executive Incentive Compensation Plan").  Mr.
Cohen's employment agreement does not provide for an early termination bonus or
other additional compensation based on performance.

         MMC has entered into an employment agreement with Jeffrey S. Moore
which expires on December 31, 1998 and which provides for an annual base salary
of $200,000.  In addition, Mr. Moore is to receive an incentive bonus each
calendar year equal to 1.5% of MMC's after tax income, provided that certain
scheduled sales goals are met, as well as deferred compensation of 1% of the
gain on sale from sales of loans during such year, payable in 48 equal
installments.  In the event payments of the incentive bonus and deferred
compensation due in any year exceed $500,000, then the excess over $500,000 is
only payable with the approval of MMC's Board of Directors.

         PEC has entered into an employment contract with Stuart Harelik which
expires on August 31, 2000 and provides for an annual base salary of $125,000.
In addition, Mr. Harelik is to receive a contingent bonus each year equal to
the sum of 1.25% of Net Sales (as defined) in excess of $20 million up to $50
million plus .75% of Net Sales in excess of $50 million.





                                       55
<PAGE>   56



STOCK OPTION PLAN



         Under the Company's Stock Option Plan, 525,000 shares of Common Stock
were reserved for issuance upon exercise of options.  The Stock Option Plan is
designed to serve as an incentive for retaining qualified and competent
employees.



         The Stock Option Committee of the Company's Board of Directors,
administers and interprets the Stock Option Plan and is authorized, in its
discretion, to grant options thereunder to all eligible employees of the
Company (currently 1,062 individuals), including officers of the Company.  The
Stock Option Plan provides for the granting of both "incentive stock options"
(as defined in Section 422A of the Internal Revenue Code) and nonstatutory
stock options.  Options can be granted under the Stock Option Plan on such
terms and at such prices as determined by the Board, or a committee thereof,
except that the per share exercise price of options may not be less than 80% of
the fair market value of the common stock on the date of grant, and, in the
case of an incentive stock option, the per share exercise price may not be less
than 100% of such fair market value.  In the case of incentive stock options
granted to a  10% shareholder, the per share exercise price may not be less
than 110% of the fair market value and the expiration is five years from grant
date.  The aggregate fair market value of the shares covered by incentive stock
options granted under the Stock Option Plan that become exercisable by a
grantee for the first time in any calendar year is subject to a $100,000 limit.



         Options granted under the Stock Option Plan are exercisable after the
period or periods specified in the option agreement.  Options granted under the
Stock Option Plan are not exercisable after the expiration of ten years from
the date of grant and are not transferable other than by will or by the laws of
descent and distribution.

         Under MMC's Stock Option Plan, which was effective upon the
consummation of MMC's public stock offering, 925,000 shares of MMC's Common 
Stock were reserved for issuance upon exercise of stock options.  The options,
even if vested, may not be exercised without the written approval of Mego
Financial Corp.  Such shares will be accompanied by stock appreciation rights
which will become exercisable as determined by the Board, or a committee
thereof, only if Mego Financial Corp. does not give approval to the exercise of
the options. This MMC plan was designed as a means to retain and motivate key
employees and directors.  MMC's Board of Directors, or a committee thereof,
administers and interprets this MMC plan and is authorized to grant options
thereunder to all eligible employees and directors of  MMC, except that no
incentive stock options (as defined in Section 422 of the Internal Revenue code)
may be granted to a director who is not also an employee of MMC, Mego Financial
Corp. or a subsidiary of MMC.

         This plan provides for the granting of both incentive stock options
and unqualified stock options.  Options will be granted on such terms and at
such prices as determined by MMC's Board of Directors, or a committee thereof,
except that the per share exercise price of incentive stock options cannot be
less than the fair market value of the common stock on the date of grant.  Each
option is exercisable after the period or periods specified in the related
option agreement, but no option may be exercisable after the expiration of ten
years from the date of grant.  Options granted to an individual who owns (or is
deemed to own) at least 10% of the total combined voting power of all classes
of stock of MMC or the Company must have an exercise price of at least 110% of
the fair market value of the common stock on the date of grant and a term of no
more than five years.  MMC is authorized to make or guarantee loans to optionees
to enable them to exercise their options.  Such loans must (I) provide for
recourse to the optionee, (ii) bear interest at a rate no less than the prime
rate of interest, and (iii) be secured by the shares of common stock purchased.
The Board of Directors of MMC has the authority to amend or terminate this plan,
provided that no such action may impair the rights of the holder of any
outstanding option without the written consent of such holder, and provided
further that certain amendments are subject to stockholder approval.  Unless
terminated sooner, this MMC plan, will continue in effect until all options
granted thereunder have expired or been exercised, provided that no options may
be granted ten years after commencement of the MMC plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Board of Directors has not designated a Compensation Committee,
but has delegated the responsibility and authority for setting and overseeing
the administration of policy which governs the compensation of all of the
Company's employees (with the exception of Messrs.  Nederlander, Cohen,
Mayerson, Hirsch and Schuster) to its President, Jerome J. Cohen.  The
compensation paid to Messrs. Nederlander, Cohen, Mayerson, Hirsch and Schuster
is determined by the Board of Directors.  The directors who are also executive
officers of the Company do not participate in deliberations of the Board of
Directors of the Company concerning their own compensation.  In fiscal 1995,
Mr. Nederlander's annual salary was increased to $150,000, and Mr. Schuster's
annual salary was increased to $60,000.





                                       56
<PAGE>   57





EXECUTIVE INCENTIVE COMPENSATION PLAN

         On June 22, 1994, effective for the year ending August 31, 1995, the
Board of Directors of the Company approved an Executive Incentive Compensation
Plan (Incentive Plan) for executives and other key employees of the Company and
its subsidiaries who contribute to the success of the Company.  Under the terms
of the Incentive Plan, awards of incentive compensation may be made by an
Incentive Compensation Committee of the Board of Directors of the Company,
which committee shall be composed of not less than two members.  The Incentive
Plan provides that the Board of Directors may amend, suspend or terminate the
Incentive Plan at any time.  Incentive Compensation for any fiscal year is
defined as an amount equal to 7.5% of incentive income (Incentive Income) for
such year.  Incentive Income for any fiscal year is defined as the amount
reported as income before taxes in the consolidated financial statements of the
Company for such year.  The maximum amount of all awards of Incentive
Compensation for any fiscal year shall not exceed (a) 7.5% of Incentive Income
for such year, reduced by (b) the amount of Incentive Income which must be paid
by the Company to employees pursuant to any contractual obligation of the
Company, increased by (c) any unawarded Incentive Compensation carried forward
from a prior fiscal year.

         On June 22, 1994, the Board of Directors also approved an employment
agreement with Mr. Jerome J. Cohen, President of the Company, and agreements
with Messrs. Don A. Mayerson and Herbert B. Hirsch, executive officers of the
Company, pursuant to which Messrs. Cohen, Mayerson and Hirsch are entitled to
receive 2.5%, 1% and 1% respectively, of Incentive Income of the Company, as
defined in the Incentive Plan, for the five year period commencing with fiscal
1995, which amounts would directly reduce the amounts available for awards
under the Incentive Plan.

SPLIT DOLLAR INSURANCE PLAN

         On April 5, 1995, the Board of Directors of the Company established a
split-dollar life insurance plan (Split-Dollar Plan) pursuant to which the
Company pays the premiums for certain "second to die" life insurance policies
on the lives of Robert Nederlander, Jerome J. Cohen, Don A. Mayerson and
Herbert B. Hirsch, executive officers of the Company (Messrs. Nederlander,
Cohen and Hirsch are also directors of the Company), and their respective
spouses, for a period not to exceed five years, at an annual aggregate premium
outlay of $400,000.  Each policy is in the name of a trust established for
family beneficiaries selected by such officers.  On August 3, 1995, the Company
approved a life insurance policy for Mr. Schuster at an annual cost of $100,000
for a period of five years.  Pursuant to the plan, and with respect to each
policy, after ten years, or earlier upon the deaths of the respective insured
parties, or certain other eventualities, the Company will receive the amount of
premiums paid on the policy.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth, as of November 8, 1996, information
with respect to the beneficial ownership of the common stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group.  Unless otherwise noted, the Company
believes that all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them.

<TABLE>
<CAPTION>
                                                               AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
                                                               -----------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1)                          SHARES                   PERCENT
-----------------------------------------                      ----------------   ----------------------
<S>                                                                 <C>                  <C>
Robert Nederlander(2) . . . . . . . . . . . . . . . . . .           2,133,697             11.6% Common
Eugene I. Schuster and Growth Realty Inc. (GRI)(3)  . . .           1,933,634             10.5% Common
Jerome J. Cohen(4)  . . . . . . . . . . . . . . . . . . .           1,127,823              6.1% Common
Herbert B. Hirsch(5)  . . . . . . . . . . . . . . . . . .           1,699,623              9.2% Common
Don A. Mayerson(6)  . . . . . . . . . . . . . . . . . . .             824,414              4.5% Common
John E. McConnaughy, Jr.(7) . . . . . . . . . . . . . . .             616,503              3.3% Common
Wilbur L. Ross, Jr.(8)  . . . . . . . . . . . . . . . . .             152,500                 * Common
Jeff  S. Moore (9)  . . . . . . . . . . . . . . . . . . .              17,000                 * Common
Stuart Harelik (10)   . . . . . . . . . . . . . . . . . .              15,700                 * Common
All Officer and Directors as a Group (9 persons)(11)  . .           8,520,894             46.2% Common
-------------------                                                                                   
</TABLE>

*   Less than 1%.





                                       57
<PAGE>   58





(1)      A person is deemed to be the beneficial owner of securities that can
         be acquired by such person within 60 days from November 27, 1996 upon
         the exercise of options and warrants.  Each beneficial owner's
         percentage ownership is determined by assuming that options and
         warrants that are held by such person (but not those held by any other
         person) and that are exercisable within 60 days from the date of this
         Form 10-K filing.

(2)      810 Seventh Avenue, 21st Floor, New York, New York 10019.  Includes
         21,000 shares issuable under an option granted pursuant to the Stock
         Option Plan, to the extent exercisable within the next 60 days and
         250,000 shares issuable upon the exercise of warrants held by an
         affiliate of Mr. Nederlander.   See "Certain Relationships and Related
         Transactions."

(3)      321 Fisher Building, Detroit, Michigan 48202.  These shares are held
         of record by GRI, a wholly owned subsidiary of Venture Funding, Ltd.
         of which Mr. Schuster is a principal shareholder, Director and Chief
         Executive Officer.  Includes 250,000 shares issuable upon the exercise
         of warrants held by an affiliate of Mr. Schuster.  See "Certain
         Relationships and Related Transactions."

(4)      1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161.
         Includes 21,000 shares issuable under an option granted pursuant to
         the Stock Option Plan, to the extent exercisable within the next 60
         days and 200,000 shares issuable upon the exercise of warrants held by
         Mr. Cohen.  Excludes 103,503 shares owned by Mr. Cohen's spouse,
         500,000 shares owned by a trust for the benefit of his children over
         which Mr. Cohen does not have any investment or voting power, as to
         which he disclaims beneficial ownership.

(5)      230 East Flamingo Road, Las Vegas, Nevada 89109.  Includes 21,000
         shares issuable under an option granted pursuant to the Stock Option
         Plan, to the extent exercisable within the next 60 days and 200,000
         shares issuable upon the exercise of warrants held by Mr. Hirsch.
         Excludes 10,000 shares held by Mr. Hirsch as custodian for a minor
         child as to which he disclaims beneficial ownership, and 21,666 shares
         held by a family trust, as to which he disclaims beneficial ownership.

(6)      1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161.
         Includes 21,000 shares issuable under an option granted pursuant to the
         Stock Option Plan, to the extent exercisable within the next 60 days 
         and 100,000 shares issuable upon the exercise of warrants held by Mr.
         Mayerson.  Excludes 56,667 shares owned by Mr. Mayerson's spouse, as
         to which he disclaims beneficial ownership.

(7)      1011 High Ridge Road, Stamford, Connecticut 06905.  Excludes 3,000
         shares owned by a member of Mr. McConnaughy's family, as to which he
         disclaims beneficial ownership.

(8)      1251 Avenue of the Americas, 51st Floor, New York, New York 10020.
         Excludes 15,000 shares owned by a member of Mr. Ross' family and
         250,000 shares owned by Rothschild, Inc., of which Mr. Ross is a
         Managing Director, over which Mr. Ross does not have any investment or
         voting power, and as to which he disclaims beneficial ownership.

(9)      1000 Parkwood Circle, Atlanta, Georgia 30339.  Includes 15,000 shares
         issuable under an option granted pursuant to the Stock Option Plan, to
         the extent exercisable within the next 60 days.

(10)     4310 Paradise Road, Las Vegas, Nevada 89109.  Includes 15,000 shares
         issuable under an option granted pursuant to the Stock Option Plan, to
         the extent exercisable within the next 60 days.

(11)     See Notes (2)-(10).

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Purchase of Preferred Equities Corporation.  Pursuant to a Stock
Purchase and Redemption Agreement dated October 6, 1987 and amended October 25,
1987, Comay Corp., an affiliate of Messrs. Cohen and Mayerson (Comay), GRI, an
affiliate of Mr. Schuster, RRE Corp., an affiliate of Mr. Nederlander (together
with its assignee, RER Corp., another affiliate of Mr. Nederlander, RER), and
H&H Financial Inc., an affiliate of Mr. Hirsch (H&H), obtained the rights (PEC
Purchase Rights) to acquire PEC, a privately-held Nevada corporation engaged in
retail land sales, resort time-sharing and other real estate related
activities.  (Comay, GRI, RER and H&H are collectively referred to as the
Assignors).





                                       58
<PAGE>   59



         Certain Arrangements Between the Company and Affiliates of Certain
Officers and Directors.

         Pursuant to the Assignment and Assumption Agreement, dated February 1,
1988 as subsequently amended, the Assignors assigned (Assignment) their PEC
Purchase Rights to the Company.  As part of the consideration for the
Assignment to the Company, the Assignors were entitled to receive from the
Company, on a quarterly basis until January 31, 1995, amounts equal in the
aggregate to 63% of the "Unrestricted Cash Balances" of PEC.  The Assignment
and Assumption Agreement defines Unrestricted Cash Balances of PEC as the cash
on hand and on deposit of PEC and its subsidiaries as of the end of a fiscal
quarter that could be used to make a dividend or other payment to the Company
without violating the most restrictive loan agreement to which PEC is a party
or by which PEC is bound.

         At January 31, 1995, at which point the accrual of payments ceased,
the Company owed the Assignors an aggregate of $13.3 million pursuant to the
Assignment and Assumption Agreement.  Pursuant to an amendment (the Amendment)
to the Assignment and Assumption Agreement, dated March 2, 1995, the Assignors
agreed to defer payment of the $10 million of Subordinated Debt and to
subordinate the payment of such amount to them to the Company's repayment of
certain borrowings and the repayment of certain obligations of subsidiaries of
the Company, the repayment of which obligations were guaranteed by the Company.
Pursuant to the Amendment, the Company is required to pay interest semi-
annually on the Subordinated Debt at a rate of 10% per year between September
1, 1995 and March 1, 1997, and make seven equal semi-annual payments of $1.4
million plus interest commencing March 1, 1997.  In addition to the
Subordinated Debt, at May 31, 1995, $3.3 million was payable to the Assignors,
which amount bears interest at the rate of 10% per year, payable semi-annually
pursuant to the provisions of the Assignment and Assumption Agreement
(Unsubordinated Amount). During fiscal 1996, the Company paid an aggregate of
$1.2 million to the Assignors, all of which represented interest.   The
Unsubordinated Amount is payable no later than March 1, 1997.  All amounts owed
to the Assignors are secured by a pledge of all the stock of PEC.

         In consideration of the payment deferral and subordination described
above, warrants (Warrants) for 1,000,000 shares of  common stock at an exercise
price of $4.25 per share (the closing market price per share on March 2, 1995)
were granted to the Assignors.  The Warrants contain restrictions on transfer
and are exercisable between March 2, 1996 and March 1, 2000.

         The amount of options exercisable at August 31, 1996 were 155,000 plus
an additional 74,000 that will become exercisable within 60 days after  the
Form 10-K filing date.

         In April 1995, PEC entered into an arrangement with HFS, of which Mr.
Nederlander became a director in July 1995.  See "Business- Preferred Equities
Corporation-Timeshare Properties and Sales."





                                       59
<PAGE>   60
                                    PART IV



ITEM 14.     EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K



         (a)     See Item 8 above for a list of financial statements and
                 financial statement schedules included as part of this
                 Annual Report on Form 10-K.



         (b)     No reports on Form 8-K were filed during the last quarter of
                 fiscal 1996.



         (c)     Exhibits.



       EXHIBIT NUMBER                           DESCRIPTION
       --------------                           -----------

         2.1(1)             Disclosure Statement  dated October  3, 1983,
                            together with  Schedules A  through G  and Debtors'
                            Plan, filed as Exhibit (2) to Mego International (a
                            predecessor of the  Company) Form 10-K for the year
                            ended February 28, 1983, and incorporated herein by
                            reference.
         2.2(8)             Articles  of Merger  of  Vacation Spa  Resorts,
                            Inc. with  and into  Preferred  Equities
                            Corporation dated  March 10,  1993, Agreement  and
                            Plan of  Merger dated  as of  July 24, 1992, among
                            Preferred Equities Corporation and Vacation  Spa
                            Resorts, Inc., Amendment to Agreement and  Plan of
                            Merger dated July 14, 1992, and Amendment to
                            Agreement and Plan of Merger dated December 7,
                            1992.
         3.1(a)(1)          Certificate of  Incorporation of the  Company, as
                            amended, filed as  Exhibit 3.1 to  the Company's
                            Form 10-K for  the fiscal year ended August 31,
                            1987 and incorporated herein by reference.
         3.1(b)(5)          Certificate of Amendment  of the Certificate of
                            Incorporation  of the Company, dated June 19, 1992.
         3.1(c)(8)          Certificate of  Amendment  of the  Certificate  of
                            Incorporation  of  the Company,  dated August 26,
                            1993.
         3.2(1)             By-laws of the Company, as amended.
         3.3(10)            Mego  Mortgage Corporation  Amended  and Restated
                            Certificate  of Incorporation  of Mego Mortgage
                            Corporation.
         3.4(10)            Mego Mortgage Corporation By-laws of Mego Mortgage
                            Corporation, as amended.
         4.1(10)            Mego Mortgage Corporation Specimen Common Stock
                            Certificate.
         10.4(a)(1)         Stock Purchase  Agreement dated October  25, 1987
                            by  and among  the Company, and  Robert
                            Nederlander, Jerome  J. Cohen,  Don A. Mayerson,
                            Herbert Hirsch  and Growth Realty  Inc.  ("GRI")
                            (collectively,  the "Purchasers")  filed as
                            Exhibit A  to a  Schedule 13D  dated October  25,
                            1987,  filed  by  Jerome J.  Cohen,  et  al.,  and
                            incorporated  herein by reference.
         10.4(b)(1)         Letter  dated   January  7,   1988  from   the
                            Purchasers  of   the  Company,   updating
                            representations  made by the  Company, in the Stock
                            Purchase Agreement (Exhibit 10.5(a)) filed as
                            Exhibit  10.2 to a Current Report on  Form 8-K of
                            the Company, dated  January 7, 1988, and
                            incorporated herein by reference.
         10.5(a)(1)         Assignment Agreement dated October 25, 1987 by and
                            among Comay  Corp. ("Comay"), GRI, RER Corp.
                            ("RER")  (as successor in interest  to RRE  Corp.)
                            and H&H Financial,  Inc. ("H&H") (collectively the
                            "Assignors")  and the Company, with  respect to
                            shares of  Common Stock of Preferred Equities
                            Corporation ("PEC"),  filed as Exhibit B  to a
                            Schedule  13D dated October 25, 1987 filed by
                            Jerome J. Cohen, et al., and incorporated herein by
                            reference.
         10.5(b)(1)         Assignment  and Assumption Agreement dated
                            February 1, 1988  by and  among the Assignors and
                            the Company  filed as Exhibit 10.2  to a Current
                            Report  of Form 8-K of  the Company, dated February
                            1, 1988 and incorporated herein by reference.
         10.5(c)(1)         Amendment  to Exhibit  10.6(b) dated  as of  July
                            29,  1988 filed  as  Exhibit 10.3  to a Current
                            Report on  Form 8-K of the Company, dated August 1,
                            1988 and incorporated herein by reference.
         10.6(a)(1)         Stock Purchase  and Redemption Agreement dated  as
                            of  October 6, 1987 by  and among PEC, Comay, GRI,
                            RRE Corp.,  H&H, Linda Sterling and the  1971 Rosen
                            Family Stock  Trust filed as Exhibit C to a
                            Schedule 13D dated October 25, 1987 filed by Jerome
                            J.  Cohen, et al., and incorporated herein by
                            reference.
         10.6(b)(1)         Amendment dated as of October 25,  1987 of Exhibit
                            10.7(a) filed as Exhibit 10.3(b)  to a Current
                            Report on  Form  8-K of  the Company  dated
                            February  1, 1988,  and incorporated herein by
                            reference.
         10.7(1)            Loan  and Security  Agreement dated  February  1,
                            1988  by and  between  the Company  and Greyhound
                            Real Estate Finance Company filed as Exhibit 10.7
                            to a Current Report on Form 8-K of the Company
                            dated February 1, 1988 and incorporated herein by
                            reference.
         10.8(1)            Pledge and Security Agreement dated February 1,
                            1988 by and among the Company and  Comay, GRI, REF,
                            H&H and  PEC regarding  the pledge  of PEC  stock
                            pursuant  to the  Assignment Agreement  and the
                            Assignment and  Assumption Agreement (Exhibits
                            10.6(a)  and (b)) filed as  Exhibit 10.8 to the
                            Form 8 Amendment dated April 18, 1988 to a Current
                            Report on Form 8-K of the Company dated February 1,
                            1988 and incorporated herein by reference.





                                       60
<PAGE>   61
       EXHIBIT NUMBER                           DESCRIPTION
       --------------                           -----------

         10.9(1)            Purchase  Agreement dated  June 30,  1988  by and
                            among  Preferred Equities  Corporation ("PEC"),
                            Southern Colorado Properties,  Inc., Colorado Land
                            and  Grazing Company and The Oxford Finance
                            Companies,  Inc. filed  as  Exhibit 10.1  to a
                            Quarterly  Report of  the Company on  Form 10-Q
                            for the  quarter ended  May 31,  1988 and
                            incorporated herein  by reference.
         10.10(2)           Amendment to Exhibit 10.5(b), dated July 29, 1988.
         10.11(3)           Amended and Restated  Loan and Security Agreement
                            between Greyhound Real Estate  Finance Company and
                            Vacation Spa  Resorts, Inc.,  dated May  10, 1989
                            and Amended  and Restated Promissory Note and
                            Guarantee and Subordination Agreement.
         10.12(3)           Amendment  No. 2 to  Loan and  Security Agreement
                            between Greyhound Real  Estate Finance Company  and
                            Vacation  Spa Resorts, Inc.,  dated April  16, 1990
                            and Amendment No.  2 to Promissory Note and
                            Guarantee and Subordination Agreement.
         10.13(3)           Purchase Agreement  dated 24th day of September,
                            1990 by and among Brigantine Inn, Ltd., Brigantine
                            Preferred Properties, Inc. and Preferred Equities
                            Corporation.
         10.14(3)           Purchase Agreement dated  24th day  of September,
                            1990  by and  among Brigantine  Villas, L.P.,
                            Brigantine Preferred Properties, Inc., and
                            Preferred Equities Corporation.
         10.15(4)           Amendment No.  3 to  Loan and Security  Agreement
                            between  Greyhound Real Estate  Finance Company and
                            Preferred Equities  Corporation, dated May 31,
                            1991 and Amendment  No. 2 to Promissory Note.
         10.16(4)           Amendment No.  3 to  Loan and Security  Agreement
                            between  Greyhound Real Estate  Finance Company and
                            Vacation Spa  Resorts,  Inc., dated  May 31,  1991
                            and  Amendment No.  2  to Promissory Note.
         10.17(4)           Loan  and  Security  Agreement   between  Dorfinco
                            Corporation  and  Preferred  Equities Corporation,
                            dated July 31, 1991 and related Promissory Note
                            dated August 9, 1991.
         10.18(4)           Forbearance  and  Assumption  Agreement,  Guarantee
                            and  Second  Amendment  to  Loan and Security
                            Agreement  between Chemical  Bank of New  Jersey,
                            Brigantine  Villas, L.P.   and Brigantine
                            Preferred  Properties,  Inc.,  dated  June  12,
                            1991,  Amended  and Restated Promissory Note  dated
                            June 18,  1991, and  Second Amendment to  Mortgage
                            dated June  18, 1991.
         10.19(5)           Stock Purchase Agreement dated August 13, 1992
                            between the Company and PEC.
         10.20(5)           Amendment  No. 4 to  Amended and  Restated Loan and
                            Security Agreement between Greyhound Real Estate
                            Finance Company and  Preferred Equities
                            Corporation, dated January  13, 1992, and Amendment
                            No. 3 to Amended and Restated Promissory Note.
         10.21(5)           Agreement  to Wholesale  Financing  and related
                            Promissory  Note between  ITT Commercial Finance
                            Corp. and Calvada Homes, Inc., dated January 17,
                            1992.
         10.22(5)           Purchase and Sale  Agreement between  Golden West
                            Homes  and Calvada  Homes, Inc.,  dated February
                            26, 1992.
         10.23(5)           Standard Form of Agreement  between Owner and
                            Contractor between Calvada Homes,  Inc. and Emfad
                            Enterprises, Inc., dated March 23, 1992.
         10.24(5)           Loan Modification  and Extension Agreement  between
                            Valley Bank  of Nevada and  Preferred Equities
                            Corporation dated January 30, 1992.
         10.25(5)           Amendment No. 2 to Amended and Restated Loan
                            Agreement between Valley Bank of Nevada  and
                            Vacation Spa Resorts,  Inc., dated February 20,
                            1992, and related Promissory  Note dated February
                            20, 1992.
         10.26(6)           Purchase  and Servicing  Agreement  dated  as of
                            October  15,  1992 among  Vacation  Spa Resorts,
                            Inc.  and  Preferred  Equities   Corporation  as
                            Sellers,  Preferred  Equities Corporation as
                            Servicer, and NBD Bank, N.A. as Purchaser.
         10.27(6)           Guaranty Agreement as of October 15, 1992 made  by
                            Vacation Spa Resorts, Inc.,  Preferred Equities
                            Corporation, and the Company in favor of NBD Bank,
                            N.A.
         10.28(6)           Letter  from  Greyhound  Financial  Corporation
                            dated  December  4,  1992  extending the borrowing
                            term of  the Amended  and Restated Loan  and
                            Security Agreement  dated May  10, 1992, between
                            Greyhound Real Estate Finance  Company and
                            Preferred Equities Corporation and Loan  and
                            Security  Agreement dated  March 30,  1989, between
                            Greyhound Real  Estate Finance Company and Vacation
                            Spa Resorts, Inc., to December 31, 1992.
         10.29(7)           Asset  Sale  Agreement dated  December  22, 1992,
                            by  and  between Brigantine  Preferred Properties,
                            Inc. as Seller, and The Oxford Finance Companies as
                            Buyer.
         10.30(7)           Amendment  No. 5 to Amended  and Restated Loan  and
                            Security  Agreement between Greyhound Real Estate
                            Finance Company and Preferred Equities Corporation,
                            dated February 23,  1993, Amendment No.  4 to  Loan
                            and Security  Agreement between  Greyhound Real
                            Estate  Finance Company and Vacation Spa Resorts,
                            Inc., dated February 23, 1993.
         10.31(7)           First  Amendment to  Stock Purchase Agreement
                            dated March 10,  1993, by  and between the Company
                            and Preferred Equities Corporation.
         10.32.(7)          Amendment  No. 6 to Amended  and Restated Loan  and
                            Security  Agreement between Greyhound Real  Estate
                            Finance Company and Preferred Equities Corporation,
                            dated June 28, 1993, and three(3)  related
                            Promissory  Notes,  relating  to  the  Grand
                            Flamingo  Winnick, Grand Flamingo Fountains, and
                            Preferred Equities Corporation corporate offices.





                                       61
<PAGE>   62
       EXHIBIT NUMBER                           DESCRIPTION
       --------------                           -----------

         10.33(7)           Second  Amendment to Loan  and Security  Agreement
                            dated June  30, 1993, between Dorfinco Corp. and
                            Preferred Equities Corporation, and First Amendment
                            to Promissory Note.
         10.34(7)           Agreement for Sale  of Notes  Receivable arising
                            from  Timeshares sales  dated August  3, 1993,  by
                            and between  Brigantine  Properties, Inc.  as
                            Seller,  and The  Oxford Finance Companies as
                            Buyer.
         10.35(7)           Purchase  and  Sale  Agreement  dated   August  30,
                            1993,  between   Preferred  Equities Corporation as
                            Developer, and Marine Midland Bank, N.A., and
                            Wellington Financial Corp.
         10.36(7)           Purchase Agreement  dated August 31,  1993, between
                            Mego Financial  Corp. as Seller,  and Legg Mason
                            Special  Investment Trust as Buyer, for the
                            purchase of  300,000 shares of the Company's
                            Preferred Stock.
         10.37(8)           Amended  and  Restated  Loan  Agreement between
                            Bank  of  America  Nevada  and Preferred Equities
                            Corporation, dated September 10, 1993.
         10.38(8)           Agreement  for  Line of  Credit  and  Commercial
                            Promissory  Note  between Mego  Mortgage
                            Corporation and First National Bank of Boston,
                            dated January 4, 1994.
         10.39(8)           Amendment  No. 7 to Amended  and Restated Loan  and
                            Security  Agreement between Greyhound Real Estate
                            Finance Company and Preferred Equities Corporation,
                            dated January 24, 1994.
         10.40(8)           Agreement  between  Mego  Mortgage  Corporation
                            and  Hamilton  Consulting,  Inc.,  dated January
                            31, 1994.
         10.41(8)           Loan  Purchase and Sale Agreement dated March 22,
                            1994, between Mego Mortgage Corporation as Buyer,
                            and Southwest Beneficial Finance, Inc. as Seller.
         10.42(8)           Amendment  No. 8 to Amended  and Restated Loan  and
                            Security  Agreement between Greyhound Real Estate
                            Finance Company and Preferred Equities Corporation,
                            dated April 15, 1994.
         10.43(8)           Purchase and  Servicing Agreement dated  as of June
                            1,  1994, between Preferred  Equities Corporation
                            as Seller and Servicer, and NBD Bank, N.A. as
                            Purchaser.
         10.44(8)           Purchase  and Servicing Agreement  dated as  of
                            July 6,  1994, between Preferred Equities
                            Corporation as Seller, and First National Bank of
                            Boston as Purchaser.
         10.45(8)           Amendment  No. 9 to Amended  and Restated Loan  and
                            Security  Agreement between Greyhound Real  Estate
                            Finance Company and  Preferred Equities
                            Corporation, dated  August 31, 1994, and  Amendment
                            No.  4 to  Amended  and Restated  Promissory Note
                            dated August  31, 1994, Amendment No. 6  to Loan
                            and Security Agreement  between Greyhound  Real
                            Estate  Finance Company and Preferred Equities
                            Corporation dated August 31, 1994, and Amendment
                            No. 4 to Promissory  Note  dated  August  31,
                            1994,  between  Preferred  Equities  Corporation as
                            successor-in-interest   to  Vacation   Spa
                            Resorts,   Inc.,   and  Greyhound   Financial
                            Corporation.
         10.46(8)           Master Loan Purchase and  Servicing Agreement dated
                            as  of August 26, 1994,  between Mego Mortgage
                            Corporation as Seller, and First National Bank of
                            Boston, as Purchaser.
         10.47(9)           Third Amendment  to Loan and Security Agreement and
                            Assumption Agreement dated August 23, 1994, by and
                            between Preferred Equities Corporation, Colorado
                            Land  and Grazing Corp. and Dorfinco Corporation.
         10.48(9)           General Loan  and Security  Agreement dated
                            October 5, 1994,  between Steamboat  Suites, Inc.
                            and Textron Financial Corporation.
         10.49(9)           Purchase and  Servicing  Agreement, Second
                            Closing,  dated  November 29,  1994,  between
                            Preferred Equities Corporation and NBD Bank, N.A.
         10.50(9)           Form of  Agreement with  respect to  the Company's
                            "Split-Dollar"  Life Insurance  Plan, including
                            Form  of Assignment  of  Limited  Interest  in Life
                            Insurance  as  Collateral Security.
         10.51(9)           Construction Loan Agreement  dated January  20,
                            1995, by  and between Preferred  Equities
                            Corporation and NBD Bank.
         10.52(9)           Amendment No. 10  to Amended and Restated  Loan and
                            Security Agreement  dated January 26, 1995, by and
                            between Greyhound Financial Corporation and
                            Preferred Equities Corporation.
         10.53(9)           Loan Agreement re: Calvada  Golf Course dated
                            January  31, 1995, by and  among The  First
                            National Bank of Boston and Preferred Equities
                            Corporation.
         10.54(9)           Second Amendment  to Assignment  and  Assumption
                            Agreement  dated March 2,  1995, by  and between
                            RER  Corp., Comay Corp.,  Growth Realty,  Inc. and
                            H&H  Financial, Inc. and  Mego Financial Corp.
         10.55(9)           First Amendment to General  Loan and Security
                            Agreement dated February 27,  1995, between
                            Steamboat Suites, Inc. and Textron Financial
                            Corporation.
         10.56(9)           Master  Loan Purchase  and  Servicing  Agreement
                            dated  April  1,  1995, by  and  between Greenwich
                            Capital Financial Products, Inc. and Mego Mortgage
                            Corporation.
         10.57(9)           Licensing  Agreement dated April  18, 1995, by  and
                            among  Hospitality Franchise Systems, Inc., Ramada
                            Franchise Systems, Inc. and Preferred Equities
                            Corporation.
         10.58(9)           Purchase and Servicing  Agreement, Third Closing,
                            dated  May 24, 1995, between  NBD Bank, N.A. and
                            Preferred Equities Corporation.
         10.59(9)           Participation and Servicing  Agreement dated May
                            25, 1995,  by and between Atlantic Bank, N.A. and
                            Mego Mortgage Corporation.
         10.60(9)           Purchase  and  Servicing  Agreement,  dated as  of
                            August  31,  1995,  between Preferred Equities
                            Corporation, Colorado Land and Grazing Corp. and
                            First National Bank of Boston.





                                       62
<PAGE>   63
       EXHIBIT NUMBER                           DESCRIPTION
       --------------                           -----------

         10.61(9)           Warehousing  Credit and Security  Agreement, dated
                            as of August 11, 1995, between Mego Mortgage
                            Corporation and First National Bank of Boston.
         10.62(10)          Mego Mortgage Corporation Stock Option Plan
         10.63(10)          Form of Tax Allocation and Indemnity  Agreement
                            entered into between Mego Mortgage
                            Corporation and the Company.
         10.64(10)          Loan Program Sub-Servicing Agreement between the
                            Mego Mortgage Corporation and Preferred Equities
                            Corporation dated as of September 1, 1996.
         10.65(10)          Servicing Agreement by and among Mego Mortgage
                            FHA Title I Loan Trust 1996-1, First Trust of
                            New York, National Association, as Trustee,
                            Norwest Bank Minnesota, N.A. as Master Servicer
                            and the Registrant, as Servicer dated as of March
                            21, 1996.
         10.66(10)          Loan Purchase Agreement between Financial Asset
                            Securities Corp., as Purchaser, and the Mego
                            Mortgage Corporation, as Seller, dated as of March
                            21, 1996.
         10.67(11)          Indemnification Agreement among MBIA Insurance
                            Corporation, as Insurer, Mego Mortgage Corporation,
                            as Seller and Greenwich Capital Markets, Inc. as
                            Underwriter, dated as of March 29, 1996.
         10.68(10)          Pooling and Servicing Agreement, dated as of March
                            21, 1996, among Mego Mortgage Corporation, Financial
                            Asset Securities Corp., as Depositor, First Trust of
                            New  York, National Association, as Trustee and 
                            Contract of Insurance Holder and Norwest Bank 
                            Minnesota, N.A., as Master Servicer.
         10.69(11)          Insurance Agreement among MBIA Insurance
                            Corporation, as Insurer, Norwest Bank Minnesota,
                            N.A., as Master Servicer, Mego Mortgage Corporation,
                            as Seller, Servicer and Claims Administrator,
                            Financial Asset Securities Corp., as Depositor, 
                            Greenwich Capital Financial Products, Inc., and
                            First Trust of New York, National Association, as
                            as Trustee and Contract of Insurance Holder, dated 
                            as of March 21, 1996.
         10.70(11)          Credit Agreement dated as of June 28, 1996
                            between Mego Mortgage Corporation and First
                            National Bank of Boston as Agent.
         10.71(10)          Loan Purchase Agreement dated as of August 1,
                            1996 between Financial Asset Securities Corp., as
                            Purchaser, and Mego Mortgage Corporation, as
                            Seller.
         10.72(10)          Pooling and Servicing Agreement dated as of
                            August 1, 1996 between Financial Asset Securities
                            Corp., as Purchaser, and Mego Mortgage Corporation,
                            as Seller.
         10.73(11)          Amendment No. 1 to Warehousing Credit and
                            Security Agreement dated as of August 9, 1996
                            between Mego Mortgage Corporation and First
                            National Bank of Boston.
         10.74(10)          Office Lease by and between MassMutual and Mego
                            Mortgage Corporation dated April 1996.
         10.75(11)          Amendment to Master Loan Purchase and Servicing
                            Agreement between Greenwich Capital Financial
                            Products, Inc., and Mego Mortgage Corporation dated
                            February 1, 1996.
         10.76(11)          Amendment No. 2 to Master Loan Purchase and
                            Servicing Agreement between Greenwich Capital
                            Financial Products, Inc., and Mego Mortgage
                            Corporation dated July 1, 1996.
         10.77(10)          Services and Consulting Agreement between Mego
                            Mortgage Corporation and Preferred Equities
                            Corporation dated as of September 1, 1996.
         10.78(11)          Employment Agreement between Mego Mortgage
                            Corporation and Jeffrey S. Moore dated January
                            1, 1994.
         10.79(11)          Form of Indenture entered into between Mego Mortgage
                            Corporation and the Indenture Trustee.
         10.80(10)          Master Repurchase Agreement dated as of September
                            4, 1996 between Mego Mortgage Corporation and
                            Greenwich Capital Markets, Inc.
         10.81(10)          Letter agreement dated October 1, 1996 between
                            Mego Mortgage Corporation and Greenwich Capital
                            Markets, Inc.
         10.82(10)          Amended and Restated Master Loan Purchase and
                            Servicing Agreement dated as of October 1, 1996
                            among Mego Mortgage Corporation, Mego Financial
                            Corp. and Greenwich Capital Markets, Inc.
         10.83(10)          Form of Agreement entered into between Mego
                            Mortgage Corporation and Mego Financial Corp.
         10.84(10)          Commitment letter between Mego Mortgage Corporation
                            and Greenwich Capital  Markets, Inc. dated
                            September 17, 1996.
         10.85              Amendment  No. 11 to Amended and Restated Loan and
                            Security Agreement dated September 22, 1995, by and
                            between Finova Capital Corporation and Preferred
                            Equities Corporation and related Promissory Note
                            relating to Aloha Bay Phase II.
         10.86              Amendment No. 12 to Amended and Restated Loan and
                            Security Agreement dated September 29, 1995, by
                            and between Finova Capital Corporation and
                            Preferred Equities Corporation and Amended and
                            Restated Promissory Note relating to Corporate
                            Office Building.
         10.87              Fourth Amendment to Loan and Security Agreement
                            and Assumption Agreement dated September 30, 1995,
                            by and between Preferred Equities Corporation,
                            Colorado Land and Grazing Corp., Mego Financial
                            Corp. and Dorfinco Corporation.





                                       63
<PAGE>   64
     EXHIBIT NUMBER                           DESCRIPTION
     --------------                           ----------- 

         10.88              Request  for Receivables  Purchase dated  November
                            16, 1995,  by  and between  Preferred Equities
                            Corporation as Seller and NBD Bank as Purchaser.
         10.89              Second Amendment to General  Loan and Security
                            Agreement dated  November 30, 1995, by and between
                            Steamboat  Suites, Inc.  and  Textron  Financial
                            Corporation  and Restated  and Amended Receivables
                            Promissory Note.
         10.90              Amendment No. 13 to Amended and  Restated Loan and
                            Security Agreement  dated December 13, 1995, by and
                            between Finova Capital Corporation  and Preferred
                            Equities Corporation  and three (3) related
                            Promissory Notes, relating to the Grand Flamingo
                            Towers Lobby, Ida  and Winnick Building Additions.
         10.91              Purchase  and  Sale Agreement  dated  December 29,
                            1995, by  and between  Overlook Lodge Limited
                            Liability Company as Seller and Preferred Equities
                            Corporation as Purchaser.
         10.92              Second  Amendment to Purchase and  Sale Agreement
                            dated  February 8,  1996, as previously amended  by
                            an  Amendment  to Purchase  and Sale  Agreement
                            dated  May 10,  1994, between Preferred Equities
                            Corporation,  Marine Midland Bank, and Wellington
                            Financial Corp.
         10.93              Acquisition and Construction Loan Agreement dated
                            March  29, 1996, by and between  Heller Financial,
                            Inc. and  Preferred  Equities Corporation  and
                            three (3)  related Promissory Notes;  Acquisition
                            Promissory  Note,   Revolving  Renovation
                            Promissory  Note,   and Receivables Promissory
                            Note.
         10.94              Construction Loan  Agreement  dated April  30,
                            1996,  by and  between Preferred  Equities
                            Corporation and NBD Bank and related Promissory
                            Note.
         10.95              Amendment No. 14 to Amended and Restated Loan and
                            Security Agreement dated June 5,  1996, by  and
                            between Finova Capital Corporation and  Preferred
                            Equities Corporation and Second Amended and
                            Restated Promissory Note, relating to Headquarters
                            and FCFC Property.
         10.96              Amendment No. 15 to  Amended and Restated  Loan and
                            Security Agreement  dated August  16, 1996,  by and
                            between  Finova Capital  Corporation  and Preferred
                            Equities Corporation; Amendment No. 7 to Loan  and
                            Security Agreement; Amendment No. 5 to Amended  and
                            Restated Promissory Note; Amendment No.  5 to
                            Promissory Note; Amendment No. 1 to  Promissory
                            Note [Towers Lobby]
         10.97              Request for Receivables Purchase dated July 30,
                            1996, by and between Preferred  Equities
                            Corporation as Seller and NBD Bank as Purchaser.
         10.98              Preferred Stock redemption agreement by and between
                            Mego Financial Corp. and Legg Mason Special
                            Investment Trust, Inc.
         10.99              Amendment to Common Stock Purchase Warrant issued by
                            Mego Financial Corp. to Legg Mason Investment Trust,
                            Inc.
         21.1               Subsidiaries of the Company
         27.1               Financial Data Schedule (For SEC Use Only)

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

 (1)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1988 and incorporated herein by reference.

 (2)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1989 and incorporated herein by reference.

 (3)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1990 and incorporated herein by reference.

 (4)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1991 and incorporated herein by reference.

 (5)     Filed as part of the Company's Registration Statement on Form S-4
         originally filed August 31, 1992 and incorporated herein by reference.

 (6)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1992 and incorporated herein by reference.

 (7)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1993 and incorporated herein by reference.

 (8)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1994 and incorporated herein by reference.

 (9)     Filed as part of the Company's Form 10-K for fiscal year ended August
         31, 1995 and incorporated herein by reference.

(10)     Filed as part of the Registration Statement on Form S-1 filed by Mego
         Mortgage Corporation, as amended (File No. 333-12443), and incorporated
         herein by reference.

(11)     Filed as part of the Registration Statement on Form S-1 filed by Mego
         Mortgage Corporation, as  amended (File No. 333-13421), and
         incorporated herein by reference.





                                       64
<PAGE>   65



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                        MEGO FINANCIAL CORP.



Date:  November 27, 1996                   By: /s/ JEROME J. COHEN
                                               --------------------------------
                                                  Jerome J. Cohen, President




         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date(s) indicated.

<TABLE>
<CAPTION>

             SIGNATURE                                 TITLE                                     DATE

 <S>                                          <C>                                           <C>
 /S/ ROBERT NEDERLANDER                       Chairman of the Board, Chief                  November 27, 1996
 ---------------------------------            Executive Officer and Director
 Robert Nederlander                           


 /S/ JEROME J. COHEN                          President and Director                        November 27, 1996
 ---------------------------------                                                                                     
 Jerome J. Cohen


 /S/ HERBERT B. HIRSCH                        Senior Vice President, Chief                  November 27, 1996
 ---------------------------------            Financial Officer, Treasurer and
 Herbert B. Hirsch                            Director                                                                         


 /S/ EUGENE I. SCHUSTER                       Vice President and Director                   November 27, 1996
 ---------------------------------                                                                                     
 Eugene I. Schuster


 /S/ DAVID A. CLEVELAND                       Vice President and Chief Accounting           November 27, 1996
 ---------------------------------            Officer                                                                         
 David A. Cleveland


 /S/ WILBUR L. ROSS, JR.                      Director                                      November 27, 1996
 ---------------------------------                                                                                     
 Wilbur L. Ross, Jr.


 /S/ JOHN E. MCCONNAUGHY, JR.                 Director                                      November 27, 1996
 ---------------------------------                                                                                     
 John E. McConnaughy, Jr.
</TABLE>





                                       65
<PAGE>   66



                     MEGO FINANCIAL CORP. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                         Page   

Independent Auditors' Report                                             F-2

Financial Statements:

    Consolidated Statements of Financial Condition - 

    August 31, 1996 and 1995                                             F-3

    Consolidated Statements of Operations - Years Ended

    August 31, 1996, 1995 and 1994                                       F-4

    Consolidated Statements of Stockholders' Equity - Years Ended

    August 31, 1996, 1995 and 1994                                       F-6

    Consolidated Statements of Cash Flows - Years Ended

    August 31, 1996, 1995 and 1994                                       F-7

Notes to Consolidated Financial Statements                               F-9





                                      F-1
<PAGE>   67





INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
Mego Financial Corp. and Subsidiaries
Las Vegas, Nevada



We have audited the accompanying statements of financial condition of Mego
Financial Corp. and its subsidiaries (the "Company") as of August 31, 1996 and
1995, and the related consolidated financial statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 1996.  These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mego Financial Corp.  and
subsidiaries at August 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996 in conformity with generally accepted accounting principles.

As discussed in Note 4 to the consolidated financial statements, in 1995 the
Company adopted Statement of Financial Accounting Standards No. 122, Accounting
for Mortgage Servicing Rights effecive September 1, 1994.



DELOITTE & TOUCHE LLP


Las Vegas, Nevada

October 25, 1996, except for Note 24 as to which the date is
November 22, 1996





                                      F-2
<PAGE>   68
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                (thousands of dollars, except per share amounts)
                                   August 31,


<TABLE>
<CAPTION>
                                                                                                       1996             1995
                                                                                                   -----------    -----------
<S>                                                                                                   <C>            <C>
ASSETS
Cash and cash equivalents                                                                               $3,185         $7,338
Restricted cash                                                                                          6,657          6,467
Notes receivable, net of allowances for cancellations, valuation discounts, and credit losses of
  $16,794 and $16,866 at August 31, 1996 and 1995, respectively                                         40,485         31,054
Mortgage related securities, at fair value                                                              22,944              0
Excess servicing rights                                                                                 14,268         16,565
Mortgage servicing rights                                                                                3,827          1,076
Timeshare interests held for sale                                                                       36,890         19,820
Land and improvements inventory                                                                          3,721          5,542
Other investments                                                                                        1,972          1,531
Property and equipment, net of accumulated depreciation of
  $13,550 and $11,848 at August 31, 1996 and 1995, respectively                                         20,262         12,681
Deferred selling costs                                                                                   2,901          3,332
Other assets                                                                                             8,485          7,351
                                                                                                   -----------    -----------
          TOTAL ASSETS                                                                                $165,597       $112,757
                                                                                                   ===========    ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Notes and contracts payable                                                                          $84,449        $44,715
  Accounts payable and accrued liabilities                                                              19,662         13,998
  Payable to assignors                                                                                   2,579          2,579
  Future estimated contingency for notes receivable sold with recourse                                   9,332          8,030
  Deposits                                                                                               2,971          3,619
  Negative goodwill                                                                                         82            131
  Deferred income taxes                                                                                 10,980          8,103
                                                                                                   -----------    -----------
          Total liabilities before subordinated debt and redeemable preferred stock                    130,055         81,175
                                                                                                   -----------    -----------
Subordinated debt                                                                                        9,691          9,352
                                                                                                   -----------    -----------
Redeemable preferred stock, Series A, 12% cumulative preferred stock, $.01 par
  value, $10 redemption value, 0 and 300,000 shares issued and outstanding at
  August 31, 1996 and 1995, respectively                                                                     0          3,000
                                                                                                   -----------    -----------
Stockholders' equity:
  Preferred stock, $.01 par value (authorized -- 5,000,000 shares)                         
  Common stock, $.01 par value (authorized -- 50,000,000 shares; issued and outstanding --
    18,433,121 and 18,087,556 at August 31, 1996 and 1995, respectively)                                   184            180
  Additional paid-in capital                                                                             6,504          4,498
  Retained earnings                                                                                     19,163         14,552
                                                                                                   -----------    -----------
          Total stockholders' equity                                                                    25,851         19,230
                                                                                                   -----------    -----------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                  $165,597       $112,757
                                                                                                   ===========    ===========
</TABLE>


                See notes to consolidated financial statements.

                                      F-3
<PAGE>   69




                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (thousands of dollars, except per share amounts)
                         For the years ended August 31,


<TABLE>
<CAPTION>
                                                                     1996          1995          1994
                                                                  ---------     ---------     ---------
<S>                                                                 <C>           <C>           <C>
REVENUES
  Timeshare interest sales, net                                     $27,778       $20,682       $19,521
  Land sales, net                                                    17,968        20,812        13,534
  Housing sales                                                           0           205           515
  Gain on sale of notes receivable                                   19,110        13,819         1,454
  Net unrealized gain on mortgage related securities                  2,697             0             0
  Interest income                                                     8,698         8,179         8,368
  Financial income                                                    3,892         1,149             0
  Amortization of negative goodwill                                      49           216           472
  Incidental operations                                               2,995         3,620         2,007
  Other                                                               1,527           890           954
                                                                  ---------     ---------     ---------
          Total revenues                                             84,714        69,572        46,825
                                                                  ---------     ---------     ---------
COSTS AND EXPENSES
  Direct cost of:
    Timeshare interest sales                                          3,998         2,977         2,684
    Land sales                                                        1,844         2,164         1,435
    Housing sales                                                         0           265           531
    Incidental operations                                             2,257         2,343         2,342
  Commissions and selling                                            30,351        23,690        18,949
  Depreciation and amortization                                       1,920         1,534         1,208
  Provision for credit losses                                         1,510           864            96
  Interest expense                                                    8,597         6,961         4,836
  General and administrative                                         26,219        17,335        11,231
  Payments to assignors                                                   0         7,252         8,526
                                                                  ---------     ---------     ---------
          Total costs and expenses                                   76,696        65,385        51,838
                                                                  ---------     ---------     ---------
INCOME (LOSS) BEFORE INCOME TAXES                                     8,018         4,187        (5,013)

INCOME TAXES                                                          3,167         3,293           761
                                                                  ---------     ---------     ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS                              4,851           894        (5,774)

GAIN ON DISCONTINUED OPERATIONS, NET OF INCOME TAXES OF $450              0           873             0
                                                                  ---------     ---------     ---------
NET INCOME (LOSS)                                                     4,851         1,767        (5,774)

CUMULATIVE PREFERRED STOCK DIVIDENDS                                    240           360           360
                                                                  ---------     ---------     ---------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK                         $4,611        $1,407       ($6,134)
                                                                  =========     =========     =========
</TABLE>





                See notes to consolidated financial statements.






                                      F-4
<PAGE>   70



                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
                (thousands of dollars, except per share amounts)
                         For the years ended August 31,




<TABLE>
<CAPTION>
                                                                1996             1995            1994
                                                            ------------   ------------     ------------   
<S>                                                        <C>                <C>               <C>
EARNINGS (LOSS) PER COMMON SHARE:
  Primary:
    Income (loss) from continuing operations                    $0.24             $0.03            ($0.34)
    Income from discontinued operations                             0              0.05                 0
                                                         ------------      ------------      ------------   
    Net income (loss)                                           $0.24             $0.08            ($0.34)
                                                         ============      ============      ============   
  Weighted average number of common shares and
    common share equivalents outstanding                   19,087,387        18,087,153        17,820,170
                                                         ============      ============      ============   
  Fully Diluted:
    Income from continuing operations                           $0.24             $0.02
    Income from discontinued operations                             0              0.05
                                                         ------------      ------------   
    Net income                                                  $0.24             $0.07
                                                         ============      ============   
  Weighted average number of common shares and
    common share equivalents outstanding                   19,087,387        18,939,201
                                                         ============      ============   
</TABLE>





                See notes to consolidated financial statements.






                                      F-5
<PAGE>   71



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



<TABLE>
<CAPTION>

                                                            Common Stock
                                                           --------------
                                                           $.01 par value                 Additional
                                                           --------------                  paid-in        Retained
                                                               Shares        Amount        capital        earnings        Total
                                                           ------------   ------------  ------------  ------------    ------------
<S>                                                         <C>                  <C>          <C>           <C>            <C>
Balance at September 1, 1993                                17,631,169           $178         $2,612       $19,219         $22,009

Issuance of common stock                                       475,000              3            647            --             650

Redemption of common stock                                     (19,419)            (1)           (61)           --             (62) 

Dividends on preferred stock                                        --             --             --           (300)          (300)

Net loss                                                            --             --             --          (5,774)       (5,774)
                                                          ------------   ------------   ------------   ------------   ------------

Balance at August 31, 1994                                  18,086,750            180          3,198         13,145         16,523

Issuance of 1,000,000 common stock warrants
  in connection with subordinated debt valued
  at $1.30 per share                                                --             --          1,300             --          1,300

Issuance of common stock in connection
  with exercise of stock options                                   806             --             --             --             --

Dividends on preferred stock                                        --             --             --           (360)          (360)

Net income                                                          --             --             --          1,767          1,767
                                                          ------------   ------------   ------------   ------------   ------------

Balance at August 31, 1995                                  18,087,556            180          4,498         14,552         19,230

Issuance of common stock in connection
  with exercise of stock options                                 2,218              1              9             --             10

Issuance of common stock in connection
  with redemption of preferred stock                           343,347              3          1,997             --          2,000

Dividends on preferred stock                                        --             --             --           (240)          (240)

Net income                                                          --             --             --          4,851          4,851
                                                          ------------   ------------   ------------   ------------   ------------
Balance at August 31, 1996                                  18,433,121           $184         $6,504        $19,163        $25,851
                                                          ============   ============   ============   ============   ============

</TABLE>




                See notes to consolidated financial statements.






                                      F-6
<PAGE>   72




                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (thousands of dollars)
                         For the years ended August 31,




<TABLE>
<CAPTION>
                                                                               1996              1995              1994
                                                                          ------------      ------------      ------------
<S>                                                                           <C>               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                             $4,851            $1,767           ($5,774)
                                                                          ------------      ------------      ------------
  Adjustments to reconcile net income (loss) to
   net cash used in operating activities:
    Amortization of negative goodwill                                              (49)             (216)             (472)
    Charges to allowance for cancellation and credit losses                     (6,918)           (6,611)           (7,909)
    Provisions for cancellation and credit losses                               11,288            10,359             7,775
    Provisions for uncollectible owners' association advances                       12             1,050               365
    Cost of sales                                                                5,842             5,406             4,650
    Depreciation and amortization expense                                        1,920             1,534             1,208
    Gain on sale of notes receivables                                           (1,116)           (1,586)             (875)
    Gain on discontinued operations                                                 --            (1,323)               --
    Increase (decrease) in future estimated contingency for notes
      receivable sold with recourse                                              3,080             4,943             2,340
    Additions to excess servicing rights                                       (21,242)          (15,336)           (1,611)
    Amortization of excess servicing rights                                      2,758               917               367
    Repayments of mortgage related securities                                       92                --                --
    Accretion of residual interest on mortgage related securities                 (243)               --                --
    Net unrealized gain on mortgage related securities                          (2,697)               --                --
    Additions to mortgage servicing rights                                      (3,306)           (1,176)               --
    Amortization of mortgage servicing rights                                      555               100                --
    Deferred income taxes                                                        2,877             2,689               761
    Amortization of future estimated contingency for notes
      receivable sold with recourse                                             (1,812)           (1,423)           (1,696)
    Repayments on notes receivable, net                                         24,680            17,965            24,614
    Proceeds from sale of notes receivable                                     152,601           119,055            31,097
    Purchase of land and timeshare interests                                   (21,091)          (13,951)           (5,339)
    Changes in operating assets and liabilities:
      Increase in restricted cash                                                 (190)           (5,715)             (252)
      Increase in notes receivable, net                                       (190,902)         (133,147)          (43,949)
      Decrease (increase) in other assets                                          327              (795)             (544)
      Decrease (increase) in deferred selling costs                                431              (277)           (1,003)
      Increase in accounts payable and accrued liabilities                       5,664             6,036             1,722
      Increase (decrease) in deposits                                             (648)            1,399               802
      Increase in payable to assignors                                              --             6,100             3,927
      Decrease in excess of liabilities over assets of
        discontinued operations                                                     --            (2,899)               --
                                                                          ------------      ------------      ------------

        Total adjustments                                                      (38,087)           (6,902)           15,978
                                                                          ------------      ------------      ------------

          Net cash provided by (used in) operating activities                  (33,236)           (5,135)           10,204
                                                                          ------------      ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                            (9,327)           (3,797)           (2,573)
  Proceeds from sale of property and equipment                                      19                 3               150
  Additions to other investments                                                (1,381)             (262)           (3,903)
  Decreases in other investments                                                   940               350             4,111
                                                                          ------------      ------------      ------------
          Net cash used in investing activities                                 (9,749)           (3,706)           (2,215)
                                                                          ------------      ------------      ------------
</TABLE>





                See notes to consolidated financial statements.






                                      F-7
<PAGE>   73




                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                             (thousands of dollars)
                         For the years ended August 31,



<TABLE>
<CAPTION>
                                                                            1996              1995              1994
                                                                         ------------      ------------      ------------
<S>                                                                        <C>               <C>                <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings                                                  201,243           122,334            41,040
  Reduction of debt                                                        (161,510)         (117,429)          (45,958)
  Preferred stock dividends                                                    (240)             (360)             (300)
  Redemption of preferred stock                                              (1,000)               --                --
  Redemption of common stock                                                     --                --               (62)
  Payments on subordinated debt                                              (1,000)               --                --
  Increase in subordinated debt                                               1,339               652                --
                                                                       ------------      ------------      ------------
          Net cash provided by (used in) financing activities                38,832             5,197            (5,280)
                                                                       ------------      ------------      ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         (4,153)           (3,644)            2,709

CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR                                7,338            10,982             8,273
                                                                       ------------      ------------      ------------

CASH AND CASH EQUIVALENTS -- END OF YEAR                                     $3,185            $7,338           $10,982
                                                                       ============      ============      ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Cash paid during the year for:
    Interest, net of amounts capitalized                                     $9,136            $5,567            $4,698
                                                                       ============      ============      ============
    Income taxes                                                                $25                $3               $--
                                                                       ============      ============      ============


SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  The Company issued 475,000 shares of its common
    stock to an unrelated entity for services rendered to
    Mego Mortgage                                                               $--               $--              $650
                                                                       ============      ============      ============

  Issuance of subordinated debt to assignors                                    $--           $10,000               $--
                                                                       ============      ============      ============

  In connection with the issuance of subordinated debt
    the Company issued 1,000,000 common stock warrants to
    the assignors                                                               $--            $1,300               $--
                                                                       ============      ============      ============

  In connection with the securitization of loans and creation of
    mortgage related securities, the Company retained interest
    only securities and residual interest securities                        $20,096               $--               $--
                                                                       ============      ============      ============

  Redemption of preferred stock through issuance of common stock             $2,000               $--               $--
                                                                       ============      ============      ============
</TABLE>





                See notes to consolidated financial statements.






                                      F-8
<PAGE>   74




                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED AUGUST 31, 1996, 1995, AND 1994




1.       NATURE OF OPERATIONS

         Mego Financial Corp. (Mego) is a specialty financial services company
         that, through its subsidiaries, Mego Mortgage Corporation (MMC) and
         Preferred Equities Corporation (PEC), is engaged primarily in
         originating, selling and servicing consumer receivables generated
         through home improvement loans and timeshare and land sales.  Mego
         Financial Corp. and its subsidiaries are herein collectively referred
         to as the Company.  MMC originates Title I home improvement loans
         (Title I Loans) insured by the Federal Housing Administration (FHA) of
         the Department of Housing and Urban Development (HUD) through a
         network of loan correspondents and home improvement contractors. In
         May 1996, MMC commenced the origination of conventional home
         improvement and home equity loans through its network of loan
         correspondents.  PEC markets and finances timeshare interests in
         select resort areas, as well as land.   By providing financing to
         virtually all of its customers, PEC also originates consumer
         receivables that it sells and services.  Timeshare and land sales have
         historically accounted for most of the Company's revenues and profits;
         however, since March 1994, when MMC commenced operations, originating,
         selling and servicing home improvement loans have accounted for an
         increasing portion of revenues and profits.  Mego was incorporated
         under the laws of the state of New York in 1954 under the name Mego
         Corp. and, in 1992, changed its name to Mego Financial Corp. In
         February  1988, Mego acquired PEC, pursuant to an assignment by the
         Assignors, as defined below, of their contract right to purchase PEC.
         See Note 2 for further discussion.

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

2.       ACQUISITION OF PREFERRED EQUITIES CORPORATION

         The acquisition of PEC on February 1, 1988, was effected pursuant to
         an Assignment Agreement, dated October 25, 1987, between Mego and
         several corporations (Assignors) and a related Assignment and
         Assumption Agreement, (Assignment and Assumption Agreement), dated
         February 1, 1988, and amended on July 29, 1988 between Mego and the
         Assignors (collectively, such agreements constitute the Assignment).
         The acquisition of PEC was accomplished by PEC's issuing 2 shares of
         its common stock to the Company for a purchase price of approximately
         $50,000. Immediately prior to that time, the previously outstanding
         shares held by others were surrendered and redeemed by PEC at a cost
         to PEC of approximately $10,463,000 plus fees and expenses, leaving
         Mego with all of the outstanding shares of PEC.

         The right to purchase shares from PEC was obtained by Mego pursuant to
         the Assignment, which assigned to the Company the right to purchase
         shares from PEC pursuant to the Stock Purchase and Redemption
         Agreement, dated October 6, 1987 , between PEC and the Assignors, as
         amended on October 25, 1987. Consideration for the Assignment
         consisted of promissory notes (Purchase Notes) from Mego to the
         Assignors in the aggregate amount of $2,000,000 and additional
         payments to the Assignors as described below.  The Purchase Notes were
         paid in full prior to August 31, 1988.  After the payment of the
         Purchase Notes, the Assignors were entitled to receive from the
         Company on a quarterly basis, as determined as of the end of each
         quarter, additional payments equal in the aggregate to 63% of PEC's
         consolidated unrestricted cash balances, for a period ending on
         January 31, 1995. The additional payments are collateralized by a
         pledge of PEC stock to the Assignors.

         On March 2, 1995, Mego entered into the Second Amendment to Assignment
         and Assumption Agreement (Amendment) whereby the Assignors agreed to
         defer payment of  $10,000,000 of the amount payable to Assignors and
         to subordinate such amounts in right of payment applied to debt for
         money borrowed by Mego or obligations of subsidiaries guaranteed by
         Mego.  Warrants for 1,000,000 shares of Mego common stock, at an
         exercise price of $4.25 per share (the closing market price per share
         on March 2, 1995) were granted to the Assignors in consideration of
         the payment deferral and subordination. The warrants contain
         restrictions on transfer and are exercisable until March 1, 2000.  The
         Amendment calls for interest to be paid semi-annually at the rate of
         10% per annum starting September 1, 1995, and 7 equal semi annual
         payments of $1,429,000 plus interest, commencing March 1, 1997.  The
         payments are collateralized by a pledge of PEC stock.  See Notes 16
         and 22 for further discussion.





                                      F-9
<PAGE>   75





3.       EXCESS OF BOOK VALUE OF NET ASSETS ACQUIRED OVER ACQUISITION COST

         On February 1, 1988, the underlying book value of the net assets of
         PEC exceeded Mego's acquisition cost by the amount of $42,315,000.
         Management allocated the excess book value to assets existing at the
         acquisition date (primarily notes receivable which mature over
         approximately seven to ten years), as a revaluation adjustment. As
         collections are made on the receivables (either through installment
         payments or upon sale of receivables), a portion of the revaluation
         adjustment is recorded to income as amortization. For the fiscal years
         ended August 31, 1996, 1995, and 1994, such amortization amounted to
         $0, $166,000, and $422,000, respectively. The Company previously
         determined that $20,000,000 of the revaluation adjustment should not
         be amortized. Payments to assignors have aggregated $47,401,000
         through January 31, 1995 at which time the accrual of payments to
         Assignors ceased.  Amounts in excess of $20,000,000 have been expensed
         and $0, $7,252,000 and $8,526,000 have been included in costs and
         expenses for the 12 months ended August 31, 1996, 1995 and 1994,
         respectively.  See Notes 2 and 22 for further discussion.

4.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation--The accompanying consolidated financial
         statements include the accounts of Mego and its subsidiaries. All
         significant intercompany accounts and transactions have been
         eliminated in consolidation. See Note 1 for further discussion.

         Parent Company Only Basis--At August 31, 1996 and 1995, Mego, on a
         "parent company only" basis, reflected total assets of $58,708,000 and
         $51,529,000, respectively, which are comprised principally of its
         equity investment in subsidiaries of $46,082,000 and $41,280,00,
         respectively  and liabilities of $23,166,000 and $22,947,000,
         respectively, excluding subordinated debt.. At August 31, 1996,
         liabilities were comprised principally of deferred income taxes of
         $11,669,000, payable to Assignors of $2,579,000, and payable to PEC of
         $7,445,000, excluding subordinated debt.  At August 31, 1995,
         liabilities excluding subordinated debt were comprised principally of
         deferred income taxes of $8,103,000, payable to Assignors of
         $2,579,000, and payable to PEC of $7,741,000. At August 31, 1996 and
         1995, subordinated debt of $9,691,000 and $9,352,000, respectively,
         was outstanding. At August 31, 1996 and 1995, Mego had outstanding
         redeemable preferred stock with an aggregate redemption price of $0
         and $3,000,000, respectively. See Notes 2, 16, and 17 for further
         discussion.

         Cash Equivalents--Cash equivalents consist primarily of certificates
         of deposit, repurchase agreements and commercial paper with original
         maturities of ninety days or less.

         Restricted Cash--Restricted cash represents cash on deposit which
         relates to utility subsidiary customer deposits and betterment fees;
         cash on deposit in accordance with notes receivable sale agreements;
         and untransmitted funds received from collection of notes receivable
         which have not as yet been disbursed to the purchasers of such notes
         receivable in accordance with the related sale agreements.

         Notes Receivable--Substantially all of the notes receivable are held
         for sale and are carried at the lower of cost or market on an
         aggregate basis by type of receivable.  The cost basis is the
         outstanding principal balance of the notes reduced by the allowances
         for cancellation and credit losses and by the net deferred origination
         fees and certain direct origination costs that are recognized upon
         sale.

         Allowances for Cancellation and Credit Losses--Provisions for
         cancellation and credit losses relating to notes receivable are
         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. The Company records a provision
         for cancellations and credit loss at the time revenue is recognized,
         based upon periodic analysis of the portfolio, collateral values,
         estimated FHA insurance recoveries, historical credit loss experience,
         borrowers' ability to repay, and current economic factors. The
         allowance for cancellations and credit losses represents the Company's
         estimate of its probable future credit losses to be incurred over the
         lives of the notes. The allowance for cancellations and credit losses
         is reduced by actual cancellations and losses 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
         future estimated cancellation and credit losses as notes receivable
         are sold. Recourse to the Company on sales of notes receivable is
         governed by the agreements between the purchasers and the Company. No
         allowance for credit losses on loans sold with recourse is established
         on loans sold through securitizations, as the Company has no recourse
         obligation under those securitization agreements. Estimated credit
         losses on loans sold through securitizations are considered in the
         Company's valuation of its residual interest securities. The Company'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





                                      F-10
<PAGE>   76





         and level of the portfolio, current economic conditions which may
         affect the purchasers' ability to pay, the changes in collateral
         values and overall portfolio quality. Changes in the allowance as a
         result of such reviews are reflected in the provision for cancellation
         and credit losses.

         Mortgage Related Securities--In 1996, the Company securitized a
         majority of loans originated by MMC into the form of a REMIC.  A REMIC
         is a trust issuing multi-class securities with certain tax advantages
         to investors and which derives its cash flow from a pool of underlying
         mortgages. Certain of the senior classes of the REMIC are sold, and an
         interest only strip and a subordinated residual class are retained by
         the Company. The subordinated residual class is in the form of
         residual certificates and are classified as residual interest
         securities. The documents governing the Company's securitizations
         require the Company to establish initial overcollateralization or
         build overcollateralization levels through retention of distributions
         by the REMIC trust otherwise payable to the Company as the residual
         interest holder. This overcollateralization causes the aggregate
         principal amount of the loans in the related pool and/or cash reserves
         to exceed the aggregate principal balance of the outstanding investor
         certificates. Such excess amounts serve as credit enhancement for the
         related REMIC trust.  To the extent that borrowers default on the
         payment of principal or interest on the loans, losses will reduce the
         overcollateralization and cash flows otherwise payable to the residual
         interest security holder to the extent that funds are available. If
         payment defaults exceed the amount of overcollateralization, as
         applicable, the insurance policy maintained by the related REMIC trust
         will pay any further losses experienced by holders of the senior
         interests in the related REMIC trust.  The Company does  not have any
         recourse obligations for credit losses in the REMIC trust. The
         residual interests are amortized to operations over the contractual
         lives of the loans, considering future estimated prepayments utilizing
         an amortization method which approximates the level yield method.

         The Company adopted Statement of Financial Accounting Standards (SFAS)
         No. 115, "Accounting for Certain Investments in Debt and Equity
         Securities" (SFAS 115) on September 1, 1995. There was no cumulative
         financial statement impact as a result of adopting SFAS 115.

         In accordance with the provisions of SFAS 115, the Company classifies
         residual interest securities and interest only securities as trading
         securities which are recorded at fair value with any unrealized gains
         or losses recorded in the results of operations in the period of the
         change in fair value. Valuations at origination and at each reporting
         period are based on discounted cash flow analyses. The cash flows are
         estimated as the excess of the weighted average coupon on each pool of
         loans securitized over the sum of the pass-through interest rate,
         servicing fees, a trustee fee, an insurance fee and an estimate of
         annual future credit losses, net of FHA insurance recoveries, related
         to the loans securitized, over the life of the loans.  These cash
         flows are projected over the life of the loans using prepayment,
         default, and loss assumptions that the Company believes market
         participants would use for similar financial instruments and are
         discounted using an interest rate that the Company believes a
         purchaser unrelated to the seller of such a financial instrument would
         require. The Company utilized prepayment assumptions of 14%, estimated
         loss factor assumptions of 1%, and weighted average discount rates of
         12%. The valuation includes consideration of characteristics of the
         loans including loan type and size, interest rate, origination date,
         and term. The Company also uses other available information such as
         externally prepared reports on prepayment rates and industry default
         rates of the type of loan portfolio under review. To the Company's
         knowledge, there is no active market for the sale of these mortgage
         related securities. The range of values attributable to the factors
         used in determining fair value is broad. Although the Company believes
         that it has made reasonable estimates of the fair value of the
         mortgage related securities, the rate of prepayments and default rates
         utilized are estimates, and actual experience may vary.

         Mortgage Servicing Rights--At August 31, 1995, effective September 1,
         1994, the Company adopted the provisions of SFAS No. 122 "Accounting
         for Mortgage Servicing Rights, an amendment of SFAS No. 65" (SFAS 122)
         which requires that a mortgage banking enterprise recognize as
         separate assets the rights to service mortgage loans for others
         however those servicing rights are acquired.  The effect of adopting
         SFAS 122 on the Company's financial statements was to increase income
         before income taxes by $1,076,000 for the year ended August 31, 1995.
         The fair value of capitalized mortgage servicing rights is estimated
         by calculating the present value of expected net cash flows from
         mortgage servicing using assumptions the Company believes market
         participants would use in their estimates of future servicing income
         and expense, including assumptions about prepayment, default and
         interest rates. Mortgage servicing rights are amortized in proportion
         to and over the period of estimated net servicing income. The estimate
         of fair value was based on a 125 basis points per annum servicing fee
         reduced by estimated costs of servicing using a discount rate of 12%
         for the year ended August 31, 1996, and a 100 basis points per annum
         servicing fee reduced by estimated costs of servicing using a discount
         rate of 12% for the year ended August 31, 1995. At August 31, 1996 and
         August 31, 1995, the book value of mortgage servicing rights
         approximated fair value. The Company periodically reviews mortgage
         servicing rights to determine impairment. This review is performed on
         a disaggregated basis, based upon date of origination.





                                      F-11
<PAGE>   77





         Impairment is recognized in a valuation allowance for each pool in the
         period of the impairment. The Company has developed its assumptions
         based on experience with its own portfolio, available market data and
         ongoing consultation with its investment  bankers.

         Timeshare Interests Held for Sale--Costs incurred in connection with
         preparing timeshare interests for sale are capitalized and include all
         costs of acquisition, renovation and furnishings. Timeshare interests
         held for sale are valued at the lower of cost or net realizable value.
         Timeshare inventory that is to be recovered from future cancellations
         of sales is provided for as estimated inventory to be recovered from
         future cancellations and is recorded at its estimated cost.

         Land and Improvements Inventory--Land and improvements inventory
         include carrying costs capitalized during the development period and
         costs of improvements incurred to date and are stated at cost, not in
         excess of market value. Land and improvements inventory that is to be
         recovered from future cancellations of sales is provided for as
         estimated inventory to be recovered from future cancellations and is
         recorded at its estimated cost.

         Property and Equipment--Property and equipment is stated at cost and
         is depreciated over its estimated useful life (generally 3-40 years)
         using the straight-line method.  Costs of maintenance and repairs that
         do not improve or extend the life of the respective assets are
         recorded as expense.

         Utility Accounting Policies -- The Company, through a wholly-owned
         subsidiary, provides water and sewer services to customers in the
         Pahrump valley of Nevada.  The Company is subject to regulation by the
         Public Service Commission of Nevada and the Company's accounting
         policies conform to generally accepted accounting principles as
         applied in the case of regulated public utilities in accordance with
         the accounting requirements of the regulatory authority having
         jurisdiction.  Contributions in aid of construction (CIAC) received by
         the Company from its customers are included as a separate liability
         and amortized over the period of 9 - 25 years, which represents the
         estimated remaining useful life of the corresponding improvements.
         Amortization of CIAC reduces amortization expense.  CIAC is included
         in accounts payable and accrued liabilities in the amounts of
         $4,494,000 and $3,750,000 at August 31, 1996 and 1995, respectively.
         The Company excludes from the CIAC liability, a sum equal to the
         income tax expense related to the receipt of CIAC funds.

         Future Estimated Contingency for Notes Receivable Sold with
         Recourse--Recourse to the Company on sales of notes receivable is
         governed by the agreements between the purchasers and the Company.
         The future estimated contingency for notes receivable sold with
         recourse represents the Company's estimate of its probable future
         credit losses to be incurred over the lives of the notes receivable.
         Proceeds from the sale of notes receivable sold with recourse were
         $135,200,000 and $119,055,000 and $31,097,000 for the years ended
         August 31, 1996, 1995 and 1994, respectively. A liability for future
         estimated contingency for notes receivable sold with recourse was
         established at the time of each sale based upon the Company's analysis
         of all probable losses resulting from the Company's recourse
         obligations under each agreement of sale. For notes receivable sold
         after September 30, 1992, the liability was determined in accordance
         with Emerging Issues Task Force (EITF) Issue No. 92-2, on a
         "discounted to present value" basis using an interest rate equivalent
         to the risk-free market rate for securities with a duration similar to
         that estimated for the underlying notes receivable.  For notes
         receivable sold prior to September 30, 1992, the liability remains on
         a non-discounted basis.

         Income Taxes--The Company utilizes the provisions of SFAS No. 109,
         "Accounting for Income Taxes."  SFAS No. 109 requires the Company to
         adhere to an asset/liability approach for financial accounting and
         reporting for income taxes.  Income taxes are provided for the tax
         effects of transactions reported in the financial statements and
         consist of taxes currently due plus deferred taxes related primarily
         to differences between the bases of the balance sheet for financial
         and income tax reporting.  The deferred tax assets and liabilities
         represent the future tax return consequences of those differences,
         which will either be taxable or deductible when they are recovered or
         settled.  Deferred taxes also are recognized for operating losses that
         are available to offset future taxable income and tax credits that are
         available to offset future income taxes.

         Revenue and Profit Recognition--Timeshare Interests and Land Sales
         --Sales of timeshare interests and land are recognized and included in
         revenues after certain "down payment" and other "continuing
         investment" criteria are met.  Land sale revenues are recognized using
         the deposit method in accordance with the provisions of SFAS No. 66
         "Accounting for Sales of Real Estate."  The agreement for sale
         generally provides for a down payment and a note secured by a deed of
         trust or mortgage payable to the Company in monthly installments,
         including interest, over a period of up to ten years.  Revenue 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 usually meet these requirements within eight to ten
         months from closing, and sales of timeshare interests usually meet
         these requirements at the time of sale.  The sales price, less a
         provision for





                                      F-12
<PAGE>   78





         cancellation, is recorded as revenue and the allocated cost related to
         such net revenue of the timeshare interest or land 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.

         All payments received prior to the recognition of the sale as revenue
         are accounted for as deposits. Selling costs directly attributable to
         unrecognized sales are accounted for as deferred selling costs until
         the sale is recognized.

         For land sales made at a location other than at the property, the
         purchaser may cancel the contract within a specified inspection
         period, usually five months from the date of purchase, provided that
         the purchaser is not in default under the terms of the contract.  At
         August 31, 1996, $131,975 of recognized sales remain subject to such
         cancellation. If a purchaser defaults under the terms of the contract,
         after all rescission and inspection periods have expired, all payments
         are generally retained by the Company.

         If the underlying note receivable is at a "below market" interest
         rate, a valuation discount is applied to the note receivable balance
         and amortized over its term so that the effective yield is 8% - 12%
         depending on the year of sale.

         Notes receivable with payment delinquencies of 90 days or more have
         been considered in determining the allowance for cancellation.
         Cancellations occur when the note receivable is determined to be
         uncollectible and related collateral, if any, has been recovered.
         Cancellation of a note receivable in the year the revenue is
         recognized is accounted for as a reversal of the revenue.
         Cancellation of a note receivable subsequent to the year the revenue
         was recognized is charged to the allowance for cancellation.

         Revenue Recognition--Gain on Sales of Notes Receivable -- Gain on sale
         of notes receivable includes the gain on sale of mortgage related
         securities and the gain on sale of notes receivable. In accordance
         with EITF Issue No. 88-11, the gain on sale of mortgage related
         securities is determined by an allocation of the cost of the
         securities based on the relative fair value of the securities sold and
         the securities retained.  In sales of loans through securitization
         transactions, the Company generally retains interest only strip
         securities and residual interest securities.The fair value of the
         interest only strip securities and residual interest securities is the
         present value of the estimated cash flow to be received after
         considering the effects of estimated prepayments and credit losses.
         The interest only strip securities and residual interest securities
         are included in mortgage related securities in the Consolidated
         Statements of Financial Condition.

         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 the Company 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. The
         Company retains certain participations in cash flows from the sold
         notes receivable and generally retains the associated servicing
         rights. The Company generally sells its notes receivable at par value.

         The present value of expected net cash flows from the sale of notes
         receivable are recorded at the time of sale as excess servicing
         rights. Excess servicing rights 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. Excess
         servicing rights are recorded at the lower of unamortized cost or
         estimated fair value. The expected cash flows used to determine the
         excess servicing rights asset have been reduced for potential losses
         net of potential FHA insurance recoveries, under recourse provisions
         of the sales agreements.  The future estimated contingency for notes
         receivable sold with recourse represents the Company's estimate of
         losses to be incurred in connection with the recourse provisions of
         the sales agreements and is shown separately as a liability in the
         Company's Consolidated Statements of Financial Condition.

         In discounting cash flows related to notes receivable sales, the
         Company defers servicing income at an annual rate of 1% - 1.25%, 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
         in financial income. The cash flows were discounted to present value
         using discount rates which averaged between 12% and15% in both fiscal
         1996 and fiscal 1995. The Company has developed its assumptions based
         on experience with its own portfolio, available market data and
         ongoing consultation with its investment bankers.

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





                                      F-13
<PAGE>   79



         Interest Income--Interest income is recorded as earned. Interest
         income represents the interest earned on notes receivable, mortgage
         related securities, and short term investments. In accordance with
         EITF Issue No. 89-4, the Company computes an effective yield based on
         the carrying amount of each mortgage related security and its
         estimated future cash flow. This yield is then used to accrue interest
         income on the mortgage related security.

         During the period that a Title I Loan is 30 days through 270 days
         delinquent, the Company accrues interest at the HUD guaranteed rate of
         7% in lieu of the contractual rate of the loan. When a Title I Loan
         becomes over 270 days contractually delinquent, it is placed on
         non-accrual status and interest is recognized only as cash is
         received. Interest income on other notes receivable greater than 90
         days delinquent is generally recognized on a cash basis.

         Financial Income-- Fees for servicing notes receivable originated or
         acquired by the Company 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.  Capitalized excess
         servicing rights and mortgage servicing rights are amortized
         systematically to reduce 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 as expense when incurred.

         Timeshare Owners' Associations-- The Company incurs a portion of
         operating expenses of the timeshare owners' associations based on
         ownership of the unsold timeshare interests at each of the respective
         timeshare properties. These costs are referred to as Association
         Assessments and are included in the Consolidated Statements of
         Operations in general and administrative expense.  See Note 22 for
         further discussion.

         Loan Origination Costs and Fees--Loan origination costs and fees,
         including non-refundable loan origination fees and incremental direct
         costs associated with loan originations are deferred and amortized
         over the lives of the loans. Unamortized loan origination costs are
         recorded as expense or income upon the sale of the related loans.

         Organizational Costs of MMC -- Organizational costs associated with
         the commencement of originating, purchasing, selling and servicing of
         Title I Loans by MMC are being amortized over a five year period by
         MMC which commenced on March 1, 1994. Such amortization is included in
         depreciation and amortization expense on the Consolidated Statements
         of Operations. Accumulated amortization related to organizational
         costs was $482,000 and $289,000 at August 31, 1996 and 1995,
         respectively.

         Earnings (loss) per common share-- Earnings (loss) per common share
         are based on the net income (loss) applicable to common stock for each
         period divided by the weighted average number of common shares and
         common share equivalents outstanding during the period.  Earnings per
         common share assuming full dilution are computed by dividing net
         income applicable to common stock by the weighted average number of
         common shares plus common share equivalents using the treasury stock
         method. In loss periods, anti- dilutive common share equivalents are
         excluded.

         Recently Issued Accounting Standards--The Financial Accounting
         Standards Board (the FASB) has issued Statement No. 121 "Accounting
         for the Impairment of Long-Lived Assets and for Long-Lived Assets to
         be Disposed of" (SFAS 121).  SFAS 121 requires that long- lived assets
         and certain identifiable intangibles be reviewed for impairment
         whenever events or changes in circumstances indicate that the carrying
         amount of an asset may not be recoverable.  SFAS 121 is effective for
         fiscal years beginning after December 15, 1995.  The Company does not
         anticipate any material  effect upon adoption on results of operation
         or financial condition.

         (C)     In October 1995, FASB issued SFAS No. 123, "Accounting for
         Stock-Based Compensation," (SFAS 123), which establishes financial
         accounting and reporting standards for stock-based employee
         compensation plans. This statement also applies to transactions in
         which an entity issues its equity instruments to acquire goods or
         services from nonemployees. Those transactions must be accounted for
         based on the fair value of the consideration received or the fair
         value of the equity instruments issued, whichever is more reliably
         measurable. SFAS 123 is effective for fiscal years beginning after
         December 15, 1995. The Company intends to provide the pro forma and
         other additional disclosure about stock-based employee compensation
         plans in its fiscal 1997 financial statements as required by SFAS 123.

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





                                      F-14
<PAGE>   80





         consistent standards for distinguishing transfers of financial assets
         that are sales from transfers that are secured borrowings. It requires
         that liabilities and derivatives incurred or obtained by transferors
         as part of a transfer of financial assets be initially measured at
         fair value. SFAS 125 also requires that servicing assets be measured
         by allocating the carrying amount between the assets sold and retained
         interests based on their relative fair values at the date of transfer.
         Additionally, this statement requires that the servicing assets and
         liabilities be subsequently measured by (a) amortization in proportion
         to and over the period of estimated net servicing income and (b)
         assessment for asset impairment or increased obligation based on the
         fair values. The statement will require that the Company's existing
         and future excess servicing receivables be measured at fair market
         value and be reclassified as interest only strip securities and
         accounted for in accordance with SFAS 115. As required by the
         statement, the Company will adopt the new requirements effective
         January 1, 1997. It is not anticipated that upon implementation, the
         statement will have any material impact on the financial statements of
         the Company, as the book value of the Company's excess servicing
         rights and mortgage related securities approximates fair value. Upon
         adoption of SFAS 125, the Company's subsidiary, PEC, will begin
         recognizing servicing rights and notes receivable held for sale,
         similar to the method currently used by MMC with respect to  mortgage
         servicing rights under SFAS 122. This will have the impact of
         increasing the gain on sale of notes at the time of sale and reducing
         future servicing fee income from PEC generated receivables sold after
         January 1, 1997.

         Reclassification- Certain reclassifications have been made to conform
         prior years with the current year presentation.



         Use of Estimates--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.

5.       FAIR VALUES OF FINANCIAL INSTRUMENTS

         SFAS No. 107, "Disclosure about Fair Value of Financial Instruments"
         (SFAS 107), requires disclosure of estimated fair value information
         for financial instruments, whether or not recognized in the Statements
         of Financial Condition. Fair values are based upon estimates using
         present value or other valuation techniques in cases where quoted
         market prices are not available. Those techniques are significantly
         affected by the assumptions used, including the discount rate and
         estimates of future cash flows. In that regard, the derived fair value
         estimates cannot be substantiated by comparison to independent markets
         and, in many cases, could not be realized in immediate settlement of
         the instrument. SFAS 107 excludes certain financial instruments and
         all nonfinancial instruments from its disclosure requirements.
         Accordingly, the aggregate fair value amounts presented do not
         represent the underlying value of the Company.

         Estimated fair values, carrying values and various methods and
         assumptions used in valuing the Company's financial instruments at
         August 31, 1996 are set forth below (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                                                ESTIMATED
                                                                                                CARRYING           FAIR
                                                                                                 VALUE            VALUE    
                                                                                             ------------     ------------
         <S>                                                                                     <C>              <C>
                 Financial Assets:
                   Cash and cash equivalents (a)                                                $ 3,185          $ 3,185
                   Notes receivable, net (b)                                                     40,485           41,973
                   Mortgage related securities (c)                                               22,944           22,944
                   Excess servicing rights (c)                                                   14,268           14,268
                   Mortgage servicing rights (c)                                                  3,827            3,827

                 Financial Liabilities:
                   Notes and contracts payable (d)                                               84,449           84,449
                   Deposits (e)                                                                   2,971            2,971
</TABLE>
         (a) Carrying value was used as the estimate of fair value.

         (b) Since it is the Company's business to sell loans it originates,
             the fair value was estimated by using outstanding commitments from
             investors adjusted for non-qualified loans and the collateral
             securing such loans.





                                      F-15
<PAGE>   81





         (c) The fair value was estimated by discounting future cash flows of
             the instruments using discount rates, default, loss and prepayment
             assumptions based upon available market data, opinions from
             investment bankers and portfolio experience.

         (d) Notes payable generally are adjustable rate, indexed to the prime
             rate, or to the 90 day London Interbank Offering Rate (LIBOR);
             therefore, carrying value approximates fair value. Contracts
             payable represent capitalized equipment leases with a weighted
             average interest rate of 9.9%, which approximates fair value.

         (e) Deposits represent down payments received from customers prior to
             the recognition of a sale under GAAP. The carrying value
             approximates the estimated fair value for these deposits.

         At August 31, 1996, the Company had $59,597,000 in outstanding
         commitments to originate and purchase loans and no other off- balance
         sheet financial instruments. A fair value of the commitments was
         estimated at $6,800,000 by calculating a theoretical gain or loss on
         the sale of a funded loan adjusted for an estimate of loan commitments
         not expected to fund, considering the difference between investor
         yield requirements and the committed loan rates.  The estimated fair
         value is not necessarily representative of the actual gain to be
         recorded on such loan sales in the future.

         The fair value estimates made at August 31, 1996 were based upon
         pertinent market data and relevant information on the financial
         instruments at that time. These estimates do not reflect any premium
         or discount that could result from the sale of the entire portion of
         the financial instruments. Because no market exists for a substantial
         portion of the financial instruments, fair value estimates may be
         based upon judgments regarding future expected loss experience,
         current economic conditions, risk characteristics of various financial
         instruments and other factors. These estimates are subjective in
         nature and involve uncertainties and matters of significant judgment
         and therefore cannot be determined with precision. Changes in
         assumptions could significantly affect the estimates.

         Fair value estimates are based upon existing on-and-off-balance sheet
         financial instruments without attempting to estimate the value of
         anticipated future business and the value of assets and liabilities
         that are not considered financial instruments. For instance, the
         Company has certain fee-generating business lines (e.g., its loan
         servicing operations) that were not considered in these estimates
         since these activities are not financial instruments. In addition, the
         tax implications related to the realization of the unrealized gains
         and losses can have a significant effect on fair value estimates and
         have not been considered in any of the estimates.

6.       CONCENTRATIONS OF RISK

         Availability of Funding Sources--The Company funds substantially all
         of the notes receivable, timeshare inventory and land inventory which
         it originates or purchases with borrowings through its financing
         facilities and internally generated funds.  These borrowings are in
         turn repaid with the proceeds received by the Company from such notes
         receivable through loan sales, repayments, or securitizations.  Any
         failure to renew or obtain adequate financing under its financing
         facilities, or other borrowings, or any substantial reduction in the
         size of or pricing in the markets for the Company's notes receivable,
         could have a material adverse effect on the Company's operations.  To
         the extent that the Company is not successful in maintaining or
         replacing existing financings, it would have to curtail its operations
         or sell assets, thereby having a material adverse effect on the
         Company's results of operations and financial condition.

         Dependence on Securitizations--In 1996, the Company pooled and sold
         through securitizations an increasing percentage of the loans that it
         originated.  The Company derives a significant portion of its income
         by recognizing gains on sale of loans through securitizations which
         are due in part to the fair value, recorded at the time of sale, of
         residual interests and interest only securities  retained.  Adverse
         changes in the securitization market could impair the Company's
         ability to sell loans through securitizations on a favorable or timely
         basis.  Any such impairment could have a material adverse effect upon
         the Company's results of operations and financial condition.

         The Company has relied on credit enhancement and overcollateralization
         to achieve the "AAA/Aaa" rating for the senior interests in its
         securitizations.  The credit enhancement has generally been in the
         form of an insurance policy issued by an insurance company insuring
         the timely repayment of senior interests in each of the REMIC trusts.
         There can be no assurance that the Company will be able to obtain
         credit enhancement in any form from the current insurer or any other
         provider of credit enhancement on acceptable terms or that future
         securitizations will be similarly rated.  A downgrading of the
         insurer's credit rating or its withdrawal of credit enhancement could
         have a material adverse effect on the Company's results of operations
         and financial condition.





                                      F-16
<PAGE>   82



         Geographic Concentrations--  The Company services notes receivable in
         all 50 states, the District of Columbia and Canada. At August 31,
         1996, 33% of the dollar value of notes receivable serviced had been
         originated in California, and 9% in Florida. No other state accounted
         for more than 10% of the servicing portfolio. The risk inherent in
         such concentrations is dependent upon regional and general economic
         stability which affects property values and the financial stability of
         the borrowers.  The Company's timeshare and land inventories are
         concentrated in Nevada, New Jersey, Colorado, and Florida.  The risk
         inherent in such concentrations is in the continued popularity of
         these resort destinations, which affects the marketability of the
         Company's products.

         Credit Risk--The Company is exposed to on-balance sheet credit risk
         related to its notes receivable and mortgage related securities. The
         Company is exposed to off-balance sheet credit risk related to loans
         which the Company has committed to originate and loans sold under
         recourse provisions. The outstanding balance of loans sold with
         recourse provisions totaled $134,084,000 and $117,469,000 at August
         31, 1996 and 1995, respectively.

         Off-Balance Sheet Activities--These financial instruments consist of
         commitments to extend credit to borrowers and commitments to purchase
         loans from others. As of August 31, 1996 and 1995, the Company had
         outstanding commitments to extend credit or purchase loans in the
         amounts of $59,597,000 and $53,447,000, respectively.  These
         commitments do not represent the expected total cash outlay of the
         Company, as historically only 40% of these commitments result in loan
         originations or purchases.  The prospective borrower or seller is
         under no obligation as a result of the Company's commitment.  The
         Company's credit and interest rate risk is therefore limited to those
         commitments which result in note originations and purchases.  The
         commitments are made for a specified fixed rate of interest, therefore
         the Company is exposed to interest rate risk, to the extent changes in
         market interest rates change prior to the origination and prior to the
         sale of the loans.

         Interest Rate Risk--The Company's profitability is in part determined
         by the difference, or "spread," between the effective rate of interest
         received on the loans originated or purchased by the Company and the
         interest rates payable under its financing facilities to fund the
         Company's notes receivable and inventory held for sale and the yield
         required by investors on notes receivable sales and loan
         securitizations.  The spread can be adversely affected after a note is
         originated or purchased and while it is held during the warehousing
         period by increases in the interest rate demanded by investors in
         securitizations or sales.  In addition, because the notes originated
         and purchased by the Company have fixed rates, the Company bears the
         risk of narrowing spreads because of interest rate increases during
         the period from the date the notes are originated or purchased until
         the closing of the sale or securitization of such notes.
         Additionally, the fair value of mortgage related securities, mortgage
         servicing rights and excess servicing rights owned by the Company may
         be adversely affected by changes in the interest rate environment
         which could affect the discount rate and prepayment assumptions used
         to value the assets.  Any such adverse change in assumptions could
         have a material adverse effect on the Company's results of operations
         and financial condition.

         7.      NOTES RECEIVABLE

         Notes receivable consist of the following (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                                       AUGUST 31,          
                                                                                               -----------------------------

                                                                                                  1996             1995    
                                                                                               ------------     ------------
                    <S>                                                                           <C>              <C>
                    Related to timeshare sales                                                    $24,973          $20,661
                    Related to land sales                                                          27,601           23,509
                    Related to Title I and conventional home improvement loans                      4,705            3,750
                                                                                                  -------          -------
                      Total                                                                        57,279           47,920
                                                                                                  -------          -------

                    Less:     Allowances for cancellation and credit losses                        16,342           16,523
                              Valuation discount                                                      452              343
                                                                                                  -------          -------
                                                                                                   16,794           16,866
                                                                                                  -------          -------

                      Total                                                                       $40,485          $31,054
                                                                                                  =======          =======
</TABLE>
         The Company provides financing to the purchasers of its timeshare
         interests and lands.  This financing is generally evidenced by notes
         secured by deeds of trust as well as non-recourse installment sales
         contracts. These notes receivable are generally payable over a period
         of up to 10 years, bear interest at rates ranging from 0% to 16% and
         require equal monthly installments of principal and interest.





                                      F-17
<PAGE>   83





         The Company has entered into financing arrangements with certain
         purchasers of timeshare interests and lands whereby no stated interest
         rate is charged if the aggregate down payment is at least 50% of the
         purchase price and the balance is payable in 24 or fewer monthly
         payments. Notes receivable of $5,991,000 and $6,855,000 at August 31,
         1996 and 1995, respectively, made under this arrangement are included
         in the table above. A valuation discount is established to provide for
         an effective interest rate (currently 10%) on notes receivable bearing
         no stated interest rate at the time of sale, and is applied to the
         principal balance and amortized over the term of note.  The effective
         interest rate is based upon the economic interest rate environment and
         similar industry data.

         The Company is obligated under certain agreements for the sale of
         notes receivable and certain loan agreements to maintain various
         minimum net worth requirements.  The most restrictive of these
         agreements requires PEC to maintain a minimum net worth of $25,000,000
         and MMC to maintain a minimum tangible net worth requirement of
         $12,500,000 plus 50% of  MMC's cumulative net income since May 1,
         1996. (50% of MMC's cumulative net income for the period May 1, 1996
         to August 31, 1996 was $1.1 million.) Additionally, MMC is required to
         maintain a minimum level of profitability of at least $500,000 per
         rolling 6 month period.

         At August 31, 1996 and 1995, receivables aggregating $54,247,000 and
         $41,299,000, respectively, were pledged to lenders to collateralize
         certain of the Company's indebtedness.  Receivables which qualify for
         the lenders' criteria may be pledged as collateral whether or not such
         receivables have been recognized for accounting purposes. See Note 15
         for further discussion.

         Allowance for Cancellation and Credit Losses--The Company provides an
         allowance for cancellation and credit losses, in an amount which in
         the Company's judgment will be adequate to absorb losses on notes
         receivable and after FHA insurance recoveries on the loans, that may
         become uncollectible. The Company's judgment in determining the
         adequacy of this allowance is based on its continual review of its
         portfolio which utilizes historical experience and current economic
         factors. These reviews take into consideration changes in the nature
         and level of the portfolio, historical rates, collateral values, and
         current and future economic conditions which may affect the obligors'
         ability to pay, collateral values and overall portfolio quality.
         Changes in the allowance for cancellation and credit losses for notes
         receivable consist of the following (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED AUGUST 31,             
                                                                            ----------------------------------------------

                                                                                1996             1995             1994    
                                                                            ------------     ------------     ------------
                 <S>                                                           <C>              <C>              <C>
                 Balance at beginning of year                                  $24,553          $21,697          $22,913
                 Provisions for credit losses and cancellations                 11,288           10,359            7,775
                 Amounts charged to allowance for cancellations                 (8,712)          (7,503)          (8,991)
                 Reductions due to reacquisition and securitization             (1,455)               -                -
                                                                               -------          -------          -------

                          Balance at end of year                               $25,674          $24,553          $21,697
                                                                               =======          =======          =======

                 Allowance for cancellation and credit losses                  $16,342          $16,523          $18,007
                 Future estimated contingency for notes receivable
                   sold with recourse                                            9,332            8,030            3,690
                                                                               -------          -------          -------

                          Total                                                $25,674          $24,553          $21,697
                                                                               =======          =======          =======
</TABLE>
         During 1996, $113,917,000 of notes receivable sold with recourse were
         repurchased and securitized as further described in Note 4.
         Reductions due to reacquisition and securitization represent the
         allowance for credit losses on notes receivable sold with recourse
         transferred to the cost basis of the mortgage related securities as a
         result of these transactions.

         Number of Notes Receivable Accounts Serviced -- The number of notes
         receivable accounts serviced at August 31, 1996 and 1995, was
         approximately 32,602 and 21,901, respectively.  At August 31, 1996 and
         1995, the amount of notes receivable with payment delinquencies of 90
         days or more was approximately $14,561,000 and  $5,254,000,
         respectively on serviced accounts.





                                      F-18
<PAGE>   84



         Loans serviced and originated consist of the following (thousands of
dollars):

<TABLE>
<CAPTION>
                                                                                                 YEAR ENDED AUGUST 31,    
                                                                                              -----------------------------

                                                                                                   1996             1995    
                                                                                               ------------     ------------
                 <S>                                                                             <C>              <C>
                 Loans originated:
                   Amount of Title I Loan originations                                         $     127,785    $      87,751
                   Amount of conventional loan originations                                           11,582                -
                     Notes receivable additions                                                       51,535           45,396
                                                                                               -------------    -------------

                          Total                                                                $     190,902    $     133,147
                                                                                               =============    =============
                 Loans serviced (including  notes securitized, notes sold
                   to investors and notes receivable held for sale):
                   Title I Loans                                                               $     202,766    $      92,286
                   Conventional loans                                                                 11,423                -
                     Timeshare and land                                                              120,709          114,333
                                                                                               -------------    -------------

                          Total                                                                $     334,898    $     206,619
                                                                                               =============    =============

</TABLE>
8.       MORTGAGE RELATED SECURITIES

         Mortgage related securities consist of interest only strips and
         residual interest certificates of FHA Title I Loan asset-backed
         securities collateralized by loans originated, purchased and serviced
         by the Company.

         Mortgage related securities are classified as trading securities and
         are recorded at estimated fair value.  Changes in the estimated fair
         value are recorded in current operations.  As of August 31, 1996
         mortgage related securities consist of the following (thousands of
         dollars):

<TABLE>
                    <S>                                                                                         <C>      
                    Interest only securities                                                                   $ 4,602
                    Residual interest securities                                                                18,342
                                                                                                               -------

                         Total                                                                                 $22,944
                                                                                                               =======
</TABLE>
         No mortgage related securities were owned during 1995.

         Activity in mortgage related securities consist of the following for
the year ended August 31, 1996 (thousands of dollars):

<TABLE>
                    <S>                                                                                         <C>  
                    Balance at beginning of year                                                               $     -
                    Additions due to securitizations, at cost                                                   20,096
                    Net unrealized gain                                                                          2,697
                    Accretion of residual interest                                                                 243
                    Principal reductions                                                                           (92)
                                                                                                               ------- 

                         Total                                                                                 $22,944
                                                                                                               =======
</TABLE>
9.       EXCESS SERVICING RIGHTS

         Activity in excess servicing rights consist of the following
(thousands of dollars):

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED AUGUST 31,             
                                                                             ----------------------------------------------

                                                                                  1996            1995             1994    
                                                                              -----------     -----------      -----------
                 <S>                                                          <C>             <C>              <C>
                 Balance at beginning of year                                 $    16,565     $     2,146      $       902
                 Plus:   Additions                                                 21,242          15,336            1,611
                 Less:   Amortization                                              (2,758)           (917)            (367)
                 Amounts related to loans repurchased, securitized and
                   transferred to mortgage related securities                     (20,781)              -                -
                                                                              -----------     -----------      -----------

                          Balance at end of year                              $    14,268     $    16,565      $     2,146
                                                                              ===========     ===========      ===========
</TABLE>





                                      F-19
<PAGE>   85





         As of August 31, 1996, 1995 and 1994, excess servicing rights
         consisted of excess cash flows on serviced loans totaling
         $140,780,000, $133,284,000 and $37,758,000, yielding weighted average
         interest rates of 12.6%, 12.9% and 12.1%, net of normal servicing and
         pass- through fees and weighted average pass-through yields to the
         investor of 8.6%, 8.7% and 9.2%, respectively.  These loans were sold
         under recourse provisions as described in Note 4 of Notes to
         Consolidated Financial Statements.

         During 1996, $113,917,000 of loans sold were repurchased and
         securitized as further described in Note 4.  Excess servicing rights
         related to the loans repurchased and securitized of $20,781,000 were
         transferred to the cost basis of the mortgage related securities as a
         result of these transactions.

         Of the Title I Loans sold in the year ended August 31, 1995,
         $56,922,000 of such loans were sold to a purchaser, in a series of
         sales commencing on April 21, 1995, under a continuing sales agreement
         which provides for the yield to the purchaser to be adjusted monthly
         to a rate equal to 200 basis points (2%) per annum over the one-month
         London Interbank Offered Rate (LIBOR).  LIBOR was 5.875% per annum at
         August 31, 1995. The principal balance of loans subject to the LIBOR
         adjustment was $29,255,000 at August  31, 1996. The effect of an
         increase or decrease in LIBOR of 100 basis points (1%) applied to
         those loans would be a decrease or increase, respectively, to the
         Company's future pre-tax income of approximately $956,000.  For
         timeshare and land loans during fiscal 1996, $12,329,000 of the total
         loans sold were sold to one purchaser, in a series of sales, providing
         a yield to the purchaser at fixed rates, ranging from 8.3% - 9.4%.  Of
         the notes receivable sold during fiscal 1995, $17,296,000 of such
         loans were sold to the same purchaser in a series of sales providing a
         yield to the purchaser at fixed rates ranging from 8.8% - 10%.

10.      MORTGAGE SERVICING RIGHTS

         Activity in mortgage servicing rights consist of the following
(thousands of dollars):

<TABLE>
<CAPTION>
                                                                               YEAR ENDED AUGUST 31,             
                                                                   ----------------------------------------------

                                                                     1996             1995             1994    
                                                                  ------------     ------------     ------------
                 <S>                                             <C>              <C>              <C>  
                 Balance at beginning of year                    $       1,076    $           -    $           -
                 Plus:  Additions                                        3,306            1,176                -
                 Less:  Amortization                                     (555)            (100)                -
                                                                 ------------     ------------     -------------

                          Balance at end of year                 $       3,827    $       1,076    $           -
                                                                 =============    =============    =============
</TABLE>
         The Company had no valuation allowance for mortgage servicing rights
         during 1996, 1995, and 1994, as the cost basis of mortgage servicing
         rights approximated fair value.

         The pooling and servicing agreements relating to the securitization
         transactions contain provisions with respect to the maximum permitted
         loan delinquency rates and loan default rates, which, if exceeded,
         would allow the termination of the Company's rights to service the
         related loans.  At September 30, 1996, the default rates on one
         pooling and servicing agreement exceeded the permitted level.  The
         mortgage servicing rights for this agreement were approximately $1.4
         million at August 31, 1996.  In the event of such termination, there
         would be an adverse effect on the valuation of the Company's mortgage
         servicing rights.

11.      INVENTORIES

         Timeshare interests held for sale consist of the following (thousands
of dollars):

<TABLE>
<CAPTION>
                                                                                                     AUGUST 31,          
                                                                                            ----------------------------

                                                                                                1996             1995    
                                                                                            ------------    ------------
         <S>                                                                                <C>             <C>
         Timeshare interests (including capitalized interest of $486 and $190 in 1996 and
            1995, respectively)                                                              $14,353          $ 9,689

         Timeshare interests under construction (including capitalized interest
            of $389 and $291 in 1996 and 1995, respectively)                                  19,338            7,687

         Inventory of timeshare interests estimated to be recovered from future
            cancellations                                                                      3,199            2,444
                                                                                               -----            -----

              Total                                                                          $36,890          $19,820
                                                                                             =======          =======

</TABLE>





                                      F-20
<PAGE>   86





         At August 31, 1996 and 1995, 7,637 and 6,328 of timeshare interests,
         respectively, were available for sale.  The number of apartment units
         of 254 and 90 at August 31, 1996 and 1995, respectively, were under
         construction and awaiting completion of remodeling, renovation,
         furnishing, conversion and registration, representing 12,954 and
         4,590, respectively, of timeshare interests.



         Land and improvements inventory consist of the following (thousands of
dollars):

<TABLE>
<CAPTION>
                                                                                                AUGUST 31,          
                                                                                        ----------------------------
                                                                                           1996             1995    
                                                                                        ------------    ------------ 
                    <S>                                                                   <C>           <C>
                    Land and improvements                                                 $    2,186    $      3,432    
                                                                                             
                    Inventory of land and improvements estimated to be
                       recovered from future cancellations                                     1,535           2,110
                                                                                        ------------    ------------ 

                      Total                                                                $   3,721           5,542
                                                                                        ============    ============ 
</TABLE>
12.      OTHER INVESTMENTS

         Other investments in the following locations, at lower of cost or
market, consist of the following (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                                AUGUST 31,          
                                                                                        ----------------------------

                                                                                           1996             1995    
                                                                                       ------------     ------------
                   <S>                                                                  <C>              <C>
                    Water rights:
                       Huerfano County, Colorado                                        $       524      $       581
                       Nye County, Nevada                                                        98               95
                    Land:
                       Nye County, Nevada                                                       863              525
                       Park County, Colorado                                                     13                9
                       Clark County, Nevada                                                      51               84
                    Other                                                                       423              237
                                                                                        ------------    ------------ 
                   Total                                                                 $    1,972     $      1,531
                                                                                        ============    ============ 
</TABLE>
13.      PROPERTY AND EQUIPMENT

         Property and equipment and related accumulated depreciation, consist
of the following (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                                        AUGUST 31,          
                                                                                             ----------------------------

                                                                                                  1996             1995    
                                                                                              ------------     ------------
                   <S>                                                                            <C>              <C>
                    Water and sewer system                                                        $13,752          $10,645
                    Furniture and equipment                                                         6,422            4,843
                    Buildings                                                                       8,451            4,792
                    Vehicles                                                                        2,304            2,173
                    Recreational facilities and equipment                                           1,192            1,082
                    Land                                                                            1,342              689
                    Leasehold improvements                                                            349              305
                                                                                                  -------          -------
                                                                                                   33,812           24,529
                    Less:     Accumulated depreciation                                             13,550           11,848
                                                                                                  -------          -------

                   Total property and equipment, net                                              $20,262          $12,681
                                                                                                  =======          =======
</TABLE>





                                      F-21
<PAGE>   87



14.      OTHER ASSETS

         Other assets consist of the following (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                                     AUGUST 31,          
                                                                                             ----------------------------

                                                                                                 1996             1995    
                                                                                             ------------     ------------
                   <S>                                                                             <C>              <C>
                    Other receivables                                                              $2,161           $1,251
                    Miscellaneous assets                                                            1,784            1,255
                    Deposits and impounds                                                             560              448
                    Licenses                                                                        1,067            1,167
                    Other receivables collateralized by trust deeds                                   222              235
                    Receivable from owners' associations (Notes 4 and 22)                             623            1,188
                    Organizational costs of MMC                                                       482              675
                    Prepaid expenses and other                                                      1,586            1,132
                                                                                                   ------           ------


                   Total                                                                           $8,485           $7,351
                                                                                                   ======           ======
</TABLE>
15.      NOTES AND CONTRACTS PAYABLE

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

<TABLE>
<CAPTION>
                                                                                                        AUGUST 31,          
                                                                                               ----------------------------

                                                                                                  1996             1995    
                                                                                              ------------     ------------
                   <S>                                                                            <C>              <C>
                    Notes collateralized by receivables (a)                                       $41,568          $26,785
                    Mortgages collateralized by real estate properties (b)                         31,078           16,525
                    Notes collateralized by excess servicing rights and
                       mortgage related securities (c)                                             10,000                -
                    Installment contracts and other notes payable                                   1,803            1,405
                                                                                                  -------          -------

                   Total                                                                          $84,449          $44,715
                                                                                                  =======          =======
</TABLE>
         The details of the notes payable are summarized as follows (thousands
of dollars):

<TABLE>
<CAPTION>
                                                                                                       AUGUST 31,          
                                                                                              ----------------------------

                                                                                                  1996             1995    
                                                                                              ------------     -----------
         <S>                                                                                      <C>              <C>
         (A) NOTES COLLATERALIZED BY RECEIVABLES
             Borrowings bearing interest at prime plus: 1% to 2.5% in 1996 including "lines
                 of credit" (see below) and 1% to 2.5% in 1995                                    $41,443          $26,595
                    Promissory notes payable                                                          125              190
                                                                                                  -------          -------

                 Total notes collateralized by receivables                                        $41,568          $26,785
                                                                                                  =======          =======




         (B) MORTGAGES COLLATERALIZED BY REAL ESTATE PROPERTIES
             Mortgages collateralized by the respective underlying assets with various
                 repayment terms and fixed interest rates of 10% to 12.5% in 1996 and 10% in
                 1995 and variable rates of prime plus:  1.25% to 3% and 90 day LIBOR plus
                 4.25% in 1996 and prime plus: 2.5% in 1995                                       $31,078          $16,525
                                                                                                  =======          =======




         (C) NOTES COLLATERALIZED BY EXCESS SERVICING RIGHTS (NOTE 8) AND MORTGAGE RELATED
             SECURITIES (NOTES 7 AND 9)                                                           $10,000          $     -
                                                                                                  =======          =======
</TABLE>
             The prime rate of interest was 8.25% and the 90 day LIBOR was
5.53% at August 31, 1996.





                                      F-22
<PAGE>   88



         Maturities -- Scheduled maturities of the Company's contracts payable,
excluding lines of credit are as follows (thousands of dollars):

<TABLE>
<CAPTION>
                                               YEAR ENDED AUGUST 31,                          
                      ------------------------------------------------------------------------
          BALANCE         1997           1998           1999          2000           2001
          -------         ----           ----           ----          ----           ----
          <S>             <C>            <C>            <C>           <C>              <C>
          $1,803          $721           $605           $293          $179             $5
</TABLE>
         Lines of Credit -- PEC entered into 5 agreements for lines of credit
         not to exceed $109,500,000 which are collateralized  by security
         interests in timeshare and land receivables and are guaranteed by the
         Company. At August 31, 1996 and 1995, an aggregate of $65,875,000 and
         $38,123,000 had been borrowed under such lines of credit. Under the
         terms of such lines of credit, PEC may borrow up to 75% to 85% of the
         balances of the pledged timeshare and land receivables.  MMC entered
         into 2 lines of credit agreements with the same lender, not to exceed
         an aggregate of  $30,000,000, one of  which is collateralized by
         security interests in loans held for sale, and the other by excess
         servicing rights and  mortgage related securities.

         Summarized line of credit information relating to these five lines of
         credit outstanding at August 31, 1996, consist of the following
         (thousands of dollars):

<TABLE>
<CAPTION>
     BORROWING
     AMOUNT AT       MAXIMUM
     AUGUST 31,     BORROWING             REVOLVING              MATURITY           INTEREST
        1996         AMOUNT          EXPIRATION DATE (F)           DATE               RATE
       -------       -------         -------------------       -----------        -------------
        <S>           <C>            <C>                       <C>                  <C>
       $47,297       $57,000         (a) December 31, 1996     September 22, 2003   Prime +2.25%
         7,821        15,000         (b) December 31, 1996     August 1, 2000       Prime +2.5%
         4,865        15,000         (c) June 27, 1998         June 27, 2005        LIBOR +4.25%
         2,925        15,000         (c) February 6, 1998      August 6, 2005       LIBOR +4.25%
         2,967         7,500         (b) December 31, 1996     June 30, 2000        Prime +2.5%
         3,265        20,000         (d) August 9, 1997        August 9, 1997       Prime +1.0%
        10,000        10,000    (d)  (e) December 31, 1997     June 30, 2000        Prime +2.0%
</TABLE>
                 (a)Restrictions include the Company's requirement to maintain
                 a tangible net worth in PEC of at least $25,000,000 during the
                 borrowing term, and thereafter this requirement is permitted
                 to decrease to $15,000,000 depending on the loan balance.

                 (b)Restrictions include the Company's requirement to maintain
                 a tangible net worth in PEC of $25,000,000 during the life of
                 the loan.

                 (c)Restrictions include the Company's requirement to maintain
                 a tangible net worth in PEC of $17,000,000 during the life of
                 the loan.

                 (d)Restrictions include the Company's requirement to maintain
                 MMC's tangible net worth at  $12,500,000 plus 50% of MMC's
                 cumulative net income since May 1, 1996.  (50% of MMC's
                 cumulative net income for the period May 1, 1996 to August 31,
                 1996 was $1.1 million). Additionally,  MMC is required to
                 maintain a minimum level of profitability of at least $500,000
                 per rolling 6 month period.

                 (e)Borrowings by MMC under this facility cannot exceed the
                 lesser of (a) 40% of MMC's excess servicing rights and
                 mortgage related securities or (b) six times the aggregate of
                 the excess servicing rights and mortgage related securities
                 payments actually received by the Company over the most recent
                 3 month period.

                 (f)Revolving expiration date represents the expiration dates
                 of the revolving features of the lines of credit, at which
                 time the credit lines assume fixed maturity.



         At August 31, 1996 and 1995, contracts payable consisted of $932,000
         and $419,000, respectively, in obligations under lease purchase
         arrangements secured by property and equipment, bearing a weighted
         average interest rate of 9.48%.





                                      F-23
<PAGE>   89



16.      SUBORDINATED DEBT

         On March 2, 1995, Mego entered into the Amendment whereby the
         Assignors agreed to defer payment of  $10 million of the amount
         payable to assignors and to subordinate such amounts in right of
         payment to debt for money borrowed by Mego or obligations of
         subsidiaries guaranteed by Mego.  Warrants for 1,000,000 shares of
         Mego Common Stock, at an exercise price of $4.25 per share (the
         closing market price per share on March 2, 1995) were granted to the
         Assignors in consideration of the payment deferral and subordination.
         The warrants contain restrictions on transfer and are exercisable
         after March 1, 1996 and until March 1, 2000.  The Amendment calls for
         interest to be paid semi-annually at the rate of 10% per annum
         starting September 1, 1995, and seven equal semi-annual payments of
         $1,429,000 plus interest, commencing March 1, 1997.  The effective
         interest rate after considering the effect of accreted interest is
         14.7%.  See Note 2 for further discussion. The following table
         represents subordinated debt activity since inception (thousands of
         dollars):

<TABLE>
<CAPTION>
                                                                                1996               1995
                  <S>                                                       <C>                <C>     
                  Face amount of debt                                       $10,000            $10,000 
                  Less: Value of warrants issued                             (1,300)            (1,300)
                                                                             -------            -------
                  Subordinated debt - original value                          8,700              8,700 
                  Accreted interest since inception                           1,991                652 
                  Less:  Interest payments since inception                   (1,000)                 - 
                                                                             ------             ------
                  Subordinated debt at August 31                             $9,691             $9,352 
                                                                             ======             ====== 
</TABLE>
17.      REDEEMABLE PREFERRED STOCK

         The Company had designated 300,000 shares of its 5,000,000 authorized
         preferred shares as Series A, 12% Cumulative Preferred Stock, par
         value, $.01 per share. The remaining 4,700,000 authorized preferred
         shares have not been designated.  As of August 31, 1993, the Company
         sold 300,000 shares of its Series A, 12% Cumulative Preferred Stock
         (Preferred Stock), at a price of $10 per share.  The Preferred Stock
         was stated at its par value of $.01 per share, and redemption value of
         $10 per share.  The Company was obligated to redeem 100,000 shares of
         Preferred Stock on August 31, 1995, at $10 per share. In August 1995,
         the Company gave notice of redemption of 100,000 shares. On September
         1, 1995, after receipt of the certificates, the Company redeemed
         100,000 shares of its Preferred Stock. On August 31, 1996, the holder
         of the Company's 200,000 shares of outstanding 12% cumulative
         preferred stock with a redemption price of $2,000,000 redeemed their
         shares for 343,347 shares of the Company's common stock.  The number
         of common shares exchanged was based upon the 10 day average closing
         stock price of $5.825 for the Company's common stock immediately prior
         to August 31, 1996.  In conjunction with the exchange, the expiration
         date of the warrants outstanding to purchase 300,000 shares of the
         Company's common stock at a price of  $1.20, issued in conjunction
         with the preferred stock, and due to expire on August 31, 1996 was
         extended to August 31, 1997.





                                      F-24
<PAGE>   90



18.      STOCKHOLDERS' EQUITY

         The Company has a stock option plan, adopted November 1993, for
         officers and key employees which provides for non-qualified and
         qualified incentive options.  The Stock Option Committee of the Board
         of Directors determines the option price (not to be less than fair
         market value for qualified incentive options) at the date of grant.
         The options generally expire ten years from the date of grant and are
         exercisable over the period stated in each option at the cumulative
         rate of 20% per year commencing December 22, 1994, for three years and
         the remaining 40% after December 22, 1997.

<TABLE>
<CAPTION>
                                                                       RESERVED                       PRICE PER
                                                                        SHARES           NUMBER         SHARE    
                                                                       --------         --------     ------------
                    <S>                                                <C>              <C>           <C>       
                    At November 17, 1993                               525,000                -        -        
                                                                                                                
                    Granted to more than 10% stockholder                     -           35,000       $2.75     
                    Granted to others                                        -          355,000       $2.50     
                                                                       -------          -------                 
                    At August 31, 1994                                 525,000          390,000       $2.50/2.75
                    Exercised                                           (2,000)          (2,000)                
                    Forfeited                                                -           (8,000)                
                    Granted                                                  -           85,000       $8.00/8.75
                                                                       -------          -------                 
                    At August 31, 1995                                 523,000          465,000                 
                    Exercised                                           (4,000)          (4,000)                
                    Forfeited                                                -           (6,000)                
                    Granted                                                  -           25,000       $5.875    
                                                                       -------          -------                 
                    At August 31, 1996                                 519,000          480,000       $2.50/8.75
                                                                       =======          =======                         
</TABLE>
         The number of options exercisable under this plan at August 31, 1996,
was 170,000 at a range of  $2.50 to $8.75 per share.

19.      TIMESHARE INTEREST SALES AND LAND SALES

         Timeshare interest sales, net-- A summary of the components of
timeshare interest sales is as follows (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                  YEAR  ENDED AUGUST 31,            
                                                                         ------------------------------------------
                                                                          1996             1995             1994    
                                                                         -------          -------          -------  
                    <S>                                                  <C>              <C>              <C>    
                    Timeshare interest sales                             $33,178          $26,272          $24,670
                    Less:     Provision for cancellation                   5,400            5,590            5,149
                                                                         -------          -------          -------
                                                                                                                  
                         Total                                           $27,778          $20,682          $19,521
                                                                         =======          =======          =======
</TABLE>
         Land sales, net -- A summary of the components of land sales is as
follows (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED AUGUST 31,             
                                                                         -----------------------------------------  
                                                                          1996             1995             1994    
                                                                         ---------     ------------     ----------  
                    <S>                                                  <C>              <C>              <C>    
                    Land sales                                           $22,346          $24,717          $15,434
                    Less:     Provision for cancellation                   4,378            3,905            1,900
                                                                         -------          -------          -------
                                                                                                                  
                         Total                                           $17,968          $20,812          $13,534
                                                                         =======          =======          =======
</TABLE>
20.      INCOME TAXES

         The Company files a consolidated federal income tax return with its
subsidiaries for its tax year which ends the last day of February.

         The Company adopted SFAS 109 effective September 1, 1992.  There was
         no cumulative effect of adopting SFAS 109 on the Company's financial
         statements.  The estimated income tax payable as of August 31, 1996,
         is approximately $1,344,000.  The tax provision for 1996 consists of
         $290,000 current provision and $2,877,000 deferred provision.  The tax
         provision for 1995 consists of $1,054,000 current provision, including
         the $450,000 of





                                      F-25
<PAGE>   91





         tax associated with discontinued operations, and $2,689,000 deferred
         provision.  The provision for 1994 consisted entirely of deferred
         provision.

         Deferred income taxes reflect the net tax effects of (a) temporary
         differences between the carrying amount of assets and liabilities for
         financial reporting purposes and the amounts used for income tax
         purposes, (b) temporary differences between the timing of revenue
         recognition for book purposes and for income tax purposes, and (c)
         operating loss and tax credit carryforwards.  The tax effects of
         significant items comprising the Company's net deferred tax liability
         as of August 31, 1996 and 1995 are as follows (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                                AUGUST 31,
                                                                                         ------------------------
                                                                                          1996              1995
                                                                                         ------            ------
                            <S>                                                         <C>                <C>
                              Deferred tax liabilities:
                                  Difference between book and tax carrying value
                                    of assets                                           $ 3,064             $3,508
                                  Timing of revenue recognition                           8,348              4,606
                                                                                        -------             ------
                                                                                         11,412              8,114
                                                                                        -------             ------
                              Deferred tax assets:
                                  Other                                                     432                 11
                                                                                        -------             ------
                                  Net deferred tax liability                            $10,980             $8,103
                                                                                        =======             ======
</TABLE>
         The provision for taxes as reported is different from the tax
   provision computed by applying the statutory federal rate of 34%.  The
   differences are as follows (thousands of dollars):

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED AUGUST 31,
                                                                       ------------------------------------------
                                                                        1996              1995              1994
                                                                       ------            ------            ------
                              <S>                                      <C>               <C>               <C>
                              Income (loss) before income taxes,
                                 including gain on discontinued
                                 operations                            $8,018            $4,187            $(5,013)
                                                                       ======            ======            ========

                              Tax at the statutory federal rate        $2,726            $1,424            $(1,704)

                              Increase (decrease) in taxes
                                 resulting from:

                                 State income taxes, net of
                                 federal income tax benefit               442               264                 --
                                 Payments to assignors                     --               813              2,218
                                 Realization of purchase price
                                   adjustments                             --                70                217
                                 Amortization of negative goodwill         --                 -                 17
                                 Contributions in aid of                   
                                   construction                            81               929                114
                                  Preferred stock dividends               (82)             (122)              (122)
                                 Other                                     --               (85)                21          
                                                                       ------            ------               ----

                                       Total                           $3,167            $3,293               $761
                                                                       ======            ======               ====
</TABLE>


21.      DISCONTINUED OPERATIONS

         Gain on discontinued operations occurred as a result of an order for
         judgment against PEC in the matter of the PEC Apartment Subsidiaries
         in the amount of $3,356,000, which amount was settled for $2,900,000
         on May 15, 1995, and paid on June 15, 1995. Excess of liability over
         assets of discontinued operations (a provision for loss) had been
         provided in the amount of $4,222,000 resulting in a gain on
         discontinued operations of $873,000 after deducting $450,000 of taxes
         to be reflected on the income statement. See Note 23 for further
         discussion.





                                      F-26
<PAGE>   92


22.      RELATED PARTY TRANSACTIONS

         Timeshare Owners' Associations--Owners' Associations have been
         incorporated for the Grand Flamingo, Reno Spa, Brigantine and
         Steamboat Springs timesharing resorts. The respective Owners'
         Associations are independent not-for-profit corporations.  PEC acts as
         the managing agent for these Owners' Associations and the White Sands
         Resort Club, which is a division of PEC (Associations) and received
         management fees for its services of $2,081,000 and $1,988,000 in 1996
         and 1995, respectively.  Such fees were recorded as a reduction of
         general and administrative expense.  The owners of timeshare interests
         in each Association are responsible for payment to the Associations of
         assessments, which are intended to fund all of the operating expenses
         at each of the resort facilities.  The Company's share of the
         Association assessments, net of room income, was $983,000 and $56,000
         for 1996 and 1995, respectively, and have been recorded as general and
         administrative expense. This increase was primarily due to the newer
         resorts recording a full year's operations in fiscal 1996 versus a
         partial year in fiscal 1995. The Company has in the past financed
         budget deficits of the Associations as is reflected in the receivable
         from such Associations, but is not obligated to do so in the future.

         Since January 1988, the Company has agreed to pay to the Associations
         the assessments of timeshare interest owners who are delinquent with
         respect to their assessments, but have paid the Company in full for
         their timeshare interests. In exchange for these payments, the
         Associations assign their liens for non-payment of assessments on the
         respective timeshare interests to the Company. In the event the
         timeshare interest holder does not satisfy the lien after having an
         opportunity to do so, the Company acquires the timeshare interest for
         the amount of the lien and any foreclosure costs.

         At August 31, 1996 and 1995, $623,000 and $1,188,000, respectively,
         was due from Owners' Associations.  These amounts are included in
         other assets at August 31, 1996 and 1995.

         Payments to Assignors-- Certain transactions have been entered into
         with the Assignors, who are affiliates of certain officers and
         directors of the Company, and these transactions are more fully
         described in Note 2. During the years ended August 31, 1996, 1995, and
         1994, approximately $1,196,000, $2,301,000, and $4,904,000, including
         interest of $1,196,000, $473,000 and $304,000, respectively, were paid
         to the Assignors.  See Note 16 for further discussion.

         Transactions with Management-- On September 24, 1990, Brigantine
         Preferred Properties, Inc. (Properties), a Nevada Corporation that is
         a wholly-owned subsidiary of the Company, entered into agreements with
         Brigantine Inn, Ltd., a New Jersey Limited Partnership (Inn), and
         Brigantine Villas, L.P., a New Jersey Limited Partnership (Villas),
         herein referred to as the Inn Agreement and the Villas Agreement,
         respectively, for the acquisition of certain assets (primarily
         inventory of timeshare interests and related assets) and the
         assumption of certain liabilities of the Inn and Villas. Inn and
         Villas were in the business of selling timeshare interests in two
         adjacent facilities located near Atlantic City, New Jersey.

         Goodwill of $1,837,000 associated with this transaction has been
         amortized over a 3 year period ending September 30, 1993. At August
         31, 1994, all of the Company's obligations owed to the Inn and Villas
         had been paid in full.

         During December 1992, Properties purchased approximately $6,025,000 of
         timeshare receivables from Inn for a purchase price of approximately
         $3,524,000.  The purchase price was financed through the sale by
         Properties of approximately $3,720,000 of the acquired receivables to
         a financial institution.  In connection with the sale, the Company
         guaranteed the repurchase and other obligations of Properties and
         agreed to maintain a net worth of at least $22,500,000.  As collateral
         for its obligations under the sale agreement, Properties also pledged
         approximately $750,000 of the acquired timeshare receivables to the
         purchaser.  The amount of the collateral required under the sale
         agreement reduces by approximately 20% per year.  In connection with
         this transaction, Properties recorded an allowance for cancellation
         and a future estimated contingency for notes receivable sold with
         recourse aggregating approximately $2,000,000.

         PEC provides account servicing for related and non-related entities
         which consists of providing billing and collection services and
         receiving funds. The Company also provides the same services for MMC.
         Deferred servicing revenues arise from sales of receivables with the
         Company becoming the servicing agent for the purchasers. At August 31,
         1996 and 1995, the Company was servicing for these entities and for
         its own receivables approximately 32,602 and 21,901 accounts,
         respectively.


                                      F-27
<PAGE>   93





23.      COMMITMENTS AND CONTINGENCIES

         Future Improvements -- Central Nevada Utilities Company, (CNUC)
         subsidiary, has issued performance bonds of $13,556,000 outstanding at
         August 31, 1996, to ensure the completion of water, sewer and other
         improvements in portions of the Calvada development areas. The cost of
         the improvements will be offset by the future receipt of betterment
         fees and connection fees.

         Leases --The Company leases certain real estate for sales and general
         and administrative usage.  The Company also leases its Hawaii real
         estate for timeshare usage.  Rental expense for fiscal years 1996,
         1995, and 1994 was $2,731,000, $2,446,000, and $1,865,000,
         respectively. Future minimum rental payments under operating leases
         are set forth below (thousands of dollars):

<TABLE>
<CAPTION>
                                        YEAR ENDING AUGUST 31,
                                        ----------------------
                                              <S>                                       <C>
                                                 1997                                   $1,941
                                                 1998                                    1,830
                                                 1999                                    1,331
                                                 2000                                    1,144
                                                 2001                                    1,154
                                              Thereafter                                 2,639
                                                                                         -----

                                                Total                                  $10,039
                                                                                       =======
</TABLE>
         Litigation -- In the matter of the PEC Apartment Subsidiaries
         litigation previously reported upon, an order for judgment of
         $3,346,000 was rendered against PEC on its limited guaranty, in
         connection with the defendants' counterclaim. Pursuant to a
         stipulation between the parties dated as of May 15, 1995, PEC paid the
         amount of $2,900,000 on June 15, 1995 in full settlement of this
         matter. Because the reserve recorded in the financial statements of
         the Company exceeded the amount of the settlement, the Company
         recognized a gain on discontinued operations of $1,323,000.

         On July 5, 1995, Pahrump Valley Vineyards, Inc. filed a complaint in
         the 5th Judicial District Court, Nye County, Nevada, against CNUC, a
         subsidiary of PEC. The plaintiff claimed compensatory damages in
         excess of $25,000 in each of 4 counts alleging trespass, nuisance,
         negligence and breach of contract for the alleged supplying of
         contaminated water by CNUC to the plaintiff, and also prayed for
         punitive damages in excess of $25,000. Following discovery, PEC's
         insurance carrier settled the case by payment of $35,000 to the
         plaintiffs.

         Following the Company's November 10, 1995 announcement disclosing
         certain accounting adjustments, an action was filed on November 13,
         1995, in the United States District Court, District of Nevada by
         Christopher Dunleavy, as a purported class action against the Company,
         certain of the Company's officers and directors and the Company's
         independent auditors.  The complaint alleges, among other things, that
         the defendants violated Section 10(b) of the Securities Exchange Act
         of 1934 and Rule 10b-5 thereunder in connection with the preparation
         and issuance of certain of the Company's financial reports issued in
         1994 and 1995, including certain financial statements reported on by
         the Company's independent auditors.  The complaint also alleges that
         one of the director defendants violated the federal securities laws by
         engaging in "insider trading."  The named plaintiff seeks to represent
         a class consisting of purchasers of the Company's Common Stock between
         January 14, 1994 and November 9, 1995, and seeks damages in an
         unspecified amount, costs, attorney's fees and such other relief as
         the court may deem just and proper.  The Company believes that it  has
         substantial defenses to the action, however, the Company presently
         cannot predict the outcome of this matter.

         On November 16, 1995, a second action was filed in the United States
         District Court for the District of Nevada by Alan Peyser as a
         purported class action against the Company and certain of its officers
         and directors, which was served on the Company on December 20, 1995.
         The complaint alleges, among other things, that the defendants
         violated the federal securities laws by making statements and issuing
         certain financial reports in 1994 and 1995 that overstated the
         Company's earnings and business prospects.  The named plaintiff seeks
         to represent a class consisting of purchasers of the Company's common
         stock between November 28, 1994 and November 9, 1995.  The complaint
         seeks damages in an unspecified amount, cost, attorney's fees and such
         other relief as the Court may deem just and proper.  The Company
         believes that it has substantial defenses to the action, however, the
         Company presently cannot predict the outcome of this matter.





                                      F-28
<PAGE>   94





         On or about June 10, 1996, the Dunleavy Action and Peyser Action were
         consolidated under the caption "In re Mego Financial Corp.  Securities
         Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a
         stipulation by the parties.  On or about July 26, 1996, Michael Nadler
         filed a motion in the above matter requesting that he be added as a
         class representative and that his attorney be added as additional
         counsel for the class.  On or about August 26, 1996, a Motion in
         Opposition to the motion to add a class representative was filed by
         the Company and certain other defendants.  Neither motion has been
         heard or decided by the court.

         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 financial
         condition or results of operations of the Company.

         Contingencies--At August 31, 1996, irrevocable letters of credit in
         the amount of $2,084,000 were issued and outstanding to secure certain
         obligations of the Company. These letters are collateralized by notes
         receivable in the amount of $2,497,000.

         License Agreement--In April 1995, PEC entered into a strategic alliance
         pursuant to which PEC was granted a ten-year (including a renewal
         option) exclusive license to operate both its existing and future
         timeshare properties under the name "Ramada Vacation Suites". PEC has
         renamed its timeshare resorts.  The arrangement provides for the
         payment by PEC of an initial access fee of $1 million, which has been
         paid, and monthly recurring fees equal to 1% of PEC's Gross Sales (as
         defined) each month through January 1996 and 1.5% of PEC's Gross Sales
         each month commencing in February 1996.  The initial term of the
         arrangement is 5 years and PEC has the option to renew the arrangement
         for an additional term of 5 years.

24.      SUBSEQUENT EVENTS

         In September 1996, MMC received a commitment from a financial
         institution providing for the purchase of up to $2  billion of loans
         over a 5 year period.  Upon closing of the final agreement, the
         Company will issue to the financial institution 4 year warrants to
         purchase 1,000,000 shares of the Company's common stock at an exercise
         price of $7.125 per share.  The value of the warrants, estimated at
         $3,000,000 (0.15% of the commitment amount) as of the commitment date,
         will be recorded as a commitment fee and charged to expense as the
         commitment is utilized.  The financial institution has also agreed to
         provide MMC a separate one year facility of up to $11,000,000, less
         any amounts advanced under a separate $3,000,000 repurchase agreement,
         for the financing of the interest only and residual certificates from
         future securitizations.

         In November 1996, MMC issued 2,300,000 shares of its common stock in a
         public offering at $10.00 per share.  As a result of this transaction,
         the Company's ownership in MMC declined from 100% at August 31, 1996 to
         81.1%.  The Company continues to have voting control on all matters
         submitted to shareholders of MMC, including the election of directors
         and approval of extraordinary corporate transactions.  Concurrently
         with the common stock offering, MMC issued $40 million  of 12.5% Senior
         Subordinated Notes due in 2001 in a public offering.  MMC currently
         intends to use approximately $13.2 million of the aggregate net
         proceeds received from the offerings to repay amounts due to Mego
         Financial Corp. and PEC and approximately $17 million to reduce the
         amounts outstanding under MMC's warehouse and revolving lines of credit
         which currently bear interest at rates ranging from 1% to 2% over the
         prime rate and which expire in August 1997 and December 1997,
         respectively, and to repay $3 million under a repurchase agreement.
         Funds received by Mego Financial Corp. and PEC will be used in their
         respective operations.  The remaining net proceeds will be used by MMC
         to provide capital to originate and securitize loans.  Pending such
         use, the net proceeds received by the Company will be invested in high
         quality, short term interest-bearing investment and deposit accounts.





                                      F-29
<PAGE>   95





INDEPENDENT AUDITORS' REPORT





To the Board of Directors and Stockholders of
Mego Financial Corp. and Subsidiaries
Las Vegas, Nevada



We have audited the consolidated financial statements of Mego Financial Corp.
and its subsidiaries (the "Company") as of August 31, 1996 and 1995, and for
each of the three years in the period ended August 31, 1996, and have issued
our report thereon dated October 25, 1996, included elsewhere in this Form
10-K.   Our audits also included the consolidated financial statement schedule
of the Company,  listed in Item 8 of this Form 10-K.  This consolidated
financial statement schedule is the responsibility of the Company's
management.  Our responsibility is to express an opinion based on our audits.
In our opinion, such consolidated financial statement schedule, when,
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects the information set forth
therein.



DELOITTE & TOUCHE LLP



Las Vegas, Nevada
October 25, 1996





                                      S-1
<PAGE>   96




                                                                   SCHEDULE VIII
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                             (thousands of dollars)
                       For the Year Ended August 31, 1996




<TABLE>
<CAPTION>
                                                                                   Additions
                                                                           ------------------------
                                                              Balance at   Charged to    Charged to                 Balance at
                                                               Beginning    Costs and       Other                     End of
               Description                                     of Period    Expenses      Accounts     Deductions     Period
---------------------------------------                      -----------   ------------  ----------    ----------   ---------- 
<S>                                                              <C>          <C>                <C>                   <C>
Allowances for cancellations                                     $16,523      $11,288           $--      $(11,469)     $16,342

Unamortized valuation discount                                       343          471            --          (362)         452

Revaluation adjustment                                                --           --            --            --           --
                                                             ----------- ------------  ------------  ------------ ------------ 
                                                                 $16,866      $11,759           $--      $(11,831)     $16,794
                                                             =========== ============  ============  ============ ============
</TABLE>
---------------------------


(a)  Excess of book value over cost at September 1, 1989.
(b)  Amortization of excess of book value over cost.





                                      S-2





<PAGE>   97




                                                                   SCHEDULE VIII
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                             (thousands of dollars)
                       For the Year Ended August 31, 1995




<TABLE>
<CAPTION>
                                                                              Additions
                                                                        ------------------------
                                                         Balance at     Charged to    Charged to                  Balance at
                                                          Beginning      Costs and       Other                      End of
                    Description                           of Period      Expenses      Accounts   Deductions        Period
---------------------------------------                -----------     ------------  ----------  ----------      ---------- 
<S>                                                       <C>            <C>           <C>        <C>               <C>
Allowances for cancellations and credit losses            $18,007        $10,359         $--      $(11,843)         $16,523

Unamortized valuation discount                                281            103          --           (41)             343

Revaluation adjustment                                        166 (a)         --          --          (166)(b)           --
                                                         --------        -------       -----     ----------        -------- 
                                                          $18,454        $10,462          $0      $(12,050)         $16,866
                                                         ========        =======       =====     ==========        ======== 
</TABLE>
--------------------------


(a)  Excess of book value over cost at September 1, 1989.
(b)  Amortization of excess of book value over cost.





                                      S-3



<PAGE>   98



                                                                   SCHEDULE VIII
                     MEGO FINANCIAL CORP. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                             (thousands of dollars)
                       For the Year Ended August 31, 1994




<TABLE>
<CAPTION>
                                                                       Additions
                                                               ------------------------
                                              Balance at       Charged to    Charged to                     Balance at
                                               Beginning        Costs and       Other                         End of
               Description                     of Period        Expenses      Accounts     Deductions         Period
---------------------------------------        -----------    ------------  ----------    ----------       ---------- 
<S>                                              <C>               <C>               <C>     <C>               <C>
Allowances for cancellations                     $19,933           $7,775           $--       $(9,701)         $18,007

Unamortized valuation discount                       275              292            --          (286)             281

Revaluation adjustment                               588 (a)           --            --          (422)(b)          166
                                             -----------     ------------  ------------  ------------     ------------   
                                                 $20,796           $8,067           $--      $(10,409)         $18,454
                                             ===========     ============  ============  ============     ============   
</TABLE>
----------------------------


(a)   Excess of book value over cost at September 1, 1989.

(b)  Amortization of excess of book value over cost.








                                       S-4