<PAGE>
 
                      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

                  For the fiscal year ended December 31, 1998

OR

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 [No Fee Required]

                       Commission file number:  1-10176

                            MERCURY FINANCE COMPANY
              ---------------------------------------------------
               (Exact Name of Registrant as Specified in Charter)
                                        
          Delaware                                        36-3627010
          --------                                        ----------
 (State or other jurisdiction of                       (I.R.S. Employer
 incorporation or organization)                        Identification No.)


            100 Field Drive, Suite 340, Lake Forest, Illinois 60045
            -------------------------------------------------------
                   (Address of principal executive offices)

Registrant's telephone number, including area code: (847) 295-8600

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                   NAME OF EACH EXCHANGE
         Title of Each Class                       ON WHICH REGISTERED
         -------------------                       --------------------

   COMMON STOCK ($1.00 PAR VALUE)                          NONE

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

                                     None
--------------------------------------------------------------------------------
                               (Title of class)

Indicate by check mark whether the Registrant (l) 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 _____
                                        -----             

As of March 2, 1999, 172,497,714 shares of Common Stock were outstanding (net of
Treasury stock).

The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on March 2, 1999, totaled approximately $17.2 million (based on
the closing price of the Registrant's Common Stock on the OTC Bulletin Board).

The following documents are incorporated into this Form 10-K by reference:

None.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of 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]
<PAGE>
 
                                    PART I

ITEM 1 - BUSINESS

GENERAL

Mercury Finance Company ("Mercury" or the "Company") is a consumer finance
concern engaged, through its operating subsidiaries, in the business of
acquiring installment sales finance contracts from automobile dealers and retail
vendors, extending short-term installment loans directly to consumers and
selling credit insurance and other related products.  Mercury's borrowers
represent a broad cross section of the consumer market.  Mercury's loans and
acquired retail installment contracts range for periods from 3 months to 48
months at annual interest rates ranging, with minor exception, from 18% to 40%.
Generally, all loans and acquired retail installment contracts are repayable in
monthly installments.

Mercury was organized in 1988, as a wholly-owned subsidiary of First Illinois
Corporation (an Evanston, Illinois based bank holding company).  On April 24,
1989, First Illinois Corporation distributed to its stockholders one share of
Mercury for each two shares of First Illinois Corporation stock held.

Mercury's operating subsidiaries commenced operations in February 1984 for the
purpose of penetrating the market for small dollar amount consumer loans
(average of $3,000 or less). The initial focus was toward small, short term,
direct installment loans made to U.S. military servicemen.  Building from this
direct lending niche, Mercury has also built a substantial, diversified consumer
finance portfolio by purchasing individual installment sales finance contracts
from retail vendors and automobile dealers.  Substantially all of Mercury's
borrowers are "non-prime" borrowers.  These are borrowers which generally would
not be expected to qualify for traditional financing such as that provided by
commercial banks or automobile manufacturers' captive finance companies.

RESTRUCTURING AND CHAPTER 11 PROCEEDINGS

On July 15, 1998, the Company filed a voluntary petition (the "Voluntary Case")
in the United States Bankruptcy Court for the Northern District of Illinois (the
"Bankruptcy Court" or the "Court") for relief under Chapter 11 of Title 11 of
the United States Code (the "Bankruptcy Code") along with a plan of
reorganization.  The filing of the Voluntary Case and plan of reorganization
conformed to the terms previously agreed upon between Mercury and substantially
all of its lenders on May 14, 1998.  On July 6, 1998, several of the litigants
in the then pending securities lawsuits filed an involuntary petition in the
Bankruptcy Court asking the Court to place the Company into a Chapter 11
proceeding (the "Involuntary Case").  The Involuntary Case was consolidated with
the Voluntary Case and has proceeded under Case No. 98-20763.  Mercury continued
to operate its business as a debtor-in-possession under the Bankruptcy Code
after the filing of the Voluntary Case.

None of the Company's subsidiaries were included in the Voluntary Case or the
Involuntary Case.  After the filing of the Voluntary Case, the Company continued
to conduct its operations in the normal course through its subsidiaries, and to
pay all trade debt and dealer contracts in the ordinary course, without
interruption.

On March 10, 1999, the Court entered an order confirming the Company's Second
Amended Plan of Reorganization (the "Plan" or "Plan of Reorganization").  The
effective date of the Plan is March 23, 1999 (the "Effective Date").  Under the
Plan, the Company's senior lenders will receive new senior secured notes equal
to 75 percent of the face value of their then current outstanding balance after
the receipt of Excess Cash (as defined in the Plan) and their pro rata share of
9,500,000 (95%) shares of the initial equity of the reorganized company.  The
holders of subordinated notes will receive $22.5 million in new junior unsecured
subordinated notes.

The shareholders will receive 500,000 shares (5%) of the initial equity of the
reorganized company and three series of warrants, each exercisable for 580,000
shares of the common stock of the reorganized company, with expiration dates of
three, four and five years, respectively, from the Effective Date.  The exercise
price of the Series A Warrants will be $15.34, the exercise price of the Series
B Warrants will be $21.81 and the exercise price of the Series C Warrants will
be $28.27.

                                      -2-
<PAGE>
 
The Plan provides that the Company will transfer to a certain trust established
under the Plan (the "Liquidating Trust"), on the Effective Date, (i) $5 million
in cash, (ii) the Company's claims against KPMG Peat Marwick and (iii) $250,000
in cash for fees and costs to be incurred in connection with the Liquidating
Trust.  Holders of Securities Fraud Claims will receive a share of the
beneficial interests in the Liquidating Trust in complete settlement,
satisfaction and discharge of their claims.  In accordance with the Plan, the
Company will also pay (i) $13.35 million into funds established for the benefit
of holders of certain indemnification claims against the Company on the
Effective Date and (ii) upon verification, costs and expenses of officers,
agents and employees who are no longer employed by the Company as of the first
day immediately following the Effective Date (other than the claims of the
estate of James A. Doyle and John N. Brincat in respect of which no obligations
shall be assumed), to the extent such costs and expenses are incurred after the
Effective Date in connection with their participation in an agency or government
investigation, which costs and expenses are limited to $250,000 in the
aggregate.  The Company has also agreed to (i) pay John N. Brincat $100,000 and
(ii) release Mr. Brincat from all claims the Company may have against him, in
complete settlement, satisfaction and discharge of any claims Mr. Brincat may
have against the Company, subject to the approval of the United States District
Court for the Northern District of Illinois by a final non-appealable order.

The above summary of the Plan does not purport to be complete and is qualified
in its entirety by reference to the Plan which is attached hereto as Exhibit 2.

BACKGROUND

On January 29, 1997, the Company announced the discovery of accounting
irregularities which caused an overstatement of the previously released earnings
for 1995 and 1996.  The accounting irregularities were the result of
unauthorized entries being made to the accounting records of the Company.
Immediately following discovery of the accounting irregularities, the Board of
Directors established a Special Committee for the purpose of investigating the
circumstances surrounding these activities.  The investigation was undertaken
with the assistance of special legal counsel and auditing experts.

Shortly after the announcement of the accounting irregularities, the Company's
Board of Directors named William A. Brandt, Jr., President and Chief Executive
Officer of the Company.  Mr. Brandt is the President and Chief Executive Officer
of Development Specialists, Inc., a firm specializing in providing management,
consulting and turnaround assistance to reorganizing businesses.  The Company's
former President and Chief Executive Officer, John Brincat, resigned from both
positions in February, 1997.  Mr. Brincat also resigned as a director of the
Company as of December 1, 1997.  The Company's Chief Financial Officer before
the Company's announcement of the accounting irregularities, James A. Doyle, was
relieved of his duties in January, 1997.

As a result of the accounting irregularities, the Company was in violation of
certain covenants in its senior note and subordinated debt agreements.  In
addition, the Company did not have access to commercial paper markets, which
historically provided a significant portion of the Company's financing.
Consequently, the Company was unable to repay maturing debt and has not repaid
the principal portion of any debt subsequent to announcement of the accounting
irregularities, except as described below.

On February 7, 1997, Mercury and all of its subsidiaries, other than its
insurance subsidiaries (the "Subsidiary Borrowers"), entered into a Loan and
Security Agreement (the "Loan Agreement") with certain financial institutions,
including BankAmerica Business Credit, Inc. ("BankAmerica"), which provided the
Company with a $50 million credit facility.  Amounts outstanding under the Loan
Agreement were secured by substantially all of the property and assets of the
Company and its Subsidiary Borrowers other than equipment and real estate.  In
addition, the Company pledged to BankAmerica all of the capital stock of each
Subsidiary Borrower.  This facility, combined with daily cash flows, provided
the Company with sufficient working capital to operate the business, discharge
significant expenses resulting from the accounting irregularities, and pay
interest on its debt obligations.  The facility terminated according to its
terms on January 6, 1998, at which time no amounts remained outstanding.

The Company had a forbearance agreement with its lenders which, including
extensions (the "Forbearance Agreements"), expired July 15, 1998.  In connection
with the execution of the last extension to the forbearance agreement, the
participating senior lenders received a fee of 2.25% of the outstanding balance.
The fee, aggregating $15.2 million, was recorded as a non-operating expense in
1998.

                                      -3-
<PAGE>
 
Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%).  In addition, the agreements required the
periodic payment of excess cash to be applied as a reduction of outstanding
principal.  Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998.  Subsequent to May 5, 1998, no payments of principal have been
made to creditors. Pursuant to the Voluntary Case, no interest has been accrued
or paid on the Company's debt subsequent to July 15, 1998, the date the
Voluntary Case was filed.

On February 6, 1997, the Company suspended payment of the dividend previously
announced on January 14, 1997, of $0.075 per share of Mercury common stock.  In
addition, on February 27, 1997, the Company adopted a stockholder rights plan
designed to protect the Company's stockholders from abusive takeover tactics and
from attempts to acquire control of Mercury without offering a fair price to all
of the Company's stockholders.  The plan did not preclude the Board of Directors
from considering and accepting an offer if the Board believes it is in the best
interest of the Company, its creditors and stockholders.

On February 18, 1997, the Company advised KPMG Peat Marwick LLP ("KPMG"), its
independent accountants, that the Company was discontinuing KPMG's services.
The Company then engaged Arthur Andersen LLP as the Company's new independent
accountants.  See Item 9 "Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures."

On March 28, 1997, Mercury entered into a Stock Purchase Agreement with Frontier
Insurance Group, Inc. to sell the stock of Lyndon Insurance Company ("Lyndon")
for $92 million in cash.  Lyndon was acquired by the Company in October, 1995,
from ITT for $72.5 million and the assumption of Lyndon's net liabilities.
Since then, other smaller insurance operations of the Company had been combined
with Lyndon.  The sale which closed on June 3, 1997, resulted in a loss to
Mercury of approximately $30 million that was recorded in the first quarter of
1997.  In addition, the earnings of Lyndon from the date of the agreement
through the date of sale aggregating approximately $2 million accrued to the
benefit of the buyer.  Management determined that it was in the best interest of
the Company to remain in the insurance business and formed a new captive
insurance subsidiary during 1997, MFN Insurance Company.  As a result, the sale
of Lyndon was not considered the discontinuation of a business.  The loss
associated with the sale of Lyndon was not tax deductible to the Company as a
loss on the sale of a consolidated subsidiary is, under certain circumstances,
not deductible for tax purposes.

On January 10, 1997, Mercury entered into a definitive agreement with Bank of
Boston Corporation for the acquisition by Mercury of Bank of Boston's consumer
finance subsidiary, Fidelity Acceptance Corporation.  The agreement called for
Mercury to issue approximately 32,708,000 shares of common stock in
consideration for the acquisition.  On January 30, 1997, Bank of Boston
terminated the agreement with Mercury as a result of certain alleged breaches in
the agreement on the part of Mercury.  Bank of Boston alleged damages as a
result of the termination of the agreement.  Such claims were settled for a cash
payment of $1,600,000 in January, 1998, with a charge to earnings in the fourth
quarter of 1997 of $1,600,000.

See Item 3 "Legal Proceedings" for information regarding legal proceedings
related to the accounting irregularities described above.

BRANCH OFFICE NETWORK/OPERATION

In December, 1997, the Company announced the implementation of its business plan
for 1998 which provided for the exit from non-profitable market areas and the
closing of branches which were considered redundant in consideration of nearby
locations.  The existing portfolios of the closed branches were either
transferred to nearby continuing branches or consolidated into 5 branches which
continue to exist in order to collect the remaining portfolio.  As of December
31, 1998, Mercury had 157 operating branches.

The continuing branch operations are divided into 21 geographically organized
districts, with each district headed by a regional director.  A regional
director is generally responsible for six to twelve offices (depending on size
and 

                                      -4-
<PAGE>
 
geographical dispersion). Regional directors report to four Group Vice
Presidents. A summary of the operating branches by state is as follows:

<TABLE>
<CAPTION>
State                         Office Locations        State                     Office Locations
-----                         ----------------        -----                     ----------------     
<S>                           <C>                     <C>                       <C>
Alabama                             1                 Nevada                               2
Arizona                             2                 New Mexico                           1
Colorado                            1                 New York                             2
Delaware                            1                 North Carolina                       7
Florida                            13                 Ohio                                 9
Georgia                             6                 Oklahoma                             1
Illinois                           12                 Pennsylvania                         5
Indiana                             5                 South Carolina                       4
Kansas                              1                 Tennessee                            2
Kentucky                            2                 Texas                               14
Louisiana                          32                 Virginia                            11
Michigan                            4                 Washington                           1
Mississippi                        11                 Wisconsin                            4
                                                                                         ---
Missouri                            3                                                  
                                                      TOTAL                              157
                                                                                         ===
</TABLE>
                                                                                
In addition, Midland Finance Co., a subsidiary of the Company, has one operating
office located in Chicago, Illinois.

Management has developed its workforce by attempting to train experienced
consumer lending professionals.  The training program includes actual training
at branch offices and personal interviews by senior operating management of the
Company.  The training program which is called the "Pride Program" is
administered by the branch managers and regional directors and is a requirement
for all branch personnel.  In addition, the Company also conducts a Manager's
Qualification Program for prospective managers.

Beginning in 1994, the Company began to experience a significant level of
turnover in its branch staff as a result of increased demand for experienced
personnel by competitors.  After the announcement of the accounting
irregularities, the Company experienced further difficulty in retaining and
hiring qualified consumer lending professionals.  During 1998, the rate of
turnover in management positions has declined and, although still a cause for
concern, management believes that the turnover rate is no greater than that
experienced by the Company prior to discovery of the accounting irregularities.

The business mix of Mercury's branch office network between sales finance
receivables (which constitutes 85% of total gross receivables) and direct
consumer loans (which constitutes 15% of total gross receivables) is generally
consistent within the 21 supervisory districts of the country.  The business mix
in any one branch office is dependent upon the location of the office and the
background of an office's loan personnel.

LOAN AND CONTRACT ORIGINATION AND MARKETING

Historically, Mercury originated loans and acquired individual sales finance
contracts through its office network based upon a decentralized approval process
tailored to the market in which its specific offices operated.  All credit
extensions were reviewed and approved at the branch level with extensions of
credit in excess of preset limits requiring approval by a regional director.  In
1998, Mercury initiated 16 regional centralized purchasing offices that review
and approve the acquisitions of sales finance contracts for a majority of the
Company's volume.  Through this process, management believes that underwriting
criteria will be applied more consistently while still allowing for flexibility
to be responsive to local market conditions.  In addition, the realignment will
release branch personnel from making credit decisions and will allow for greater
emphasis to be placed on cash collections and expanding dealer relationships.

Installment sales finance receivables which originate with local dealers
(household goods, appliance and automobile) are subjected to the same credit
review and credit worthiness policies as direct consumer loans.  A specific
installment sales finance contract is acquired only after objective
investigations of the credit worthiness of 

                                      -5-
<PAGE>
 
the borrower and a determination of the underlying value of the asset through
use of industry publications, combined with the subjective assessment by
underwriters. Every sales finance contract is reviewed individually and
extensions of credit are made based upon the credit worthiness of each customer.

Individual sales finance contracts are acquired pursuant to formal agreements
with local merchants.  Mercury acquires sales finance contracts from local
franchised and independent used car dealers with which Mercury has established
ongoing relationships.  A relationship with a dealer begins only after analysis
of the soundness of their business is completed.  Mercury acquires a majority of
its sales finance contracts from dealers at a discount.  Mercury negotiates the
amount of the discounts with the dealers based upon various criteria, one of
which is the credit risk associated with the sales finance contracts being
acquired.

Mercury encourages a decentralized marketing approach which allows each office
to pursue and develop business leads which are unique to individual markets.
Mercury does no national advertising.  Branch offices may advertise in local
publications and most branch offices rely on the endorsement of customers to
build a client base.  Mercury believes that client service in the form of timely
loan application processing makes customer referrals the most cost effective
primary marketing tool.

INSURANCE OPERATIONS

In conjunction with their lending practices, the consumer finance subsidiaries
offer credit life, accident and health and property insurance to borrowers who
obtain financing directly from the consumer finance subsidiaries, and to
borrowers under sales finance contracts acquired from merchants and automobile
dealers.  Notwithstanding the disposition of Lyndon, Mercury continues to offer
a variety of insurance and insurance related products through third party
carriers and MFN Insurance Company.

Lyndon was engaged in the business of direct writing of credit life, accident
and health and various other credit related insurance policies for customers of
Mercury and other companies.  Prior to disposition, Lyndon Life was licensed in
forty-eight states and Lyndon Property was licensed in forty-seven states.
Lyndon subsidiaries, Mercury Life and Gulfco Life were engaged primarily in the
business of reinsuring and direct writing, respectively, of credit life and
accident and health insurance policies issued to borrowers under finance
receivables and sales finance contracts acquired by Mercury.  The policies
insured the holder of a sales finance contract or other debt instrument for the
outstanding balance payable in the event of death or disability of the debtor.
Premiums were earned over the life of the contracts principally using pro-rata
and sum-of-the-months digits methods or in relation to anticipated benefits to
the policy holder.  As described above, Lyndon (including its subsidiaries) was
disposed of on June 3, 1997.  Management has determined that it is in the best
interest of the Company to remain in the insurance business and formed a new
captive insurance subsidiary during 1997, MFN Insurance Company ("MFN").  MFN
provides aggregate coverage for incurred losses in excess of targeted loss
ratios through a reinsurance agreement with the primary carrier.  As a result,
the sale of Lyndon is not considered the discontinuation of a business.

SOURCE OF FUNDS

Mercury funds its operations primarily through collections of principal and
interest from finance receivables and the sale of debt securities.  At December
31, 1998, Mercury had total debt of $698 million.  Of this total, 48.6% was in
commercial paper and notes, 48.2% was in fixed rate senior term notes and 3.2%
was in fixed rate subordinated term notes.  In addition, Mercury previously had
a $50 million credit facility which expired on its own terms in January, 1998,
with no amounts then outstanding thereunder.

As indicated above, as a result of the accounting irregularities, the Company's
credit rating has been downgraded and consequently, the Company does not have
access to the commercial paper markets and is not now obtaining additional
financing.  Proceeds from the collection of existing sales finance contracts
have provided sufficient working capital for operations, since collections
exceed originations.  Lower amounts are being spent on new sales finance
contracts due to the reduction in the number of operating branches and the
stricter underwriting criteria.  Additionally, the Company's relief from paying
principal and interest under the Voluntary Case has also provided capital to the
Company.

                                      -6-
<PAGE>
 
COMPETITION

The consumer finance business is intensely competitive.  Mercury competes with
other consumer finance companies, personal loan departments of commercial banks,
federally insured credit unions, industrial banks, credit card issuers and
companies which finance the sales of their own merchandise or the merchandise of
others.

In the last two years, a number of Mercury's competitors have announced that
they have exited the sub-prime sales finance industry, have no funds available
to acquire additional sales finance contracts or have tightened credit standards
resulting in lower volumes.  While this may be a sign that competitive pressures
should be easing, there still appears to be no shortage of alternatives for auto
dealers attempting to sell sales finance contracts.

EMPLOYEES

As of December 31, 1998, Mercury had approximately 1,380 employees.  None of its
employees are represented by a collective bargaining agreement.

GOVERNMENT REGULATION

All consumer finance operations are subject to federal and state regulations.
Personal loan lending laws and laws regulating the acquisition of retail
installment contracts generally require licensing of the lender, limitations on
the amount, duration and charges for various categories of loans, adequate
disclosure of certain contract terms and limitations on certain collection
policies and creditor remedies.  Federal consumer credit statutes primarily
require disclosures of credit terms in consumer finance transactions.  In
general, the business is conducted under licenses issued by individual states.
Each licensed office is subject to periodic examination by state regulatory
authorities.  The state licenses are revocable for cause.  Mercury believes that
its current operations comply in all material respects with these regulations.
Mercury is also subject to the provisions of the Federal Consumer Credit
Protection Act and its related regulations.

Credit insurance offered in connection with the direct lending and sales finance
activities of Mercury and the premiums payable by credit customers and
commissions payable by insurers to the originators of such insurance are also
subject to state laws and regulations.

                                      -7-
<PAGE>
 
ITEM 2

PROPERTIES

The executive offices of Mercury are located at 100 Field Drive, Lake Forest,
Illinois 60045, telephone number (847) 295-8600.  Mercury occupies approximately
11,750 square feet of a modern office building subject to a lease having a term
expiring on March 31, 2002.  Mercury also leases space for all its branch
offices.  The leases for the branch offices are generally for terms from 3 to 5
years.  Total rent expense for the Company approximated $3,667,000, $4,571,000
and $4,392,000 in 1998, 1997 and 1996, respectively.

                                      -8-
<PAGE>
 
ITEM 3.

LEGAL PROCEEDINGS

On July 15, 1998, the Company filed the Voluntary Case along with its plan of
reorganization. The Court entered an order confirming the Plan on March 10,
1999. See "Item 1 Restructuring and Chapter 11 Proceedings" for more
information.

The Company has been named as a defendant in a variety of lawsuits generally
arising from the Company's announcement on January 29, 1997 that it would
restate its earnings for certain prior periods as a result of the discovery of
accounting irregularities.  To date, forty-five actions have been filed against
the Company in the United States District Court for the Northern District of
Illinois, six cases are pending against the Company in Illinois Chancery Court,
and nine cases are pending in Delaware Chancery Court.  The complaints seek
compensatory damages, attorneys' fees and costs.

Forty-one of the lawsuits filed in the Northern District of Illinois are class
actions which generally allege claims under Sections 10 and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.  These
lawsuits name one or more officers or directors of the Company as additional
defendants.  One case pending in the Northern District of Illinois alleges
derivative claims seeking to recover damages on behalf of the Company from
certain of the Company's officers and directors.  Thirty-nine of the non-
derivative cases pending in the Northern District of Illinois were consolidated
pursuant to a Stipulation entered on April 30, 1997.  Seven of these cases were
dismissed in 1998.  In November, 1997, the Minnesota State Board of Investment
was appointed lead plaintiff in the federal class cases.  One of the cases
pending in the Northern District of Illinois seeks to represent a class of
participants in Mercury's employee retirement plan and alleges ERISA violations
arising out of the plan's investment in Mercury's allegedly overvalued stock.
Participants in the proposed class may include certain officers and former
officers of the Company.  One case pending in the Northern District of Illinois
alleges non-class securities fraud and common law claims.  A second case
alleging similar claims was dismissed on September 9, 1998.  The ERISA action
and the two non-class securities fraud cases were consolidated in February,
1997, with the cases in which the Minnesota State Board of Investment is lead
plaintiff.  Three of the Illinois state court actions are class actions alleging
claims under the Illinois Securities Act, the Illinois Consumer Fraud and
Deceptive Business Practices Act and common law claims of fraud and negligent
misrepresentation.  The other Illinois state court actions are derivative
actions which seek to recover damages on behalf of the Company from certain of
the Company's officers and directors.  Each of the Delaware state court actions
is a derivative action which seeks to recover damages on behalf of the Company
from certain of the Company's officers and directors.  The case pending in
Municipal Court in Hamilton, Ohio, alleges violations of Ohio state securities
laws and common law.  Pursuant to Section 362(a) of the Bankruptcy Code, all of
the pending lawsuits against the Company were stayed after the filing of the
Voluntary Case.

Pursuant to the Plan, the Company will transfer to a certain trust established
under the Plan (the "Liquidating Trust"), on the effective date of the Plan, (i)
$5 million in cash, (ii) the Company's claims against KPMG Peat Marwick and
(iii) $250,000 in cash for fees and costs to be incurred in connection with the
Liquidating Trust.  Holders of Securities Fraud Claims will receive a share of
the beneficial interests in the Liquidating Trust in complete settlement,
satisfaction and discharge of their claims.  In accordance with the Plan, the
Company will also pay (i) $13.35 million into funds established for the benefit
of holders of certain indemnification claims against the Company on the
effective date of the Plan and (ii) upon verification, costs and expenses of
officers, agents and employees who are no longer employed by the Company as of
the first day immediately following the effective date of the Plan (other than
the claims of the estate of James A. Doyle and John N. Brincat in respect of
which no obligations shall be assumed), to the extent such costs and expenses
are incurred after the effective date of the Plan in connection with their
participation in an agency or government investigation, which costs and expenses
are limited to $250,000 in the aggregate.  The Company has also agreed to (i)
pay John N. Brincat $100,000 and (ii) release Mr. Brincat from all claims the
Company may have against him, in complete settlement, satisfaction and discharge
of any claims Mr. Brincat may have against the Company, subject to the approval
of the United States District Court for the Northern District of Illinois by a
final non-appealable order.

                                      -9-
<PAGE>
 
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities.  Those events are also under investigation by
the United States Attorney for the Northern District of Illinois and the Federal
Bureau of Investigation.  The Company is cooperating fully in these
investigations.

On January 10, 1997, the Company entered into an agreement (the "Agreement")
with BankBoston Corporation ("BankBoston") pursuant to which the Company was to
acquire all of the outstanding stock of Fidelity Acceptance Corporation, a
subsidiary of BankBoston, in return for the issuance of approximately 32.7
million shares of the Company's common stock.  On January 30, 1997, BankBoston
notified the Company that it was terminating the Agreement as a result of
breaches of the Agreement resulting from the accounting irregularities described
above.  On July 10, 1997, BankBoston notified Mercury that BankBoston intended
to seek appropriate compensation for its damages resulting from such breaches.
Such claims were settled for a cash payment of $1,600,000 in January, 1998 which
was accrued in December, 1997.

In the normal course of its business, Mercury and its subsidiaries are named as
defendants in legal proceedings generally referred to as consumer finance
litigation.  A number of such actions are pending in the various states in which
subsidiaries of Mercury do business.  It is the policy of Mercury and its
subsidiaries to vigorously defend litigation, but Mercury and (or) its
subsidiaries have and may in the future enter into settlements of claims where
management deems appropriate.  Although management is of the opinion that the
resolution of these proceedings will not have a material effect on the financial
position of Mercury, it is not possible at this time to estimate the amount of
damages or settlement expenses that may be incurred.

The Company recognizes the expense for litigation when the incurrance of loss is
probable and the amount of such loss is estimable.  Based upon the confirmation
of the Plan, as described above, which provides for the settlement of all claims
and lawsuits against the Company arising out of the financial irregularities in
exchange for payments in the aggregate of $18.950 million, the Company recorded
a provision and related accrual for $18.950 million during 1998. However,
because of the uncertainty that still surrounds the consumer finance litigation,
no accrual has been made for the majority of these lawsuits at December 31,
1998. The costs to defend against this litigation are expensed as incurred.

                                      -10-
<PAGE>
 
ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                      -11-
<PAGE>
 
                                    PART II

ITEM 5

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock of Mercury Finance Company has been trading on the OTC Bulletin
Board under the symbol "MFNNQ" since May 20, 1998.  Prior thereto, the Company's
common stock traded on the New York Stock Exchange.  On December 31, 1998,
Mercury had approximately 4,453 holders of record of common stock, exclusive of
holders of shares in "street" or nominee names.  The following table sets forth
the high and low closing sale prices as reported on the OTC Bulletin Board and
the New York Stock Exchange, as the case may be, during the last two fiscal
years.  The table also indicates the cash dividends declared by the Company per
share during such periods.

<TABLE>
<CAPTION>
                                                         1998                                        1997
                                       ----------------------------------------     --------------------------------------
                                                                     Dividends                                  Dividends   
                                          High          Low          Declared          High         Low          Declared   
                                       -----------  ------------   -------------    -----------  ---------    -------------- 
<S>                                    <C>          <C>           <C>               <C>          <C>          <C>
First Quarter........................     $ .875       $   .5            0           $ 15.75       $1.875          $.075
Second Quarter.......................      .6875        .0625            0              2.75          1.5              0
Third Quarter........................        .16         .075            0            2.6875        1.375              0
Fourth Quarter.......................       .085         .035            0              1.75           .5              0
</TABLE>

On January 14, 1997, the Board of Directors declared a dividend of $0.075 per
share of Mercury Common Stock to be payable March 3, 1997, to holders of record
at February 17, 1997.  On February 6, 1997, the Company suspended payment of
this dividend.

Based on existing defaults and events of default under the Company's Senior and
Subordinated Note Agreements and the filing of the Voluntary Case, no dividends
may be paid on the common stock of the Company.  The amount owing as a result of
the declared but unpaid dividend from early 1997 is included in liabilities 
subject to compromise under reorganization at December 31, 1998.


                                      -12-
<PAGE>
 
ITEM 6

SELECTED FINANCIAL DATA

Introduction
------------

All financial information included herein reflects the adjustments to correct
for the irregularities described in Item 1, "Business - Background."

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)                                        Years ended December 31,
----------------------------------------------------------------------------------------------------------------------------
                                                            1998          1997          1996           1995          1994
<S>                                                      <C>          <C>           <C>            <C>           <C>  
SUMMARY INCOME STATEMENT
  Interest income......................................   $181,093    $  235,621     $  271,889     $  255,066    $  211,565
  Interest expense (Note 1)............................     38,593        86,529         64,789         57,303        39,375
                                                          --------    ----------     ----------     ----------    ----------
 
  Net interest income before provision for                 142,500       149,092        207,100        197,763       172,190
    Finance credit losses..............................
  Provision for finance credit losses..................     56,790       106,374        215,171         32,641         7,376
                                                          --------    ----------     ----------     ----------    ----------
  Net interest income/(loss) after provision                85,710        42,718         (8,071)       165,122       164,814
    For finance credit losses..........................
  Other income.........................................     13,191        47,080        101,985         58,349        40,907
  Other expenses.......................................     85,295       128,005        143,297        103,363        64,731
                                                          --------    ----------     ----------     ----------    ----------
 
  Operating income/(loss) before income tax                 13,606       (38,207)       (49,383)       120,108       140,990
    provisions/(benefits)..............................
  Non-operating expenses...............................    (61,176)      (52,236)             0              0             0
  Income tax provision/(benefit).......................      6,000       (16,250)       (20,415)        45,979        54,445
                                                          --------    ----------     ----------     ----------    ----------
 
  Net income/(loss)....................................   $(53,570)   $  (74,193)    $  (28,968)    $   74,129    $   86,545
                                                          ========    ==========     ==========     ==========    ==========
 
Weighted average common shares outstanding:
    Basic..............................................    172,498       172,489        172,768        172,449       173,342
                                                          ========    ==========     ==========     ==========    ==========
    Diluted............................................    172,498       172,489        172,768        174,109       175,150
                                                          ========    ==========     ==========     ==========    ==========
 
Per share net income/(loss) attributable to common
 shares
    Basic..............................................   $  (0.31)   $    (0.43)    $    (0.17)    $     0.43    $     0.50
                                                          ========    ==========     ==========     ==========    ==========
    Diluted............................................   $  (0.31)   $    (0.43)    $    (0.17)    $     0.43    $     0.49
                                                          ========    ==========     ==========     ==========    ==========
 
Dividend per share declared                               $      0    $     .075     $      .30     $      .25    $      .19
                                                          ========    ==========     ==========     ==========    ==========
 
SELECTED BALANCES AT YEAR END
  Total assets.........................................   $798,683    $  979,404     $1,543,360     $1,598,098    $1,036,403
  Total gross finance receivables......................    793,268     1,175,439      1,396,081      1,441,288     1,272,430
  Total finance receivables (Net of unearned charges)..    643,705       971,377      1,160,423      1,197,776     1,039,867
  Allowance for finance credit losses..................     53,485       102,204         97,762         46,366        22,488
  Nonrefundable dealer reserves........................     36,820        52,731         89,378         61,961        66,477
  Senior debt, commercial paper and notes..............    339,340       416,731        525,051        489,990       449,945
  Senior debt, term notes..............................    335,905       412,514        488,625        438,750       265,375
  Subordinated debt....................................     22,500        22,500         22,500         29,500        35,500
  Stockholders' equity.................................     29,130        82,700        168,885        259,487       227,514
 
SELECTED RATIOS
  Net income/(loss) to average total assets............      (6.30%)       (5.94%)        (1.88%)         6.01%         9.71%
  Net income/(loss) to average stockholders' equity....     (83.82%)      (64.20%)       (12.85%)        29.64%        40.23%
  Total stockholders' equity to total assets...........       3.65%         8.44%         10.94%         16.24%        21.95%
  Earnings to fixed charges (Note 2)...................          -             -              -           3.05          4.48
  Deficiency of fixed charges coverage (Note 2)........   $ 57,934    $   90,443     $   49,383            N/A           N/A
</TABLE>

Note 1. Pursuant to the Voluntary Case, no interest has been accrued or paid on
        the Company's debt subsequent to July 15, 1998, the date the Voluntary
        Case was filed. This has resulted in the reduction of interest expense
        by approximately $27 million from what the Company would have expected
        to incur had the Voluntary Case not been filed (assuming default rates
        of interest).

Note 2. SEC Regulation S-K requires the disclosure of the ratio of earnings to
        fixed charges except where the ratio falls below 1, then the deficiency
        shall be disclosed in dollar terms.

                                      -13-
<PAGE>
 
ITEM 7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

(Dollars in tables in thousands)

The following discussion is intended to assist readers in their analysis of the
accompanying consolidated financial statements and notes that are presented
elsewhere in this report.

                                    OVERVIEW
                                    --------

Mercury continued its financial and operating restructuring in 1998.  After
reaching agreement with its senior lenders as to the terms of a formal
restructuring, Mercury filed a voluntary petition (the "Voluntary Case") in the
United States Bankruptcy Court for the Northern District of Illinois for relief
under Chapter 11 of Title 11 of the United States Code on July 15, 1998.
Mercury's financial statements for 1998 have been presented in conformity with
the American Institute of Certified Public Accountants' Statement of Position
90-7 "Financial Reporting By Entities In Reorganization Under The Bankruptcy
Code" ("SOP 90-7").  Therefore, the financial statements as of December 31, 1998
and for the year then ended are not comparable with the prior years and are not
indicative of what the results of operations would have been in the absence of
the filing of the Voluntary Case.

Mercury continued to experience strong competition in 1998.  Although the
industry shake-out that occurred in 1997 and 1998 reduced the number of
companies in the sub-prime specialty finance arena, there still exists
sufficient competitors on a national and regional level to continue the pricing
and credit pressures that had been experienced during the past few years.

Mercury had previously responded to the competitive pressures by reducing credit
standards while accepting lower pricing on sales finance contracts and
introducing new products that ultimately proved to be unprofitable.  During late
1997 and in 1998, Mercury changed its lending practices by implementing tighter
credit standards and was successful in significantly reducing delinquencies and
charge-offs on new accounts, but at a significantly lower volume of
originations.  Delinquencies and charge-offs on the older accounts continue to
be at the higher historical levels.

These factors combined with a high level of employee turnover at the branch
level and interest expense at default rates caused the Company to incur an
operating loss for 1997.  Although operating results improved during 1998, the
Company would have incurred an operating loss for the year except that no
interest expense was recorded on the parent company debt since July 15, 1998,
the date the Voluntary Case was filed.

                              FINANCIAL CONDITION
                              -------------------

ASSETS AND FINANCE RECEIVABLES

During 1998, total assets of Mercury decreased 18.5% to $798.7 million at
December 31, 1998.  The decline of total assets can be attributed to a reduction
in finance receivables and the write-down of the credit card portfolio to its
net realizable value.  Total assets decreased 36.5% in 1997 to $979 million at
year end.  The decline of total assets in 1997 from 1996 was due to the sale of
Lyndon combined with a decrease in sales finance receivables.

Total finance receivables decreased 33.7% in 1998 compared to 1997 (from $971.4
million to $643.7 million) after a 16.3% decrease in 1997 over 1996 ($1,160.4
million).  Finance receivables decreased in 1998 as a result of a lower level of
new volume due to increased credit standards, and a fewer number of branches,
continuing the trend that commenced in 1997.  During 1997, disruption caused by
the accounting irregularities also contributed to the lower volume of
originations.  The number of branches open at December 31, 1998, 1997 and 1996
were 157, 218 and 287, respectively.  The Company's offices in Texas, Florida
and Illinois accounted for approximately 13%, 13% and 12% of gross sales and
direct finance receivables at December 31, 1998.

From late 1997 through 1998, the Company implemented a restructuring plan to
close approximately 110 branches and reduce branch personnel by 260.  The
Company recorded a provision in 1997 for the branch restructuring in the 

                                      -14-
<PAGE>
 
amount of $3.7 million of which $2.8 million has been utilized as of December
31, 1998. In addition, $0.3 million has been credited to income in 1998 as the
Company expects that the full amount of the original 1997 estimated provision
will not be required. This reduction in the provision is primarily due to a
change in estimates of employee severance and retention payments based on actual
experience during 1998. For additional information on branch closings, see
"Restructuring Charges."

The following tables summarize the composition of finance receivables at
December 31:

                                                    1998            1997
                                                             
Gross Finance Receivables:                                   
Direct                                          $ 117,136       $  149,624
Sales                                             676,132          954,319
                                                ---------       ----------
Total gross finance receivables                   793,268        1,103,943
Less:  Unearned finance charges                  (146,978)        (200,820)
       Unearned commissions and other              (2,585)          (3,242)
                                                ---------       ----------
Sales and direct finance receivables              643,705          899,881
Credit card (See below)                                 0           71,496
                                                ---------       ----------
Total finance receivables                       $ 643,705       $  971,377
                                                =========       ==========

The credit card portfolio had a gross receivables balance of approximately $50.6
million as of December 31, 1998.  In December 1998, the Board of Directors
approved the terms of a sale of the credit card portfolio.  The sale price was
below the carrying value of the portfolio and accordingly the Company recorded a
$15.8 million charge in 1998 to reduce the portfolio to its net realizable
value.  In addition, the portfolio has been classified as assets held for sale
at December 31, 1998.  The sale of the credit card portfolio was consummated on
March 2, 1999.

ALLOWANCE AND PROVISION FOR FINANCE CREDIT LOSSES

Mercury originates direct consumer loans, acquires individual sales finance
contracts from third party dealers and provided revolving credit to individuals
through a Visa affiliated program.  The Company maintains an allowance for
finance credit losses that are expected to be incurred on receivables that have
demonstrated a risk of loss based upon delinquency or bankruptcy status.

The sales finance contracts are generally acquired at a discount from the
principal amount.  This discount is normally referred to as a non-refundable
dealer reserve.  The amount of the discount is based upon the credit risk of the
borrower, the note rate of the contract and competitive factors.  The dealer
reserve is made available to absorb credit losses over the life of the pool of
receivables.  The dealer reserve cannot be utilized to offset provision for
finance credit losses immediately, but must be held to offset future losses.
Management believes this method provides for an appropriate matching of finance
charge income and provision for finance credit losses.

Each period, the provision for finance credit losses in the income statement
results from the combination of (a) an estimate by management of loan losses
that occurred during the current period and (b) the ongoing adjustment of prior
estimates of losses.  As the specific borrower and amount of a loan loss is
confirmed by gathering additional information, taking collateral in full or
partial settlement of the loan, bankruptcy of the borrower, etc., the loan is
charged off, reducing the allowance for finance credit losses.  If, subsequent
to a charge off, the Company is able to collect additional amounts from the
borrower or obtain control of collateral worth more than earlier estimated, a
recovery is recorded, decreasing current period charge offs.

In 1996, Mercury adopted a loss reserving methodology commonly referred to as
"static pooling."  The static pooling methodology provides that the Company
stratify the components of its sales finance receivable portfolio (i.e. dealer
reserve, principal loan balances and related chargeoffs) into separately
identified pools based upon the period the loans were acquired.  Mercury defines
a pool as loans acquired within a given month.  The application of the static
pooling methodology increased the 1996 provision for credit losses by $89
million.

Reserve requirements for sales finance, direct and credit card receivables are
calculated based on the estimated losses inherent in each category of
delinquency (i.e. 30, 60, 90 and 120 days past due).  These assumed losses are

                                      -15-
<PAGE>
 
utilized to determine the projected cash flows from each impaired category.  The
projected cash flow is then discounted at the loan's original yield to estimate
the net present value of the impaired loans.  A reserve is established in an
amount sufficient to reduce the book value of the impaired receivable to its net
present value.  Repossessed collateral is valued at an estimate of its fair
value, less selling costs.

The following is a summary of the activity in the allowance for finance credit
losses for the years ended December 31:

<TABLE>
<CAPTION>
                                                                     1998        1997       1996
<S>                                                                <C>        <C>         <C>
Balance at beginning of year                                       $102,204   $  97,762   $ 46,366
Provision charged to expense                                         56,790     106,374    215,171
Finance receivables charged-off, net of recoveries                  (99,409)   (101,932)   (89,326)
Transfer to nonrefundable dealer reserves                                 0           0    (74,449)
Transfer to credit card portfolio held for sale                      (6,100)          0          0
                                                                   --------   ---------   --------
Balance at end of year                                             $ 53,485   $ 102,204   $ 97,762
                                                                   ========   =========   ========
 
Allowance as a percent of total finance receivables outstanding        8.31%      10.52%      8.42%
                                                                   ========   =========   ========
</TABLE>

The decrease in the provision for finance credit losses in 1998 and 1997 is due
to an improvement in the delinquencies and charge-offs as a result of stricter
credit standards combined with an overall reduction in the finance receivable
balances.  In addition, the 1996 provision was increased by approximately $89
million as a result of the adoption of the static pooling methodology of
accounting for loss reserves.

NONREFUNDABLE DEALER RESERVES

Mercury acquires a majority of its sales finance contracts from dealers at a
discount.  Mercury negotiates the amount of the discount with the dealers based
upon various criteria, one of which is the credit risk associated with the sales
finance contracts being acquired.  The following table sets forth a
reconciliation of the changes in nonrefundable dealer reserves for the years
ended December 31:
<TABLE>
<CAPTION>
 
                                                             1998       1997        1996
<S>                                                        <C>        <C>        <C>
Balance at beginning of year                               $ 52,731   $ 89,378   $  61,961
Discounts acquired on new volume                             24,982     45,010      67,442
Losses absorbed                                             (40,893)   (81,657)   (114,474)
Transfer from the allowance for finance credit losses             0          0      74,449
                                                           --------   --------   ---------
Balance at end of year                                     $ 36,820   $ 52,731   $  89,378
                                                           ========   ========   =========

Reserve as a percent of gross sales finance receivables        5.45%      5.53%       7.71%
                                                               ====       ====        ====
</TABLE>

Under the static pooling methodology, the total balances of nonrefundable dealer
reserves are not available to offset current finance credit losses, but are
amortized and made available to absorb credit losses over the life of the
corresponding pool of receivables.  The decrease in the percentage of
nonrefundable dealer reserve is due to a lower percentage of dealer reserve
being obtained on 1998 and 1997 volume as a result of the improvement in the
quality of the new volume.

The discount acquired on new volume decreased in 1998 and 1997 primarily as a
result of lower volume levels.

INCOME TAX ACCOUNTS

At December 31, 1997, the Company had recorded an income tax receivable of $79.9
million.  This balance was comprised of three primary items:  (i) refund claim
for the amendment of 1995 and prior income tax returns for the accounting
irregularities, (ii) the carryback of the net operating loss for 1996 to prior
periods and (iii) an estimate of the carryback of the net operating loss for
1997 to prior periods.  During 1998, the Company received payments of
approximately $78 million.

                                      -16-
<PAGE>
 
A provision of the Taxpayer Relief Act of 1997, signed into law in August, 1997,
was to reduce the Net Operating Loss (NOL) carryback period from three years to
two years for tax years beginning after August 5, 1997.  For financial reporting
purposes, the change in tax law raises a question as to the future realizability
of the deferred tax asset that would be recorded in the financial statements as
of December 31, 1998 and 1997 because as of January 1, 1998, the reversal of the
temporary differences giving rise to the deferred taxes can no longer be carried
back to periods of taxable income.  Accordingly, a full valuation allowance on
deferred tax assets has been recorded at December 31, 1998 and 1997.

Mercury elected to be treated as a dealer in securities under Section 475 of the
Internal Revenue Code effective for the year ended December 31, 1996.  Pursuant
to this election, Mercury must annually recognize as taxable income or loss the
difference between the fair market value of its securities and the income tax
basis of the securities for the year ended December 31, 1996 and prospectively.
This election has no impact on the recognition of pre-tax income for financial
reporting purposes.

LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION.

THE FOLLOWING TABLE SHOWS THE LIABILITIES SUBJECT TO COMPROMISE UNDER
REORGANIZATION AS OF DECEMBER 31, 1998.  THESE LIABILITIES HAVE BEEN RECORDED AT
AMOUNTS THAT THE COURT WAS EXPECTED TO ALLOW AS CLAIMS RATHER THAN ESTIMATES OF
THE AMOUNTS FOR WHICH THE CLAIMS MAY BE SETTLED.  THERE WERE NO LIABILITIES
SUBJECT TO COMPROMISE UNDER REORGANIZATION AS OF DECEMBER 31, 1997.

<TABLE>
<CAPTION>
                                                                                     1998
<S>                                                                                <C>
Senior debt, commercial paper and notes                                            $339,340
Senior debt, term notes                                                             335,905
Subordinated debt                                                                    22,500
Dividends payable                                                                    12,937
Pre-petition accrued interest                                                         8,393
Restructuring fee                                                                       695
                                                                                   --------
   Total liabilities subject to compromise under reorganization                    $719,770
                                                                                   ========
</TABLE>

DEBT

As a result of net losses incurred, accounting irregularities, and related
matters, Mercury violated certain covenants permitting the holders of its Senior
Term Notes and Subordinated Debt to accelerate all such debt which, if
accelerated, would result in all of such debt being currently due and payable.
In addition, the Company was no longer permitted by the terms of certain debt
instruments to pay dividends.

The Company had a forbearance agreement with its lenders which, including
extensions, expired July 15, 1998.  In connection with the execution of an
extension to the previous forbearance agreement, the participating senior
lenders received a fee of 2.25% of the outstanding balance.  The fee,
aggregating $15.2 million was recorded as a non-operating expense in 1998.

Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%).  In addition, the agreements required the
periodic payment of excess cash to be applied as reduction of outstanding
principal.  Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998.  Subsequent to May 5, 1998, no payments of principal have been
made to creditors.

As described in Note 3 to the Consolidated Financial Statements, all of the
Company's debt is subject to compromise under the Plan of Reorganization.
Therefore, the entire amount of outstanding debt as of December 31, 1998 of
$697.7 million is identified as "Liabilities subject to compromise under
reorganization" in the Company's financial statements.

Pursuant to the Voluntary Case, no interest has been accrued or paid on the
Company's debt subsequent to July 15, 1998, the date the Voluntary Case was
filed.  This has resulted in the reduction of interest expense by approximately

                                      -17-
<PAGE>
 
$27 million from what the Company would have expected to incur had the Voluntary
Case not been filed (assuming default rates of interest).

The following table represents Mercury's debt instruments and the corresponding
stated rates on the debt as of December 31:

<TABLE>
<CAPTION>
                           1998                 1997                1996
                      ---------------     ---------------     -----------------
                      Balance   Rate      Balance   Rate       Balance    Rate
<S>                   <C>       <C>       <C>       <C>       <C>         <C>
Senior Debt:                                              
  Commercial paper                                        
    and notes         $339,340   5.7%     $416,731   5.7%     $  525,051   5.6%
  Term notes           335,905   7.0%      412,514   7.0%        488,625   7.0%
Subordinated debt       22,500  10.3%       22,500  10.3%         22,500  10.3%
                      --------  ----      --------  ----      ----------  ----
      Total           $697,745   6.5%     $851,745   6.5%     $1,036,176   6.4%
                      ========  ====      ========  ====      ==========  ====
</TABLE>

LITIGATION ACCRUAL

Based upon the confirmation of the Plan, which provides for the settlement of
all claims and lawsuits against the Company arising out of the financial
irregularities in exchange for payments in the aggregate of $18.950 million, the
Company recorded a liability for such amount at December 31, 1998. 

STOCKHOLDERS' EQUITY

Total stockholders' equity at December 31, 1998 was $29.1 million which compares
with $82.7 million at December 31, 1997.  During 1998, Mercury had a net loss of
$53.6 million.  The Company did not declare any dividends or repurchase any
shares of common stock during the year.  At December 31, 1998, Mercury's
stockholders' equity as a percent of total assets was 3.7% which compares with
8.4% at December 31, 1997.

Total stockholders' equity at December 31, 1997 was $82.7 million which compares
with $168.9 million at December 31, 1996.  During 1997, Mercury had a net loss
of $74.2 million, and declared, but did not pay, dividends of $12.9 million.  At
December 31, 1997, Mercury's stockholders' equity as a percent of total assets
was 8.4% which compares with 10.9% at December 31, 1996.

                             RESULTS OF OPERATIONS
                             ---------------------

NET LOSS

For the year ended December 31, 1998, Mercury reported a net loss of $53.6
million compared to net losses of $74.2 million and $29.0 million for 1997 and
1996, respectively.  Operating results improved in 1998 from 1997 and 1996 due
in part to a lack of interest expense being recorded since July 15, 1998, the
date the Voluntary Case was filed.  However, both 1998 and 1997 net results were
negatively impacted by a number of non-operating expenses aggregating $61.2
million and $52.2 million, respectively.

INTEREST INCOME AND INTEREST EXPENSE

The largest single component of Mercury's net loss is net interest income which
is the difference between interest income and interest expense before provision
for finance credit losses.  For the year ended December 31, 1998, net interest
income was $142.5 million, which compares with $149.1 million and $207.1 million
in 1997 and 1996, respectively.  For the year ended December 31, 1998, Mercury's
net interest margin, which is the ratio of net interest income divided by
average interest earning assets, was 15.85%.  This compares with a net interest
margin of 12.68% and 14.73% in 1997 and 1996, respectively.  The increase in net
interest margin in 1998 is due to the Voluntary Case which provided for no
interest to be paid or accrued by the Company after July 15, 1998.  The change
in the net interest margin in 1997 was primarily the result of the increase in
interest expense to default levels of interest expense beginning in February,
1997.  The interest income rate increased in 1998 and 1997 due to the sale of

                                      -18-
<PAGE>
 
Lyndon in 1997 which had a substantial amount of investments that earned a
relatively low rate of interest compared to the finance receivables.  The
following table summarizes net interest income and the net interest margin for
the three years ended December 31:

<TABLE> 
<CAPTION> 
                                                   1998          1997         1996
<S>                                            <C>          <C>           <C> 
Average interest earning assets                $  899,041   $  1,176,194  $ 1,405,916
Average interest bearing liabilities              739,645        963,431      984,904
                                               ----------   ------------  -----------
Net                                            $  159,396   $    212,763  $   421,012
                                                            
Interest income                                $  181,093   $    235,621  $   271,889
Interest expense                                   38,593         86,529       64,789
                                               ----------   ------------  -----------
Net interest income before provision for                    
  finance credit losses                        $  142,500   $    149,092  $   207,100
                                                            
Rate earned                                         20.14%         20.03%       19.34%
Rate paid                                            5.22%          8.98%        6.58%
                                                ----------   -----------  ----------
Net                                                 14.92%         11.05%       12.76%
                                                            
Net interest margin                                 15.85%         12.68%       14.73%
                                                =========    ===========  ===========
</TABLE>

OTHER OPERATING INCOME

In addition to finance charges and interest, Mercury derives premiums and
commission income from the sale of other credit related products.  These
products include the issuance of credit life, accident and health and other
credit insurance policies to borrowers of Mercury.

During 1996, Mercury earned insurance premiums on business Lyndon had
underwritten through outside distributors, business in a run-off mode from
subsidiaries of its prior owner, and through Mercury's branch offices.
Insurance premiums declined in 1998 and 1997 as a result of the sale of Lyndon
in June 1997.  However, Mercury continued to participate in the credit insurance
business through its wholly-owned subsidiary, MFN Insurance, which was formed in
1997.  Insurance commission, fees and other income declined during 1998 and 1997
corresponding to the decrease in volume and finance receivables outstanding.
The following table summarizes the amounts earned from these products for the
three years ended December 31:

<TABLE>
<CAPTION>
 
                                                       1998      1997      1996
<S>                                                  <C>       <C>       <C>
Insurance premiums                                   $ 4,027   $35,660   $ 83,277
Insurance commissions, fees and other                  9,164    11,420     18,708
                                                    --------   -------   --------
Total                                                $13,191   $47,080   $101,985
                                                    ========   =======   ========
 
Other operating income as a % of average interest
  earning assets                                        1.47%     4.00%      7.25%
                                                    ========   =======   ========
</TABLE>

                                       19
<PAGE>
 
OTHER OPERATING EXPENSES (EXCLUDING RESTRUCTURING EXPENSES)

In addition to interest expense and the provision for finance credit losses,
Mercury incurs other operating expenses in the conduct of its business.  During
1998, other operating expenses decreased 31.1% from 1997.  During 1997, other
operating expenses decreased 13.3% from 1996.  The 1998 and 1997 decrease as
compared to 1996 is the result of the sale of Lyndon as of June 3, 1997 and the
reduction in the number of operating branches.  The following table summarizes
the components of other operating expenses for the three years ended December
31:

<TABLE>
<CAPTION>
                                                                 1998      1997       1996
<S>                                                            <C>       <C>        <C>
Salaries and employee benefits                                 $49,142   $ 56,799   $ 54,942
Incurred insurance claims expense and other underwriting
  expense                                                        1,121     20,466     47,243
Other operating expenses (excluding restructuring expenses)     35,376     47,015     41,112
                                                               -------   --------   --------
Total                                                          $85,639   $124,280   $143,297
                                                               =======   ========   ========
 
Operating expenses excluding restructuring charges
  as a % of average interest earning assets                       9.53%     10.57%     10.19%
                                                               =======   ========   ========
</TABLE>

RESTRUCTURING CHARGES

During 1997 and 1998, the Company implemented a restructuring plan to close
approximately 110 branches and reduce branch personnel by 260.  The Company
recorded a provision in 1997 for the restructuring in the amount of $3.725
million ($0.02 per common share) of which $2.831 million has been utilized by
December 31, 1998.  In addition, $0.344 million has been credited in 1998 as the
Company expects that the full amount of the original 1997 estimated provision
will not be required.  This reduction in the provision is primarily due to
change in estimates of employee severance and retention payments based on actual
experience during 1998.  These charges and their utilization through December
31, 1998 and estimated utilization for 1999 are summarized in the following
table:

<TABLE>
<CAPTION>
                                                                                  Amounts Expected
                                        Amounts       Amounts         Amounts           to be
                                        Charged       Utilized       Utilized         Utilized
                                        In 1997       in 1997         in 1998          In 1999
<S>                                     <C>           <C>            <C>          <C>
Asset and leasehold write-offs           $1,200         $200          $1,079              $ 75
Lease buyouts and other expenses          1,025          101             799               100
Employee severance and retention          1,500            0             652               375
                                         ------         ----          ------              ----
  Total                                  $3,725         $301          $2,530              $550
                                         ======         ====          ======              ====
</TABLE>

The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action.  The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred.  Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.

The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease.  It
is the Company's policy to continue to charge depreciation, rental, and other
operating costs relating to excess space to ongoing operations while they remain
in business use.  Salaries and benefits are charged to operations while the
employee is actively employed.

Reserves for assets and leasehold improvements written-off are utilized at the
date of disposal or the final date of the lease.

                                       20
<PAGE>
 
OTHER NON-OPERATING EXPENSES

Other non-operating expenses are as follows:

<TABLE>
<CAPTION>
                                                     1998               1997
<S>                                                <C>                <C>   
Corporate counsel                                  $ 2,056            $ 2,836
Investment banking                                   2,045              2,657
Creditor attorneys and advisors                      2,235              2,584
Independent accountants                              1,059              2,469
Management consultants                               2,336              2,399
Special investigation                                    0              1,919
Bank line of credit fees                               121              1,650
Bank of Boston settlement                                0              1,600
Board of Directors representation                    1,312              1,132
Forbearance fee                                     15,176                  0
Other                                                   86              1,437
                                                   -------            -------
  Total                                            $26,426            $20,683
                                                   =======            =======
</TABLE>
                                        
INCOME TAXES

The effective rate of tax (provision)/benefit applicable to the net loss in
1998, 1997 and 1996 was (12.6%), 18.0% and 41.3%, respectively.

The negative effective tax rate in 1998 is primarily due to a valuation
adjustment to finance receivables and certain expenses incurred in connection
with the restructuring which were not deductible for tax purposes.  The lower
effective tax rate in 1997 is primarily due to the loss on the sale of Lyndon
which was not deductible for tax purposes.

CREDIT LOSSES

Direct finance receivables on which no payment is received within 149 days, on a
recency basis, are charged off.  Sales finance receivables which are
contractually delinquent 150 days are charged off monthly before they become 180
days delinquent.  Accounts which are deemed uncollectible prior to the maximum
charge-off period are charged off immediately.  Management may authorize an
extension if collection appears imminent during the next calendar month.

                                       21
<PAGE>
 
The following table sets forth information relating to charge-offs, the
allowance for finance credit losses and dealer reserves:

<TABLE>
<CAPTION>
                                                           1998      1997       1996
<S>                                                      <C>       <C>        <C>
Loss provision charged to income                         $56,790   $106,374   $215,171
Net charge-offs against allowance                         99,409    101,932     89,326
Net charge-offs against nonrefundable dealer reserves     40,893     81,657    114,474
Allowance for finance credit losses at end of period      53,485    102,204     97,762
Dealer reserves at end of period                          36,820     52,731     89,378
 
RATIOS
 
                                                            1998       1997       1996
 
Net charge-offs against allowance to average total
  finance receivables                                      12.30%      9.44%      7.54%
Net charge-offs against nonrefundable dealer reserves
  to average total finance receivables                      5.06%      7.56%      9.66%
Allowance for finance credit losses to total gross
  finance receivables at end of period                      6.74%      9.26%      7.45%
Dealer reserves to gross sales finance receivables
  at end of period                                          5.45%      5.53%      7.71%
</TABLE>

DELINQUENCIES AND REPOSSESSIONS

The Company generally suspends the accrual of interest when an account becomes
60 days or more contractually delinquent and no full contractual payment is
received in the month the account obtains such status or if the borrower has
filed for bankruptcy protection.  The following table sets forth certain
information with respect to the contractually delinquent receivables and
repossessed assets as of December 31 (excluding activity relating to the credit
card portfolio):

<TABLE>
<CAPTION>
                                                         1998      1997
                                                       --------  --------
<S>                                                    <C>       <C>
Delinquent gross receivables                           $19,938   $34,430
Bankrupt accounts                                       23,607    37,037
Repossessed assets                                       3,836     5,167
                                                       -------   -------
Total                                                  $47,381   $76,634
                                                       =======   =======
 
Delinquent gross receivables and bankrupt accounts
  to gross finance receivables                            5.49%     6.47%
                                                       =======   =======
 
Delinquent gross receivables, bankrupt accounts and
  repossessed assets to gross finance
  receivables plus repossessed assets                     5.94%     6.91%
                                                       =======   =======
</TABLE>


Loan collateral is repossessed when debtors are 120 days late or more on
payments.  Automobiles are generally sold within 60 days at auction.

CREDIT CARD PROGRAM

The Company had a portfolio of approximately $50.6 million and $71.5 million of
receivables at December 31, 1998 and 1997, respectively, relating to a credit
card program that had solicitations in 1995 and 1996.  This program generated
losses prior to the allocation of interest expense of $3.9 million in 1998, $5.0
million in 1997 and $1.4 million in 1996.

                                       22
<PAGE>
 
During 1998, the Company negotiated a sale of the credit card portfolio for
$27.9 million, net of selling expenses.  As a result, the Company reclassified
these assets at December 31, 1998 as "credit card portfolio held for sale" and
recorded a $15.8 million loss on the sale in 1998.  The sale of the credit card
portfolio was consummated on March 2, 1999.

DISPOSITION OF LYNDON

On March 28, 1997, Mercury executed a Stock Purchase Agreement for the sale of
Lyndon in the amount of approximately $92 million.  The sale, which closed on
June 3, 1997, resulted in a loss to Mercury of approximately $29.5 million net
of earnings through the date of sale.  This loss was reflected on Mercury's 1997
first quarter consolidated statement of income.

Management has determined that it is in the best interest of the Company to
remain in the insurance business and formed a new captive insurance subsidiary
during 1997, MFN Insurance Company.  As a result, the sale of Lyndon is not
considered the discontinuation of a business.  The loss associated with the sale
of Lyndon was not tax deductible to the Company as a loss on the sale of a
consolidated subsidiary is, under certain circumstances, not deductible for tax
purposes.

                       LIQUIDITY AND FINANCIAL RESOURCES
                       ---------------------------------

As a result of net losses incurred, accounting irregularities, and related
matters, Mercury violated certain covenants permitting the holders of its Senior
Term Notes and Subordinated Debt to accelerate all such debt which, if
accelerated, would result in all of such debt being currently due and payable.
In addition, the Company was no longer permitted by the terms of certain debt
instruments to pay dividends.

The Company had a forbearance agreement beginning on July 12, 1997 with its
lenders which, including extensions (the "Forbearance Agreements"), expired July
15, 1998.  In connection with the execution in 1998 of an extension to a
previous forbearance agreement, the participating senior lenders received a fee
of 2.25% of the outstanding balance.  The fee, aggregating $15.2 million, is
included in non-operating expenses.

Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%).  In addition, the agreements required the
periodic payment of excess cash to be applied as reduction of outstanding
principal.  Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998.  Subsequent to May 5, 1998, no payments of principal have been
made to creditors.

Since February, 1997, the Company has funded its operations, the acquisition of
new finance receivables and periodic payments to creditors from the proceeds
from previous existing finance receivables and the sale of Lyndon.  During the
two years ended December 31, 1998, finance receivables, net of unearned
interest, declined approximately $466 million.  Prior to the financial
irregularities disclosed in January, 1997, Mercury funded its operations through
the issuance of a combination of short term notes and commercial paper.

As described in Note 3 to the Consolidated Financial Statement, all of the
Company's debt is subject to compromise under the Plan of Reorganization.
Therefore, the entire amount of outstanding debt as of December 31, 1998 of
$697.8 million is included in "Liabilities subject to compromise under
reorganization" in the Company's financial statements.

                                       23
<PAGE>
 
Pursuant to the Voluntary Case, no interest has been paid on the Company's debt
subsequent to July 15, 1998, the date the Voluntary Case was filed.  Under SOP
90-7, post-petition interest expense for 1998 has not been recorded at the
amount that will be paid on the Effective Date that is attributable to the
period ending December 31, 1998 as provided by the Plan. The following table
represents Mercury's debt instruments and the corresponding stated rates at the
end of the periods indicated (dollars in thousands):

<TABLE>
<CAPTION>
                                                      Dec. 31, 1998                Dec. 31, 1997                     
                                                      -------------                -------------                      
                                                   Balance        Rate           Balance       Rate    
<S>                                                <C>           <C>            <C>            <C> 
Senior Debt:
   Commercial paper and short-term loans           $339,340       5.7%          $416,731       5.7%                 
   Term notes                                       335,905       7.0%           412,514       7.0%                 
Subordinated debt                                    22,500      10.3%            22,500      10.3%                 
                                                   --------      ----           --------      ----                  
         Total                                     $697,745       6.5%          $851,745       6.5%                 
                                                   ========      ====           ========      ====                  
</TABLE>

                             YEAR 2000 COMPLIANCE
                             --------------------

The Company has undertaken a review of its exposure to computer malfunctions
relating to the year 2000 ("Y2K").  The Y2K issue exists because many computer
systems and applications currently use two digit date fields to designate a
year.  As the century date change occurs, date sensitive systems may recognize
the year 2000 as 1900 or not at all.  This inability to recognize or properly
treat the Y2K issue may cause systems to process critical financial and
operational information incorrectly.

The Company has several systems that it considers critical to operations
including the branch loan system, the operating systems, and the financial
accounting systems.  In addition, Mercury has other less significant systems in
use by the human resources and legal departments.  Mercury has evaluated all of
these systems to determine the specific risks related to the year 2000 and has
implemented changes to all of these systems to address any risks.  As a result
of these efforts, all of the Company's systems are currently Y2K compliant or
are in the process of being tested to ensure that the Y2K issue will not affect
their operation.  Those systems which have not yet been fully tested will be
completed in the first quarter of 1999 and are anticipated to be fully Y2K
compliant.  Mercury also utilizes computer software maintained by external
vendors and has received written assurances from these vendors that Y2K
compliant upgrades are or will be available to the Company in sufficient time
for an orderly transition.

To date, the costs associated with becoming Y2K compliant have been minimal
(i.e., less than $50,000).  These costs have been expensed as incurred, while
the cost of new software is capitalized and amortized over the software's useful
life.  The overall costs of any additional upgrades and changes necessary for
compliance with Y2K is not expected to be material.

RECENT ACCOUNTING PRONOUNCEMENTS

During 1998, the FASB issued SFAS 133 and 134, "Accounting for Derivative
Instruments and Hedging Activities" and "Accounting for Mortgage-Backed
Derivative Securities Retained After the Securitization of Mortgage Loans Held
For Sale by a Mortgage Banking Enterprise", effective for fiscal years beginning
after June 15, 1999 and December 15, 1998, respectively.  Management does not
expect these statements to have a material impact on either the financial
position, results of operations or financial statement disclosures of the
Company.

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None.

                                       24
<PAGE>
 
ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders
 of Mercury Finance Company:

We have audited the accompanying consolidated balance sheets of Mercury Finance
Company and subsidiaries (the "Company") as of December 31, 1998 and 1997, and
the related consolidated statements of income and comprehensive income, changes
in stockholders' equity and cash flows for the each of the three years in the
period ended December 31, 1998.  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, the financial statements referred to above present fairly, in
all material respects, the financial position of Mercury Finance Company and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern.  As discussed in Note 2 to the financial
statements, the Company has incurred losses in 1996 through 1998 and is
continuing to incur losses in 1999.  Furthermore, as described in Note 1, on
July 15, 1998, the Company filed a voluntary petition in the United States
Bankruptcy Court for the Northern District of Illinois for relief under Chapter
11 of Title 11 of the United States Code.  Under the Second Amended Plan of
Reorganization (the "Plan"), which was confirmed by order of the Court on March
10, 1999, a portion of the outstanding debt will be converted to equity, the
remaining debt will be restructured and the litigation pending related to the
financial irregularities will be settled.  Upon the effective date of the Plan,
the Company will adopt fresh-start accounting and continuation of the business
thereafter is dependent on the Company's ability to achieve sufficient cash flow
to meet its restructured debt obligations.  These matters raise substantial
doubt about the Company's ability to continue as a going concern.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

                                               /s/ Arthur Andersen LLP


Chicago, Illinois
March 10, 1999

                                       25
<PAGE>
 
                            MERCURY FINANCE COMPANY
                            (DEBTOR-IN-POSSESSION)
                          CONSOLIDATED BALANCE SHEETS
                               AS OF DECEMBER 31

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                    1998                1997
ASSETS
<S>                                                                               <C>                <C>
  Cash and cash equivalents                                                       $186,350           $  53,896
  Finance receivables:                                                             643,705             971,377
    Less allowance for finance credit losses                                       (53,485)           (102,204)
    Less nonrefundable dealer reserves                                             (36,820)            (52,731)
                                                                                  --------           ---------
    FINANCE RECEIVABLES, NET                                                       553,400             816,442
 
  Income taxes receivable                                                            8,599              79,941
  Premises and equipment (at cost, less accumulated
    depreciation of $9,836 and $10,750)                                              3,709               5,899
  Goodwill, net of amortization                                                     12,745              13,604
  Credit card portfolio held for sale, at net realizable value                      27,894                   0
  Other assets (including repossessions)                                             5,986               9,622
                                                                                  --------           ---------
    TOTAL ASSETS                                                                  $798,683           $ 979,404
                                                                                  ========           =========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
LIABILITIES
  Liabilities not subject to compromise under reorganization:
       Income taxes currently payable                                             $ 12,000           $       0
       Other liabilities not subject to compromise                                  18,833                   0
                                                                                  --------           ---------
             Total liabilities not subject to compromise                            30,833                   0
                                                                                  --------           ---------
  Liabilities subject to compromise under reorganization (Note 3)                  719,770                   0
  Senior debt, commercial paper and notes                                                0             416,731
  Senior debt, term notes                                                                0             412,514
  Subordinated debt                                                                      0              22,500
  Accounts payable and other liabilities                                                 0              44,959
  Litigation accrual (Note 13)                                                      18,950                   0
                                                                                  --------           ---------
    TOTAL LIABILITIES                                                              769,553             896,704
                                                                                  --------           ---------
 
STOCKHOLDERS' EQUITY
  Common stock - $1.00 par value per share:
    300,000,000 shares authorized
    177,900,671 shares outstanding                                                 177,901             177,901
  Paid in capital                                                                    8,244               8,244
  Accumulated deficit                                                             (103,351)            (49,781)
  Treasury stock - 5,402,957 shares, at cost                                       (53,664)            (53,664)
                                                                                  --------           ---------
    TOTAL STOCKHOLDERS' EQUITY                                                      29,130              82,700
                                                                                  --------           ---------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $798,683           $ 979,404
                                                                                  ========           =========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       26
<PAGE>
 
                            MERCURY FINANCE COMPANY
                            (DEBTOR-IN-POSSESSION)
          CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                        FOR THE YEARS ENDED DECEMBER 31

(In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                                            1998                1997                1996
INTEREST INCOME
<S>                                                                       <C>                 <C>                 <C>
  Finance charges and loan fees                                           $178,897            $228,028            $258,602
  Investment income                                                          2,196               7,593              13,287
                                                                          --------            --------            --------
    Total finance charges, loan fees and investment income                 181,093             235,621             271,889
  Interest expense (See Note 6)                                             38,593              86,529              64,789
                                                                          --------            --------            --------
     Net interest income before provision for finance credit               142,500             149,092             207,100
      losses
  Provision for finance credit losses                                       56,790             106,374             215,171
                                                                          --------            --------            --------
    NET INTEREST INCOME (LOSS) AFTER
      PROVISION FOR FINANCE CREDIT LOSSES                                   85,710              42,718              (8,071)
                                                                          --------            --------            --------
 
OTHER OPERATING INCOME
  Insurance premiums                                                         4,027              35,660              83,277
  Insurance commissions, fees and other                                      9,164              11,420              18,708
                                                                          --------            --------            --------
    TOTAL OTHER OPERATING INCOME                                            13,191              47,080             101,985
                                                                          --------            --------            --------
 
OTHER OPERATING EXPENSES
  Salaries and employee benefits                                            49,142              56,799              54,942
  Occupancy expense                                                          4,592               5,897               5,923
  Equipment expense                                                          3,291               3,870               3,158
  Data processing expense                                                    1,898               2,059               2,366
  Incurred insurance claims and other underwriting expense                   1,121              20,466              47,243
  Restructuring charges                                                       (344)              3,725                   0
  Reorganization expenses, net                                               3,259                   0                   0
  Other operating expenses                                                  22,336              35,189              29,665
                                                                          --------            --------            --------
    TOTAL OTHER OPERATING EXPENSES                                          85,295             128,005             143,297
                                                                          --------            --------            --------
 
OPERATING INCOME/(LOSS)                                                     13,606             (38,207)            (49,383)
 
NON-OPERATING EXPENSES
  Loss on sale of Lyndon                                                         0             (29,528)                  0
  Loss on credit card portfolio held for sale                              (15,800)                  0                   0
  Income from Lyndon due to buyer                                                0              (2,025)                  0
  Provision for litigation                                                 (18,950)                  0                   0
  Other non-operating expenses, net                                        (26,426)            (20,683)                  0
                                                                          --------            --------            --------
    Total non-operating expenses                                           (61,176)            (52,236)                  0
                                                                          --------            --------            --------
 
LOSS BEFORE INCOME TAXES                                                   (47,570)            (90,443)            (49,383)
  Provision/(benefit) for income taxes                                       6,000             (16,250)            (20,415)
                                                                          --------            --------            --------
 
NET LOSS ATTRIBUTABLE TO COMMON SHARES                                    $(53,570)           $(74,193)           $(28,968)
 
OTHER COMPREHENSIVE LOSS
  Unrealized depreciation on available for sale securities                       0                (942)             (1,027)
                                                                          --------            --------            --------
 
COMPREHENSIVE LOSS                                                        $(53,570)           $(75,135)           $(29,995)
                                                                          ========            ========            ========
 
Weighted average common shares outstanding:
  Basic                                                                    172,498             172,489             172,768
  Diluted                                                                  172,498             172,489             172,768
 
Per share net loss attributable to common shares:
  Basic                                                                   $  (0.31)           $  (0.43)           $  (0.17)
  Diluted                                                                 $  (0.31)           $  (0.43)           $  (0.17)
 
Dividends per share declared                                              $    .00            $   .075            $    .30
                                                                          ========            ========            ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
 
                            MERCURY FINANCE COMPANY
                            (DEBTOR-IN-POSSESSION)
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands)

<TABLE>
<CAPTION>
                                                              Retained
                                         Common    Paid in   Earnings/    Unrealized     Treasury
                                          Stock    Capital   (Deficit)   Appreciation     Stock       Total
<S>                                      <C>       <C>      <C>          <C>             <C>         <C>
Balance at December 31, 1995             $176,478   $   39   $ 118,138        $ 1,969    $(37,137)   $259,487
  1996 net loss                                                (28,968)                               (28,968)
  Stock options exercised                   1,241    6,500                                             7,741
  Dividends declared ($.30 per share)                          (51,821)                               (51,821)
  Unrealized depreciation on
    available-for-sale securities,
    net of tax                                                                (1,027)                 (1,027)
  Treasury stock acquired                                                                (16,527)    (16,527)
                                         --------   ------   ---------        -------   ---------   ---------
Balance at December 31, 1996              177,719    6,539      37,349            942     (53,664)    168,885
  1997 net loss                                                (74,193)                               (74,193)
  Stock options exercised                     182    1,705                                             1,887
  Dividends declared ($0.075 per
    share) (Note 8)                                            (12,937)                               (12,937)
  Unrealized depreciation on or sale
   of
    available-for-sale securities,
    net of tax                                                                  (942)                   (942)
                                         --------   ------   ---------        -------   ---------    --------
 
Balance at December 31, 1997              177,901    8,244     (49,781)             0     (53,664)     82,700
  1998 net loss                                                (53,570)                               (53,570)
                                         --------   ------   ---------        -------   ---------    --------
Balance at December 31, 1998             $177,901   $8,244   $(103,351)       $     0    $(53,664)   $ 29,130
                                         ========   ======   =========        =======   =========    ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       28
<PAGE>
  
                            MERCURY FINANCE COMPANY
                            (DEBTOR-IN-POSSESSION)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31

(In thousands)
<TABLE>
<CAPTION>
                                                                              1998              1997           1996
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                        <C>               <C>             <C>
   Net loss                                                                $ (53,570)        $ (74,193)      $ (28,968)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
      Loss on credit card portfolio held for sale                             15,800                 0               0
      Provision for litigation settlement                                     18,950                 0               0
      Loss on sale of Lyndon                                                       0            29,528               0
      Provision for finance credit losses                                     56,790           106,374         215,171
      Provision (benefit) for deferred income taxes                                0            38,964         (11,432)
      Depreciation and amortization                                            2,537             2,842           5,207
      Gain on sale of investment securities                                        0                 0            (769)
      Net increase in reinsurance receivable                                       0            (6,287)         (3,496)
      Net (increase)/decrease in deferred acquisition costs and
        Present value of future profits                                            0            15,473         (39,567)
      Net (increase)/decrease in taxes receivable                             71,342           (26,177)        (53,764)
      Net decrease in other assets                                             3,636            29,412          15,739
      Net increase/(decrease) in reinsurance payable                               0            12,582         (87,637)
      Net increase/(decrease) unearned premium and claim reserves                  0           (12,388)         43,812
      Net increase/(decrease) in taxes payable                                12,000                 0          (9,261)
      Net decrease in other liabilities                                       (2,199)          (45,526)         (1,920)
                                                                           ---------         ---------       ---------
        Net cash provided by operating activities                            125,286            70,604          43,115
                                                                           ---------         ---------       ---------
 
CASH FLOWS FROM INVESTING ACTIVITIES
      Principal collected on finance receivables                             589,034           772,650         860,190
      Principal originated or acquired on finance receivables               (427,299)         (722,183)       (959,195)
      Purchases of short term and available for sale investment                    0           (44,169)        (83,816)
       securities
      Purchases of held to maturity investment securities                          0            (2,552)         (8,480)
      Proceeds from sales and maturities of short term and
        available for sale investment securities                                   0            46,786         104,774
      Proceeds from maturities of held to maturity investment                      0             6,476          13,393
       securities
      Net proceeds from the sale of Lyndon, net of cash sold                       0            88,884               0
      Net purchase of premises and equipment                                    (567)             (616)         (2,254)
                                                                           ---------         ---------       ---------
        Net cash provided by/(used in) investing activities                  161,168           145,276         (75,388)
                                                                           ---------         ---------       ---------
 
CASH FLOWS FROM FINANCING ACTIVITIES
      Net borrowings/(repayments) of commercial paper and notes              (77,391)         (108,320)         35,061
      Borrowings of senior debt, term notes                                        0                 0          90,000
      Repayments of senior debt, term notes                                  (76,609)          (76,111)        (40,125)
      Repayments of subordinated notes                                             0                 0          (7,000)
      Stock options exercised                                                      0             1,490           7,741
      Cash dividends paid                                                          0                 0         (38,887)
      Treasury stock acquired                                                      0                 0         (16,527)
                                                                           ---------         ---------       ---------
        Net cash provided by/(used in) financing activities                 (154,000)         (182,941)         30,263
                                                                           ---------         ---------       ---------
        Net increase/(decrease) in cash and cash equivalents                 132,454            32,939          (2,010)
 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                               53,896            20,957          22,967
                                                                           ---------         ---------       ---------
 CASH AND CASH EQUIVALENTS AT END OF YEAR                                  $ 186,350         $  53,896       $  20,957
                                                                           =========         =========       =========
 
 Supplemental Disclosures
   Income taxes paid to federal and state governments                      $   1,563         $   5,138       $  40,092
   Interest paid to creditors                                              $  36,874         $  84,118       $  62,079
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       29
<PAGE>
  
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       December 31, 1998, 1997 and 1996
          (dollars in tables in thousands, except per share amounts)

1)   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Mercury Finance Company ("Mercury" or the "Company") is a consumer finance
company doing business in 27 states through its operating subsidiaries (the
"consumer finance subsidiaries").  The Company also offered certain insurance
services through its former subsidiary, Lyndon Property Insurance Company and
subsidiaries ("Lyndon") and now offers such services through MFN Insurance
Company ("MFN Insurance"), a subsidiary.  The Company's borrowers generally
would not be expected to qualify for traditional financing, such as that
provided by commercial banks or automobile manufacturers' captive finance
companies.

BASIS OF PRESENTATION

The accounting and reporting policies of Mercury conform to generally accepted
accounting principles for the finance and insurance industries.  The
consolidated financial statements include the accounts of the Company, the
consumer finance subsidiaries, Lyndon and MFN Insurance.  All significant
intercompany accounts and transactions have been eliminated.  Certain amounts
from prior years have been reclassified to conform to the 1998 presentation.  In
addition, see Note 2 for information regarding the Company's voluntary petition
(the "Voluntary Case") in the United States Bankruptcy Court for the Northern
District of Illinois (the "Court") for relief under Chapter 11 of Title 11 of
the United States Code (the "Code").  The Voluntary Case was filed with the
Court by the Company on July 15, 1998.  The Company's Second Amended Plan of
Reorganization (the "Plan" or "Plan of Reorganization") was confirmed by order
of the Court on March 10, 1999.  The effective date of the Plan is March 23,
1999 (the "Effective Date").

Since the date of the filing of the Voluntary Case, the Company has been
operating as a debtor-in-possession in accordance with the Code.  As a debtor-
in-possession, the Company is authorized to operate its business, but may not
engage in transactions outside the normal course of business without approval,
after notice and hearing, of the Court.

The Company's financial statements as of December 31, 1998 have been presented
in conformity with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position 90-7 "Financial Reporting By Entities In
Reorganization Under The Bankruptcy Code" ("SOP 90-7").  Accordingly, during the
Voluntary Case, all pre-petition liabilities of the Company that are subject to
compromise, as defined by Note 3, are listed in the Company's consolidated
balance sheet as "Liabilities subject to compromise under reorganization".
These liabilities are recorded at amounts expected to be allowed as claims by
the Court rather than estimates of amounts for which the claims may be settled
as a result of approval of the Plan of Reorganization by the Court.  All
liabilities incurred since the filing of the petition, as well as pre-petition
liabilities not subject to compromise according to the Plan are listed on the
balance sheet as "Liabilities not subject to compromise under reorganization".
In addition, as required by SOP 90-7, all income and expenses associated with
the Voluntary Case are listed as reorganization expenses in the Company's
statement of income and comprehensive income for the year ended December 31,
1998.  See Note 7 for more information and description of these amounts.

The Company will adopt, as of the Effective Date of the Plan, "fresh start"
reporting pursuant to SOP 90-7.  Under fresh start reporting, the reorganization
fair value of the Company is allocated to the entity's assets, the Company's
accumulated deficit is eliminated, and the equity in the new Company is issued
according to the Plan.  As a result of adopting fresh start reporting and
emerging from Chapter 11 status, the Company's financial statements will not be
comparable with those prepared before the Plan is confirmed, including the
historical financial statements included in this annual report.

As prescribed by SOP 90-7, prior period's balances have not been reclassified to
conform with the current period's balances.  The most significant difference
between prior period and current presentations is the reclassification of all of
the Company's outstanding debt to "Liabilities subject to compromise under
reorganization".  See Note 3 for a detailed description of liabilities subject
to compromise at December 31, 1998.

                                       30
<PAGE>
  
REVENUE RECOGNITION - CONSUMER FINANCE SUBSIDIARIES

Finance charges on precomputed loans and sales finance contracts (collectively
referred to as "precompute accounts") are credited to unearned finance charges
at the time the loans and sales finance contracts are made or acquired.
Interest income is calculated using the effective interest method to produce
constant rates of interest (yields).  If a precompute account becomes greater
than 60 days contractually delinquent and no full contractual payment is
received in the month the account attains such delinquency status, the accrual
of income is suspended until one or more full contractual monthly payments are
received.  Interest on interest bearing loans and sales finance contracts is
calculated on a 360-day year basis and recorded on the accrual basis; accrual is
suspended when an account is 60 or more days contractually delinquent.  Late
charges and deferment charges on all contracts are taken into income as
collected.  Fees and other income are derived from the sale of other products
and services.

INSURANCE OPERATIONS

In conjunction with their lending practices, the consumer finance subsidiaries,
as agents for Lyndon (through the date of its sale) and unaffiliated insurers,
offer credit life, accident and health and property insurance to borrowers who
obtain direct consumer loans directly from the consumer finance subsidiaries,
and to borrowers under sales finance contracts and financing contracts acquired
from merchants and automobile dealers.  Commissions on credit life, accident and
health and property insurance from unaffiliated insurers are earned by Mercury
over the average terms of the related policies on the sum-of-the-months digits
method.

Lyndon was engaged in the business of reinsuring and direct writing of credit
life, accident and health and various other property and casualty insurance
policies issued to borrowers under direct consumer loan and sales finance
contracts originated by Mercury and other companies.  The policies insure the
holder of a sales finance contract or other debt instrument for the outstanding
balance payable in the event of death or disability of the debtor.  Insurance
premiums are earned over the life of the contracts principally using pro-rata
and sum-of-the-months digits methods or in relation to anticipated benefits to
the policy holders.

Lyndon had established policy liabilities and claim reserves.  The claim
reserves were based upon accumulated estimates of claims reported, plus
estimates of incurred but unreported claims.

Lyndon was sold during the second quarter of 1997.  Also during the second
quarter of 1997, the Company formed a captive insurance company, MFN Insurance
Company ("MFN"), to participate in the Company program which provides insurance
to Mercury's customers who do not provide proof of coverage on automobiles that
are collateral for the outstanding loans.  MFN provides aggregate coverage for
incurred losses in excess of targeted loss ratios through a reinsurance
agreement with the primary carrier.

FINANCE RECEIVABLES, ALLOWANCE FOR FINANCE CREDIT LOSSES AND NONREFUNDABLE
DEALER RESERVES

Mercury originates direct consumer loans and acquires individual sales finance
contracts from third party dealers.  Finance receivables consist of
contractually scheduled payments from sales finance contracts net of unearned
finance charges, direct finance receivables and credit card receivables.  The
Company's borrowers typically have limited access to traditional sources of
consumer credit due to past credit history or insufficient cash to make the
required down payment on an automobile.  As a result, receivables originated or
acquired by the Company are generally considered to have a higher risk of
default and loss than those of other consumer financings.

Statement of Financial Accounting Standards ("SFAS") 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," requires that loan origination and commitment
fees and certain direct loan origination costs be deferred and amortized as an
adjustment to the related loan's yield.  Mercury has not adopted the provisions
of this statement because adoption would not have a material effect on the
Company's reported results of operations or financial condition.

Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over the
original term of the related precompute account.

                                       31
<PAGE>
  
Mercury acquires a majority of its sales finance contracts from dealers at a
discount.  The level of discount is based on, among other things, the credit
risk of the borrower.  The discount, which is the difference between the amount
financed and the acquisition cost, represents nonrefundable dealer reserves
which are available to absorb future credit losses over the life of the acquired
loan.  Historical loss experience on the Company's sales finance receivables has
shown that the acquisition discount recorded as nonrefundable dealer reserves is
not adequate to cover potential losses over the life of the loans. In 1996,
Mercury adopted a reserving methodology commonly referred to as "static
pooling".  The method previously used by the Company analyzed reserve adequacy
on a total portfolio basis. The static pooling reserving methodology allows
Mercury to stratify components of its sales finance receivables portfolio (i.e.,
nonrefundable dealer reserves, principal loan balances, and related loan charge-
offs) into separately identified and chronologically ordered monthly pools.  A
portion of the dealer reserve is made available to cover estimated credit losses
for each identified monthly pool based on a pro rata calculation over the term
of each specific account.

Each period, the provision for finance credit losses in the income statement
results from the combination of (a) an estimate by management of loan losses
that occurred during the current period and (b) the ongoing adjustment of prior
estimates of losses occurring in prior periods.

The allowance for finance credit losses is maintained by direct charges to
operations in amounts that are intended to provide adequate reserves on the
Company's finance receivables portfolio to absorb possible credit losses
incurred on finance receivables that are considered to be impaired (in excess of
the available nonrefundable dealer reserves for sales finance accounts).
Management evaluates the allowance requirements by examining current
delinquencies, the characteristics of the accounts, the value of the underlying
collateral, the availability of the nonrefundable dealer reserves to absorb
credit losses on impaired loans and general economic conditions and trends.

As the specific borrower and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of the
loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the
allowance for finance credit losses.  If, subsequent to a chargeoff, the Company
is able to collect additional amounts from the borrower or obtain control of
collateral worth more than earlier estimated, a recovery is recorded, increasing
the allowance for finance credit losses.

The Company applies SFAS 114 and 118, which address the accounting by creditors
for impairment of a loan and related income recognition and disclosures.  In
accordance with SFAS 114, the Company's approach for estimating losses results
in a measure of impairment based on discounting expected future cash flows
(including the anticipated proceeds from repossessed collateral) at the loan's
original yield.  If the measure of the impaired receivable is less than the net
recorded investment in the receivable, the Company recognizes an impairment by
creating an additional allowance for finance credit losses in excess of the
nonrefundable dealer reserves available to absorb losses, with a corresponding
charge to provision for finance credit losses.  Generally, the Company considers
receivables more than 60 days contractually delinquent to be impaired.

Direct installment loans on which no payment is received within 149 days, on a
recency basis, are charged off.  Sales finance accounts (net of unearned finance
charges) which are contractually delinquent 150 days are charged off monthly
before they become 180 days delinquent.  Accounts which are deemed uncollectible
prior to the maximum charge-off period are charged off immediately.  Management
may authorize a temporary extension beyond the maximum charge off policy if
collection appears imminent during the next calendar month.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes readily marketable securities with original
maturities of three months or less.

PREMISES AND EQUIPMENT

Premises and equipment are carried at cost, less accumulated depreciation, and
are depreciated on a straight-line basis over their estimated useful lives.

                                       32
<PAGE>
  
REINSURANCE ACTIVITIES

In the normal course of business, Lyndon assumed and ceded reinsurance on both a
pro rata and excess basis.  Reinsurance provides greater diversification of
business and limits the maximum net loss potential arising from large claims.
Although the ceding of reinsurance does not discharge an insurer from its
primary legal liability to a policy holder, the reinsuring company assumes the
related insurance risk.  Lyndon monitored the financial condition of its
reinsurers on a periodic basis.  This risk was assumed by the buyer after the
date of sale.

INCOME TAXES

The Company and its subsidiaries file a consolidated federal income tax return
and individual state tax returns in most states.

Mercury recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

The Company evaluates deferred tax assets to determine whether they are likely
to be realized.  In making its determination, management considers the possible
recovery of taxes already paid but does not assume the generation of additional
taxable income in the future.  See Note 15 for a discussion of the valuation
reserve at December 31, 1998 and 1997.

IMPAIRMENT OF LONG-LIVED ASSETS

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Assets to be Disposed of," requires that
long-lived assets and certain identifiable intangibles that are used in
operations be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets might not be
recoverable.  For additional information on asset dispositions, see Note 4.

At each balance sheet date, the Company evaluates the realizability of goodwill
(and other intangibles) based on expectations of non-discounted cash flows and
operating income for each subsidiary having a material goodwill balance.  The
Company believes that no material impairment of goodwill existed at December 31,
1998 or 1997.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation," ("SFAS 123") defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting.  The Company has elected, as
permitted under SFAS 123, to continue to measure compensation cost for its plan
using the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25.  For additional information, see Note
12.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes.  The accounts which are subject to such estimation
techniques include the allowance for finance credit losses as more fully
discussed in Note 5.  Actual results could differ from these estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

During 1998, the FASB issued SFAS 133 and 134, "Accounting for Derivative
Instruments and Hedging Activities" and "Accounting for Mortgage-Backed
Derivative Securities Retained After the Securitization of Mortgage Loans Held
For Sale by a Mortgage Banking Enterprise", effective for fiscal years beginning
after June 15, 1999 and

                                       33
<PAGE>
   
December 15, 1998, respectively. Management does not expect these statements to
have a material impact on either the financial position, results of operations
or financial statement disclosures of the Company.

2)   GOING CONCERN

The Company incurred losses in the years 1996 through 1998 and continues to
incur losses in 1999.  As a result, the Company has experienced a significant
reduction in capital.  All of its outstanding debt is subject to acceleration or
has matured by its terms as a result of the Company's defaults of its various
lending agreements.  In addition, the Company is currently a defendant in
various litigation arising from the restatement of previously reported financial
information for 1995 and interim periods in 1996.

Pursuant to the Plan of Reorganization, which was confirmed by order of the
Court on March 10, 1999, a portion of the outstanding debt will be converted to
equity, the remaining debt will be restructured and the litigation pending
related to the financial irregularities will be settled.  However, there can be
no assurances that the reorganized entity will return to profitable operations.
Thus, there is substantial doubt about the Company's ability to continue as a
going concern.  The accompanying financial statements have been prepared on the
basis that the Company is a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.

3)   LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION.

The following table shows the liabilities subject to compromise under
reorganization as of December 31, 1998.  These liabilities have been recorded at
amounts that the Court is expected to allow as claims rather than estimates of
the amounts for which the claims may be settled.  There were no liabilities
subject to compromise under reorganization as of December 31, 1997.

<TABLE>
<CAPTION>
                                                                                     1998
<S>                                                                                <C>
Senior debt, commercial paper and notes                                            $339,340
Senior debt, term notes                                                             335,905
Subordinated debt                                                                    22,500
Dividends payable                                                                    12,937
Pre-petition accrued interest                                                         8,393
Restructuring fee                                                                       695
                                                                                   --------
   Total liabilities subject to compromise under reorganization                    $719,770
                                                                                   ========
</TABLE>

4)    DISPOSITIONS

On March 28, 1997, Mercury executed a Stock Purchase Agreement between Mercury
Finance Company and Frontier Insurance Group, Inc. ("Frontier") for the sale of
Lyndon to Frontier for $92 million.  The sale, which closed on June 3, 1997,
resulted in a loss to Mercury of approximately $30 million.  In addition, the
earnings of Lyndon from the date of the agreement through the date of sale
aggregating approximately $2 million accrued to the benefit of the buyer.

Management determined that it was in the best interest of the Company to remain
in the insurance business and formed a new captive insurance subsidiary during
1997, MFN Insurance Company.  As a result, the sale of Lyndon was not considered
the discontinuation of a business.  The loss associated with the sale of Lyndon
was not tax deductible to the Company as a loss on the sale of a consolidated
subsidiary is, under certain circumstances, not deductible for tax purposes.

In December 1998, the Board of Directors approved the terms of a sale of the
credit card portfolio.  The sale price was below the carrying value of the
portfolio and accordingly the Company recorded a $15.8 million charge in 1998 to
reduce the portfolio to its net realizable value.  In addition, the portfolio
has been classified as assets held for sale at December 31, 1998.  The sale of
the credit card portfolio was consummated on March 2, 1999.

5)  FINANCE RECEIVABLES

Direct loans generally have terms of 12 to 24 months with maximum terms of 36
months; secured loans are generally collateralized by real or personal property.
Sales finance contracts are generally accounted for on a

                                       34
<PAGE>
 
discount basis and generally have terms of 18 to 36 months with maximum terms of
48 months. Mercury Card receivables are mainly unsecured balances. The Company's
finance receivables are primarily with individuals located in the southeastern,
central and western United States. As of December 31, 1998, approximately 13%,
13% and 12% of gross sales and direct finance receivables were from branches
located in Texas, Florida and Illinois, respectively. Loans outstanding at
December 31, 1998 and 1997 were as follows:

                                                1998           1997
                                                           
DIRECT FINANCE RECEIVABLES                                 
  Interest bearing                           $  17,123      $   20,504
  Precompute                                   100,013         129,120
                                             ---------      ----------
Total direct finance receivables               117,136         149,624
SALES FINANCE RECEIVABLES                                  
Total sales finance receivables                676,132         954,319
                                             ---------      ----------
Total gross finance receivables                793,268       1,103,943
Less:  Unearned finance charges               (146,978)       (200,820)
       Unearned commissions and other           (2,585)         (3,242)
                                             ---------      ----------
Sales and direct finance receivables           643,705         899,881
CREDIT CARD                                                
Total credit card                                    0          71,496
                                             ---------      ----------
Total finance receivables                    $ 643,705      $  971,377
                                             =========      ==========

The credit card portfolio had a gross receivables balance of approximately $50.6
million as of December 31, 1998 and has been classified as assets held for sale.

Included in finance receivables at December 31, 1998 and 1997 were approximately
$43.5 million and $79.0 million, respectively, of receivables for which interest
accrual had been suspended.  Contractual maturities of the finance receivables
by year are not readily available at December 31, 1998 and 1997, but experience
has shown that such information is not an accurate forecast of the timing of
future cash collections due to the amount of renewals, conversions,
repossessions, or payoffs prior to actual maturity.

Repossessed assets, classified as other assets, primarily consists of vehicles
held for resale and vehicles which have been sold for which payment has not been
received.  Repossessed assets are carried at estimated fair value.  At December
31, 1998 and 1997, repossessed assets totaled approximately $3.8 million and
$5.2 million, respectively.

Principal cash collections (excluding finance charges earned) for the years
ended December 31, 1998 and 1997, were as follows:
 
                                     1998       1997
 
DIRECT FINANCE RECEIVABLES
Principal cash collections         $122,192   $136,004
Percent of average net balances         109%       107%
 
SALES FINANCE RECEIVABLES
Principal cash collections         $436,277   $599,977
Percent of average net balances          66%        69%
 
CREDIT CARD RECEIVABLES
Principal cash collections         $ 30,565   $ 36,669
Percent of average balances            50.5%      47.2%

Effective in 1996, the Company adopted a static pooling methodology for
computing the allowance for finance credit losses.  During 1996, Mercury
converted to a more sophisticated portfolio manager software system, which
enabled the Company to analyze performance criteria on a static 

                                       35
<PAGE>
 
pool basis. In management's view, the static pooling methodology was preferable
to the method previously used. If static pooling had not been adopted in 1996,
the 1996 provision for finance credit losses would have been decreased by
approximately $89 million.

As a part of its adoption of the static pooling reserving methodology, the
Company adjusted its newly identified nonrefundable dealer reserve pools to
eliminate any negative pools, (i.e., those where related loan charge offs
exceeded available nonrefundable dealer reserve pool balances), and to reflect
certain previous sales finance charge offs as reductions in dealer reserves as
opposed to reductions in the allowance for finance credit losses.  The net
effect of these adjustments was to increase nonrefundable dealer reserves by $74
million and decrease the allowance for finance credit losses by a corresponding
amount.  A summary of the activity in the allowance for finance credit losses
for the years ended December 31, was as follows:

<TABLE>
<CAPTION>
                                                         1998        1997        1996
<S>                                                    <C>        <C>         <C>  
Balance at beginning of year                           $102,204   $  97,762   $  46,366
Provision for finance credit losses                      56,790     106,374     215,171
Finance receivables charged off, net of recoveries      (99,409)   (101,932)    (89,326)
Transfer to credit card portfolio held for sale          (6,100)          0           0
Transfer to non-refundable dealer reserves                    0           0     (74,449)
                                                       --------   ---------   ---------
  Balance at end of year                               $ 53,485   $ 102,204   $  97,762
                                                       ========   =========   =========
</TABLE> 
 
A summary of the activity in nonrefundable dealer reserves for the years ended
December 31, was as follows:
 
<TABLE> 
<CAPTION> 
                                                        1998         1997        1996
<S>                                                    <C>        <C>         <C> 
Balance at beginning of year                           $ 52,731   $  89,378   $  61,961
Discounts acquired on new volume                         24,982      45,010      67,442
Transfer from the allowance for finance credit losses         0           0      74,449
Losses absorbed                                         (40,893)    (81,657)   (114,474)
                                                       --------   ---------   ---------
  Balance at end of year                               $ 36,820   $  52,731   $  89,378
                                                       ========   =========   =========
</TABLE>

Under the static pooling methodology, the total balances of nonrefundable dealer
reserves are not available to offset current finance credit losses, but instead
are amortized and made available to absorb credit losses over the life of the
corresponding pool of receivables.

6)   SENIOR AND SUBORDINATED DEBT AND LINES OF CREDIT

As a result of net losses incurred, accounting irregularities, and related
matters, Mercury violated certain covenants permitting the holders of its Senior
Term Notes and Subordinated Debt to accelerate all such debt which, if
accelerated, would have resulted in all of such debt being currently due and
payable.  In addition, the Company was no longer permitted by the terms of
certain debt instruments to pay dividends.

The Company had a forbearance agreement beginning on July 12, 1997 with its
lenders which, including extensions (the "Forbearance Agreements"), expired July
15, 1998.  In connection with the execution in 1998 of an extension to a
previous forbearance agreement, the participating senior lenders received a fee
of 2.25% of the outstanding balance.  The fee, aggregating $15.2 million, was
paid in 1998 and recorded as a non-operating expense.

Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%).  In addition, the agreements required the
periodic payment of excess cash to be applied as reduction of outstanding
principal.  Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998.  Subsequent to May 5, 1998, no payments of principal have been
made to creditors.

As described in Note 3 all of the Company's debt is subject to compromise under
the Plan of Reorganization.  Therefore, the entire amount of outstanding debt as
of December 31, 1998 of $697.7 million is included in "Liabilities subject to
compromise under reorganization" in the Company's financial statements.

                                       36
<PAGE>
 
Pursuant to the Voluntary Case, no interest has been paid or recorded on the
Company's debt subsequent to July 15, 1998, the date the Voluntary Case was
filed.  Interest expense for the year would have amounted to approximately $66
million if the Company had not been relieved from paying interest under the
Voluntary Case.  The following table represents Mercury's debt instruments and
the corresponding stated rates at the end of the periods indicated:

                                    Dec. 31, 1998           Dec. 31, 1997
                                    -------------           -------------
                                 Balance        Rate      Balance       Rate
Senior debt:                                                            
   Commercial paper and notes    $339,340        5.7%     $416,731       5.7%
   Term notes                     335,905        7.0%      412,514       7.0%
Subordinated debt                  22,500       10.3%       22,500      10.3%
                                 --------                 --------      
         Total                   $697,745        6.5%     $851,745       6.5%
                                 ========                 ========     

7)   REORGANIZATION EXPENSES
 
Reorganization expenses for the year ended December 31, 1998 are as follows:

                                      1998
 
Professional fees                     $ 5,206
Interest income                        (1,947)
                                      -------
  Total                               $ 3,259
                                      =======

The Company has estimated the amount of professional fees which relate
specifically to the Voluntary Case that the Company is currently undergoing.

The Company has adopted SOP 90-7 which requires interest earned on funds held on
deposit that would have been paid to senior debt holders if the Company had not
filed the Voluntary Case, to be set-off against expenses related to the
Voluntary Case.

8)   DIVIDEND RESTRICTIONS

On February 6, 1997, the Company suspended payment of the dividend previously
declared on January 14, 1997 of $0.075 per share of Mercury common stock.  The
Company has not been permitted to pay dividends since the filing of the
Voluntary Case.  The amount owing as a result of the declared but unpaid
dividend is included under liabilities subject to compromise in the
December 31, 1998 balance sheet. 


9)   COMMON STOCK

The Company has implemented the provisions of SFAS No. 128 "Earnings Per Share".
This standard requires the presentation of basic and diluted earnings per share
as opposed to primary and fully diluted earnings per share under APB Opinion 15.
This standard also prescribes that when computing the dilution of options, the
Company is to use its average stock price for the period, rather than the more
dilutive greater of the average share price or end-of-period share price
required by APB Opinion 15 for fully diluted earnings per share.

                                       37
<PAGE>
 
Earnings per share is computed by dividing net income/(loss) by the total of
weighted average common shares and common stock equivalents outstanding during
the periods.  The calculated averages were as follows:

                           1998              1997             1996
Weighted Average:                                     
Common Shares           177,900,671      177,892,453      177,129,351
Treasury Shares          (5,402,957)      (5,402,957)      (4,361,499)
                        -----------      -----------      -----------
Basic Shares            172,497,714      172,489,496      172,767,852
Common Equivalents                0                0                0
                        -----------      -----------      -----------
Diluted Shares          172,497,714      172,489,496      172,767,852
                        ===========      ===========      ===========

In February, 1997, following the announcement of the discovery of accounting
irregularities which caused the overstatement of the previously released
earnings for 1995 and 1996, the market value of the Company's common stock was
significantly reduced.  Since the announcement, the market value of the common
stock has not exceeded the exercise price of the stock options granted or
regranted under the revised stock option program (See Note 12).  As a result,
the calculation of the common share equivalents becomes meaningless for the
years ended December 31, 1998 and 1997.

The calculation of common stock equivalents for the year ended December 31, 1996
can be completed as the market value of common stock was in excess of the
exercise price of the stock options outstanding, however, as the Company
incurred a net loss for the year ended December 31, 1996, common share
equivalents totaling 923,236 would be anti-dilutive to earnings per share and
have not been included in the weighted average shares calculation.

10)  RESTRUCTURING CHARGES

During 1997 and 1998, the Company closed a number of branches and implemented a
plan to close additional branches for a total closure of approximately 110
branches and a reduction of approximately 260 branch personnel.  The amount
charged during 1997 was $3.725 million ($0.02 per common share) of which $2.831
million has been utilized to date.  In addition, $0.344 million has been
credited in 1998 as the Company expects that the full amount of the original
1997 estimated provision will not be required.  This reduction in the provision
is primarily due to change in estimates of employee severance and retention
payments based on actual experience during 1998.  These charges and their
utilization through December 31, 1998 and estimated utilization for 1999 are
summarized in the following table:

                                     Amounts  Amounts    Amounts  Amounts to be
                                     Charged  Utilized  Utilized    Utilized
                                     In 1997  in 1997    in 1998     In 1999
                                                                  
Asset and leasehold write-offs        $1,200    $200     $1,079         $ 75
Lease buyouts and other expenses       1,025     101        799          100
Employee severance and retention       1,500       0        652          375
                                      ------    ----     ------         ----
  Total                               $3,725    $301     $2,530         $550
                                      ======    ====     ======         ====

The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action.  The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred.  Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.

The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease.  It
is the Company's policy to continue to charge depreciation, rental, and other
operating costs relating to excess space to ongoing operations while they remain
in business use.  Salaries and benefits are charged to operations while the
employee is actively employed.

Reserves for assets and leasehold improvements written-off are utilized at the
date of disposal or the final date of the lease.

                                       38
<PAGE>
 
11)  OTHER NON-OPERATING EXPENSES

Other non-operating expenses are as follows:

                                          1998               1997
                                      
Corporate counsel                       $ 2,056            $ 2,836
Investment banking                        2,045              2,657
Creditor attorneys and advisors           2,235              2,584
Independent accountants                   1,059              2,469
Management consultants                    2,336              2,399
Special investigation                         0              1,919
Bank line of credit fees                    121              1,650
Bank of Boston settlement                     0              1,600
Board of Directors representation         1,312              1,132
Forbearance fee                          15,176                  0
Other                                        86              1,437
                                        -------            -------
  Total                                 $26,426            $20,683
                                        =======            =======

12)  STOCK OPTIONS

Under the terms of Mercury's 1989 Stock Option and Incentive Compensation Plan
(the "1989 Option Plan"), 24,837,036 common shares were reserved for the future
granting of options to officers, non-employee directors and other key employees.
Options become exercisable in whole or in part up to two years after the date of
grant at the closing price of Mercury's common stock on the date of grant.
Options are forfeited upon termination of employment and expire after ten years.
Shares available for future grants totaled 5,482,965, 4,895,091 and 134,055 at
December 31, 1998, 1997 and 1996, respectively.

The information provided below has been prepared as of December 31, 1998.
Subsequent to this date and as a result of the events described in Note 1, the
Company's Plan of Reorganization will result in the cancellation and
extinguishment of all stock options outstanding prior to the Effective Date of
the Plan.

Activity with respect to stock options is as follows for the years ended
December 31, (adjusted for all stock splits):

<TABLE> 
<CAPTION> 
                                                              1998            1997              1996
<S>                                                        <C>              <C>               <C> 
Outstanding January 1                                       3,025,659        7,967,919        8,714,492
Options granted (average price of $3.00 in 1998,               10,000        3,420,318        1,300,250
 $3.36 in 1997 and   $11.10 in 1996)                                                     
Forfeited/cancelled                                          (597,874)      (8,181,354)        (543,250)
Options exercised (average price of $8.21 in 1997 and                                    
  $4.48 in 1996)                                                    0         (181,224)      (1,503,573)
                                                            ---------       ----------       ----------
Outstanding December 31                                     2,437,785        3,025,659        7,967,919
                                                            =========       ==========       ==========
</TABLE>

The average option price under the plan was $3.03, $3.23 and $10.53 at December
31, 1998, 1997 and 1996, respectively.  On June 13, 1997, the Company cancelled
and reissued 2,385,443 options at a new exercise price of $3.00.  New options
were also granted to certain employees with an exercise price equal to $3.00 per
share. 31,602 and 2,001 of the 2,437,785 options outstanding at December 31,
1998 have an exercise price of $1.90 and $1.93, respectively.  The remaining
2,404,182 options have exercise prices between $3.00 and $8.87, with a weighted
average exercise price of $3.20 and a weighted contractual life of approximately
10 years.  2,255,910 of these options are exercisable.

The Company applies APB Opinion 25 in accounting for its Plan, and accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements.  Had the Company determined 

                                       39
<PAGE>
 
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's 1998 and 1997 net losses and loss per
share would have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                             1998               1997
 
<S>                                                   <C>                <C>                 <C>
Net Loss                                              As reported        $  (53,570)          $  (74,193)
                                                      Pro forma          $  (53,581)          $  (78,564)
Basic and Diluted Loss per Share                      As reported        $    (0.31)          $    (0.43)
                                                      Pro forma          $    (0.31)          $    (0.46)
</TABLE>

The weighted average fair value of the options granted, using the Black-Scholes
method, was $2.60 and $2.41 per option in 1998 and 1997, respectively.  The full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss amounts presented above because
compensation cost is reflected over the options' vesting period of eighteen
months.

Upon the announcement of the discovery of the accounting irregularities and
financial statement restatement in January, 1997, the market value of the
Company's common stock declined dramatically.  Management thus believes that the
market value of the Company's common stock during 1996 is overstated.  Because a
key component of the fair value calculation (and the related pro forma net
income and earnings per share disclosures) is the market value of the Company's
stock, the fair value and other disclosures required under SFAS 123 for 1996 is
not considered meaningful.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the option grants in 1998:  risk-free interest rate of 5.48
percent, expected dividend yield of 0 percent, expected life of 10 years and
expected volatility of 84.97 percent.

13)  CONTINGENCIES AND LEGAL MATTERS

On July 15, 1998, the Company filed the Voluntary Case along with its plan of
reorganization.  The Court entered an order confirming the Plan of
Reorganization on March 10, 1999.  See "Item 1  Restructuring and Chapter 11
Proceedings" for more information.

The Company has been named as a defendant in a variety of lawsuits generally
arising from the Company's announcement on January 29, 1997 that it would
restate its earnings for certain prior periods as a result of the discovery of
accounting irregularities.  To date, forty-five actions have been filed against
the Company in the United States District Court for the Northern District of
Illinois, six cases are pending against the Company in Illinois Chancery Court,
and nine cases are pending in Delaware Chancery Court.  The complaints seek
compensatory damages, attorneys' fees and costs.

Forty-one of the lawsuits filed in the Northern District of Illinois are class
actions which generally allege claims under Sections 10 and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.  These
lawsuits name one or more officers or directors of the Company as additional
defendants.  One case pending in the Northern District of Illinois alleges
derivative claims seeking to recover damages on behalf of the Company from
certain of the Company's officers and directors.  Thirty-nine of the non-
derivative cases pending in the Northern District of Illinois were consolidated
pursuant to a Stipulation entered on April 30, 1997.  Seven of these cases were
dismissed in 1998.  In November, 1997, the Minnesota State Board of Investment
was appointed lead plaintiff in the federal class cases.  One of the cases
pending in the Northern District of Illinois seeks to represent a class of
participants in Mercury's employee retirement plan and alleges ERISA violations
arising out of the plan's investment in Mercury's allegedly overvalued stock.
Participants in the proposed class may include certain officers and former
officers of the Company.  One case pending in the Northern District of Illinois
alleges non-class securities fraud and common law claims.  A second case
alleging similar claims was dismissed on September 9, 1998.  The ERISA action
and the two non-class securities fraud cases were consolidated in February,
1997, with the cases in which the Minnesota State Board of Investment is lead
plaintiff.  Three of the Illinois state court actions are class actions alleging
claims under the Illinois Securities Act, the Illinois Consumer Fraud and
Deceptive Business Practices Act and common law claims of fraud and negligent
misrepresentation.  The other Illinois state court actions are derivative
actions which seek to recover damages on behalf of the Company from certain of
the Company's officers 

                                       40
<PAGE>
 
and directors. Each of the Delaware state court actions is a derivative action
which seeks to recover damages on behalf of the Company from certain of the
Company's officers and directors. The case pending in Municipal Court in
Hamilton, Ohio, alleges violations of Ohio state securities laws and common law.
Pursuant to Section 362(a) of the Bankruptcy Code, all of the pending lawsuits
against the Company were stayed after the filing of the Voluntary Case.

Pursuant to the Plan, the Company will transfer to a certain trust established
under the Plan (the "Liquidating Trust"), on the effective date of the Plan, (i)
$5 million in cash, (ii) the Company's claims against the Company's previous
auditors and (iii) $250,000 in cash for fees and costs to be incurred in
connection with the Liquidating Trust.  Holders of Securities Fraud Claims will
receive a share of the beneficial interests in the Liquidating Trust in complete
settlement, satisfaction and discharge of their claims.  In accordance with the
Plan, the Company will also pay (i) $13.35 million into funds established for
the benefit of holders of certain indemnification claims against the Company on
the effective date of the Plan and (ii) upon verification, costs and expenses of
officers, agents and employees who are no longer employed by the Company as of
the first day immediately following the effective date of the Plan (other than
the claims of the estate of James A. Doyle and John N. Brincat in respect of
which no obligations shall be assumed), to the extent such costs and expenses
are incurred after the effective date of the Plan in connection with their
participation in an agency or government investigation, which costs and expenses
are limited to $250,000 in the aggregate.  The Company has also agreed to (i)
pay John N. Brincat $100,000 and (ii) release Mr. Brincat from all claims the
Company may have against him, in complete settlement, satisfaction and discharge
of any claims Mr. Brincat may have against the Company, subject to the approval
of the United States District Court for the Northern District of Illinois by a
final non-appealable order.

The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities.  Those events are also under investigation by
the United States Attorney for the Northern District of Illinois and the Federal
Bureau of Investigation.  The Company is cooperating fully in these
investigations.

On January 10, 1997, the Company entered into an agreement (the "Agreement")
with BankBoston Corporation ("BankBoston") pursuant to which the Company was to
acquire all of the outstanding stock of Fidelity Acceptance Corporation, a
subsidiary of BankBoston, in return for the issuance of approximately 32.7
million shares of the Company's common stock.  On January 30, 1997, BankBoston
notified the Company that it was terminating the Agreement as a result of
breaches of the Agreement resulting from the accounting irregularities described
above.  On July 10, 1997, BankBoston notified Mercury that BankBoston intended
to seek appropriate compensation for its damages resulting from such breaches.
Such claims were settled for a cash payment of $1.6 million in January, 1998
which was accrued in December, 1997.

In the normal course of its business, Mercury and its subsidiaries are named as
defendants in legal proceedings generally referred to as consumer finance
litigation.  A number of such actions are pending in the various states in which
subsidiaries of Mercury do business.  It is the policy of Mercury and its
subsidiaries to vigorously defend litigation, but Mercury and (or) its
subsidiaries have and may in the future enter into settlements of claims where
management deems appropriate.  Although management is of the opinion that the
resolution of these proceedings will not have a material effect on the financial
position of Mercury, it is not possible at this time to estimate the amount of
damages or settlement expenses that may be incurred.

The Company recognizes the expense for litigation when the incurrance of loss is
probable and the amount of such loss is estimable. Based upon the confirmation
of the Plan, which provides for the settlement of all claims and lawsuits
against the Company arising out of the financial irregularities in exchange for
payments in the aggregate of $18.950 million, the Company recorded a provision
and related accrual for $18.950 million during 1998. However, because of the
uncertainty that still surrounds the consumer finance litigation, no accrual has
been made for the majority of these lawsuits at December 31, 1998. The costs to
defend against this litigation are expensed as incurred.

14)  PENSION PLANS AND OTHER EMPLOYEE BENEFITS

Substantially all employees of Mercury are covered by non-contributory defined
benefit pension plans.

                                       41
<PAGE>
 
The following table sets forth the status of Mercury's qualified plans and
amounts recognized in the 1998, 1997 and 1996 consolidated financial statements:

<TABLE>
<CAPTION>
                                                                                1998                   1997
CHANGE IN PROJECTED BENEFIT OBLIGATION
<S>                                                                     <C>                     <C>
Projected Benefit Obligation, Beginning of Year                         $   14,097,933           $   10,685,989
Service Cost                                                                 1,737,610                 1,332,275
Interest Cost                                                                1,018,962                   846,104
Plan Amendments                                                                      0                         0
Curtailments                                                                  (187,247)                        0
Actuarial Gain                                                                 400,837                 1,478,000
Benefits Paid                                                                 (339,916)                 (244,435)
                                                                        ---------------          ----------------
Projected Benefit Obligation, End of Year                               $   16,728,179           $    14,097,933
                                                                        ==============           ===============
 
CHANGE IN PLAN ASSETS
Plan Assets at Fair Value, Beginning of Year                            $   16,667,300           $    13,638,037
Actual Return on Plan Assets                                                   683,824                 3,273,698
Company Contributions                                                                0                         0
Benefits Paid                                                                 (339,916)                 (244,435)
                                                                        ---------------           ---------------
Plan Assets at Fair Value, End of Year                                  $   17,011,208            $    16,667,300
                                                                        ==============            ===============
 
RECONCILIATION OF ACCRUED PENSION COST
  AND TOTAL AMOUNT RECOGNIZED
Funded status of the Plan                                               $   283,029            $ 2,569,367
Unrecognized Net Gain                                                    (2,591,821)            (3,834,800)
Unrecognized Prior Service Cost                                             (21,363)               (44,360)
Unrecognized Net Transition Obligation (Asset)                             (188,606)              (202,462)
                                                                        -----------            -----------
Accrued Pension Cost                                                    $(2,518,761)           $(1,512,255)
                                                                        ===========            ===========
                                                                        
WEIGHTED-AVERAGE ASSUMPTION                                             
Discount Rate                                                                 6.75%                  7.25%
Expected Return on Plan Assets                                                8.50%                  8.50%
Rate of Compensation Increase                                                 5.50%                  5.50%
                                                                        
TOTAL COST                                                              
Service Cost                                                            $ 1,737,610            $ 1,332,275
Interest Cost                                                             1,018,962                846,104
Expected Return on Plan Assets                                           (1,395,111)            (1,139,181)
Amortization of:                                                        
         Unrecognized Net Gain                                              (72,150)               (86,787)
         Unrecognized Prior Service Cost                                      2,797                  2,797
         Unrecognized Net Asset                                             (50,720)               (50,720)
         Prior Service Cost                                                   2,635                  3,489
Recognized actuarial Gain                                                   (58,705)                (6,667)
                                                                        -----------            -----------
Net Periodic Pension Cost                                               $ 1,185,318            $   901,310
Amount recognized due to curtailment                                       (178,812)                     0
                                                                        -----------            -----------
Total benefit cost                                                      $ 1,006,506            $   901,310
                                                                        ===========            ===========
</TABLE>

Mercury has a tax deferred Retirement Savings Plan ("401(k) Plan"). Employees
are eligible to participate in these plans after having attained specified terms
of service. Both plans cover substantially all full time employees of Mercury
and provide for employee contributions and partial matching contributions by
Mercury. The expenses related to these plans are not material.


                                       42
<PAGE>
 
15)  INCOME TAXES

The components of the 1998, 1997 and 1996 income tax provisions (benefits) were
as follows:

<TABLE>
<CAPTION>
                                                                   1998        1997         1996               
<S>                                                              <C>         <C>          <C>                  
INCOME TAX PROVISION/(BENEFIT):                                                                                
Current Taxes:                                                                                                 
  Federal                                                        $ 4,100     $(55,214)    $ (8,274)            
  State                                                            1,900            0         (709)            
                                                                 -------     --------     --------             
Total Current Taxes                                                6,000      (55,214)      (8,983)            
  Deferred income tax provision/(benefit)                              0       38,964      (11,432)            
                                                                 -------     --------     --------             
INCOME TAX PROVISION/(BENEFIT)                                   $ 6,000     $(16,250)    $(20,415)            
                                                                 =======     ========     ========             
</TABLE> 

The differences between the U.S. federal statutory income tax rate and the
Company's effective rate are:

<TABLE> 
<CAPTION> 
                                                                        1998           1997          1996             
<S>                                                                  <C>           <C>           <C> 
Statutory federal income tax                                            35.0 %         35.0%         35.0%            
Loss on sale of Lyndon                                                     0          (11.4)            0             
Income from Lyndon due to buyer                                            0            (.8)            0             
Valuation of finance receivables                                       (24.1)             0             0             
Deferred tax valuation allowance                                       (12.8)           (.7)            0             
Nondeductible restructuring expenses                                    (4.5)             0             0             
State income taxes, net of federal tax benefit                          (2.6)          (2.1)          3.0             
Other, net                                                              (3.6)          (2.0)          3.3             
                                                                     -------       --------      --------             
  Company's effective tax rate                                         (12.6)%         18.0%         41.3%            
                                                                     =======       ========      ========             
</TABLE>

The total income tax benefit reflected in stockholders' equity for stock options
exercised was $397 and $4,400 in 1997 and 1996, respectively. No stock options
were exercised in 1998. Temporary differences between the amounts reported in
the financial statements and the tax basis of assets and liabilities result in
deferred taxes. A full valuation allowance was recorded against the deferred tax
asset balances at December 31, 1998 and 1997 because there is no assurance that
such assets can be realized as reductions in future taxable income nor carried
back to periods of taxable income. Deferred tax assets and liabilities at
December 31, were as follows:

<TABLE>
<CAPTION>
 
                                                        1998         1997   
<S>                                                   <C>           <C>     
DEFERRED TAX ASSETS:                                                        
Allowances for finance receivables                  $   1,402       $    0  
Accrued non-operating expenses                          6,826        1,758  
Capitalized restructuring expenses                        858            0  
Other                                                   1,012        1,095  
                                                      -------       ------  
  Deferred tax assets                                  10,098        2,853  
                                                      -------       ------  
DEFERRED TAX LIABILITIES:                                                   
Allowances for finance receivables                          0        2,196  
Imputed interest during bankruptcy proceeding           3,348            0  
                                                      -------       ------  
  Deferred tax liabilities                              3,348        2,196  
                                                      -------       ------  
Net deferred tax assets before valuation allowance      6,750          657  
  Less:  Valuation allowance                           (6,750)        (657) 
                                                      -------       ------  
NET DEFERRED TAX ASSETS                               $     0       $    0  
                                                      =======       ======   
</TABLE>

Mercury has elected to be treated as a dealer in securities under section 475 of
the Internal Revenue Code.  Pursuant to this election, Mercury must recognize as
taxable income or loss the difference between the fair market value of its
securities and the income tax basis of its securities. This election has no
impact on the recognition of pre-tax income for financial reporting purposes.


                                       43
<PAGE>
 
16) LEASES

Mercury and its subsidiaries lease office space generally under cancelable
operating leases expiring in various years through 2004. Most of these leases
are renewable for periods ranging from three to five years. Future minimum
payments, by year and in the aggregate, under operating leases with initial or
remaining terms of one year or more consisted of the following at December 31,
1998:

              Year                     Amount
                                             
                1999                 $  2,978
                2000                    2,053
                2001                    1,332
                2002                      605
                2003 and after            153
                                     --------
                 Total               $  7,121
                                     ======== 

The Company has announced its intention to close branches and expects to settle
commitments for less than the current lease contracts on the closed branches.

It is expected that in the normal course of business, office leases that expire
will be renewed or replaced by leases on other properties.  Total rent expense
approximated $3,667, $4,571 and $4,392 in 1998, 1997 and 1996, respectively.

17) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.  Fair value estimates are made at a specific point in time for Mercury's
financial instruments; they are subjective in nature and involve uncertainties,
and matters of significant judgment and, therefore, cannot be determined with
precision.  Fair value estimates assume the continuation of Mercury as a going
concern.

CASH AND CASH EQUIVALENTS

Due to the short term nature of these items, management believes that the
carrying amount is a reasonable estimate of fair value.

FINANCE RECEIVABLES

Finance receivables have been valued based upon an estimate of future cash flows
discounted at an imputed weighted average cost of capital.

SENIOR DEBT, COMMERCIAL PAPER AND NOTES

The fair value has been computed based upon a valuation provided by the
Company's investment banking advisors and verified by pricing of recent trades.

SENIOR DEBT, TERM NOTES

The fair value has been computed based upon a valuation provided by the
Company's investment banking advisors and verified by pricing of recent trades.

SUBORDINATED DEBT

The fair value has been computed based upon pricing of recent trades.

                                       44
<PAGE>
 
The estimated fair values of Mercury's financial instruments at December 31, are
as follows:

<TABLE>
<CAPTION>
                                                             1998                               1997
                                                             ----                               ----
                                                  Carrying              Fair         Carrying            Fair      
                                                  Amount               Value         Amount             Value      
<S>                                               <C>                  <C>           <C>               <C>         
FINANCIAL ASSETS:                                                                                                  
Cash and cash equivalents                           $186,350            $186,350       $ 53,896          $ 53,896  
Finance receivables, net                             553,400             553,724        816,442           731,038  
                                                    --------            --------       --------          --------  
  Total                                             $739,750            $740,074       $870,338          $784,934  
                                                    ========            ========       ========          ========  
FINANCIAL LIABILITIES:                                                                                             
Senior debt, commercial paper and notes             $339,340            $305,406       $416,731          $354,221  
Senior debt, term notes                              335,905             302,315        412,514           350,637  
Subordinated debt                                     22,500              16,875         22,500            16,875  
                                                    --------            --------       --------          --------  
  Total                                             $697,745            $624,596       $851,745          $721,733  
                                                    ========            ========       ========          ========   
</TABLE>

The above estimates do not include any adjustments to reflect the substantial
negative impact for the events disclosed in Note 2.

18) BUSINESS SEGMENT DATA

The Finance Segment consists of the noninsurance segment of Mercury. The
Insurance Segment consists of Lyndon through date of disposition and MFN
Insurance thereafter. Included in revenues is interest income before provision
for finance credit losses and total other income. Operating profit represents
income before income taxes and includes interest expense, as financing costs are
an integral part of the Company's operations. Income by segment assumes each
business services its own debt (including acquisition debt). The segments
generally provide for income taxes as if separate returns were filed subject to
certain consolidated return limitations and benefits. The following table
presents the business segment data of Mercury for the year ended December 31,
1996. Following the sale of Lyndon in 1997, the operations of the insurance
segment are not a material segment of the Company's operations and are therefore
not disclosed in the following table:

(in millions)

<TABLE> 
<CAPTION> 
                                                                 1996
<S>                                                            <C>  
REVENUES                               
Finance                                                        $  203.2
Insurance                                                         105.9
                                                               --------
  Total                                                        $  309.1
                                                               ========
OPERATING PROFITS (LOSSES)             
Finance                                                        $  (89.4)
Insurance                                                          40.0
                                                               --------
  Total                                                        $  (49.4)
                                                               ========
NET INCOME (LOSS)                      
Finance                                                        $  (56.0)
Insurance                                                          27.0
                                                               --------
  Total                                                        $  (29.0)
                                                               ========
IDENTIFIABLE ASSETS                    
Finance                                                        $1,123.4
Insurance                                                         420.0
                                                               --------
  Total                                                        $1,543.4
                                                               ========
</TABLE> 

                                       45
<PAGE>
 
QUARTERLY FINANCIAL DATA (UNAUDITED)

BALANCE SHEET AVERAGE FOR THE QUARTER 1998
(Amounts in thousands, except per share)

<TABLE>
<CAPTION>
 
                                                 4th Qrtr   3rd Qrtr    2nd Qrtr    1st Qrtr
<S>                                             <C>         <C>        <C>         <C>
ASSETS
Cash                                            $144,189    $ 74,507   $ 56,141    $ 59,596
Finance Receivables                              686,479     757,192    822,858     915,981
Allowance for Credit Losses                      (60,287)    (72,952)   (83,503)    (95,198)
Nonrefundable Dealer Reserves                    (36,691)    (37,705)   (41,258)    (48,199)
Other Assets                                      68,126      77,999     78,533      93,726
                                                --------    --------   --------    --------
Total Assets                                    $801,816    $799,041   $832,771    $925,906
                                                ========    ========   ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise under
reorganization (Note 1)                         $ 34,153    $ 20,908   $ 24,400    $ 28,764
Liabilities subject to compromise under
reorganization (Note 1)                          719,422     714,879    738,182     815,182
Total Stockholders' Equity                        48,241      63,254     70,189      81,960
                                                --------    --------   --------    --------
Liabilities and Stockholders' Equity            $801,816    $799,041   $832,771    $925,906
                                                ========    ========   ========    ========
 
INCOME STATEMENT
Interest Income                                 $ 40,820    $ 43,153   $ 45,979    $ 51,141
Interest Expense                                     721       2,766     16,509      18,597
                                                --------    --------   --------    --------
Net Interest Income                               40,099      40,387     29,470      32,544
Provision for Credit Losses                       17,099      11,467     15,265      12,959
                                                --------    --------   --------    --------
Net Interest Income after Credit Losses           23,000      28,920     14,205      19,585
Other Income                                       3,260       3,095      2,910       3,926
Other Expenses                                   (20,160)    (22,089)   (20,347)    (22,699)
Non-Operating Expenses, net                      (38,321)     (1,731)   (18,834)     (2,290)
                                                --------    --------   --------    --------
Income (loss) Before Income Taxes                (32,221)      8,195    (22,066)     (1,478)
Applicable Income Taxes                            6,000           0          0           0
                                                --------    --------   --------    --------
Net Income/(loss)                               $(38,221)   $  8,195   $(22,066)   $ (1,478)
                                                ========    ========   ========    ========
Average Common & Equivalent
  Shares Outstanding                             172,498     172,498    172,498     172,498
Net Income/(loss) per Common Share (adjusted
for stock splits)                               $   (.22)   $   0.05   $  (0.13)     $(0.01)
Cash Dividend Declared (Per Share)              $      0    $      0   $      0    $      0
Market Price (Per Share):
  High                                             0.085         .16      11/16         7/8
  Low                                              0.035       0.075       1/16         1/2
  Close at End of Period                            .045         .08        .13         3/4
 
RATIOS
Net Interest Margin                                19.15%      19.27%     13.45%      13.53%
Net Income/(loss) to Average Total Assets          (4.77%)      1.03%     (2.65%)     (0.16%)
Net Income/(loss) to Average
  Stockholders' Equity                            (79.23%)     12.96%    (31.44%)     (1.80%)
</TABLE>

(1)  Average amounts have been computed based upon classifications as if the
Voluntary Case had been filed at the beginning of 1998.

                                       46
<PAGE>
 
BALANCE SHEET AVERAGE FOR THE QUARTER 1997
(Amounts in thousands, except per share)

<TABLE>
<CAPTION>
 
                                                 4th Qrtr     3rd Qrtr     2nd Qrtr     1st Qrtr
<S>                                             <C>          <C>          <C>          <C>
 
ASSETS
Cash                                            $   28,844   $   67,351   $   78,350   $   23,374
Investments                                         23,368       23,368      110,711      217,189
Finance Receivables                              1,008,767    1,070,968    1,110,949    1,143,272
Allowance for Credit Losses                       (111,168)    (121,868)    (117,594)    (104,673)
Nonrefundable Dealer Reserves                      (57,019)     (66,336)     (76,021)     (85,028)
Other Assets                                       121,486      141,484      231,814      325,366
                                                ----------   ----------   ----------   ----------
Total Assets                                    $1,014,278   $1,114,967   $1,338,209   $1,519,500
                                                ==========   ==========   ==========   ==========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Debt, Commercial Paper                   $  431,305   $  469,749   $  498,619   $  514,335
Senior Debt, Term Notes                            426,939      464,995      488,625      488,625
Subordinated Debt                                   22,500       22,500       22,500       22,500
Other Liabilities                                   48,289       56,151      209,234      348,042
Total Stockholders' Equity                          85,245      101,572      119,231      145,998
                                                ----------   ----------   ----------   ----------
Liabilities and Stockholders' Equity            $1,014,278   $1,114,967   $1,338,209   $1,519,500
                                                ==========   ==========   ==========   ==========
 
INCOME STATEMENT
Interest Income                                 $   47,950   $   57,588   $   62,505   $   66,780
Interest Expense                                   (20,710)     (21,554)     (23,549)     (20,716)
                                                ----------   ----------   ----------   ----------
Net Interest Income                                 28,039       36,034       38,956       46,064
Provision for Credit Losses                        (24,288)     (27,080)     (24,544)     (30,462)
                                                ----------   ----------   ----------   ----------
Net Interest Income after Credit Losses              3,750        8,954       14,412       15,602
Other Operating Income                               4,089        3,329       12,939       26,723
Other Operating Expenses                           (28,501)     (23,818)     (32,684)     (43,001)
Non-operating Expenses                              (7,088)      (3,013)      (7,478)     (34,657)
                                                ----------   ----------   ----------   ----------
Income/(loss) Before Income Taxes                  (27,750)     (14,548)     (12,811)     (35,333)
Applicable Income Taxes/(Credit)                   (22,661)      13,018       (4,442)      (2,165)
                                                ----------   ----------   ----------   ----------
Net Income/(loss)                               $   (5,089)  $  (27,566)  $   (8,369)  $  (33,168)
                                                ==========   ==========   ==========   ==========
Average Common & Equivalent
  Shares Outstanding                               172,498      172,498      172,948      172,465
Per Common Share (adjusted for stock splits)        $(0.03)      $(0.16)      $(0.05)      $(0.19)
Net Income/(Loss)                               $   (5,089)  $  (27,566)  $   (8,369)  $  (33,168)
Cash Dividend Declared Per Share                $        0   $        0   $        0       $0.075
Market Price:
  High                                             1 11/16      2 11/16        2 3/4       15 3/4
  Low                                                 9/16        1 3/8        1 1/2        1 7/8
  Close at End of Period                              9/16        1 3/8       2 7/16        2 1/2
Ratios
Net Interest Margin                                  10.84%       13.06%       12.79%       13.73%
Net Income/(loss) to Average Total Assets           (1.99)%      (9.81)%      (2.51)%      (8.85)%
Net Income/(loss) to Average
  Stockholders' Equity                             (23.68)%    (107.67)%     (28.15)%     (92.13)%
</TABLE>

Please refer to the "Income Taxes" section of Management's Discussion and
Analysis for more information concerning the Company's income taxes and
benefits.

                                       47
<PAGE>
 
ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES

On February 18, 1997, the Company advised KPMG Peat Marwick LLP ("KPMG") that
the Company was discontinuing KPMG's services as the Company's independent
accountants and was engaging Arthur Andersen LLP ("Arthur Andersen") as the
Company's independent accountants. The decision to discontinue KPMG and to
engage Arthur Andersen was approved by the Audit Committee of the Board of
Directors as well as by the Board of Directors as a whole.

On January 29, 1997, the Company announced the discovery of accounting
irregularities with respect to previously reported results for fiscal years 1993
through 1996.  Results for 1996 had recently been announced by the Company, but
KPMG had not completed its audit of the 1996 financial statements.  In
connection with KPMG's incomplete audit, KPMG advised the Company that
information had come to its attention that the Company's previously announced
unaudited results for 1996 were materially misstated.  In addition, KPMG advised
the Company that information had come to its attention that materially impacted
the fairness and reliability of the Company's previously issued 1995 financial
statements and the related audit report.  KPMG further informed the Company that
information had come to its attention that, subject to further investigation,
may have caused KPMG to have been unwilling to rely on representations of
management employed at the time of discovery of the accounting irregularities.
As a result of its dismissal, KPMG did not complete such further investigation.

KPMG's reports on the financial statements of the Company for the fiscal years
ended December 31, 1994 and 1995 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.

To the knowledge of the present executive management and the Board of Directors
of the Company, in connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31, 1994 and 1995,
and in the subsequent interim period, there were no disagreements with KPMG on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope and procedure which, if not resolved to the
satisfaction of KPMG, would have caused KPMG to make reference to the matter in
its reports.

Arthur Andersen was engaged by legal counsel to the Special Committee of the
Board of Directors in connection with the investigation of the previously
announced accounting irregularities at the Company.

Subsequent to the discontinuation of KPMG's services described above, KPMG
reissued their opinion on the Company's restated 1995 financial statements.

There has been no disagreements with Arthur Andersen LLP on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope and procedure, since they were engaged as independent accountants by the
Company.

                                       48
<PAGE>
 
                                    PART III
                                        
ITEM 10

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS OF THE REGISTRANT

<TABLE>
<CAPTION>
Name of                                    Position With            Principal Occupation for Last Five Years
Director                  Age               the Company                         and Directorships
----------------------  -------   -------------------------------  ------------------------------------------
<S>                     <C>       <C>                              <C>
Dennis H. Chookaszian         55  Director since 1993              Chairman, Executive Committee of CNA
                                                                   Financial.  Chairman and Chief Executive
                                                                   Officer of CNA Insurance Companies from
                                                                   1992 until February, 1999.  President and
                                                                   Chief Operating Officer of CNA from 1990
                                                                   to 1992.  Vice President and Chief
                                                                   Financial Officer of CNA prior to 1990.
                                                                   Also a director of Loews Corporation.
 
William C. Croft              81  Director since 1989              Chairman of the Board, Clements National
                                                                   Company (manufacturer of electrical
                                                                   products).  Also a director of Methode
                                                                   Electronics, Inc.
 
Clifford R. Johnson           75  Director since 1989              Consultant since 1986, after retirement as
                                                                   Executive Vice President, Jewel Companies,
                                                                   Inc. and American Stores Properties, Inc.
                                                                   (retail food and drug stores).
 
Andrew McNally IV             59  Director since 1989              Retired Chairman and Chief Executive
                                                                   Officer of Rand McNally & Co. (printer and
                                                                   publishing).  Director of Rand McNally &
                                                                   Co., Hubbell, Inc., Zenith Electronics
                                                                   Corporation, Morgan Stanley Funds and Borg
                                                                   Warner Security.
 
Bruce I. McPhee               54  Director since 1993              Vice Chairman of Kimball Homes, Inc. since
                                                                   1993.  President and Chief Executive
                                                                   Officer of Banc One Illinois Corporation
                                                                   from 1992 to 1993.  President and Chief
                                                                   Executive Officer of First Illinois
                                                                   Corporation from 1989 to 1992.  Also a
                                                                   Director of A.J. Gerrard & Co.
 
Fred G. Steingraber           60  Director since 1993              Chief Executive Officer and Director, A.T.
                                                                   Kearney, Inc.  Also a Director of Maytag
                                                                   Corporation, the Southeastern Thrift and
                                                                   Bank Fund and Lawter International.
</TABLE>

                                       49
<PAGE>
 
<TABLE>
<S>                           <C>     <C>                          <C>
Philip J. Wicklander          60      Director since 1989          Chairman and Chief Executive Officer of
                                                                   Wicklander Printing Corporation.
===========================================================================================================
</TABLE>

EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
                                                                       Position with the Company;
                                                                          Principal Occupation
Name                                          Age                         for Last Five Years
-----------------------------------------  ---------  ------------------------------------------------------------
<S>                                        <C>        <C>
William A. Brandt, Jr.                         49     President and Chief Executive Officer of the Company since
                                                      February, 1997.  Also President and Chief Executive Officer
                                                      of Development Specialists, Inc. ("DSI"), a firm
                                                      specializing in providing management, consulting and
                                                      turnaround assistance to reorganizing businesses, since
                                                      1978.
                                                     
Fred C. Caruso                                 43     Acting Chief Operating Officer since 1997.  Also a
                                                      consultant with DSI since 1982.
                                                     
                                                     
Patrick J. O'Malley                            39     Acting Principal Financial and Accounting Officer since
                                                      1997.  Also a consultant with DSI since 1991.
                                                     
Edward G. Stautzenbach                         60     Vice President, Marketing since 1991.  Formerly Assistant
                                                      Vice President from 1988.
                                                     
Steven G. Gould                                42     Vice President  Operations of the Company since July 1994.
                                                      Formerly Assistant Vice President/Regional Director of
                                                      Company and First Illinois Finance Company (the Company's
                                                      predecessor) from 1986.
                                                     
George R. Carey                                58     Vice President - Operations of the Company since June 1995.
                                                      Formerly Assistant Vice President/Regional Director of
                                                      Company from September 1992.
                                                     
Sheila M. Tilson                               48     Vice President - Operations and Assistant Secretary since
                                                      April 1995.  Assistant Vice President Operations from
                                                      January 1987.
                                                     
John N. Brincat, Jr.                           38     Vice President - Operations of the Company since July 1994.
                                                      Formerly Assistant Vice President/Regional Director of
                                                      Company from 1991.
                                                     
Michael Caul                                   55     Vice President - Operations of the Company since January,
                                                      1997.  Formerly Vice President - Operations of General
                                                      Acceptance Corporation for two years.  Prior thereto,
                                                      Assistant Vice President/Regional Director of the Company
                                                      since 1988.
                                                     
David Joseph Peters                            40     Vice President - Operations of the Company since March,
                                                      1997.  Formerly Assistant Vice President/Regional Director
                                                      of the Company since 1993, and prior thereto, branch
                                                      manager since 1987.
</TABLE> 
 

                                       50
<PAGE>
 
                                                Position With Company    
                                                Principal Occupation      
      Name of               Age                 for Last Five Years       
----------------------     ----       ------------------------------------------

Charles H. Lam              47        Vice President - Operations of the Company
                                      since February, 1996. Formerly Assistant
                                      Vice President/Regional Director of
                                      Company from October 1990. Branch Manager
                                      prior thereto.
                                      
Al Green                    40        Vice President Insurance and Portfolio
                                      Management since May, 1997. Prior thereto,
                                      Regional Director/Assistant Vice President
                                      of the Company since 1992.
--------------------------------------------------------------------------------

                                       51
<PAGE>
 
ITEM 11

EXECUTIVE COMPENSATION

CASH COMPENSATION

The following table sets forth information regarding compensation paid by the
Company for services rendered in all capacities to the Company and its
subsidiaries by the Company's Chief Executive Officer and the other four most
highly compensated executive officers (the "Named Executive Officers") for the
1998, 1997 and 1996 fiscal years.  Certain executive officers of the Company are
employed by Development Specialists, Inc. and are not included in the table
below.  See "Item 13 - Certain Relationships and Related Transactions" for more
information regarding the relationship between the Company and Development
Specialists, Inc.

                                 SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                            Annual                                        Long Term
                                         Compensation                                   Compensation
                                         ------------                                -------------------
                                                                                          Securities     
Name and Principal                                                                        Underlying             All Other
Position                                     Year       Base Salary       Bonus           Options (#)         Compensation(1)
---------------------------------------  ------------  --------------  ------------   ------------------- -----------------------
<S>                                      <C>           <C>             <C>            <C>                 <C>
William A. Brandt, Jr.                           1998        $750,000       $     0                   0                 $    0
President and Chief Executive Officer            1997         750,000             0                   0                      0
                                                 1996               -             -                   -                      -
 
John N. Brincat, Jr.                             1998         134,000        70,500                   0                  8,000
Vice President-Operations                        1997         130,000        50,000              10,000                  7,625
                                                 1996         118,385        20,000              20,000                  7,304
 
Steven G. Gould                                  1998         136,000        45,500                   0                  3,129
Vice President-Operations                        1997         132,000        27,500              10,000                  7,745
                                                 1996         134,000        30,000              20,000                  7,396
 
George R. Carey                                  1998         127,000        50,500                   0                  7,555
Vice President-Operations                        1997         123,000        20,000              10,000                  7,265
                                                 1996         117,000        20,000              20,000                  7,027
 
Charles H. Lam                                   1998         134,000        38,000                   0                  8,340
Vice President-Operations                        1997         130,000        45,000              10,000                  7,624
                                                 1996         132,000        40,000              15,000                  6,923
</TABLE> 

(1) Represents the Company matching contribution to the 401K Plan.

                    OPTIONS GRANTED IN THE LAST FISCAL YEAR

No options were granted during 1998 to the Named Executive Officers.

                                       52
<PAGE>
 
                AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR
                           AND YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                  
                                                                                        Value of               
                                                      Number of Unexercised       Unexercised In-the-Money  
                             Shares                    Options at  Year End          Options at Year End
                            Acquired     Value                                         
                           on Exercise  Realized   Exercisable    Unexercisable    Exercisable     Unexercisable
                           -----------  --------  --------------  -------------  ----------------  -------------
<S>                        <C>          <C>       <C>             <C>            <C>               <C>
William A. Brandt, Jr.          0          $0               0           -               $0          $          - 
John N. Brincat, Jr.            0          $0         117,079           -               $0          $          - 
Steven G. Gould                 0          $0          26,666           -               $0          $          - 
George R. Carey                 0          $0          49,166           -               $0          $          - 
Charles H. Lam                  0          $0          21,666           -               $0          $          -  
</TABLE>

RETIREMENT PLAN

The Company has a defined benefit Retirement Plan (The "Retirement Plan")
covering eligible employees who are at least 21 years of age and have completed
at least 1 year of service.  The amount of the Company's annual contribution to
the Retirement Plan is determined for the total of all participants covered by
such Retirement Plan, and the amount of payment in respect of a specified person
is not and cannot readily be separated or individually calculated by the regular
actuaries for the Retirement Plan.  The remuneration covered by the Retirement
Plan ("pension based pay") is the highest average monthly total compensation for
any 5 consecutive years out of the employee's last 10 years of employment.  The
normal retirement benefit at age 65 equals 70% of pension base pay minus 50% of
the participant's primary Social Security benefit.  This amount is reduced by
1/35th for each year by which the participant has fewer than 35 years of
participation in the Retirement Plan.  Benefits are also available to
participants who terminate employment before age 65 after completing 5 or more
years of service or due to total and permanent disability.

                                       53
<PAGE>
 
The following table sets forth estimated annual benefits upon retirement,
payable on a straight life annuity basis, for employees in the specified pension
base pay (shown on an annual basis) and years of participation classifications,
and is based upon the assumption that the Retirement Plan will be continued and
that the employee will continue with the Company until his normal retirement age
of 65:

Number of Years of Participation

<TABLE>
Remuneration**                5            10             15            20           25               30             35
------------------        -------       -------        -------       -------      -------         --------       ----------
<S>                       <C>           <C>            <C>           <C>          <C>             <C>            <C> 
$  100,000                $ 8,930       $17,860        $26,790       $35,720      $44,650         $ 53,580       $   62,510
$  110,000                $ 9,930       $19,860        $29,790       $39,720      $49,650         $ 59,580       $   69,510
$  120,000                $10,930       $21,860        $32,790       $43,720      $54,650         $ 65,580       $   76,510
$  130,000                $11,930       $23,860        $35,790       $47,720      $59,650         $ 71,580       $   83,510
$  140,000                $12,930       $25,860        $38,790       $51,720      $64,650         $ 77,580       $   90,510
$  150,000                $13,930       $27,860        $41,790       $55,720      $69,650         $ 83,580       $   97,510
$  160,000                $14,930       $29,860        $44,790       $59,720      $74,650         $ 89,580       $  104,510
$  170,000                $15,930       $31,860        $47,790       $63,720      $79,650         $ 95,580       $  111,510
$  180,000                $16,930       $33,860        $50,790       $67,720      $84,650         $101,580       $  118,510
$  190,000                $17,930       $35,860        $53,790       $71,720      $89,650         $107,580       $   25,510  *
$  200,000                $18,930       $37,860        $56,790       $75,720      $94,650         $113,580       $   32,510  *
</TABLE>

____________________

*  The annual retirement benefits are subject to maximum limitations ($130,000
at December 31, 1998) under the Internal Revenue Code.

**The annual limit on remuneration for purposes of pension plan benefit
calculation was $160,000 at December 31, 1998 under the Internal Revenue Code.

The credited years of participation for the individuals named in the above
compensation table are as follows:  John N. Brincat, Jr., 13 years; Steven G.
Gould, 14 years; George R. Carey, 8 years; and Charles H. Lam, 11 years.  Mr.
Brandt does not participate in the Plan.

DIRECTOR COMPENSATION

The compensation of Directors is based upon standard fee arrangements for the
Company which provide for non-management directors' fees consisting of an annual
retainer of $3,000 payable quarterly, plus an attendance fee of $200 for each
board and committee meeting of the Company attended.

The Company has a Deferred Compensation Plan for Directors ("Deferred
Compensation Plan").  Pursuant to the provisions of the Deferred Compensation
Plan, any director of the Company may elect to defer all or any portion of the
compensation due him as a director.  Interest shall be computed on and credited
to any deferred compensation at the prevailing market rate for 6 month
Individual Retirement Account Certificates of Deposit.  The rate is adjusted on
January 1 and July 1 each year.  Payments of the amount of deferred compensation
and interest earned thereon shall commence as of the first day in May after a
director ceases to be a director of the Company.  Payment may be made in a lump
sum or in any number of installments (maximum of 5 annually), equal or
otherwise, as the Executive Committee shall determine.  All directors elected to
defer their compensation beginning in 1997.  All claims for such compensation
will be discharged on the Effective Date pursuant to the Plan.

EMPLOYMENT AGREEMENTS

In February, 1997, the Company entered into an employment agreement with Mr.
Brandt, President and Chief Executive Officer of Development Specialists, Inc.,
employing Mr. Brandt as President and Chief Executive Officer of the Company.
The annual salary under the employment contract is $750,000.   The Company may
terminate the employment agreement with 90 days notice of termination or
immediately with continuation of compensation for 90 days.  Mr. Brandt may
terminate the employment agreement with 30 days notice.  Pursuant to an
amendment to 

                                       54
<PAGE>
 
Mr. Brandt's employment agreement, the Company will pay Mr. Brandt $1 million on
the Effective Date. See "Item 13 - Certain Relationships and Related
Transactions" for more information regarding the relationship between the
Company and Development Specialists, Inc.

Until the Plan's Effective Date, it is expected that William A. Brandt, Jr.,
Fred C. Caruso, Patrick J. O'Malley and the balance of the management team from
DSI will continue to provide for the management of the Company.

Mr. Brincat, the Company's former President and Chief Executive Officer,
resigned from both positions in February, 1997.  Mr. Brincat also resigned as an
employee and director of Mercury effective as of December 1, 1997.  Pursuant to
a separation agreement which was consummated in the first quarter of 1998, Mr.
Brincat returned $1 million of bonus compensation which he previously received
and waived rights to certain other benefits.

In 1998, the Company conducted an active search for a permanent Chief Executive
Officer and management team.  In early November, the Company, with the consent
of the Creditors' Committee, selected Edward G. Harshfield to be the new
President and Chief Executive Officer of the Company upon confirmation and
effectiveness of the Plan.  The Company is employing Mr. Harshfield as a
consultant until the Effective Date of the Plan.  The terms of Mr. Harshfield's
consulting arrangement is set forth in the Consulting Agreement which is filed
as Exhibit 10AZ hereto.

                                       55
<PAGE>
 
ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Based on information within the Company's possession including Schedules 13D and
13G filed with the Securities and Exchange Commission, as of December 31, 1998,
there were not any persons or entities known by the Company to be the beneficial
owner of more than five percent of the Company's voting securities.

The following table sets forth, with respect to the Company's Common Stock,
shares believed by the Company to be beneficially owned as of March 1, 1999 by
(i) all directors, (ii) the executive officers named in the Summary Compensation
Table, and (iii) the directors and all executive officers as a group.  The
information is based on data within the Company's possession.

<TABLE>
<CAPTION>
                                  Beneficial Shares Owned            Unexercised                                        
                                     Before Exercisable          Options Exercisable                        Percent     
                                     Stock Options (1)             within 60 days            Total          of Class    
                               ---------------------------      ----------------------   --------------  -------------- 
<S>                            <C>                              <C>                      <C>              <C> 
DIRECTORS
Dennis H. Chookaszian........                        1,500                     20,000            21,500         *
William C. Croft.............                      660,363                     20,000           680,363         *
Clifford R. Johnson(2).......                      573,037                     31,602           604,639         *
Andrew McNally IV............                      375,968                     20,000           395,968         *
Bruce I. McPhee..............                      303,259                     20,000           323,259         *
Fred G. Steingraber..........                        6,000                     20,000            26,000         *
Philip J. Wicklander(3)......                      217,790                     20,000           237,790         *
                                                                                                                
OTHER EXECUTIVE OFFICERS:                                                                                       
William A. Brandt, Jr........                            0                          0                 0         0
John N. Brincat, Jr..........                        8,000                    117,079           125,079         *
Steven G. Gould..............                            0                     26,666            26,666         *
George R. Carey..............                            0                     49,166            49,166         *
Charles H. Lam...............                            0                     21,666            21,666         *
Directors and Executive                                                                                                 
  Officers as a Group........                    2,151,422                    583,925         2,735,347       1.6% 
</TABLE>

____________________
*Less than one percent.

(1)  Nature of beneficial ownership of securities is direct unless otherwise
     indicated by footnote. Beneficial ownership as shown in the table arises
     from sole voting power and sole investment power unless otherwise indicated
     by footnote.

(2)  Includes 216,984 shares held by Mr. Johnson's wife, as to which Mr. Johnson
     disclaims beneficial interest.

(3)  Does not include 1,500 shares held by minor children.

                                       56
<PAGE>
 
ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See "Item 11-Employment Agreements."

The Consulting firm of Development Specialists, Inc. ("DSI"), owned by William
A. Brandt, Jr., was engaged to fill certain positions of executive management
including Chief Operating Officer, Chief Financial and Accounting Officer and
Chief Credit Officer.  In addition, DSI staff members have provided additional
support in the accounting and finance area.  These services are being provided
based upon time spent performing such functions at the individuals' customary
hourly billing rates.  For the year ended December 31, 1998, the Company paid
$2,788,707 of fees relating to services rendered by DSI.  In addition, DSI was
paid $1.6 million in early 1999 which was accrued as of December 31, 1998.

                                       57
<PAGE>
 
                                    PART IV

ITEM 14

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements Filed in this Annual Report on Form 10-K
---------------------------------------------------------------------

Report of Arthur Andersen LLP
Consolidated Balance Sheets as of December 31, 1998, and December 31, 1997.
Consolidated Statements of Income for the years ended December 31, 1998, 1997,
and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996.
Consolidated Statement of Cash Flows for the years ended December 31, 1998,
1997, and 1996.
Notes to Consolidated Financial Statements for the years ended December 31,
1998, 1997, and 1996.
Quarterly Financial Data (unaudited)

(a)(2)  Financial Statement Schedules
-------------------------------------

None

(a)(3)  Exhibits
----------------

2        Mercury Finance Company's Second Amended Plan of Reorganization.

3A       Certificate of Incorporation, as amended, incorporated herein by
         reference to Exhibit Number 3A to the Company's Annual Report on Form
         10-K for the year ended December 31, 1996.

3B       Bylaws, incorporated herein by reference to Exhibit Number 3B to the
         Company's Form 10 filed February 1, 1989.

10A      1989 Mercury Finance Company Stock Option Plan, incorporated herein by
         reference to Exhibit Number 10A to the Company's Form 10 filed February
         1, 1989.

10B      Mercury Finance Company Employee Stock Purchase Plan, incorporated
         herein by reference to Exhibit Number 10B to the Company's Form 10
         filed February 1, 1989.

10C      Mercury Finance Company Retirement Plan and Retirement Trust,
         incorporated herein by reference to Exhibit Number 10C to the Company's
         Form 10 filed February 1, 1989.

10D      Mercury Finance Company Deferred Compensation Plan for Directors,
         incorporated herein by reference to Exhibit Number 10D to the Company's
         Form 10 filed February 1, 1989.

10E      Mercury Finance Company Dividend Reinvestment Plan, incorporated herein
         by reference to Exhibit Number 10E to the Company's Form 10 filed
         February 1, 1989.

10F      Form of Mercury Finance Company Commercial Paper Note, incorporated
         herein by reference to Exhibit Number 10T to the Company's Form 10
         filed February 1, 1989.

10G      Senior Subordinated Note Agreement Series C Dated as of December 1,
         1989 Between Mercury Finance Company and:

         - Cigna Property and Casualty Insurance Company
         - Connecticut General Life Insurance Company
         - Life Insurance Company of North America
         - Phoenix Mutual Life Insurance Company,

                                       58
<PAGE>
 
         incorporated herein by reference to Exhibit Number AM to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

10H      Senior Subordinated Note Agreement Series D Dated as of May 15, 1990
         Between Mercury Finance Company and:
 
         - Cigna Property and Casualty Company
         - Connecticut General Life Insurance Company,

         incorporated herein by reference to Exhibit Number AF to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31, 1990.

10I      Issuing and Paying Agent Agreement between Security Pacific National
         Trust Company (New York) and Mercury Finance Company dated August 1,
         1990, incorporated herein by reference to Exhibit 10I to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1996.

10J      Commercial Paper Dealer Agreement dated as of March 25, 1991, between
         Mercury Finance Company and Paine Webber Inc., as successor to Kidder,
         Peabody & Co, incorporated herein by reference to Exhibit Number 10J to
         the Company Annual Report on Form 10-K for the year ended December 31,
         1997.

10K      Loan Agreement Dated October 30, 1991 Between Mercury Finance Company
         and Allomon Funding Corporation (Uncommitted Credit Facility),
         incorporated herein by reference to Exhibit Number AJ to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31, 1991.

10L      Senior Note Agreement Dated March 1, 1992 Between Mercury Finance
         Company and Principal Mutual Life Insurance Company, incorporated
         herein by reference to Exhibit Number 10AK to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1992.

10M      Senior Note Agreement Dated May 1, 1992 Between Mercury Finance Company
         and:

         - Allstate Life Insurance Company                
         - State Mutual Life Assurance Company of America, 

         incorporated herein by reference to Exhibit Number 10AL to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1992.

10N      Senior Note Agreement Dated March 1, 1993 Between Mercury Finance
         Company and Principal Mutual Life Insurance Company, incorporated
         herein by reference to Exhibit Number 10AS to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1993.

10O      Purchase Agreement Dated April 1, 1993 Between Mercury Finance Company
         and Independent Life Insurance Company, incorporated herein by
         reference to Exhibit Number 10AR to the Company's Annual Report on Form
         10-K for the fiscal year ended December 31, 1993.

10P      Senior Note Agreement Dated July 1, 1993 Between Mercury Finance
         Company and Pacific Mutual Life Insurance Company, incorporated herein
         by reference to Exhibit Number 10AT to the Company's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1993.

10Q      Senior Note Agreement Dated December 1, 1993 Between Mercury Finance
         Company and:

         - American United Life Insurance Company
         - MONY Capital Management
         - Pacific Mutual Life Insurance Company
         - Principal Mutual Life Insurance Company,

                                       59
<PAGE>
 
         incorporated herein by reference to Exhibit Number 10AU to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1993.

10R      Letter Agreement dated March 23, 1994, between NationsBanc Capital
         Markets, Inc. and Mercury Finance Company, incorporated hereby by
         reference to Exhibit 10S to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1996.

10S      Dealer Agreement dated as of October 24, 1994 between BA Securities,
         Inc. and Mercury Finance Company, incorporated herein by reference to
         Exhibit 10U to the Company's Annual Report on Form 10-K for the year
         ended December 31, 1996.

10T      Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
         Company and Norddeutsche Landesbank Girozentrale, incorporated herein
         by reference to Exhibit Number 10AZ to the Company's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1994.

10U      Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
         Company and The Long-Term Credit Bank of Japan, Ltd., incorporated
         herein by reference to Exhibit Number 10BA to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1994.

10V      Senior Note Agreement Dated June 29, 1995 Between Mercury Finance
         Company and:

         - Allstate Life Insurance Company                   
         - Allstate Insurance Company                       
         - Metropolitan Life Insurance Company              
         - Principal Mutual Life Insurance Company          
         - Pacific Mutual Life Insurance Company            
         - PM Group Life Insurance Company                  
         - TMG Life Insurance Company                       
         - Lincoln-Security Life Insurance Company          
         - Security-Connecticut Life Insurance Company      
         - Oxford Life Insurance Company                    
         - London Life International Reinsurance Corporation
         - American States Life Insurance Company           
         - Phoenix Home Life Mutual Insurance Company       
         - Phoenix American Life Insurance Company          
         - American Guardian Life Assurance Company,         

         incorporated herein by reference to Exhibit Number 10BB to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1995.

10W      Senior Note Agreement Date October 3, 1995 Between Mercury Finance
         Company and Bank of America Illinois, incorporated herein by reference
         to Exhibit Number 10BC to the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1995.

10X      Purchase Agreement Dated October 20, 1995 Between Mercury Finance
         Company and ITT Corporation, incorporated herein by reference to
         Exhibit Number 10BE to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1995.

10Y      Senior Note Agreement, dated as of April 5, 1996, as amended, among
         Mercury Finance Company and the noteholders party thereto, incorporated
         herein by reference to Exhibit 10AA to the Company's Annual Report on
         Form 10-K for the year ended December 31, 1996.

10Z      Demand Promissory Note dated January 29, 1997, made by Mercury Finance
         Company in favor of Bank of America Illinois, incorporated herein by
         reference to Exhibit 10AB to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1996.

                                       60
<PAGE>
 
10AA      Employment Agreement between Mercury Finance Company and William A.
          Brandt, Jr. dated February 1, 1997, incorporated herein by reference
          to Exhibit 10AC to the Company's Annual Report on Form 10-K for the
          year ended December 31, 1996.*

10AB      Form of Limited Waiver Agreement entered into between Mercury Finance
          Company and senior noteholders on or about February 7, 1997,
          incorporated herein by reference to Exhibit 99.2 to the Company's
          Current Report on Form 8-K dated March 13, 1997.

10AC      Limited Waiver Agreement entered into between Mercury Finance Company
          and Paine Webber Inc. dated February 7, 1997 under Commercial Paper
          Dealer Agreement, incorporated herein by reference to Exhibit 99.4 to
          the Company's Current Report on Form 8-K dated March 13, 1997.

10AD      Loan and Security Agreement (the "Loan Agreement"), dated as of
          February 7, 1997 between Mercury Finance Company and all of its
          subsidiaries, other than its insurance company subsidiaries and
          BankAmerica Business Credit, Inc., incorporated herein by reference to
          Exhibit 10.1 to the Company's Current Report on Form 8-K dated
          February 13, 1997.

10AE      First Amendment to Loan Agreement dated February 14, 1997, between
          Mercury Finance Company and BankAmerica Business Credit, Inc.,
          incorporated herein by reference to Exhibit 10.1 to the Company's
          Current Report on Form 8-K dated March 11, 1997.

10AF      Rights Agreement dated as of February 27, 1997 between Mercury Finance
          Company and Harris Trust and Savings Bank as Rights Agent, which
          includes as Exhibit A the Forms of Rights Certificates, and as Exhibit
          B the Form of Rights Summary, incorporated herein by reference to
          Exhibit 1 to the Company's Form 8-A dated March 18, 1997.

10AG      Form of Second Limited Waiver Agreement entered into between Mercury
          Finance Company and senior noteholders on or about March 10, 1997,
          incorporated herein by reference to Exhibit 99.3 to the Company's
          Current Report on Form 8-K dated March 13, 1997.

10AH      Limited Waiver Agreement entered into between Mercury Finance Company
          and Paine Webber Inc. dated March 10, 1997 under Commercial Paper
          Dealer Agreement, incorporated herein by reference to Exhibit 99.5 to
          the Company's Current Report on Form 8-K dated March 13, 1997.

10AI      Second Amendment to Loan Agreement dated March 12, 1997, between
          Mercury Finance Company and BankAmerica Business Credit, Inc.,
          incorporated herein by reference to Exhibit 99.1 to the Company's
          Current Report on Form 8-K dated March 13, 1997.

10AJ      Form of Limited Waiver Agreement entered into between Mercury Finance
          Company and Credit Suisse First Boston Corporation, holder of Mercury
          commercial paper dated on or about February 7, 1997, incorporated
          herein by reference to Exhibit 99.6 to the Company's Current Report on
          Form 8-K dated March 13, 1997.

10AK      Limited Waiver Agreement entered into between Mercury Finance Company
          and Credit Suisse First Boston Corporation, holder of Mercury
          commercial paper dated as of March 10, 1997, incorporated herein by
          reference to Exhibit 99.7 to the Company's Current Report on Form 8-K
          dated March 13, 1997.

10AL      Limited Waiver Agreement entered into between Mercury Finance Company
          and Credit Suisse First Boston Corporation, holder of Mercury
          Subordinated Notes dated as of March 10, 1997, incorporated herein by
          reference to Exhibit 99.8 to the Company's Current Report on Form 8-K
          dated March 13, 1997.

_________________
* Management Contract.

                                       61
<PAGE>
 
10AM      Letter Agreement of Mercury Finance Company to the Paying Agent and
          Holders of Commercial Paper of Mercury Finance Company dated March 12,
          1997, incorporated herein by reference to Exhibit 99.9 to the
          Company's Current Report on Form 8-K dated March 13, 1997.

10AN      Stock Purchase Agreement between Mercury Finance Company and Frontier
          Insurance Group, Inc. dated March 28, 1997, incorporated herein by
          reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
          dated March 28, 1997.

10AO      Forbearance Agreement dated as of July 11, 1997, between Mercury
          Finance Company and the persons listed on the signature pages thereto,
          incorporated herein by reference to Exhibit 99.1 to the Company's
          Current Report on Form 8-K dated July 16, 1997.

10AP      Forbearance Agreement dated as of July 11, 1997, between Mercury
          Finance Company and the persons listed on the signature pages thereto,
          incorporated herein by reference to Exhibit 99.2 to the Company's
          Current Report on Form 8-K dated July 16, 1997.

10AQ      Forbearance and Third Limited Waiver Agreement dated as of July 11,
          1997, between Mercury Finance Company and Credit Suisse First Boston
          Management Corporation, incorporated herein by reference to Exhibit
          99.3 to the Company's Current Report on Form 8-K dated July 16, 1997.

10AR      Third Amendment to Loan and Security Agreement dated as of July 9,
          1997, among certain financial institutions, BankAmerica Business
          Credit, Inc., Mercury Finance Company, and certain other borrowers,
          incorporated herein by reference to Exhibit 99.4 to the Company's
          Current Report on Form 8-K dated July 16, 1997.

10AS      First Amendment to Forbearance Agreement dated as of November 6, 1997
          between the Company and certain lenders, incorporated herein by
          reference to Exhibit 99.3 to the Company's Current Report on Form 8-K
          dated November 6, 1997.

10AT      Fourth Limited Waiver Agreement dated as of November 6, 1997 between
          the Company and certain lenders, incorporated herein by reference to
          Exhibit 99.4 to the Company's Current Report on Form 8-K dated
          November 6, 1997.

10AU      Fourth Limited Waiver Agreement dated as of November 6, 1997 between
          the Company and Credit Suisse First Boston Management, incorporated
          herein by reference to Exhibit 99.5 to the Company's Current Report on
          Form 8-K dated November 6, 1997.

10AV      Fourth Limited Waiver Agreement dated as of November 6, 1997 between
          the Company and Painewebber, Inc., incorporated herein by reference to
          Exhibit 99.6 to the Company's Current Report on Form 8-K dated
          November 6, 1997.

10AW      Forbearance and Fourth Limited Waiver Agreement dated as of November
          6, 1997 between the Company and Credit Suisse First Boston Management
          Corporation, incorporated herein by reference to Exhibit 99.7 to the
          Company's Current Report on Form 8-K dated November 6, 1997.

10AX      Separation Agreement between the Company and John N. Brincat dated
          December 30, 1997, incorporated herein by reference to Exhibit 10AZ to
          the Company's Annual Report on Form 10-K for the year ended December
          31, 1996.

10AY      Retention and Letter of Engagement between the Company and Development
          Specialists, Inc. dated February 5, 1997, incorporated herein by
          reference to Exhibit BA to the Company's Annual Report on form 10-K
          for the year ended December 31, 1997.

10AZ      Consulting Agreement dated November 5, 1998 between the Company and
          Edward G. Harshfield.

                                       62
<PAGE>
 
10BA      First Amendment to Retention and Letter of Engagement of Development
          Specialists, Inc. dated as of July 14, 1998, between the Company and
          DSI.

10BB      First Amendment to Employment Agreement dated July 14, 1998, between
          the Company and William A. Brandt, Jr.

10BC      Retention Agreement dated July 14, 1998 by and among DSI and certain 
          subsidiaries of the Company.

11        Computation of Net Income Per Share

12        Ratio of Earnings to Fixed Charges

16        Letter dated February 25, 1997, from KPMG Peat Marwick LLP to the
          Securities and Exchange Commission, incorporated herein by reference
          to Exhibit 16 to the Company's Current Report on Form 8-K dated
          February 25, 1997.

21        Subsidiaries of Mercury Finance Company

23        Consent of Arthur Andersen LLP

27        Financial Data Schedule

(b)  Reports on Form 8-K
------------------------

The Company filed the following Current Reports on Form 8-K during the fourth
quarter of 1998:

          (i)  Item 5 and Item 7 8-K dated November 24, 1998; and

          (ii) Item 5 and Item 7 8-K dated December 29, 1998.

                                       63
<PAGE>
 
                                  SIGNATURES

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

                                 Mercury Finance Company
                                     (Registrant)

Date:  March 19, 1999
                                 By:/s/   William A. Brandt, Jr.
                                    --------------------------------------------
                                       William A. Brandt, Jr.,  
                                       President and Chief Executive Officer 

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 and
in the capacities and on the dates indicated.

<TABLE> 
<S>                                             <C>                        <C> 
/s/ William A. Brandt, Jr.                                                 March 19, 1999 
--------------------------                                                               
William A. Brandt, Jr.                                                                   
President and Chief Executive Officer                                                    
                                                                                         
                                                                                         
/s/ Patrick J. O'Malley                                                    March 19, 1999
-----------------------                                                                  
Patrick J. O'Malley                                                                      
Principal Financial and Accounting Officer                                               
                                                                                         
                                                                                         
/s/ Dennis H. Chookaszian                       Director                   March 19, 1999
-------------------------                                                                
Dennis H. Chookaszian                                                                    
                                                                                         
                                                                                         
/s/ William C. Croft                            Director                   March 19, 1999
--------------------                                                                     
William C. Croft                                                                         
                                                                                         
                                                                                         
/s/ Clifford R. Johnson                         Director                   March 14, 1999
-----------------------                                                                  
Clifford R. Johnson                                                                      
                                                                                         
                                                                                         
/s/ Andrew McNally IV                           Director                   March 19, 1999
---------------------                                                                    
Andrew McNally IV                                                                        
                                                                                         
                                                                                         
/s/ Bruce I. McPhee                             Director                   March 16, 1999
-------------------                                                                      
Bruce I. McPhee                                                                          
                                                                                         
                                                                                         
/s/ Fred G. Steingraber                         Director                   March 19, 1999
-----------------------                                                                  
Fred G. Steingraber                                                                      
                                                                                         
                                                                                         
/s/ Philip J. Wicklander                        Director                   March 19, 1999 
------------------------                                  
Philip J. Wicklander
</TABLE> 

                                       64
<PAGE>
 
EXHIBIT
NUMBER   DESCRIPTION OF EXHIBIT

2         Mercury Finance Company's Second Amended Plan of Reorganization.

3A        Certificate of Incorporation, as amended, incorporated herein by
          reference to Exhibit 3A to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1996.

3B        Bylaws, incorporated herein by reference to Exhibit Number 3B to the
          Company's Form 10 filed February 1, 1989.

10A       1989 Mercury Finance Company Stock Option Plan, incorporated herein by
          reference to Exhibit Number 10A to the Company's Form 10 filed
          February 1, 1989.

10B       Mercury Finance Company Employee Stock Purchase Plan, incorporated
          herein by reference to Exhibit Number 10B to the Company's Form 10
          filed February 1, 1989.

10C       Mercury Finance Company Retirement Plan and Retirement Trust,
          incorporated herein by reference to Exhibit Number 10C to the
          Company's Form 10 filed February 1, 1989.

10D       Mercury Finance Company Deferred Compensation Plan for Directors,
          incorporated herein by reference to Exhibit Number 10D to the
          Company's Form 10 filed February 1, 1989.

10E       Mercury Finance Company Dividend Reinvestment Plan, incorporated
          herein by reference to Exhibit Number 10E to the Company's Form 10
          filed February 1, 1989.

10F       Form of Mercury Finance Company Commercial Paper Note, incorporated
          herein by reference to Exhibit Number 10T to the Company's Form 10
          filed February 1, 1989.

10G       Senior Subordinated Note Agreement Series C Dated as of December 1,
          1989 Between Mercury Finance Company and:

          - Cigna Property and Casualty Insurance Company
          - Connecticut General Life Insurance Company   
          - Life Insurance Company of North America      
          - Phoenix Mutual Life Insurance Company,        

          incorporated herein by reference to Exhibit Number AM to the Company's
          Annual Report on Form 10-K for the fiscal year ended December 31,
          1989.

10H       Senior Subordinated Note Agreement Series D Dated as of May 15, 1990
          Between Mercury Finance Company and:
 
          - Cigna Property and Casualty Company        
          - Connecticut General Life Insurance Company, 

          incorporated herein by reference to Exhibit Number AF to the Company's
          Annual Report on Form 10-K for the fiscal year ended December 31,
          1990.

10I       Issuing and Paying Agent Agreement between Security Pacific National
          Trust Company (New York) and Mercury Finance Company dated August 1,
          1990, incorporated herein by reference to Exhibit 10I to the Company's
          Annual Report on Form 10-K for the year ended December 31, 1996.

10J       Commercial Paper Dealer Agreement dated as of March 25, 1991, between
          Mercury Finance Company and Paine Webber Inc., as successor to Kidder,
          Peabody & Co., incorporated herein by reference to Exhibit 10J to the
          Company's Annual Report on Form 10-K for the year ended December 31,
          1997.

                                       65
<PAGE>
 
10K       Loan Agreement Dated October 30, 1991 Between Mercury Finance Company
          and Allomon Funding Corporation (Uncommitted Credit Facility),
          incorporated herein by reference to Exhibit Number AJ to the Company's
          Annual Report on Form 10-K for the fiscal year ended December 31,
          1991.

10L       Senior Note Agreement Dated March 1, 1992 Between Mercury Finance
          Company and Principal Mutual Life Insurance Company, incorporated
          herein by reference to Exhibit Number 10AK to the Company's Annual
          Report on Form 10-K for the fiscal year ended December 31, 1992.

10M       Senior Note Agreement Dated May 1, 1992 Between Mercury Finance
          Company and:

          - Allstate Life Insurance Company                
          - State Mutual Life Assurance Company of America, 

          incorporated herein by reference to Exhibit Number 10AL to the
          Company's Annual Report on Form 10-K for the fiscal year ended
          December 31, 1992.

10N       Senior Note Agreement Dated March 1, 1993 Between Mercury Finance
          Company and Principal Mutual Life Insurance Company, incorporated
          herein by reference to Exhibit Number 10AS to the Company's Annual
          Report on Form 10-K for the fiscal year ended December 31, 1993.

10O       Purchase Agreement Dated April 1, 1993 Between Mercury Finance Company
          and Independent Life Insurance Company, incorporated herein by
          reference to Exhibit Number 10AR to the Company's Annual Report on
          Form 10-K for the fiscal year ended December 31, 1993.

10P       Senior Note Agreement Dated July 1, 1993 Between Mercury Finance
          Company and Pacific Mutual Life Insurance Company, incorporated herein
          by reference to Exhibit Number 10AT to the Company's Annual Report on
          Form 10-K for the fiscal year ended December 31, 1993.

10Q       Senior Note Agreement Dated December 1, 1993 Between Mercury Finance
          Company and:

          - American United Life Insurance Company  
          - MONY Capital Management                 
          - Pacific Mutual Life Insurance Company   
          - Principal Mutual Life Insurance Company, 

          incorporated herein by reference to Exhibit Number 10AU to the
          Company's Annual Report on Form 10-K for the fiscal year ended
          December 31, 1993.

10R       Letter Agreement dated March 23, 1994, between NationsBanc Capital
          Markets, Inc. and Mercury Finance Company, incorporated herein by
          reference to Exhibit 10S to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1996.

10S       Dealer Agreement dated as of October 24, 1994 between BA Securities,
          Inc. and Mercury Finance Company, incorporated herein by reference to
          Exhibit 10U to the Company's Annual Report on Form 10-K for the year
          ended December 31, 1996.

10T       Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
          Company and Norddeutsche Landesbank Girozentrale, incorporated herein
          by reference to Exhibit Number 10AZ to the Company's Annual Report on
          Form 10-K for the fiscal year ended December 31, 1994.

10U       Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
          Company and The Long-Term Credit Bank of Japan, Ltd., incorporated
          herein by reference to Exhibit Number 10BA to the Company's Annual
          Report on Form 10-K for the fiscal year ended December 31, 1994.

10V       Senior Note Agreement Dated June 29, 1995 Between Mercury Finance
          Company and:

                                       66
<PAGE>
 
          - Allstate Life Insurance Company                   
          - Allstate Insurance Company                       
          - Metropolitan Life Insurance Company              
          - Principal Mutual Life Insurance Company          
          - Pacific Mutual Life Insurance Company            
          - PM Group Life Insurance Company                  
          - TMG Life Insurance Company                       
          - Lincoln-Security Life Insurance Company          
          - Security-Connecticut Life Insurance Company      
          - Oxford Life Insurance Company                    
          - London Life International Reinsurance Corporation
          - American States Life Insurance Company           
          - Phoenix Home Life Mutual Insurance Company       
          - Phoenix American Life Insurance Company          
          - American Guardian Life Assurance Company,         

          incorporated herein by reference to Exhibit Number 10BB to the
          Company's Annual Report on Form 10-K for the fiscal year ended
          December 31, 1995.

10W       Senior Note Agreement Date October 3, 1995 Between Mercury Finance
          Company and Bank of America Illinois, incorporated herein by reference
          to Exhibit Number 10BC to the Company's Annual Report on Form 10-K for
          the fiscal year ended December 31, 1995.

10X       Purchase Agreement Dated October 20, 1995 Between Mercury Finance
          Company and ITT Corporation, incorporated herein by reference to
          Exhibit Number 10BE to the Company's Annual Report on Form 10-K for
          the fiscal year ended December 31, 1995.

10Y       Senior Note Agreement, dated as of April 5, 1996, as amended, among
          Mercury Finance Company and the noteholders party thereto,
          incorporated herein by reference to Exhibit 10AA to the Company's
          Annual Report on Form 10-K for the year ended December 31, 1996.

10Z       Demand Promissory Note dated January 29, 1997, made by Mercury Finance
          Company in favor of Bank of America Illinois, incorporated herein by
          reference to Exhibit 10AB to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1996.

10AA      Employment Agreement between Mercury Finance Company and William A.
          Brandt, Jr. dated February 1, 1997, incorporated herein by reference
          to Exhibit 10AC to the Company's Annual Report on Form 10-K for the
          year ended December 31, 1996.

10AB      Form of Limited Waiver Agreement entered into between Mercury Finance
          Company and senior noteholders on or about February 7, 1997,
          incorporated herein by reference to Exhibit 99.2 to the Company's
          Current Report on Form 8-K dated March 13, 1997.

10AC      Limited Waiver Agreement entered into between Mercury Finance Company
          and Paine Webber Inc. dated February 7, 1997 under Commercial Paper
          Dealer Agreement, incorporated herein by reference to Exhibit 99.4 to
          the Company's Current Report on Form 8-K dated March 13, 1997.

10AD      Loan and Security Agreement (the "Loan Agreement"), dated as of
          February 7, 1997 between Mercury Finance Company and all of its
          subsidiaries, other than its insurance company subsidiaries and
          BankAmerica Business Credit, Inc., incorporated herein by reference to
          Exhibit 10.1 to the Company's Current Report on Form 8-K dated
          February 13, 1997.

10AE      First Amendment to Loan Agreement dated February 14, 1997, between
          Mercury Finance Company and BankAmerica Business Credit, Inc.,
          incorporated herein by reference to Exhibit 10.1 to the Company's
          Current Report on Form 8-K dated March 11, 1997.

                                       67
<PAGE>
 
10AF      Rights Agreement dated as of February 27, 1997 between Mercury Finance
          Company and Harris Trust and Savings Bank as Rights Agent, which
          includes as Exhibit A the Forms of Rights Certificates, and as Exhibit
          B the Form of Rights Summary, incorporated herein by reference to
          Exhibit 1 to the Company's Form 8-A dated March 18, 1997.

10AG      Form of Second Limited Waiver Agreement entered into between Mercury
          Finance Company and senior noteholders on or about March 10, 1997,
          incorporated herein by reference to Exhibit 99.3 to the Company's
          Current Report on Form 8-K dated March 13, 1997.

10AH      Limited Waiver Agreement entered into between Mercury Finance Company
          and Paine Webber Inc. dated March 10, 1997 under Commercial Paper
          Dealer Agreement, incorporated herein by reference to Exhibit 99.5 to
          the Company's Current Report on Form 8-K dated March 13, 1997.

10AI      Second Amendment to Loan Agreement dated March 12, 1997, between
          Mercury Finance Company and BankAmerica Business Credit, Inc.,
          incorporated herein by reference to Exhibit 99.1 to the Company's
          Current Report on Form 8-K dated March 13, 1997. 

10AJ      Form of Limited Waiver Agreement entered into between Mercury Finance
          Company and Credit Suisse First Boston Corporation, holder of Mercury
          commercial paper dated on or about February 7, 1997, incorporated
          herein by reference to Exhibit 99.6 to the Company's Current Report on
          Form 8-K dated March 13, 1997.

10AK      Limited Waiver Agreement entered into between Mercury Finance Company
          and Credit Suisse First Boston Corporation, holder of Mercury
          commercial paper dated as of March 10, 1997, incorporated herein by
          reference to Exhibit 99.7 to the Company's Current Report on Form 8-K
          dated March 13, 1997.

10AL      Limited Waiver Agreement entered into between Mercury Finance Company
          and Credit Suisse First Boston Corporation, holder of Mercury
          Subordinated Notes dated as of March 10, 1997, incorporated herein by
          reference to Exhibit 99.8 to the Company's Current Report on Form 8-K
          dated March 13, 1997.

10AM      Letter Agreement of Mercury Finance Company to the Paying Agent and
          Holders of Commercial Paper of Mercury Finance Company dated March 12,
          1997, incorporated herein by reference to Exhibit 99.9 to the
          Company's Current Report on Form 8-K dated March 13, 1997.

10AN      Stock Purchase Agreement between Mercury Finance Company and Frontier
          Insurance Group, Inc. dated March 28, 1997, incorporated herein by
          reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
          dated March 28, 1997.

10AO      Forbearance Agreement dated as of July 11, 1997, between Mercury
          Finance Company and the persons listed on the signature pages thereto,
          incorporated herein by reference to Exhibit 99.1 to the Company's
          Current Report on Form 8-K dated July 16, 1997.

10AP      Forbearance Agreement dated as of July 11, 1997, between Mercury
          Finance Company and the persons listed on the signature pages thereto,
          incorporated herein by reference to Exhibit 99.2 to the Company's
          Current Report on Form 8-K dated July 16, 1997.

10AQ      Forbearance and Third Limited Waiver Agreement dated as of July 11,
          1997, between Mercury Finance Company and Credit Suisse First Boston
          Management Corporation, incorporated herein by reference to Exhibit
          99.3 to the Company's Current Report on Form 8-K dated July 16, 1997.

10AR      Third Amendment to Loan and Security Agreement dated as of July 9,
          1997, among certain financial institutions, BankAmerica Business
          Credit, Inc., Mercury Finance Company, and certain other borrowers,
          incorporated herein by reference to Exhibit 99.4 to the Company's
          Current Report on Form 8-K dated July 16, 1997.

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<PAGE>
 
10AS      First Amendment to Forbearance Agreement dated as of November 6, 1997
          between the Company and certain lenders, incorporated herein by
          reference to Exhibit 99.3 to the Company's Current Report on Form 8-K
          dated November 6, 1997.

10AT      Fourth Limited Waiver Agreement dated as of November 6, 1997 between
          the Company and certain lenders, incorporated herein by reference to
          Exhibit 99.4 to the Company's Current Report on Form 8-K dated
          November 6, 1997.

10AU      Fourth Limited Waiver Agreement dated as of November 6, 1997 between
          the Company and Credit Suisse First Boston Management, incorporated
          herein by reference to Exhibit 99.5 to the Company's Current Report on
          Form 8-K dated November 6, 1997.

10AV      Fourth Limited Waiver Agreement dated as of November 6, 1997 between
          the Company and Painewebber, Inc., incorporated herein by reference to
          Exhibit 99.6 to the Company's Current Report on Form 8-K dated
          November 6, 1997.

10AW      Forbearance and Fourth Limited Waiver Agreement dated as of November
          6, 1997 between the Company and Credit Suisse First Boston Management
          Corporation, incorporated herein by reference to Exhibit 99.7 to the
          Company's Current Report on Form 8-K dated November 6, 1997.

10AX      Separation Agreement between the Company and John N. Brincat dated
          December 30, 1997, incorporated herein by reference to Exhibit 10AZ to
          the Company's Annual Report on Form 10-K for the year ended December
          31, 1996.

10AY      Retention and Letter of Engagement between the Company and Development
          Specialists, Inc. dated February 5, 1997, incorporated herein by
          reference to Exhibit 10BA to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1997.

10AZ      Consulting Agreement dated November 5, 1998, between the Company and
          Edward G. Harshfield.

10BA      First Amendment to Retention and Letter of Engagement of Development
          Specialists, Inc. dated as of July 14, 1998, between the Company and
          DSI.

10BB      First Amendment to Employment Agreement dated July 14, 1998, between
          the Company and William A. Brandt, Jr.

10BC      Retention Agreement dated July 14, 1998 by and among DSI and certain 
          subsidiaries of the Company.

11        Computation of Net Income Per Share

12        Ratio of Earnings to Fixed Charges

16        Letter dated February 25, 1997, from KPMG Peat Marwick LLP to the
          Securities and Exchange Commission, incorporated herein by reference
          to Exhibit 16 to the Company's Current Report on Form 8-K dated
          February 25, 1997.

21        Subsidiaries of Mercury Finance Company 
                                                 
23        Consent of Arthur Andersen LLP         
                                                 
27        Financial Data Schedule                 

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