<PAGE>   1



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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                  FORM 10-Q/A

                               AMENDMENT NO. 1 

(MARK ONE)

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

                FOR THE QUARTERLY PERIOD ENDED: FEBRUARY 28, 1998

                                       OR

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

          FOR THE TRANSITION PERIOD FROM _____________TO _____________

                         COMMISSION FILE NUMBER: 0-21689




                            MEGO MORTGAGE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                             88-0286042
(STATE OR OTHER JURISDICTION OF                              (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                             IDENTIFICATION NO.)

             1000 PARKWOOD CIRCLE, SUITE 500, ATLANTA, GEORGIA 30339
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                                 (770) 952-6700
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


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



                      APPLICABLE ONLY TO CORPORATE ISSUERS:

        As of May 19, 1998, there were 12,300,000 shares of Common Stock, $.01
par value per share, of the Registrant outstanding.

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

<PAGE>   2
         The Registrant hereby amends the Registrant's Quarterly Report on Form
10-Q for the period ended February 28, 1998 in its entirety. In accordance with
Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended,
the complete text of the Registrant's Amended Quarterly Report on Form 10-Q for
the period ended February 28, 1998 follows.

         Subsequent to February 28, 1998, the Registrant reviewed its
underlying assumptions with respect to the probability that the Registrant will
be able to use any or all of the deferred tax asset created from the pre-tax
losses during the previous six months within a reasonable amount of time. Upon
this review, the Registrant determined that based on the weight of available
evidence that it is more likely than not that the deferred tax asset relating
to the net operating loss carryforwards will not be realized, and has elected
to create an allowance (of 100%) of the deferred tax asset relating to the net
operating loss carryforward portion of the deferred tax asset. 

         Prior to this adjustment, the Registrant's net loss for the six month
period ended February 28, 1998 was $20.2 million and after the adjustment, the
Registrant's net loss for the six month period ended February 28, 1998 was
$32.5 million.

         As discussed in Note 4 of the Notes to Condensed Financial Statements,
the Registrant is not in compliance with certain covenants on its warehouse line
of credit with outstanding balances in the amount of $8.5 million and $40.0
million at August 31, 1997 and February 28, 1998, respectively, and its
revolving line of credit with outstanding balances in the amount of $25.0
million and $10.0 million at August 31, 1997 and February 28, 1998, and there is
no assurance that the lines of credit will be renewed. As discussed in Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, certain mortgage servicing rights aggregating $3.1 million at
February 28, 1998, are subject to termination due to loan default rates in
excess of the permitted limit set forth in the related pooling and servicing
agreements. Also, as discussed in Part II Other Information - Item 1. Legal
Proceedings a class action suit was filed against the Registrant and the
Registrant's Chief Executive Officer that alleges, among other things, that the
Registrant violated the federal securities laws in connection with the
preparation and issuance of the Registrant's financial statements. As discussed
in Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations the Registrant is not in compliance with certain covenants
in the subordinated notes indenture which prohibits the Registrant from
obtaining additional financing. The Registrant has operated on a negative cash
flow basis since inception and due to cash flow restrictions, the Registrant has
curtailed loan originations and subsequently reduced its work force. During
March and April 1998, the Registrant originated only $5.5 million of
Conventional Loans, $0.5 million of Title I Loans and $3.3 million of First
Mortgage Loans compared to $304.3 million, $18.1 million and $4.8 million,
respectively, of Conventional, Title I and First Mortgage Loans for the six
months ended February 28, 1998. These matters, among others, raise substantial
doubt about the Registrant'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.

         In order to return the Registrant to profitability and improve the
Registrant's financial position, the Registrant is focusing on the following
strategic initiatives: (i) consummation of the recapitalization transactions as
described in Note 8 to Notes to Condensed Financial Statements; (ii) balancing
whole loan sales on a servicing released or retained basis for cash premiums
with the use of securitizations as a method of loan disposition; (iii)
implementing cost saving measures; (iv) offering new complementary loan products
such as non-conforming first mortgage loans; and (v) diversifying its production
channels to include direct loan originations, including through one or more
strategic acquisitions of retail lending institutions.

         If the Registrant is unable to obtain additional equity or financing as
a result of the proposed recapitalization, the alternatives potentially
available to the Registrant are limited and the Registrant may be forced to
consider bankruptcy proceedings.


<PAGE>   3

                                  MEGO MORTGAGE CORPORATION



                                            INDEX
                                            -----

<TABLE>
<CAPTION>


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


Item 1.    Condensed Financial Statements (unaudited)

           Condensed Statements of Financial Condition at
           August 31, 1997 and February 28, 1998...........................................1

           Condensed Statements of Operations for the Three and Six Months Ended
           February 28, 1997 and 1998  ....................................................2

           Condensed Statements of Cash Flows for the Six Months Ended
           February 28, 1997 and 1998 .....................................................3

           Condensed Statements of Stockholders' Equity for the Six Months Ended
           February 28, 1998 ..............................................................4

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

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations......................................................12

PART II    OTHER INFORMATION

Item 1.    Legal Proceedings..............................................................32

Item 5.    Other..........................................................................32

Item 6.    Exhibits and Reports on Form 8-K...............................................32

SIGNATURE ................................................................................33
</TABLE>



                                       i

<PAGE>   4

                            MEGO MORTGAGE CORPORATION
                   CONDENSED STATEMENTS OF FINANCIAL CONDITION
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                                      AUGUST 31,    FEBRUARY 28,
                                                                                         1997          1998
                                                                                       --------      --------
                                                                                 (thousands of dollars, except
                                                                                      per share amounts)
<S>                                                                                   <C>           <C>     
ASSETS
Cash and cash equivalents                                                              $  6,104      $  3,152
Cash deposits, restricted                                                                 6,890        10,039
Loans held for sale, net of allowance for credit losses of $100 and $887                  9,523        55,820
Mortgage related securities, at fair value                                              106,299        91,254
Mortgage servicing rights                                                                 9,507         8,714
Other receivables                                                                         7,945         4,835
Property and equipment, net of accumulated depreciation of $675 and $1,010                2,153         1,847
Organizational costs, net of amortization                                                   289           193
Prepaid debt expenses                                                                     2,362         4,791
Prepaid commitment fee                                                                    2,333         3,869
Deferred income tax asset                                                                    --         2,152
Other assets                                                                                795           439
                                                                                       --------      --------

            TOTAL ASSETS                                                               $154,200      $187,105
                                                                                       ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
   Notes and contracts payable                                                         $ 35,572      $ 56,821
   Accounts payable and accrued liabilities                                              17,858        13,387
   Allowance for credit losses on loans sold with recourse                                7,014         8,514
   State income taxes payable                                                               649            --
                                                                                       --------      --------

            Total liabilities                                                            61,093        78,722
                                                                                       --------      --------

Subordinated debt                                                                        40,000        80,367
                                                                                       --------      --------

Stockholders' equity:
   Preferred Stock, $.01 par value per share
     (Authorized--5,000,000 shares)                                                          --            --
   Common Stock, $.01 par value per share
     (Authorized--50,000,000 shares;
     Issued and outstanding--12,300,000 at August 31, 1997 and February 28, 1998)           123           123
   Additional paid-in capital                                                            29,185        36,633
   Retained earnings (accumulated deficit)                                               23,799        (8,740)
                                                                                       --------      --------

            Total stockholders' equity                                                   53,107        28,016
                                                                                       --------      --------

            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $154,200      $187,105
                                                                                       ========      ========
</TABLE>


                  See notes to condensed financial statements.
 
                                        1
<PAGE>   5
                            MEGO MORTGAGE CORPORATION
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (unaudited)

<TABLE>
<CAPTION>


                                                                        THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                                            FEBRUARY 28,                     FEBRUARY 28,
                                                                 -----------------------------     ----------------------------
                                                                      1997             1998             1997             1998
                                                                 ------------     ------------     ------------     ------------
                                                                              (thousands of dollars, except per share amounts)
<S>                                                              <C>             <C>              <C>              <C>         
REVENUES:
    Gain (loss) on sale of loans                                 $      5,823     $     (1,912)    $     15,424     $      1,809
    Net unrealized gain (loss) on mortgage related securities           3,143           (3,652)           2,908          (16,760)
    Loan servicing income, net                                            560            1,310            1,198            2,504

    Interest income                                                     2,029            4,879            3,029            9,175
    Less: interest expense                                             (1,503)          (4,195)          (2,148)          (7,281)
                                                                 ------------     ------------     ------------     ------------
       Net interest income                                                526              684              881            1,894
                                                                 ------------     ------------     ------------     ------------

                Net revenues (losses)                                  10,052           (3,570)          20,411          (10,553)
                                                                 ------------     ------------     ------------     ------------

COSTS AND EXPENSES:
    Net provision for credit losses                                      (800)             706              911            2,296
    Depreciation and amortization                                         156              298              296              506
    Other interest                                                         51              150               98              227
    General and administrative:
       Payroll and benefits                                             2,497            4,624            4,313            9,831
       Professional services                                              560            1,019              991            2,536
       Commissions and selling                                            651              642            1,234            1,332
       Sub-servicing fees                                                 372              610              657            1,271
       Other services                                                     252              694              457            1,084
       Rent and lease expenses                                            197              365              451              658
       Travel                                                              83              276              205              536
       Credit reports                                                     380              194              533              466
       FHA insurance                                                       75               37              278              143
       Other                                                              129              506              526            1,100
                                                                 ------------     ------------     ------------     ------------

                Total costs and expenses                                4,603           10,121           10,950           21,986
                                                                 ------------     ------------     ------------     ------------

INCOME (LOSS) BEFORE INCOME TAXES                                       5,449          (13,691)           9,461          (32,539)

INCOME TAXES                                                            2,078            7,153            3,611               --
                                                                 ------------     ------------     ------------     ------------

NET INCOME (LOSS)                                                $      3,371     $    (20,844)    $      5,850     $    (32,539)
                                                                 ============     ============     ============     ============





EARNINGS (LOSS) PER COMMON SHARE:
    Basic:
    Net income (loss)                                            $       0.27     $      (1.69)    $       0.52     $      (2.65)
                                                                 ============     ============     ============     ============

    Weighted-average number of common shares outstanding           12,300,000       12,300,000       11,296,133       12,300,000
                                                                 ============     ============     ============     ============

    Diluted:
    Net income (loss)                                            $       0.27     $      (1.69)    $       0.51     $      (2.65)
                                                                 ============     ============     ============     ============
    Weighted-average number of common shares
       and assumed conversions                                     12,476,069       12,300,000       11,463,259       12,300,000
                                                                 ============     ============     ============     ============
</TABLE>

                  See notes to condensed financial statements.

                                       2
<PAGE>   6
                            MEGO MORTGAGE CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>


                                                                                            SIX MONTHS ENDED FEBRUARY 28,
                                                                                              -------------------------
                                                                                                 1997            1998
                                                                                              ---------       ---------
                                                                                                (thousands of dollars)
<S>                                                                                           <C>             <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                                         $   5,850       $ (32,539)
                                                                                              ---------       ---------
    Adjustments to reconcile net income (loss) to net cash used in operating activities:
       Additions to mortgage servicing rights                                                    (3,086)           (434)
       Net unrealized loss (gain) on mortgage related securities                                 (2,908)         16,760
       Additions to mortgage related securities                                                 (26,715)          1,532
       Net provisions for estimated credit losses                                                   911           2,296
       Depreciation and amortization expense                                                        296             506
       Amortization of prepaid debt expense                                                         177             656
       Amortization of prepaid commitment fee                                                       264             464
       Amortization of mortgage servicing rights                                                  1,108           1,227
       Accretion of residual interest on mortgage related securities                             (1,306)         (4,435)
       Payments on mortgage related securities                                                      503             632
       Amortization of mortgage related securities                                                  956             556
       Loans originated for sale                                                               (174,009)       (335,510)
       Payments on loans held for sale                                                               97           1,179
       Proceeds from sale of loans                                                              167,441         286,800
       Changes in operating assets and liabilities:
          Increase in cash deposits, restricted                                                  (1,088)         (3,149)
          Decrease (increase) in other assets, net                                               (1,011)          2,755
          Decrease in state income taxes payable                                                   (672)           (649)
          Increase in deferred income tax asset                                                      --          (2,152)
          Increase (decrease) in other liabilities, net                                          (6,447)          4,052
                                                                                              ---------       ---------

             Total adjustments                                                                  (45,489)        (26,914)
                                                                                              ---------       ---------

                Net cash used in operating activities                                           (39,639)        (59,453)
                                                                                              ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                                           (1,119)            (30)
    Proceeds from sale of property and equipment                                                      3              --
                                                                                              ---------       ---------

                Net cash used in investing activities                                            (1,116)            (30)
                                                                                              ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from borrowings on notes and contracts payable                                     123,067         328,802
    Payments on notes and contracts payable                                                    (126,278)       (310,611)
    Amortization of premium on subordinated debt                                                     --             (33)
    Issuance of subordinated debt                                                                37,750          38,373
    Proceeds from sale of common stock                                                           20,658              --
                                                                                              ---------       ---------

                Net cash provided by financing activities                                        55,197          56,531
                                                                                              ---------       ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                             14,442          (2,952)

CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD                                                      443           6,104
                                                                                              ---------       ---------

CASH AND CASH EQUIVALENTS--END OF PERIOD                                                      $  14,885       $   3,152
                                                                                              =========       =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the period for:
       Interest                                                                               $   1,041       $   4,602
                                                                                              =========       =========
       State income taxes                                                                     $   1,241       $     493
                                                                                              =========       =========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
    Addition to prepaid commitment fee and Due to Mego Financial Corp. 
       in connection with loan sale commitment received                                       $   3,000       $      --
                                                                                              =========       =========
    Increase in deferred federal income tax asset related to Spin-off                         $      --       $   2,354
                                                                                              =========       =========
</TABLE>

                  See notes to condensed financial statements.

                                       3


<PAGE>   7
                            MEGO MORTGAGE CORPORATION
                  CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (unaudited)

<TABLE>
<CAPTION>

                                                            COMMON STOCK                
                                                           $.01 PAR VALUE         ADDITIONAL
                                                   --------------------------       PAID-IN        RETAINED     
                                                     SHARES          AMOUNT         CAPITAL        EARNINGS           TOTAL
                                                   ----------      ----------      ----------      ----------       ----------
                                                               (thousands of dollars, except per share amounts)

<S>                                                <C>             <C>             <C>             <C>              <C>       
Balance at August 31, 1997                         12,300,000      $      123      $   29,185      $   23,799       $   53,107

Increase in additional paid-in capital due to
    adjustment of deferred federal income tax
    asset related to Spin-off                              --              --           2,354              --            2,354

Increase in additional paid-in capital due to
    settlement of amount payable to
    Mego Financial Corp. related to Spin-off
    (see Note 5 of Notes to Condensed
    Financial Statements)                                  --              --           5,094              --            5,094

Net loss for the six months ended
    February 28, 1998                                      --              --              --         (32,539)         (32,539)
                                                   ----------      ----------      ----------      ----------       ----------

Balance at February 28, 1998                       12,300,000      $      123      $   36,633      $   (8,740)      $   28,016
                                                   ==========      ==========      ==========      ==========       ==========

</TABLE>

                  See notes to condensed financial statements.

                                        4


<PAGE>   8


                            MEGO MORTGAGE CORPORATION
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
          FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998


1.  CONDENSED FINANCIAL STATEMENTS

        In the opinion of management, when read in conjunction with the audited
Financial Statements for the years ended August 31, 1996 and 1997, contained in
the Form 10-K of Mego Mortgage Corporation filed with the Securities and
Exchange Commission for the year ended August 31, 1997, the accompanying
unaudited Condensed Financial Statements contain all of the information
necessary to present fairly the financial position of Mego Mortgage Corporation
at February 28, 1998, the results of its operations for the three and six months
ended February 28, 1997 and 1998, the change in stockholders' equity for the six
months ended February 28, 1998 and the cash flows for the six months ended
February 28, 1997 and 1998. Certain reclassifications have been made to conform
prior periods with the current period presentation.

        The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all material adjustments necessary for the fair
presentation of these statements have been included herein which are normal and
recurring in nature. The results of operations for the three and six months
ended February 28, 1998 are not necessarily indicative of the results to be
expected for the full year.

2.  NATURE OF OPERATIONS

        Mego Mortgage Corporation (the "Company") was incorporated on June 12,
1992, in the state of Delaware. The Company, through its loan correspondents and
home improvement contractors, is primarily engaged in the business of
originating, selling, servicing and pooling home improvement and debt
consolidation loans, certain of which qualify under the provisions of Title I of
the National Housing Act which is administered by the U.S. Department of Housing
and Urban Development ("HUD"). Pursuant to the Title I credit insurance program,
90% of the principal balances of the loans are U.S. government insured ("Title I
Loans"), with cumulative maximum coverage equal to 10% of all Title I Loans
originated by the Company. In May 1996, the Company commenced the origination of
conventional home improvement loans, generally secured by residential real
estate, and debt consolidation loans ("Conventional Loans") through its network
of loan correspondents and dealers. In December 1997, the Company commenced the
origination of subprime conventional residential first mortgage loans ("First
Mortgage Loans") solely for sale at cash premiums in the secondary market,
without recourse for credit losses or risk of prepayment. During the six months
ended February 28, 1998, the Company's loan originations were comprised of 93.0%
Conventional Loans, 5.5% Title I Loans and 1.5% First Mortgage Loans.

        The Company was formed as a wholly-owned subsidiary of Mego Financial
Corp. ("Mego Financial") and remained so until November 1996, when the Company
issued 2.3 million shares of its common stock, $.01 par value per share (the
"Common Stock"), in an underwritten public offering (the "IPO") at $10.00 per
share. As a result of this transaction, Mego Financial's ownership in the
Company was reduced from 100% at August 31, 1996 to 81.3%. Concurrently with the
Common Stock offering, the Company issued $40.0 million of 12.5% senior
subordinated notes due in 2001 in an underwritten public offering. In October
1997, the Company issued an additional $40.0 million of 12.5% senior
subordinated notes due in 2001 in a private placement (the "Private Placement").
The proceeds from the offerings received by the Company have been used to repay
borrowings and provide funds for originations and securitizations of loans. See
Note 8.

        On September 2, 1997, Mego Financial distributed all of its 10 million
shares of the Company's Common Stock to Mego Financial shareholders in a
tax-free spin-off (the "Spin-off").

                                       5

<PAGE>   9
                            MEGO MORTGAGE CORPORATION
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
          FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998



3.  RECENT DEVELOPMENTS

        In January 1998, in order to improve its cash position, the Company
entered into the Excess Yield and Servicing Rights Purchase and Assumption
Agreement (the "Excess Yield Agreement") with a financial institution with which
the Company has a master loan purchase and servicing agreement providing for the
purchase of up to $2.0 billion in loans over a five year period (the "Master
Purchase Agreement"). Pursuant to the Excess Yield Agreement, the Company sold
the excess yield and servicing rights pertaining to approximately $175.5 million
of Conventional Loans which had previously been sold under the Master Purchase
Agreement. In the aggregate, when combined with the original sales proceeds, the
Company received a purchase price equivalent to 101% of the principal balance of
the Conventional Loans. In February, March and April 1998, the First, Second and
Third Amendments to the Excess Yield Agreement were executed pursuant to which
an additional $19.5 million of Conventional Loans were sold. These transactions
resulted in a loss of approximately $417,000 and generated approximately $4.5
million in cash proceeds to the Company. The Company is to receive additional
compensation in the form of sales commissions upon the eventual disposition of
certain of these Conventional Loans in the secondary market. The amount of the
sales commissions will depend on the timing of those sales and the identities of
the eventual purchasers. Approximately $99.0 million of these Conventional Loans
had been resold in the secondary market by the end of March 1998. The remaining
balance of these Conventional Loans of approximately $90.0 million are expected
to be pooled with other Conventional Loans held by that financial institution
with the intention of disposing of them in an asset-backed securitization in
June 1998. The Company is to receive a two-thirds residual interest pertaining
to the portion of Conventional Loans originated by the Company which are
disposed of in that securitization. Prior to eventual disposition of the
Conventional Loans, there is limited recourse to the Company for repurchase of
those loans which become more than 60 days contractually delinquent. The amount
of this recourse is limited to 2-1/2% of the principal balance of the loans as
of the date they became subject to the Excess Yield Agreement. The servicing
rights of these loans will transferred to a third party and a reversal of
servicing rights of approximately $1.2 million was recorded pursuant to this
transaction.

        In April 1998, an agreement was made to adjust by $5.3 million the
federal income tax portion of a payable that the Company owed Mego Financial as
a result of the Company filing a consolidated federal income tax return with
Mego Financial's affiliated group prior to the Spin-off. See Note 5.

4.  FINANCING ARRANGEMENTS

        The Company has four significant sources of financing: (i) a warehouse
line of credit for up to $55.0 million decreasing in stages to $35.0 million at
March 4, 1998 and subsequently to $16.0 million (the "Warehouse Line"), which
matures on May 29, 1998 at which time the outstanding balance thereunder is
payable in full; (ii) a revolving credit facility for up to $25.0 million, less
amounts outstanding under repurchase agreements (the "First Revolving Credit
Facility"); (iii) a second revolving credit facility for up to $5.0 million
which may, under certain circumstances, be increased to $8.8 million (the
"Second Revolving Credit Facility"); and (iv) $80.0 million of outstanding 12
1/2% Senior Subordinated Notes due 2001 (the "Notes"). In addition, the Company
has the Master Purchase Agreement providing for the purchase of up to $2.0
billion in loans over a five year period. Pursuant to a letter agreement dated
December 29, 1997, the Master Purchase Agreement may be amended to provide for
the purchase of up to $3.0 billion in loans over the period ending September
2001.

        The Company is currently not in compliance with certain terms of the
Warehouse Line, under which $14.5 million is presently outstanding, because the
Company is not in compliance with the adjusted tangible net worth requirement
and the amount outstanding exceeds the amount permitted to be borrowed
thereunder. In addition, the Company does not have purchase commitments covering
the pledged loans and has not delivered to the Warehouse Line lenders
satisfactory takeout commitments. The Company is also not in compliance with the
debt-to-net worth requirement contained in the agreement governing the First
Revolving Credit Facility, under which $10.0 million is presently outstanding.
In addition, under the terms of the Indenture governing the Notes (the
"Indenture"), the Company cannot presently incur additional indebtedness other
than Permitted Warehouse Indebtedness (as defined therein) and certain other
types of indebtedness because the Company is not in compliance with the
consolidated leverage ratio requirement contained in the Indenture. The agent
has advised the Company that the Warehouse Line lenders do not intend to renew
the Warehouse Line.

        In February 1998, in order to avoid non-compliance with the terms of the
Warehouse Line, the Company entered into an amended and restated credit
agreement (the "Amended Credit Agreement") which has been further amended
modifying the existing Warehouse Line agreement to, among other things: (i)
reduce the amount of the Warehouse Line from $65.0 million to $55.0 million and
in stages to $35.0 million by March 4, 1998 and subsequently to $16.0 million
(subject to increase with the approval of all of the parties to such agreement);
(ii) change the expiration date of the Warehouse Line from June 15, 1998 to May
29, 1998; (iii) add the ability to borrow against First Mortgage Loans in an
amount not to exceed 15% of the lenders' aggregate commitment; (iv) reduce the
advance rate for certain loan categories; (v) prohibit the payment of dividends
by the Company; (vi) limit the amount of "Funded Debt" (as defined therein to
mean indebtedness for money borrowed, with certain exceptions) to the sum of (a)
100% of cash, (b) 95% of "loans held for sale, net" and (c) 80% of "Restricted
Assets" which are restricted cash, mortgage related securities, mortgage
servicing rights and excess servicing rights; and (vii) modify certain of the
financial covenants 


                                       6


<PAGE>   10
                            MEGO MORTGAGE CORPORATION
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
          FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998
to, among other things, require the maintenance of (a) an adjusted leverage
ratio of total liabilities (which excludes subordinated debt up to $80.4
million) to adjusted tangible net worth not to exceed 1.75 to 1.0, (b) an
adjusted tangible net worth (which includes subordinated debt) of at least
$110.0 million plus 75% of positive net income after December 31, 1997 and 100%
of any new equity or subordinated debt offering and (c) a tangible net worth
(which excludes subordinated debt) of at least $30.0 million plus 75% of
positive net income after December 31, 1997 and 100% of any new equity offering.
At February 28, 1998, the Company's actual adjusted tangible net worth was $99.1
million, which was $10.9 million less than the required minimum. In addition,
the Company agreed to provide satisfactory purchase commitments by March 3, 1998
to the Warehouse Line lenders, covering the then pledged loans in the Warehouse
Line. An extension of this compliance date to March 13, 1998 was received and
the Company was in compliance with this requirement at that date. As of the date
hereof, the Company is not in compliance with the requirement to maintain
purchase commitments.

        In April 1998, the Company entered in an amendment to the Amended Credit
Agreement modifying such agreement to, among other things: (i) reduce the amount
of the Warehouse Line to $20.0 million by April 17, 1998 and subsequently to
$16.0 million; and (ii) change certain definitions relating to the eligibility
of loans as collateral under the agreement. As of the date of this report, the
Company is not in compliance with the terms of the Warehouse Line because, among
other reasons, the amount outstanding under the line exceeds the amount
permitted to be borrowed thereunder. The Company has received commitments for
the sale of loans, the proceeds of which would be applied to reduce the amount
outstanding under the line and would be sufficient to bring the Company in
compliance with the terms thereof. However, there can be no assurance that such
loan sales will be consummated.


        As a result of the losses the Company recognized during the six months
ended February 28, 1998, the Company was not in compliance with certain
provisions of the pledge and security agreement, as amended, governing the First
Revolving Credit Facility and is not in compliance with certain provisions of
the Indenture governing the Notes. Specifically, the pledge and security
agreement governing the First Revolving Credit Facility requires the Company to
maintain a debt-to-net worth ratio not to exceed 2.5:1 and at February 28, 1998,
the ratio was 4.25:1. The financial institution providing the First Revolving
Credit Facility has agreed to waive the non-compliance provided that the
debt-to-net worth ratio shall not exceed 6:1 prior to May 31, 1998 after which
the ratio may not exceed 2.5:1. Additionally, at February 28, 1998 the Company
is required to maintain a minimum net worth of $42.5 million and the Company's
actual net worth was $28.0 million. 

        The Indenture governing the Notes includes material covenant
restrictions which, among other things, limit the Company's ability to incur
indebtedness other than warehouse loans, grant liens on its assets and enter
into extraordinary corporate transactions. The Company may not incur
indebtedness (other than Permitted Warehouse Indebtedness and certain other
limited types of indebtedness) or issue capital stock containing certain terms.
At February 28, 1998, the Consolidated Leverage Ratio was 5.52:1. Accordingly,
while the Company is not in default under the terms of the Indenture, the
Company cannot presently incur additional debt other than Permitted Warehouse
Indebtedness and certain other types of indebtedness.

        The Company can give no assurance that it will be able to remain in
compliance with financial covenants under the First Revolving Credit Facility,
the Indenture or any of the Company's other credit facilities. Failure to remain
in compliance is likely to result in material adverse consequences, including
potential bankruptcy proceedings.

5. SETTLEMENT OF AMOUNT PAYABLE TO MEGO FINANCIAL CORP.

        In April 1998, an agreement was made to adjust by $5.3 million the
income tax portion of a payable that the Company owed Mego Financial under a Tax
Allocation and Indemnity Agreement dated November 19, 1996. The Company filed a
consolidated federal income tax return with Mego Financial's affiliated group
prior to the Spin-off under such Tax Allocation and Indemnity Agreement dated
November 19, 1996. Following this transaction, the Company will owe Mego
Financial $869,000 of which $215,000 is to be paid by conveyance to Mego
Financial of certain loans with principal balances of approximately $404,000
with the balance payable in four annual installments. The settlement of the
amount payable is recorded as an additional capital contribution on the
Company's Statement of Financial Condition.

6.  RECENT ACCOUNTING PRONOUNCEMENTS

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

                                       7
<PAGE>   11

                            MEGO MORTGAGE CORPORATION
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
          FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998

distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. It requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value. SFAS 125 also requires that servicing assets be measured
by allocating the carrying amount between the assets sold and retained interests
based on their relative fair values at the date of transfer. Additionally, this
statement requires that the servicing assets and liabilities be subsequently
measured by (a) amortization in proportion to and over the period of estimated
net servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values. SFAS 125 requires the Company's
excess servicing rights be measured at fair market value and be reclassified as
interest only receivables, carried as mortgage related securities, and accounted
for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As required by SFAS 125, the Company adopted the new
requirements effective January 1, 1997, and applied them prospectively.
Implementation of SFAS 125 did not have any material impact on the financial
statements of the Company, as the book value of the Company's mortgage related
securities approximated fair value.

        The following table reflects the components of mortgage related
securities as required by SFAS 125 at February 28, 1998 (thousands of dollars):

<TABLE>
<CAPTION>
<S>                                                               <C>    
Interest only strip securities                                    $ 4,916
Residual interest securities                                       78,709
Interest only receivables (formerly excess servicing rights)        7,629
                                                                  -------
  Total mortgage related securities                               $91,254
                                                                  =======
</TABLE>

        All mortgage related securities are classified as trading securities and
are recorded at their estimated fair values. Changes in the estimated fair
values are recorded in current operations. See Note 7.

        SFAS No. 128, "Earnings per Share" ("SFAS 128") was issued by the FASB
in February 1997, effective for financial statements issued after December 15,
1997. SFAS 128 provides simplified standards for the computation and
presentation of earnings per share ("EPS"), making EPS comparable to
international standards. SFAS 128 requires dual presentation of "Basic" and
"Diluted" EPS, by entities with complex capital structures, replacing "Primary"
and "Fully-diluted" EPS under Accounting Principles Board ("APB") Opinion No.
15.

        Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from common stock equivalents, similar to
fully-diluted EPS, but uses only the average stock price during the period as
part of the computation.


                                       8
<PAGE>   12


                            MEGO MORTGAGE CORPORATION
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
          FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998


        Data utilized in calculating pro forma earnings per share under SFAS 128
is as follows:

<TABLE>
<CAPTION>


                                                     THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                         FEBRUARY 28,                        FEBRUARY 28,
                                                -----------------------------        ------------------------------
                                                   1997               1998               1997               1998
                                                -----------       -----------        -----------       ------------
                                                                        (thousands of dollars)
<S>                                             <C>               <C>                <C>               <C>          
Basic:
  Net income (loss)                             $      3,371      $    (20,844)      $      5,850      $    (32,539)
                                                ============      ============       ============      ============
  Weighted-average number of common shares  
    outstanding                                   12,300,000        12,300,000         11,296,133        12,300,000
                                                ============      ============       ============      ============

Diluted:
  Net income (loss)                             $      3,371      $    (20,844)      $      5,850      $    (32,539)
                                                ============      ============       ============      ============
  Weighted-average number of common
    shares and assumed conversions                12,476,069        12,300,000         11,463,259        12,300,000
                                                ============      ============       ============      ============
</TABLE>

        The following tables reconcile the net income (loss) applicable to
common stockholders, basic and diluted shares, and EPS for the following
periods:

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED FEBRUARY 28,  1997            THREE MONTHS ENDED FEBRUARY 28, 1998
                                 ----------------------------------------------   ------------------------------------------------
                                                                     PER-SHARE                                         PER-SHARE
                                    INCOME            SHARES           AMOUNT        INCOME             SHARES            AMOUNT
                                 ------------      ------------      ----------   ------------       ------------       ----------
                                                               (thousands of dollars, except per share amounts)

<S>                              <C>               <C>               <C>          <C>                <C>                <C>
Net income (loss)                $      3,371                                     $    (20,844)          

BASIC EPS
Income (loss) applicable
  to common stockholders                3,371        12,300,000      $     0.27        (20,844)        12,300,000       $    (1.69)
                                 ------------      ------------      ==========   ------------       ------------       ==========

Effect of dilutive
  securities:
  Warrants                                 --                --                             --                 --            
  Stock options                            --           176,069                             --                 --           
                                 ------------      ------------                   ------------       ------------       

DILUTED EPS
Income (loss) applicable
  to common stockholders
  and assumed conversions        $      3,371        12,476,069      $     0.27   $    (20,844)        12,300,000       $    (1.69)
                                 ============      ============      ==========   ============       ============       ==========
</TABLE>

                                       9
<PAGE>   13

                            MEGO MORTGAGE CORPORATION
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
          FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998


<TABLE>
<CAPTION>
                                       SIX MONTHS ENDED FEBRUARY 28, 1997               SIX MONTHS ENDED FEBRUARY 28, 1998
                                 ---------------------------------------------   ---------------------------------------------
                                                                     PER-SHARE                                      PER-SHARE
                                    INCOME            SHARES           AMOUNT       INCOME             SHARES         AMOUNT
                                 ------------      ------------       ========   ------------       ------------      ========
                                                         (thousands of dollars, except per share amounts)

<S>                              <C>                <C>               <C>        <C>                <C>              <C>
Net income (loss)                $      5,850                                    $    (32,539)

BASIC EPS
Income (loss) applicable
  to common stockholders                5,850        11,296,133       $   0.52        (32,539)        12,300,000      $  (2.65)
                                 ------------      ------------       ========   ------------       ------------      ========

Effect of dilutive
  securities:
  Warrants                                 --                --                           --                 --      
  Stock options                            --           167,126                           --                 --   
                                 ------------      ------------                  ------------       ------------   

DILUTED EPS
Income (loss) applicable
  to common stockholders
  and assumed conversions        $      5,850        11,463,259       $   0.51   $    (32,539)        12,300,000      $  (2.65)
                                 ============      ============       ========   ============       ============      ========
</TABLE>

        In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS No.
131 establishes standards of reporting by publicly-held business enterprise and
disclosure of information about operating segments in annual financial
statements and, to a lesser extent, in interim financial reports issued to
shareholders. SFAS Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997. As both SFAS Nos. 130 and 131 deal with financial
statements disclosure, the Company does not anticipate the adoption of these new
standards will have a material impact on it financial position, results of
operations or cash flows. The Company has not yet determined what its reporting
segments will be under SFAS 131.

7.  ADJUSTMENTS TO CARRYING VALUES OF MORTGAGE RELATED SECURITIES

        During the three months ended November 30, 1997, the Company experienced
voluntary prepayment activity and delinquencies with respect to its securitized
Conventional Loans which substantially exceeded the levels which had been
assumed for this time frame. This acceleration in the speed of prepayment has
caused management, after consultation with its financial advisors, to adjust as
of November 30, 1997, the assumptions previously utilized in calculating the
carrying value of its mortgage related securities. The revised prepayment
assumptions reflect an annualized prepayment rate of 3% in the first month
following a securitization, increasing by level monthly increments up to the
15th month at which time the annualized rate is at 17%. This annualized
voluntary prepayment rate is maintained at that level through the 36th month at
which time such rate is assumed to decline by 1/2% per month until the 42nd
month, at which time the rate is presumed to be 14%. This rate is assumed to be
maintained for the remaining life of the loan portfolio.

        The loss assumptions have also been modified to reflect losses
commencing in the third month following a securitization increasing in level
monthly increments until a 2% annualized loss rate is achieved in the 18th
month. The annualized loss rate is projected to remain at that level throughout
the remaining life of the portfolio. On a cumulative basis, this model assumes
aggregate losses of approximately 9% of the original portfolio balance. Despite
the moderate change in the acceleration of assumed losses, after applying the
new voluntary prepayment rates, the cumulative loss assumption of 9% results in
approximately the same level of loss as had been previously assumed.

        At November 30, 1997, the application of such revised prepayment and
loss assumptions to the Company's portfolio of mortgage related securities
required the Company to adjust the carrying value of such securities by
approximately $14.1 million, of which $10.2 million related to Conventional
Loans and $3.9 million related to Title I Loans.

        During the three months ended February 28, 1998, the Company experienced
increased levels of over-collateralization and higher than anticipated
prepayments on Title I Loans resulting in a downward adjustment to the portfolio
of mortgage related securities. The Company also recognized the impairment of
the carrying value of a security which had previously been recorded as a whole
loan sale, sold servicing retained, whose underlying loans are anticipated to
be repurchased and included in a future securitization. As a result of the
foregoing, the Company adjusted the carrying value of mortgage related
securities with negative adjustments of approximately $3.7 million and $17.7
million for the three and six months ended February 28, 1998, respectively. At
February 28, 1998, 


                                       10


<PAGE>   14
                           MEGO MORTGAGE CORPORATION
              NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
         For the three and six months ended February 28, 1997 and 1998

mortgage related securities were $91.3 million compared to $94.3 million at
November 30, 1997 and $106.3 million at August 31, 1997.

        The Company utilizes a 12% discount rate to calculate the present value
of cash flow streams. Taken in conjunction with the above prepayment and loss
assumptions, management believes these valuations reflect current market
values. Because of the inherent uncertainty of the valuations these estimated
market values may differ from values that would have been used had a ready
market for the securities existed, and the difference could be material. The
Company has not obtained an independent valuation of the assumptions utilized
in calculating the carrying value of mortgage related securities for any period
subsequent to August 31, 1997.

8.  PRIVATE PLACEMENT

        In October 1997, the Company issued $40.0 million of 12.5% senior
subordinated notes ("Additional Notes") due in 2001 in the Private Placement
which increased the aggregate principal amount of outstanding 12.5% senior
subordinated notes from $40.0 million to $80.0 million. The Company used the net
proceeds of $38.4 million, after deducting expenses, of the Private Placement to
repay $3.9 million of debt due to Mego Financial, $29.0 million to reduce the
amounts outstanding under the Company's lines of credit and the balance to
provide capital to originate and securitize loans and for working capital. These
Additional Notes are subject to the indenture governing all of the Company's
senior subordinated notes. In connection with the consent solicitation, the
Company made consent payments totaling $392,000 ($10.00 cash per $1,000
principal amount of Exiting Notes) to holders thereof who properly furnished
their consents to the amendments to the original indenture.

        The Company has entered into a registration rights agreement with
Friedman, Billings, Ramsey & Co., Inc. ("Registration Rights Agreement")
pursuant to which the Company agreed, for the benefit of the holders of the
Additional Notes, at the Company's cost, (i) to file a registration statement
(the "Exchange Offer Registration Statement") with respect to a registered offer
to exchange the Additional Notes ("Exchange Offer") for notes of the Company
with terms identical in all material respects to the Additional Notes ("Exchange
Notes") (except that the Exchange Notes will not contain terms with respect to
transfer restrictions or interest rate increases) with the Securities and
Exchange Commission ("SEC") by November 28, 1997 and (ii) to use its best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act on or before January 12, 1998. The Company
did not meet the January 12, 1998 deadline and expects to pay additional
interest of less than $20,000. Promptly after the Exchange Offer Registration
Statement has been declared effective, the Company will offer the Exchange Notes
in exchange for surrender of the Additional Notes. The Company will keep the
Exchange Offer open for not less than 30 days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
holders of the Additional Notes. For each Additional Note validly tendered to
the Company pursuant to the Exchange Offer and not withdrawn by the holder
thereof, the holder of such Additional Note will receive Exchange Notes having a
principal amount equal to that of the tendered Additional Note. Interest on each
Exchange Note will accrue from the last interest payment date on which interest
was paid on the tendered Additional Notes in exchange therefor or, if no
interest has been paid on such Additional Notes, from the date of its original
issue. The Company filed the Exchange Offer Registration statement with the SEC
on November 28, 1997, however, such registration statement has not been declared
effective by the SEC.



9.  INCOME TAXES

     The Company has filed consolidated federal income tax returns with 
Mego Financial. Income taxes for the Company are provided for on a separate
return basis. As part of a tax sharing arrangement, the Company has recorded a
liability to Mego Financial for federal income taxes applied to the Company's
financial statement income after giving consideration to applicable income tax
law and statutory rates. The Company accounts for taxes under SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which requires an asset and
liability approach. For periods after September 2, 1997 (after the Spin-off),
the Company will file separate consolidated federal income tax returns.
 
     The provision for income taxes includes deferred income taxes, which result
from reporting items of income and expense for financial statement purposes in
different accounting periods than for income tax purposes. The Company also
provides for state income taxes at the rate of 6% of income before income taxes.
The Company provides a valuation allowance for deferred tax assets when
management determines, based on the weight of available evidence, that it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.  Management determined that at February 28, 1998 a valuation
allowance was required for the net operating loss deferred tax asset in the
amount of $12.3 million which resulted in income tax expense for the three
months ended February 28, 1998 in the amount of $7.2 million and a reversal of
the income tax benefit of $7.2 million recorded for the three months ended
November 30, 1997.

     Prior to the Spin-off, the Company recorded a liability to Mego Financial 
for federal income taxes at the statutory rate (currently 34%). State income
taxes are computed at the appropriate state rate (6%) net of any available
operating loss carryovers and are recorded as state income taxes payable. Income
tax expense (benefit) has been computed as follows:
 
<TABLE>
<CAPTION>
                                       FOR THE THREE              FOR THE SIX                 
                                        MONTHS ENDED              MONTHS ENDED                
                                        FEBRUARY 28,              FEBRUARY 28,                
                                   ---------------------   ---------------------------
                                      1997        1998         1997           1998
                                   ---------   ---------   ------------   ------------
                                                (THOUSANDS OF DOLLARS)
<S>                                <C>         <C>         <C>            <C>
Income (loss) before income
  taxes.......................      $ 5,449   $ (13,691)      $9,461        $(32,539)
                                    =======   =========       ======        ========
Federal income taxes (benefit)
  at 34% of income............      $ 1,853   $  (4,655)      $3,217        $(11,063)
State income taxes (benefit),
  net of federal income tax
  benefit.....................          218        (548)         571          (1,302)
Increase in valuation
  allowance...................           --      12,349           --          12,349
Other.........................            7           7         (177)             16
                                    -------   ---------       ------        --------
Income tax expense............      $ 2,078   $   7,153       $3,611        $     --
                                    =======   =========       ======        ========
Income tax expense               
  is comprised of the
  following:
  Current.....................      $ 2,078   $   7,153       $3,037        $     --

  Deferred....................           --          --          574              --
  
                                    -------   ---------       ------        --------
          Total...............      $ 2,078   $   7,153       $3,611        $     --
                                    =======   =========       ======        ========
</TABLE>

                                       11
<PAGE>   15




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

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

        The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains certain forward-looking
statements and information relating to Mego Mortgage Corporation (the "Company")
that are based on the beliefs of management as well as assumptions made by and
information currently available to management. Such forward-looking statements
include, without limitation, the Company's expectation and estimates as to the
Company's business operations, including the introduction of new loan programs
and products and future financial performance, including growth in revenues and
net income and cash flows. In addition, included herein the words "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions,
as they relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company's management with respect to future events and are subject to certain
risks, uncertainties and assumptions. Also, the Company specifically advises
readers that the factors listed under the caption "Liquidity and Capital
Resources" could cause actual results to differ materially from those expressed
in any forward-looking statement. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected.

        The following discussion and analysis should be read in conjunction with
the Condensed Financial Statements, including the notes thereto, contained
elsewhere herein and in the Financial Statements, including the notes thereto,
in the Company's Form 10-K for the fiscal year ended August 31, 1997.

GENERAL

        The Company is a specialized consumer finance company that originates,
purchases, sells, securitizes and services consumer loans consisting primarily
of conventional uninsured home improvement and debt consolidation loans which
are generally secured by liens on residential property ("Conventional Loans").
The Company historically has originated loans through its network of independent
correspondent lenders ("Correspondents") and home improvement construction
contractors ("Dealers"). To both broaden its channels of origination and reduce
its overall cost of loan acquisition, the Company commenced direct origination
of Conventional Loans in the three months ended November 30, 1997. To facilitate
these new origination channels, the Company has entered into contractual
arrangements with third party financial institutions for the acquisition of
qualified consumer loan referrals. These referrals do not conform to that
institution's programs, but may be suitable for approval and funding under the
Company's product lines that are not available at the referring institution. By
making direct loans to consumers, the Company avoids the payment of premiums
which it incurs with the acquisition of completed loans from its Correspondent
network. It is anticipated that the origination fees charged to consumers on the
direct loans will adequately cover the cost of the referrals and thereby place
the Company on a positive cash flow basis with respect to these direct loan
originations.

        Until May 1996, the Company originated only home improvement loans
insured under the Title I credit insurance program ("Title I Loans") of the
Federal Housing Administration (the "FHA"). Subject to certain limitations, the
Title I program provides for insurance of 90% of the principal balance of the
loan and certain other costs. The Company began offering Conventional Loans
through its Correspondents in May 1996 and through its Dealers in September
1996. Since May 1996, Conventional Loans have accounted for an increasing
portion of the Company's loan originations. For the three months ended February
28, 1997 and 1998, the Company originated $89.7 million and $116.5 million of
Conventional Loans, respectively, which constituted 80.6% and 91.5%,
respectively, of the Company's total loan originations during the periods. For
the six months ended February 28, 1997 and 1998, the Company originated $120.8
million and $304.3 million of Conventional Loans, respectively, which
constituted 69.6% and 93.0%, respectively, of the Company's total loan
originations during the periods.

        In December 1997, the Company began originating subprime residential
first mortgage loans ("First Mortgage Loans"). The Company originates First
Mortgage Loans through the correspondent loan source network as well as through
specifically approved brokers. The Company believes that there are several
advantages to 

                                       12
<PAGE>   16

originating First Mortgage Loans including (i) the existence of a more liquid
secondary market for such loans, (ii) the average principal amount of such loans
is typically two times greater than that of a Conventional Loan and (iii) such
loans are originated by correspondents at lower premiums. For the six months
ended February 28, 1998, the Company originated $4.8 million of First Mortgage
Loans.

        The Company has historically sold substantially all the loans it
originated either through securitizations at a yield below the stated interest
rate on the loans, generally retaining the right to service the loans and to
receive any amounts in excess of the yield to the purchasers, or through whole
loan sales to third party institutional purchasers. In connection with whole
loan sales, the Company either sells the loans on a servicing retained basis at
a yield below the stated interest rate on the loans or on a servicing released
basis. Currently, sales on a servicing released basis and some sales on a
servicing retained basis are at a premium. In connection with securitizations,
certain of the regular interests of the related securitizations were sold, with
the interest only and residual class securities generally retained by the
Company. The Company presently intends to dispose of a majority of its loan
originations on an ongoing basis through whole loan sales on a servicing
released basis, at a premium, as opposed to securitizations.

        The Company has operated since March 1994 on a negative cash flow basis.
As a result of such negative cash flow of the Company's operations, the
provisions under the indenture governing the Company's senior subordinated notes
limiting the Company's ability to incur additional indebtedness and the
reduction of the Company's warehouse line of credit ("Warehouse Line") from
$55.0 million to $16.0 million, the Company has substantially curtailed the
origination of loans during the quarter ended February 28, 1998. Loan
originations for the three months ended February 28, 1998 totaled $127.3 million
as compared to $199.9 million for the three months ended November 30, 1997. In
conjunction with this curtailment, the Company restructured its workforce which
resulted in a 32% reduction in the number of employees from its peak in early
January 1998 through March 1998. The Company has refocused its operations on the
origination of those loan products which are either cash flow positive at the
time of their acquisition or substantially less expensive to acquire than the
historical business previously generated by the Dealer and Correspondent
divisions. In this regard, the Company is intensifying its efforts toward direct
consumer loan origination which generates fees to the Company at the time of
origination. Additional efforts are being made to expand the Company's First
Mortgage Loan originations which have a lower cost of acquisition as well as a
more liquid secondary market for loan dispositions. There can be no assurance,
however, that the Company will be successful in its efforts to achieve a cash
flow neutral or positive basis.
        The Company proposes to engage in a series of transactions to
recapitalize the Company. While no definitive agreements have been executed and
no terms have been determined, the Company proposes to raise $40.0 to $60.0
million through a private placement of equity securities at an anticipated price
of between $1.50 and $2.00. The Company is also proposing to offer to exchange
new subordinated notes and convertible preferred stock, subject to certain
limitations, for all of the outstanding $80.0 million of 12 1/2% Senior
Subordinated Notes due 2001 (the "Notes"). Consummation of the private placement
is expected to be contingent upon holders of substantially all of the
outstanding Notes accepting the exchange offer. The Company expects to commence
the private placement and the exchange offer promptly. Offers will be made only
by means of an offering memorandum. The securities proposed to be issued
pursuant to the private placement and the exchange offer will not be registered
under the Securities Act of 1933 and may not be offered or sold in the United
States absent registration or an applicable exemption from such registration.
The Company contemplates that following consummation of the private placement
and the exchange offer it will issue to common stock holders of record on May
13, 1998, rights to purchase additional shares of common stock at the same price
as common stock is sold in the private placement. Due to pressing cash
requirements, the Company has curtailed its loan originations and proposes to
use the net proceeds of the private placement and the rights offering to provide
capital to originate loans and for general corporate purposes. The securities
proposed to be issued pursuant to the rights offering will be registered under
the Securities Act of 1933 and the offering will be made only by means of a
prospectus. Management of the Company believes that if the Company is unable to
complete the transactions to recapitalize the Company the alternatives
potentially available to the Company are limited and that the Company may be
forced to consider bankruptcy proceedings.

        The Company recognizes revenue from gain on sale of loans, unrealized
gain on mortgage related securities, interest income and servicing income.
Interest income, net, represents the interest received on loans in the Company's
portfolio prior to their sale, plus accretion of interest related to mortgage
related securities, net of interest paid under its credit agreements. The
Company continues to service a substantial amount of loans sold through February
28, 1998. However, during the six months ended February 28, 1998, $113.1 million
of loans were sold with servicing released. Net loan servicing income represents
servicing fee income and other ancillary fees received for servicing loans less
the amortization of capitalized mortgage servicing rights, and through January
1, 1997, the date of adoption of Statement of Financial Accounting Standards No.
125 ("SFAS 125"), the amortization of excess servicing rights. Mortgage
servicing rights are amortized in proportion to and over the period of estimated
net servicing income. Excess servicing rights were amortized in proportion to
and over the estimated lives of the related loans.

        Gain on sale of loans includes the gain on sale resulting from
securitizations and whole loan sales. The gain on sale in securitization
transactions is determined by an allocation of the cost of the securities based
on the relative fair values of the interests sold and the interests retained. In
a securitization, the Company retains a residual interest security and may
retain an interest only strip security. The fair value of the residual interest
and interest only strip security is the present value of the estimated net cash
flows to be received after considering the effects of estimated prepayments and
credit losses and, where applicable, net of estimated FHA insurance recoveries
on Title I Loans. The net unrealized gain (loss) on mortgage related securities
represents the difference between the allocated cost basis of the securities and
the estimated fair value.

                                       13
<PAGE>   17

        The Company carries interest only and residual securities at fair value.
As such, the carrying value of these securities is affected by changes in market
interest rates and prepayment and loss experiences of these and similar
securities. The Company estimates the fair value of the interest only and
residual securities utilizing prepayment and credit loss assumptions the Company
believes to be appropriate for each particular securitization. To the Company's
knowledge, there is no active market for the sale of these interest only and
residual securities. Because of the inherent uncertainty of the valuations,
those estimated market values may differ from values that would have been used
had a ready market for the securities existed and the difference could be
material.

        During the three months ended November 30, 1997, the Company experienced
voluntary prepayment activity and delinquencies with respect to its securitized
Conventional Loans which substantially exceeded the levels which had been
assumed for this time frame. As a result of this increase, the Company adjusted
the assumptions previously utilized in calculating the carrying value of its
mortgage related securities. The revised prepayment assumptions presume an
annualized prepayment rate of 3% in the first month following a securitization,
increasing by level monthly increments up to the 15th month at which time the
annualized rate is at 17%. This annualized voluntary prepayment rate is
maintained at that level through the 36th month, at which time such rate is
assumed to decline by 1/2% per month until the 42nd month, at which time the
rate is presumed to be 14%. This rate is assumed to be maintained for the
remaining life of the loan portfolio.

        The Company's loss assumptions have been further modified to reflect
losses commencing in the third month following a securitization increasing in
level monthly increments until a 2% annualized loss rate is achieved in the 18th
month. This annualized loss rate is projected to remain at that level throughout
the remaining life of the portfolio. On a cumulative basis, this loss model
assumes aggregate losses of approximately 9% of the original portfolio balance.
Despite the moderate change in the acceleration of assumed losses, after
applying the new voluntary prepayment rates, the cumulative loss assumption of
9% results in approximately the same level of loss as had previously been
assumed.

        The Company utilizes a 12% discount rate to calculate the present value
of cash flow streams. Taken in conjunction with the above prepayment and loss
assumptions, management believes these valuations reflect current market values.
See Note 7 to Notes to Condensed Financial Statements.


        The application of such revised prepayment and loss assumptions to the
Company's portfolio of mortgage related securities generated from its
securitizations required the Company to adjust the carrying value of such
securities by approximately $10.2 million at November 30, 1997. Additional
negative adjustments of approximately $3.9 million to the carrying value of
mortgage related securities pertaining to Title I loan securitizations and other
sales were also recognized during the three months ended November 30, 1997 due
to a higher level of defaults and prepayments than had been previously
anticipated. Following a calculation of the effect of accretion of interest,
amortization of cash flow residuals and increased prepayment penalty fees, the
carrying value of the Company's mortgage related securities was reduced to $94.3
million as of November 30, 1997 from $106.3 million as of August 31, 1997. As a
result of, among other things, the application of the revised prepayment and
loss assumptions, the Company was required to take a $14.1 million charge to
earnings during the three months ended November 30, 1997. During the three
months ended February 28, 1998, negative adjustments of approximately $3.7
million were recognized due to increased required levels of
over-collateralization and higher than anticipated prepayments on Title I Loans
and the recognition of an impairment to the carrying value of a mortgage related
security which had previously been recorded as a whole loan sale, sold servicing
retained, whose underlying loans are anticipated to be repurchased and included
in a future securitization. For the six months ended February 28, 1998, the
Company incurred a net loss of $32.5 million as compared to net income of $5.9
million for the six months ended February 28, 1997. The rate of voluntary
prepayments on the securitized Conventional Loans during December 1997, January
1998 and February 1998 was significantly lower than the new assumptions
predicted. However, there can be no assurance that this decrease in prepayments
is a trend or that, if it is a trend, the trend will continue.

        Although the Company believes that it has made reasonable estimates of
the fair value of the mortgage related securities in formulating the revised
prepayment and loss assumptions, the rate of prepayments and default rates
utilized are estimates, and actual experience may vary from these estimates and
the difference may be material. The Company has not obtained an independent
valuation of the assumptions utilized in calculating the carrying value of the
Company's mortgage related securities for any period subsequent to August 31,
1997. There can be no assurance that the revised prepayment and loss assumptions
used to determine the fair value of the Company's mortgage related securities
and mortgage servicing rights will remain appropriate for the life of the loans.
If actual loan prepayments or credit losses exceed the Company's estimates, the
carrying value of the Company's mortgage related securities and mortgage
servicing rights may have to be further written down through a charge against
earnings.

                                       14
<PAGE>   18


        The Company has four significant sources of financing: (i) the Warehouse
Line for up to $16.0 million; (ii) a revolving line of credit for up to $25.0
million, less amounts outstanding under repurchase agreements (the "First
Revolving Credit Facility"); (iii) a second revolving credit facility for up to
$5.0 million which, under certain circumstances, may be increased to $8.8
million (the "Second Revolving Credit Facility"); and (iv) $80.0 million of
outstanding Notes. As a result of the losses the Company recognized during the
six months ended February 28, 1998, the Company was not in compliance with
certain provisions of the pledge and security agreement, as amended, governing
the First Revolving Credit Facility and is not in compliance with certain
provisions of the Indenture governing the Notes (the "Indenture") and the
credit agreement governing the Warehouse Line. While the Company is not in
default under the terms of the Indenture, the Company cannot presently incur
additional debt other than Permitted Warehouse Indebtedness (as defined therein)
and certain other types of indebtedness. The Company must maintain external
sources of cash to fund its operations and therefore must maintain its sources
of financing or identify other external sources of funds. See "Liquidity and
Capital Resources."

        The Company is currently not in compliance with certain terms of the
Warehouse Line, under which $14.5 million is presently outstanding, because the
Company is not in compliance with the adjusted tangible net worth requirement
and the amount outstanding exceeds the amount permitted to be borrowed
thereunder. In addition, the Company does not have purchase commitments covering
the pledged loans and has not delivered to the Warehouse Line lenders
satisfactory takeout commitments. The Company is also not in compliance with the
debt-to-net worth requirement contained in the agreement governing the First
Revolving Credit Facility, under which $10.0 million is presently outstanding.
In addition, under the terms of the Indenture, the Company cannot presently
incur additional indebtedness other than Permitted Warehouse Indebtedness and
certain other types of indebtedness because the Company is not in compliance
with the consolidated leverage ratio requirement contained in the Indenture.

        The Company has operated since March 1994 on a negative cash flow basis.
As a result of such negative cash flow, since December 31, 1997, the Company has
significantly decreased the volume of its loan originations. In addition,
partially as a result of such negative cash flow, and as part of the Company's
cost saving measures, the Company completed an internal restructuring, resulting
in a reduction of approximately 32% of its workforce from its peak in early
January 1998, primarily as a result of a substantial reduction of the Dealer
Division. The Dealer Division generated approximately 4.6% and 7.6% of
Conventional and total loan originations, respectively, in the six months ended
February 28, 1998, but accounted for a disproportionately higher amount of the
Company's costs. The Company will continue to originate Title I Loans through
its Correspondent Division, intended solely for sale to the Federal Home Loan
Mortgage Association ("FNMA").


                                       15
<PAGE>   19
RESULTS OF OPERATIONS

        The following table sets forth certain data regarding loans originated
and serviced by the Company during the three and six months ended February 28, 
1997 and 1998:

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED FEBRUARY 28,             SIX MONTHS ENDED FEBRUARY 28,
                                              ----------------------------------------   ---------------------------------------
                                                      1997                1998                   1997               1998
                                              -------------------  -------------------   ------------------  -------------------
                                                                          (thousands of dollars)
PRINCIPAL BALANCE OF LOANS ORIGINATED:
   Correspondents:
<S>                                           <C>         <C>      <C>         <C>      <C>         <C>      <C>         <C> 
        Title I                               $ 11,346       10.2% $  2,014        1.6% $ 30,511       17.5% $  6,916        2.1%
        Conventional                            87,911       79.0   107,695       84.6   118,762       68.4   286,453       87.6
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Correspondents                 99,257       89.2   109,709       86.2   149,273       85.9   293,369       89.7
                                              --------    -------  --------    -------  --------    -------  --------    -------
   Dealers:
       Title I                                  10,186        9.2     4,014        3.2    22,425       12.9    11,214        3.4
       Conventional                              1,817        1.6     5,092        4.0     2,024        1.2    13,846        4.2
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Dealers                        12,003       10.8     9,106        7.2    24,449       14.1    25,060        7.6
                                              --------    -------  --------    -------  --------    -------  --------    -------
   Retail:
       Conventional                                 --       --       3,717        2.9        --       --       3,964        1.2
       First Mortgage                               --       --         243        0.2        --       --         243        0.1
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Retail                             --       --       3,960        3.1        --       --       4,207        1.3
                                              --------    -------  --------    -------  --------    -------  --------    -------
   First Mortgage                                   --       --       4,509        3.5        --       --       4,509        1.4
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Principal Amount
               of Loans Originated            $111,260      100.0% $127,284      100.0% $173,722      100.0% $327,145      100.0%
                                              ========    =======  ========    =======  ========    =======  ========    =======

NUMBER OF LOANS ORIGINATED:
   Correspondents:
        Title I                                    551       12.5%       95        2.3%    1,493       20.0%      320        2.9%
        Conventional                             2,884       65.7     3,320       78.9     3,960       53.2     8,760       80.0
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Correspondents                  3,435       78.2     3,415       81.2     5,453       73.2     9,080       82.9
                                              --------    -------  --------    -------  --------    -------  --------    -------
   Dealers:
       Title I                                     873       19.9       357        8.5     1,907       25.6       944        8.6
       Conventional                                 83        1.9       244        5.8        93        1.2       733        6.7
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Dealers                           956       21.8       601       14.3     2,000       26.8     1,677       15.3
                                              --------    -------  --------    -------  --------    -------  --------    -------
   Retail:
       Conventional                                 --       --         111        2.7        --       --         119        1.1
       First Mortgage                               --       --           5        0.1        --       --           5       --
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Retail                             --       --         116        2.8        --       --         124        1.1
                                              --------    -------  --------    -------  --------    -------  --------    -------
   First Mortgage                                   --       --          73        1.7        --       --          73        0.7
                                              --------    -------  --------    -------  --------    -------  --------    -------
           Total Number of Loans Originated
                                                 4,391      100.0%    4,205      100.0%    7,453      100.0%   10,954      100.0%
                                              ========    =======  ========    =======  ========    =======  ========    =======
</TABLE>


<TABLE>
<CAPTION>

                                                                                         FEBRUARY 28,
                                                              -----------------------------------------------------------------
                                                                         1997                                 1998
                                                              ----------------------------         ----------------------------
LOANS SERVICED AT END OF PERIOD (INCLUDING LOANS
SECURITIZED, SOLD TO INVESTORS AND HELD FOR SALE):
<S>                                                           <C>                    <C>            <C>                    <C>  
Title I                                                       $237,633               64.5%          $245,921               31.6%
Conventional                                                   130,736               35.5            529,887               68.1
First Mortgage                                                      --               --                2,706                0.3
                                                              --------            -------           --------            -------
   Total Loans Serviced at End of Period                      $368,369              100.0%          $778,514              100.0%
                                                              ========            =======           ========            =======
</TABLE>


  

                                     16



<PAGE>   20



        The following table sets forth the principal balance of loans sold or
securitized and related gain on sale data for the three and six months ended
February 28, 1997 and 1998:

<TABLE>
<CAPTION>

                                                            THREE MONTHS ENDED                SIX MONTHS ENDED
                                                              FEBRUARY 28,                       FEBRUARY 28,
                                                      -------------------------           -------------------------
                                                         1997            1998               1997            1998
                                                      ---------       ---------           ---------       ---------
                                                                        (thousands of dollars)
<S>                                                   <C>             <C>       <C>       <C>             <C>       <C>
WHOLE LOAN SALES SOLD WITH RECOURSE AND
  SECURITIZATIONS:
Principal amount of loans sold:
  Title I                                             $  22,277       $  (7,952)(1)       $  55,666       $  (8,770)(1)
  Conventional                                           84,655          47,834             111,775         154,255
                                                      ---------       ---------           ---------       ---------
    Total principal balances                          $ 106,932       $  39,882           $ 167,441       $ 145,485
                                                      =========       =========           =========       =========
Gain (loss) on sale of loans                          $   5,823       $  (3,519)          $  15,424       $    (730)
                                                      =========       =========           =========       =========
Net unrealized gain (loss) on mortgage
  related securities                                  $   3,143       $  (3,661)          $   2,908       $ (16,768)
                                                      =========       =========           =========       =========
Gain (loss) on sale of loans as a
  percentage of principal balance of loans sold             5.4%           (8.8)%               9.2%           (0.5)%
Gain (loss) on sale of loans plus net
  unrealized gain (loss) on mortgage
  related securities as a percentage of
  principal balance of loans sold                           8.4%          (18.0)%              10.9%          (12.0)%

WHOLE LOAN SALES SOLD WITH SERVICING
  RELEASED TO FNMA AND OTHERS:
Principal amount of loans sold:
  Title I                                             $      --       $  10,735           $      --       $  22,627
  Conventional                                               --          72,668                  --         111,029
  First Mortgage                                             --           2,088                  --           2,088
                                                      ---------       ---------           ---------       ---------
    Total principal balances                          $      --       $  85,491           $      --       $ 135,744
                                                      =========       =========           =========       =========
Gain on sale of loans                                 $      --       $   1,607           $      --       $   2,539
                                                      =========       =========           =========       =========
Net unrealized gain on mortgage
  related securities                                  $      --       $       9           $      --       $       8
                                                      =========       =========           =========       =========

Gain on sale of loans as a percentage of
  principal balance of loans sold                            --%            1.9%                 --%            1.9%
Gain on sale of loans plus net unrealized
  loss on mortgage related securities as a
  percentage of principal balance of loans sold              --%            1.9%                 --%            1.9%
</TABLE>


---------

(1)     Negative Title I Loan sales resulted from the repurchase of loans sold
        with recourse from a financial institution and the sale of certain of
        such loans to FNMA without recourse.

        The percentage of gain on sale of loans can vary for several reasons,
including the relative amounts of Conventional and Title I Loans, each of which
type of loan has different (i) estimated prepayment rates, (ii) weighted-average
interest rates, (iii) weighted-average maturities, and (iv) estimated future
default rates. Typically, the gain on sale of loans through securitizations is
higher than on whole loan sales.


                                       17
<PAGE>   21



        Delinquencies--The following table sets forth the Title I Loan and
Conventional Loan delinquency and Title I insurance claims experience of loans
serviced by the Company as of the dates indicated:
<TABLE>
<CAPTION>

                                                                         AUGUST 31,      FEBRUARY 28,
                                                                               1997             1998
                                                                         --------------   --------------
                                                                           (thousands of dollars)
<S>                                                                      <C>               <C>  
Delinquency period (1):
  31-60 days past due                                                        1.54%              1.53%
  61-90 days past due                                                        0.80               0.87
  91 days and over past due                                                  3.07               3.95
  91 days and over past due, net of claims filed (2)                         2.32               3.42
Outstanding claims filed with HUD (3)                                        0.75               0.53
Outstanding number of Title I insurance claims filed                          269                244
Total servicing portfolio                                               $ 628,068          $ 778,514
Title I Loans serviced                                                    255,446            245,921
Conventional Loans serviced                                               372,622            529,887
First Mortgage Loans serviced                                                  --              2,706
Amount of FHA insurance available for Title I Loans serviced               21,094             17,974(4)
Amount of FHA insurance available as a percentage of Title I
  Loans serviced                                                             8.26%              7.31%(4)
Aggregate losses on liquidated loans (5)                                $     201          $       9
</TABLE>

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

(1)     Represents the dollar amount of delinquent loans as a percentage of the
        total dollar amount of loans serviced by the Company (including loans
        owned by the Company) as of the dates indicated. Conventional Loan
        delinquencies represented 10.35% and 24.37%, respectively, of the
        Company's total delinquencies at August 31, 1997 and February 28, 1998.

(2)     Represents the dollar amount of delinquent loans net of delinquent Title
        I Loans for which claims have been filed with the U.S. Department of
        Housing and Urban Development ("HUD") and payment is pending as a
        percentage of the total dollar amount of total loans serviced by the
        Company (including loans owned by the Company) as of the dates
        indicated.

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

(4)     If all claims filed with HUD had been processed as of February 28, 1998,
        the amount of FHA insurance available for all serviced Title I Loans
        would have been reduced to $14.0 million, which as a percentage of Title
        I Loans serviced would have been 5.80%.

(5)     On Title I Loans, a loss is recognized upon receipt of payment of a
        claim or final rejection thereof. Claims paid in a period may relate to
        a claim filed in an earlier period. Since the Company commenced its
        Title I lending operations in March 1994, there has been no final
        rejection of a claim by the FHA. Aggregate losses on liquidated Title I
        Loans related to 994 Title I insurance claims made by the Company, as
        servicer, since commencing operations through February 28, 1998. Losses
        on Title I Loans liquidated will increase as the balance of the claims
        are processed by HUD. The Company has received an average payment from
        HUD equal to 90% of the outstanding principal balance of such Title I
        Loans, plus appropriate interest and costs.

        The pooling and servicing agreements and sale and servicing agreements
related to the Company's securitization transactions contain provisions with
respect to the maximum permitted loan delinquency rates and loan default rates,
which, if exceeded, would allow the termination of the Company's right to
service the related loans. At February 28, 1998, the rolling three-month average
annual default rates on the pools of loans sold in the March 1996, August 1996
and December 1996 securitization transactions exceeded 6.5%, the permitted limit
set 

                                       18


<PAGE>   22

forth in the related pooling and servicing agreements. Accordingly, this
condition could result in the termination of the Company's servicing rights with
respect to those pools of loans by the trustee, the master servicer or the
insurance company providing credit enhancement for those transactions. No
assurance can be given that the insurance company, trustee or master servicer
will not exercise its right to terminate the Company's servicing rights. In the
event of such termination, there would be an adverse effect on the valuation of
the Company's mortgage servicing rights and results of operations in the amount
of such mortgage servicing rights ($3.1 million before tax at February 28, 1998)
on the date of termination. The Company has taken certain steps designed to
reduce the default rates on these pools of loans as well as its other loans.
These steps include the hiring of a new vice president in charge of collection
of delinquent loans, the hiring of additional personnel to collect delinquent
accounts, the assignment of additional personnel specifically assigned to the
collection of these pools of loans and the renegotiation of the terms of certain
delinquent accounts in these pools of loans within the guidelines promulgated by
HUD.

        The pooling and servicing agreements and sale and servicing agreements
also require that certain delinquency and default rates not exceed certain
thresholds. If these thresholds are exceeded, higher levels of
over-collateralization are required which can cause a delay in cash receipts to
the Company as a holder of the residual interest, causing an adverse valuation
adjustment to the carrying value of the residual security.

        Delinquencies of loans serviced by the Company have also decreased the
amount of loan servicing income recorded during the six months ended February
28, 1998 as the Company's loan servicing income has been reduced by the amount
of interest advanced to the owners of these loans, which advances the Company
expects to recover.

        Delinquencies on loans serviced by the Company have increased to $49.5
million at February 28, 1998 from $34.0 million at August 31, 1997. Since the
Company began originating Title I Loans in 1994, an increasing level of
delinquencies has appeared as expected on such loans less than two years old.
Conventional Loan delinquencies represented 10.35% and 24.37%, respectively, of
the Company's total delinquencies at August 31, 1997 and February 28, 1998.

Three Months Ended February 28, 1998 compared to Three Months Ended February 28,
1997

        The Company originated $127.3 million of loans during the three months
ended February 28, 1998 compared to $111.3 million of loans during the three
months ended February 28, 1997, an increase of 14.4%. The increase is a result
of the overall growth in the Company's business, including an increase in the
number of active Correspondents. At February 28, 1998, the Company had 565
active Correspondents and 249 active Dealers, compared to 484 active
Correspondents and 467 active Dealers at February 28, 1997. Of the $127.3
million of loans originated during the three months ended February 28, 1998,
$116.5 million were Conventional Loans, $6.0 million were Title I Loans and $4.8
million were First Mortgage Loans compared to $89.7 million of Conventional
Loans, $21.6 million of Title I Loans and no First Mortgage Loans during the
three months ended February 28, 1997. Pursuant to its recent restructuring, the
Company is de-emphasizing its reliance on the Dealer division, and to a lesser
extent the Correspondent division, as a source of loan originations.

        Net revenues (losses) decreased to a loss of $3.6 million during the
three months ended February 28, 1998 from revenues of $10.1 million during the
three months ended February 28, 1997. The decrease was primarily the result of
the downward valuation adjustment which is reflected in the net unrealized loss
on mortgage related securities. See Note 7 of Notes to Condensed Financial 
Statements.

        The combined gain on sale of loans and net unrealized gain (loss) on
sale of mortgage related securities decreased to a loss of $5.6 million during
the three months ended February 28, 1998 from a gain of $9.0 million during the
three months ended February 28, 1997. The decrease was primarily due to the
change in business strategy whereby the Company is focusing on whole loan sales
for cash premiums as opposed to securitizations and the downward valuation
adjustment, causing the net unrealized loss on mortgage related securities.

        Loan servicing income, net, increased $750,000 to $1.3 million during
the three months ended February 28, 1998 from $560,000 during the three months
ended February 28, 1997. The increase was primarily the result of 

                                       19

<PAGE>   23

the increase in the servicing portfolio to $778.5 million at February 28, 1998
from $368.4 million at February 28, 1997.

        Interest income on loans held for sale and mortgage related securities,
net of interest expense, increased $158,000 to $684,000 during the three months
ended February 28, 1998 from $526,000 during the three months ended February 28,
1997. The increase was primarily the result of the increase in the average size
of the portfolio of loans held for sale and mortgage related securities, which
was partially offset by interest accrued on the Additional Notes (as defined
below) during the quarter ended February 28, 1998.

        The net provision for credit losses increased $1.5 million to $706,000
for the three months ended February 28, 1998 from $(800,000) for the three
months ended February 28, 1997. The increase in the provision was directly
related to the increase in the volume of loans originated and the increased
ratio of Conventional Loans to Title I Loans originated during the three months
ended February 28, 1998 compared to the three months ended February 28, 1997 and
a shift away from securitizations to whole loan sales. No allowance for credit
losses on loans sold with recourse is established on loans sold through
securitizations or on whole loan sales on a servicing released basis, as the
Company has no recourse obligation under those securitization agreements for
credit losses and estimated credit losses on loans sold through securitizations
are considered in the Company's valuation of its residual interest securities.
The provision for credit losses is based upon periodic analysis of the
portfolio, economic conditions and trends, historical credit loss experience,
borrowers' ability to repay, collateral values and estimated FHA insurance
recoveries on Title I Loans originated and sold.

        Total general and administrative expenses increased to $9.0 million
during the three months ended February 28, 1998 compared to $5.2 million during
the three months ended February 28, 1997. The increase was primarily a result of
increased professional services due to increased legal and audit expenses
associated with the creation of new debt, a private placement of $40.0 million
of senior subordinated notes (the "Private Placement), additional Securities and
Exchange Commission ("SEC") filings and amendments to existing debt agreements,
increased loan servicing expenses due to an increase in loans serviced and
increased payroll and benefits related to the hiring of additional underwriting,
loan processing, administrative, loan quality control and other personnel as a
result of the expansion of the Company's business.

        Payroll and benefits expense increased $2.1 million to $4.6 million
during the three months ended February 28, 1998 from $2.5 million during the
three months ended February 28, 1997 primarily due to an increased number of
employees and severance expenses. The number of employees increased to 381 at
February 28, 1998 from 277 at February 28, 1997 due to increased staff necessary
to support the business expansion and maintain quality control. The Company has
recently reduced its workforce by approximately 32% since its peak in early
January 1998; however, the savings from the reduction will not be realized until
subsequent accounting periods.

        Professional services increased $459,000 to $1.0 million during the
three months ended February 28, 1998 from $560,000 for the three months ended
February 28, 1997, due to increased legal and audit expenses and
reclassification of certain consulting and management services expenses that
were previously classified in different line items.

        Sub-servicing fees paid to Preferred Equities Corporation ("PEC")
increased to $610,000 for the three months ended February 28, 1998 from $372,000
for the three months ended February 28, 1997 due primarily to a larger loan
servicing portfolio, notwithstanding a lower sub-servicing fee rate.

        Other services increased $442,000 to $694,000 during the three months
ended February 28, 1998 from $252,000 for the three months ended February 28,
1997 due to increased loan volume and documentation expenses associated with the
sale of loans with servicing released during the current quarter.

        Rent and lease expenses increased $168,000 to $365,000 during the three
months ended February 28, 1998 from $197,000 for the three months ended February
28, 1997 due to the prior year reflecting new tenant discounts for office space
at Parkwood Circle.

                                       20
<PAGE>   24

        Travel expenses increased $193,000 to $276,000 during the three months
ended February 28, 1998 from $83,000 during the three months ended February 28,
1997 due to increased travel caused by higher staff levels necessary to support
the business expansion.

        Other general and administrative expenses increased $377,000 to $506,000
during the three months ended February 28, 1998 from $129,000 during the three
months ended February 28, 1997 due primarily to increased expenses related to
the ongoing expansion of facilities.

        Income (loss) before income taxes decreased to a loss of $13.7 million
for the three months ended February 28, 1998 from income of $5.4 million for the
three months ended February 28, 1997. Due to the increase in the deferred income
tax valuation adjustment of $7.2 million, the provision for income taxes
increased to $7.2 million for the three months ended February 28, 1998 from an
income tax expense of $2.1 million for the three months ended February 28, 1997.

        As a result of the foregoing, the Company incurred a net loss of $20.8
million for the three months ended February 28, 1998 compared to net income of
$3.4 million for the three months ended February 28, 1997.

Six Months Ended February 28, 1998 compared to Six Months Ended February 28,
1997

        The Company originated $327.1 million of loans during the six months
ended February 28, 1998 compared to $173.7 million of loans during the six
months ended February 28, 1997, an increase of 88.3%. The increase is a result
of the overall growth in the Company's business primarily during the quarter
ended November 30, 1997, including an increase in the number of active
Correspondents. At February 28, 1998, the Company had 565 active Correspondents
and 249 active Dealers, compared to 484 active Correspondents and 467 active
Dealers at February 28, 1997. Of the $327.1 million of loans originated during
the six months ended February 28, 1998, $304.3 million were Conventional Loans,
$18.1 million were Title I Loans and $4.7 million were First Mortgage Loans
compared to $120.8 million of Conventional Loans, $52.9 million of Title I Loans
and no First Mortgage Loans during the six months ended February 28, 1997.

        Net revenues (losses) decreased to a loss of $10.6 million during the
six months ended February 28, 1998 from revenues of $20.4 million during the six
months ended February 28, 1997. The decrease was primarily the result of the
downward valuation adjustment which is reflected in the net unrealized loss on
mortgage related securities and the change in business strategy with the focus
on whole loan sales for cash premiums. See Note 7 of Notes to Condensed
Financial Statements.

        The combined gain on sale of loans and net unrealized gain (loss) on
sale of mortgage related securities decreased to a loss of $15.0 million during
the six months ended February 28, 1998 from a gain of $18.3 million during the
six months ended February 28, 1997. The decrease was primarily due to the
downward valuation adjustment, causing the net unrealized loss on mortgage
related securities. See Note 7 of Notes to Condensed Financial Statements.

        Loan servicing income, net, increased $1.3 million to $2.5 million
during the six months ended February 28, 1998 from $1.2 million during the six
months ended February 28, 1997. The increase was primarily the result of the
increase in the servicing portfolio to $778.5 million at February 28, 1998 from
$368.4 million at February 28, 1997.

        Interest income on loans held for sale and mortgage related securities,
net of interest expense, increased $1.0 million to $1.9 million during the six
months ended February 28, 1998 from $881,000 during the six months ended
February 28, 1997. The increase was primarily the result of the increase in the
average size of the portfolio of loans held for sale and mortgage related
securities.

        The net provision for credit losses increased $1.4 million to $2.3
million for the six months ended February 28, 1998 from $911,000 for the six
months ended February 28, 1997. The increase in the provision was directly
related to the increase in the volume of loans originated and the increased
ratio of Conventional Loans to Title I Loans originated during the six months
ended February 28, 1998 compared to the six months ended 

                                       21


<PAGE>   25

February 28, 1997 and a shift away from securitizations to whole loan sales. No 
allowance for credit losses on loans sold with recourse is established on loans
sold through securitizations or on whole loan sales on a servicing released
basis, as the Company has no recourse obligation under those securitization
agreements for credit losses and estimated credit losses on loans sold through
securitizations are considered in the Company's valuation of its residual
interest securities. The provision for credit losses is based upon periodic
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay, collateral values, and estimated
FHA insurance recoveries on Title I Loans originated and sold.

        Total general and administrative expenses increased to $19.0 million
during the six months ended February 28, 1998 from $9.6 million during the six
months ended February 28, 1997. The increase was primarily a result of increased
professional services due to increased legal and audit expenses associated with
the creation of new debt, additional SEC filings and amendments to existing debt
agreements, increased loan servicing expenses due to an increase in loans
serviced and increased payroll and benefits related to the hiring of additional
underwriting, loan processing, administrative, loan quality control and other
personnel as a result of the expansion of the Company's business during the
period prior to the reduction in the workforce.

        Payroll and benefits expense increased $5.5 million to $9.8 million
during the six months ended February 28, 1998 from $4.3 million during the six
months ended February 28, 1997 primarily due to an increased number of employees
and severance expenses. The number of employees increased to 381 at February 28,
1998 from 277 at February 28, 1997 due to increased staff necessary to support
the business expansion and maintain quality control. From its peak in early
January 1998, the workforce has since been reduced by 32%, pursuant to the
Company's restructuring.

        Professional services increased $1.5 million to $2.5 million during the
six months ended February 28, 1998 from $991,000 for the six months ended
February 28, 1997, due to increased legal and audit expenses associated with the
creation of new debt, the Private Placement, additional SEC filings and
amendments to existing debt agreements.

        Sub-servicing fees increased to $1.3 million for the six months ended
February 28, 1998 from $657,000 for the six months ended February 28, 1997 due
primarily to a larger loan servicing portfolio, notwithstanding a lower
sub-servicing rate in the later part of the six months ended February 28 1998.

        Other services increased $627,000 to $1.1 million during the six months
ended February 28, 1998 from $457,000 for the six months ended February 28, 1997
due to increased loan volume and documentation expenses for loans sold with
servicing released during the current quarter.

        Rent and lease expenses increased $207,000 to $658,000 during the six
months ended February 28, 1998 from $451,000 for the six months ended February
28, 1997 due to the prior year reflecting new tenant discounts for office space
at Parkwood Circle.

        Travel expenses increased $331,000 to $536,000 during the six months
ended February 28, 1998 from $205,000 during the six months ended February 28,
1997 due to increased travel necessary to support the then business expansion.

        Other general and administrative expenses increased $574,000 to $1.1
million during the six months ended February 28, 1998 from $526,000 during the
six months ended February 28, 1997 due primarily to increased expenses related
to the expansion of facilities.


        As a result of the foregoing, the Company incurred a net loss of $32.5
million for the six months ended February 28, 1998 compared to net income of
$5.9 million for the six months ended February 28, 1997.

                                       22

<PAGE>   26

LIQUIDITY AND CAPITAL RESOURCES

        Cash and cash equivalents were $3.2 million at February 28, 1998
compared to $6.1 million at August 31, 1997. 

        The Company has operated since March 1994 on a negative cash flow basis.
As a result of such negative cash flow, since December 1997, the Company has
been required to significantly curtail the volume of its loan originations. In
addition, as discussed below, the Company is not in compliance with certain of
the financial requirements and covenants contained in certain of the Company's
financing arrangements.

        In November 1996, the Company consummated an underwritten public
offering (the "IPO") pursuant to which it issued 2.3 million shares of Common
Stock at $10.00 per share. Concurrently with the IPO, the Company issued $40.0
million of senior subordinated notes (the "Existing Notes") in an underwritten
public offering. The Company used approximately $13.9 million of the aggregate
net proceeds from these offerings to repay intercompany debt due to Mego
Financial and PEC and approximately $24.3 million to reduce the amounts
outstanding under the Company's lines of credit. The balance of the net proceeds
was used to originate loans.

        In October 1997, the Company consummated the Private Placement pursuant
to which it issued $40.0 million in additional senior subordinated notes
("Additional Notes"), which increased the aggregate principal amount of the
outstanding subordinated notes from $40.0 million to $80.0 million. The Company
used approximately $3.9 million of the net proceeds from the Private Placement
to repay debt due to Mego Financial and approximately $29.0 million to reduce
the amounts outstanding under the Company's lines of credit. The balance of the
net proceeds was used to originate loans and for working capital. Prior to the
Private Placement, the Company obtained consents to certain amendments to the
original indenture (as amended, the "Indenture") governing the Notes ("Indenture
Amendments"), which among other things permitted the issuance of the Additional
Notes, modified certain covenants applicable to the Company and will permit the
issuance of an additional $70.0 million of principal amount of senior
subordinated notes. In connection with the consent solicitation, the Company
made consent payments totaling $392,000 ($10.00 cash per $1,000 principal amount
of the Existing Notes) to holders thereof who properly furnished their consents
to the amendments to the original indenture. See Note 8 of Notes to Condensed
Financial Statements.

        The Company's cash requirements arise from loan originations, payments
of operating and interest expenses, over-collateralization requirements related
to securitization transactions and deposits to reserve accounts related to loan
sale transactions. Loan originations are initially funded principally through
the Company's Warehouse Line pending the sale of loans in the secondary market.
In addition, the Company has an agreement providing for the purchase of up to
$2.0 billion of loans over a five year period, of which $1.3 billion remained to
be purchased at February 28, 1998. Substantially all of the loans originated by
the Company are sold. Loans under the Warehouse Line are repaid primarily from
the proceeds from the sale of loans in the secondary market. These proceeds
totaled approximately $167.4 million and $281.2 million for the six months ended
February 28, 1997 and 1998, respectively.

        The Company has operated since March 1994 on a negative cash flow basis,
although the Company is implementing measures intended to place it on at least a
cash flow neutral basis for the calendar year 1998. There can be no assurance
that the Company will be successful in implementing these measures. In
connection with securitizations and certain whole loan sales, the Company
recognizes a gain on sale of the loans upon the closing of the transaction and
the delivery of the loans, but does not receive the cash representing such gain
until it receives the excess servicing spread, which is payable over the actual
life of the loans sold. The Company is subject to over-collateralization
requirements and incurs significant expenses in connection with securitizations
and incurs tax liabilities as a result of the gain on sale. As a result of such
negative cash flow, since November 30, 1997, the Company has curtailed the 
volume of its loan originations.

        The Company has reduced its dependence on securitizations during Fiscal
1998 due to the negative cash flow generated by this method of loan disposition.
Alternatively, during Fiscal 1998 the Company has made whole loan sales on a
servicing released basis, at a premium, in order to enhance its cash flow.

                                       23
<PAGE>   27



        The pooling and servicing agreements and sale and servicing agreements
related to the Company's securitizations require the Company to build
over-collateralization levels through retention within each securitization trust
of excess servicing distributions and application thereof to reduce the
principal balances of the senior interests issued by the related trust or cover
interest shortfalls. This retention causes the aggregate unpaid principal amount
of the loans in the related pool to exceed the aggregate principal balance of
the outstanding investor securities. Such over-collateralization amounts serve
as credit enhancement for the related trust and therefore are available to
absorb losses realized on loans held by such trust.

        The Company continues to be subject to the risks of default and
foreclosure following the sale of loans through securitizations to the extent
excess servicing distributions are required to be retained or applied to reduce
principal or cover interest shortfalls from time to time. Such retained amounts
are predetermined by the entity issuing any guarantee of the related interests
as a condition to obtaining insurance or by the rating agencies as a condition
to obtaining their applicable rating thereon. In addition, such retention delays
cash distributions that otherwise would flow to the Company through its retained
interest, thereby adversely affecting the flow of cash to the Company.

        Certain whole loan sale transactions require the subordination of
certain cash flows payable to the Company to the payment of scheduled principal
and interest due to the loan purchasers. In connection with certain of such sale
transactions, a portion of amounts payable to the Company from the excess
interest spread is required to be maintained in an account to the extent of the
subordination requirements. The subordination requirements generally provide
that the excess interest spread is payable to the account until a specified
percentage of the principal balances of the sold loans is accumulated therein.
Excess interest spread payable to the Company is subject to being utilized first
to replenish cash paid from the account to fund shortfalls in collections of
interest from borrowers who default on the payments on the loans until the
Company's deposits into the account equal the specified percentage. The excess
interest required to be deposited and maintained in the respective accounts is
not available to support the cash flow requirements of the Company. At February
28, 1998, amounts on deposit in such accounts totaled $3.5 million.

        Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market, are essential for
the continuation of the Company's loan origination operations. Loan originations
are initially funded principally through the Company's Warehouse Line. At
February 28, 1998, $40.0 million was outstanding under this Warehouse Line. In
excess of 95.2% of the aggregate loans originated by the Company since inception
through February 28, 1998 had been sold.

        The Warehouse Line, which is secured by loans prior to sale, became
effective in June 1997 and was increased from $40.0 million to $55.0 million in
September 1997 and to $65.0 million in October 1997 and then reduced in stages
to $35.0 million in March 1998 and to $16.0 million in May 1998. Under the
original agreement, the Company had the option of borrowing funds under the
Warehouse Line, subject to certain conditions, at an annual rate equal to (i)
the higher of the corporate base rate of interest announced by The First
National Bank of Chicago from time to time or the weighted-average of rates on
overnight federal funds transactions, as published by the Federal Reserve Bank
of New York, plus 0.5%, (ii) the Federal Funds Funding Rate plus 1.75% or (iii)
the Eurodollar Base Rate. The original agreement required the Company to
maintain minimum adjusted tangible net worth (defined as net worth less
intangibles plus subordinated debt) of $65.0 million plus 50% of the Company's
cumulative net income since November 30, 1996, plus all net proceeds received by
the Company through the sale or issuance of stock or additional subordinated
notes. Additionally, the following material covenant restrictions existed: i)
the ratio of total liabilities (not including subordinated notes) divided by
tangible net worth (including subordinated notes) cannot exceed 3:1, and ii)
total liabilities must be less than the aggregate of 100% of cash plus 93% of
loans held for sale plus 55% of restricted cash and mortgage related securities.
At February 28, 1998, the ratio of total liabilities to tangible net worth was 
0.79:1 and total liabilities were $78.1 million, which was $48.4 million under 
the maximum amount allowed.

                                       24
                                        
<PAGE>   28
        In February 1998, in order to avoid non-compliance with the terms of the
Warehouse Line, the Company entered into an amended and restated credit
agreement (the "Amended Credit Agreement") which has been further amended
modifying the existing Warehouse Line agreement to, among other things: (i)
reduce the amount of the Warehouse Line from $65.0 million to $55.0 million,
and, thereafter, in stages to $35.0 million by March 4, 1998 and subsequently to
$16.0 million with maturity on May 29, 1998 (subject to increase with the
approval of all of the parties to such agreement); (ii) change the expiration
date of the Warehouse Line from June 15, 1998 to May 29, 1998; (iii) add the
ability to borrow against First Mortgage Loans in an amount not to exceed 15% of
the lenders' aggregate commitment; (iv) reduce the advance rate for certain loan
categories; (v) prohibit the payment of dividends by the Company; (vi) limit the
amount of "Funded Debt" (as defined therein to mean indebtedness for money
borrowed, with certain exceptions) to the sum of (a) 100% of cash, (b) 95% of
"loans held for sale, net" and (c) 80% of "Restricted Assets" which are
restricted cash, mortgage related securities, mortgage servicing rights and
excess servicing rights; and (vii) modify certain of the financial covenants to,
among other things, require the maintenance of (a) an adjusted leverage ratio of
total liabilities (which excludes subordinated debt up to $80.4 million) to
adjusted tangible net worth not to exceed 1.75 to 1.0, (b) an adjusted tangible
net worth (which includes subordinated debt) of at least $110.0 million plus 75%
of positive net income after December 31, 1997 and 100% of any new equity or
debt offering and (c) a tangible net worth of at least $30.0 million plus 75% of
positive net income after December 31, 1997 and 100% of any new equity. In
addition, the Company agreed to provide satisfactory purchase commitments by
March 3, 1998 to the Warehouse Line lenders, covering the then pledged loans in
the Warehouse Line. An extension of this compliance date to March 13, 1998 was
received and the Company was in compliance with this requirement at that date.
All of the Company's funding under the Warehouse Line currently bears interest
at an annual rate equal to the agent's corporate base rate plus 1.0%.  The agent
has advised the Company that the Warehouse Line lenders do not intend to renew
the Warehouse Line.

        At February 28, 1998, the Company's actual adjusted tangible net worth
calculated pursuant to the agreement was $99.1 million, which was $10.9 million
less than the required minimum adjusted tangible net worth of $110.0 million.
Additionally, the following material covenant restrictions exist: i) the ratio
of total liabilities (not including subordinated notes) divided by tangible net
worth (including subordinated notes) cannot exceed 1.75:1, and ii) total
liabilities must be less than the aggregate of 100% of cash plus 95% of loans
held for sale plus 80% of restricted cash and mortgage related securities. At
February 28, 1998, the ratio of total liabilities to tangible net worth was
0.79:1 and total liabilities were $78.1 million, which was $48.4 million under
the maximum amount allowed. As of the date of this report, the Company is not in
compliance with the terms of the Warehouse Line because the amount outstanding
under the line exceeds the amount permitted to be borrowed thereunder and the
Company has not complied with the requirement to maintain purchase commitments
from third parties. The Company has received commitments for the sale of loans,
the proceeds of which would be applied to reduce the amount outstanding under
the line and would be sufficient to bring the Company in compliance with the
terms thereof. However, there can be no assurance that such loan sales will be
consummated.

        In September 1996, the Company entered into a repurchase agreement with
another financial institution pursuant to which the Company may pledge the
interest only certificates from its securitizations in exchange for advances. In
April 1997, the Company entered into a pledge and security agreement with the
same financial institution which currently provides for a revolving credit
facility, the First Revolving Credit Facility, of up to $25.0 million, less any
amounts outstanding under the repurchase agreement, with respect to which credit
facility $10.0 million was outstanding at February 28, 1998. The First Revolving
Credit Facility is secured by a pledge of certain of the Company's interest only
and residual class certificates relating to securitizations carried as mortgage
related securities on the Company's Statements of Financial Condition, payable
to the Company pursuant to its securitization agreements. A portion of the loans
under the agreement bears interest at one-month LIBOR + 3.5%, is due and payable
on December 31, 1998, and requires the Company to maintain a minimum net worth
of the greater of $35.0 million, or following fiscal year end 1997, 80% of net
worth as of August 31, 1997. The portion of the credit line agreement applicable
to a repurchase agreement secured by insured interest only certificates bears
interest at one-month LIBOR + 2.0%. At February 28, 1998, the required net worth
was $42.5 million and the Company's actual net worth was $28.0 million.  The
agreement requires the Company to maintain a debt-to-net worth ratio to exceed
2.5:1, although at February 28, 1998, the ratio was 4.25:1.  The financial
institution has agreed to waive the noncompliance provided that the
debt-to-net worth ratio shall not exceed 6:1 prior to May 31, 1998 after which
the ratio may not exceed 2.5:1.

                                       25


<PAGE>   29
        In October 1997, the Company entered into a revolving credit facility,
the Second Revolving Credit Facility, with a financial institution providing for
an initial advance of up to $5.0 million secured by certain residual interest
and interest only securities. At February 28, 1998, $5.0 million was outstanding
under the Second Revolving Credit Facility. The Second Revolving Credit Facility
bears interest at an annual rate equal to the higher of (i) the prime rate as
established by the Chase Manhattan Bank, N.A., plus 2.5% or (ii) 9.0%. The
Second Revolving Credit Facility may be increased to an aggregate principal
amount of up to $8.8 million with additional lender participations. The Second
Revolving Credit Facility contains financial covenants similar to those
contained in the original Warehouse Line.

        Certain material covenant restrictions also exist in the Indenture
governing the Notes. These covenants include limitations on the Company's
ability to incur indebtedness, grant liens on its assets and to enter into
extraordinary corporate transactions. The Company may not incur indebtedness or
issue capital stock having certain terms if, on the date of such incurrence or
issuance and after giving effect thereto, the Consolidated Leverage Ratio would
exceed 2:1, subject to certain exceptions. At February 28, 1998, the
Consolidated Leverage Ratio was 5:52:1. Accordingly, while the Company is not in
default under the terms of the Indenture, the Company cannot presently incur
additional indebtedness other than Permitted Warehouse Indebtedness(as defined
below) and certain other types of indebtedness, or issue capital stock having
certain terms, not including  the Common Stock offered in the proposed private
placement, until such time as the required 2:1 ratio has been met. The
Consolidated Leverage Ratio is the ratio of (i) all indebtedness of the Company,
excluding the (A) Permitted Warehouse Indebtedness,guarantees thereof permitted
under the Indenture, (B) Hedging Obligations permitted under the Indenture and
(C) Junior Subordinated Obligations, to (ii) the consolidated net worth of the
Company. The Permitted Warehouse Indebtedness generally is the outstanding
amount under the Warehouse Line. In addition, an increasing amount of the
Company's mortgage related securities are required to remain unpledged. At
February 28, 1998, that requirement was $46.8 million, and at that date $43.7
million of mortgage related securities were pledged, and $47.6 million of
mortgage related securities were unpledged.

        In addition, the Indenture Amendments provide, among other things, that
the Company may not incur Unsecured Senior Indebtedness (as defined in the
Indenture), if the Adjusted Consolidated Leverage Ratio, on the date of such
incurrence after giving effect thereto, exceeds 1:1. The Adjusted Consolidated
Leverage Ratio is the ratio of (i) the amount of all Unsecured Senior
Indebtedness to (ii) the sum of (A) Consolidated Net Income (net income minus
gain on sale of loans and net unrealized gain on mortgage related securities
plus provision for credit losses, depreciation and amortization and amortization
of excess servicing rights) from September 1, 1997 to the end of the most recent
fiscal quarter and (B) the aggregate net proceeds received by the Company from
the issuance or sale of stock or debt securities converted to stock, after
September 1, 1997. Furthermore, the Indenture Amendments imposed a limit on the
amount of mortgage related securities that must remain unpledged and removed the
limitation on the amount of Permitted Warehouse Indebtedness.

        While the Company believes that following consummation of the proposed
private placement and exchange offer it will be able to maintain its existing
credit facilities and obtain replacement financing as its credit arrangements
mature and additional financing, if necessary, there can be no assurance that
such financing will be available on favorable terms, or at all. The lack of
adequate capital may result in the further curtailment of loan originations and
thereby impair the Company's revenue and income stream. At February 28, 1998, no
commitments existed for material capital expenditures. In the absence of
successful completion of the Company's proposed private placement and exchange
offer, the Board of Directors of the Company believes that the strategic
alternatives potentially available to the Company are limited and that the
Company may be forced to consider bankruptcy proceedings.


                                       26

<PAGE>   30
        In furtherance of the Company's earlier strategy to sell loans primarily
through securitizations, beginning in March 1996 through August 1997, the
Company completed its first seven securitizations pursuant to which it sold
pools of loans aggregating $531.3 million. The Company previously reacquired an
aggregate of $512.3 million of such loans. Pursuant to these securitizations,
pass-through securities evidencing interests in the pools of loans were sold in
public offerings. The Company continues to service the sold loans and is
entitled to receive from payments in respect of interest on the sold loans, not
in default, a servicing fee equal to 1.25% of the balance of each loan with
respect to the March 1996 transaction and 1.0% with respect to the other
transactions. In addition, from each securitization, the Company has received
residual interest securities, contractual rights, and in certain of the
transactions, also received interest only strip securities, all of which were
recorded as mortgage related securities on the Statements of Financial
Condition. The residual interest securities and the contractual rights represent
the excess differential (after payment of any servicing, interest and other
fees, and the contractual obligations payable to the note and certificate
holders) between the interest paid by the obligors of the sold loans and the
yield on the sold notes, certificates and interest only strip securities. Also,
from the two securitizations completed during fiscal 1996 and the first two
securitizations completed in fiscal 1997, the Company has also received interest
only strip securities. These interest only securities yield annual rates between
0.45% and 1.00% calculated on the principal balance of the loans not in default.
The Company may be required to repurchase loans that do not conform to the
representations and warranties made by the Company in the securitization
agreements and, as servicer, may be required to advance interest in connection
with the securitizations.

        The values of and markets for the sale of Company's loans are dependent
upon a number of factors, including general economic conditions, interest rates
and government regulations. Adverse changes in those factors may affect the
Company's ability to originate or sell loans in the secondary market for
acceptable prices within reasonable time frames. The ability of the Company to
sell loans in the secondary market is essential for continuation of the
Company's loan origination activities. A reduction in size of the secondary
market for home improvement or debt consolidation loans would adversely affect
the Company's ability to sell its loans in the secondary market with a
consequent adverse impact on the Company's profitability and future
originations. The Company anticipates that a majority of its loan originations
in 1998 will be disposed of through whole loan sales on a servicing released
basis. This method of loan disposition is anticipated to generate cash sale
premiums and further advance the Company's strategy to achieve at least a cash
flow neutral basis from operations in 1998.

        Securitization transactions may be affected by a number of factors, some
of which are beyond the Company's control, including, among other things,
conditions in the securities markets in general, conditions in the asset-backed
securitization market, the conformity of loan pools to rating agency
requirements and, to the extent that monoline insurance is used, the
requirements of such insurers.

        In April 1995, the Company entered into a continuing agreement with a
financial institution pursuant to which an aggregate of approximately $884.9
million in principal amount of loans had been sold at February 28, 1998 for an
amount approximately equal to their remaining principal balances. Pursuant to
the agreement, as modified by the Excess Yield Sale Agreement the purchaser is
entitled to receive interest at a variable rate equal to the sum of 200 basis
points and the one-month LIBOR rate as in effect from time to time on loans not
yet sold by the institution which amounted to $3.2 million at February 28, 1998.
The Company retained the right to service the loans and the right to receive the
excess interest. The Company is required to maintain a reserve account equal to
25% of the principal amount of Title 1 Loans which are more than 60 days
delinquent plus 100% of the principal amount Conventional Loans which are more
than 60 days delinquent. In the first quarter of fiscal 1997, the Company
entered into the Master Purchase Agreement with the same financial institution,
providing for the purchase of up to $2.0 billion of loans over a five-year
period, of which $1.1 billion remained to be purchased at February 28, 1998.
Pursuant to the agreement, Mego Financial issued to the financial institution
four-year warrants to purchase 1.0 million shares of Mego Financial's common
stock at an exercise price of $7.125 per share. The agreement also provides that
so long as the aggregate principal balance of loans purchased by the financial
institution and not resold to third parties exceeds $100.0 million (the
"Facility Limit") and temporarily increased to $199.0 million in December 1997,
the financial institution shall not be obligated to purchase, and the Company
shall not be obligated to sell, loans under the agreement. The value of the
warrants, estimated at $3.0 million (0.15% of the commitment amount) as of the
commitment date, is being amortized as the commitment for the purchase of loans
is utilized.


                                       27

<PAGE>   31
        In December 1997, the Company entered into the December 1997 Letter
Agreement with this financial institution, providing, among other things, for
certain amendments to the Master Purchase Agreement. Pursuant to the December
1997 Letter Agreement, during the Interim Period, the Facility Limit was
increased to $199.0 million from $150.0 million and the purchase price for loans
was reduced. Upon expiration of the Interim Period, the Facility Limit will be
reduced to $100.0 million and the purchase price for loans will be increased. In
addition, upon the sale by the Company of equity securities for at least $15.0
million, the Facility Limit will be increased to $150.0 million. Pursuant to the
December 1997 Letter Agreement, the Company paid a fee of $1.0 million to this
financial institution and agreed to pay additional fees of $250,000 on each of
March 31, June 30, September 30, and December 31, 1998. Under the most current
agreement, although the financial institution has reached the Facility Limit,
the institution has agreed to purchase additional loans, when the aggregate
amount of loans now held by it has been reduced below $125.0 million by sales to
third parties, in an amount which would not bring the total loans held by it
above $125.0 million through March 31, 1998 and, thereafter, when the aggregate
amount of loans held by it has been reduced below $100.0 million by sales to
third parties, in an amount which would not bring the total amount of loans held
by it above $100.0 million.

        In January 1998, in order to improve its cash position, the Company
entered into the Excess Yield Sale Agreement with this financial institution
pursuant to which it sold the excess spread and servicing rights with respect to
$175.5 million of Conventional Loans and agreed to sell the excess spread and
servicing rights with respect to $14.2 million of Title I Loans, in each case
purchased by the financial institution under the Master Purchase Agreement and
still held by the institution. Pursuant to the Excess Yield Sale Agreement, the
Company is required to repurchase any Sold Loan that becomes more than 60 days
delinquent, provided, that the Company's repurchase obligations will not exceed
2-1/2% of the aggregate principal balances of the Sold Loans as of December 31,
1997. In the aggregate, when combined with the original sales proceeds, the
Company received a purchase price equivalent to 101% of the principal balance of
the Conventional Loans. In February, March and April 1998, the First, Second and
Third Amendments to the Excess Yield Sale Agreement were executed pursuant to
which an additional $19.5 million of principal balance of Conventional Loans
were sold under this agreement. These transactions resulted in a loss of
approximately $417,000 and generated approximately $4.5 million in cash proceeds
to the Company. The Company is to receive additional compensation in the form of
sales commissions upon the eventual disposition of certain of these Conventional
Loans in the secondary market. The amount of the sales commissions will depend
on the timing of those sales and the identities of the eventual purchasers.
Approximately $99.0 million of these Conventional Loans had been resold in the
secondary market by the end of March 1998. The remaining balance of these
Conventional Loans of approximately $96.0 million are expected to be pooled with
other conventional loans held by that financial institution with the intention
of disposing of them in an asset-backed securitization in June 1998. The Company
is to receive a two-thirds residual interest pertaining to the portion of the
Conventional Loans disposed of in that securitization which had been originated
by the Company. Prior to eventual disposition of the Conventional Loans, there
is limited recourse to the Company for repurchase of those loans which become
more than 60 days contractually delinquent. The amount of this recourse is 
limited to 2 1/2% of the principal balance of the loans as of the date they
became subject to the Excess Yield Agreement. The servicing rights of these
loans will be transferred to a third party and a reversal of servicing rights of
approximately $1.2 million was recorded in the three months ended February 28,
1998 pursuant to this transaction. In February, March and April 1998, the
Company sold $19.5 million of Additional Sold Loans to the same institution,
including the excess yield and servicing rights relating thereto, and the Excess
Yield Sale Agreement was amended to include the Additional Sold Loans, with
similar repurchase obligations. Upon the sale by the financial institution of
the Sold Loans and the Additional Sold Loans, the Company will be entitled to
receive a sales commission based upon a percentage of the Net Dispositions
Proceeds (as defined in the Excess Yield Sale Agreement, as amended) received by
the financial institution.

        Net cash used in the Company's operating activities for the six months
ended February 28, 1997 and 1998 was $39.6 million and $59.5 million,
respectively. During the six months ended February 28, 1997 and 1998, cash
provided by financing activities amounted to $55.2 million and $56.5 million,
respectively. Net cash used in investing activities for the six months ended
February 28, 1997 and 1998 was $1.1 million and $30,000, respectively.

        Prior to the consummation of the Company's IPO in November 1996, the
Company was dependent on Mego Financial to provide, among other things, (i)
funds for operations without interest and (ii) guarantees of the Company's
financing arrangements. Subsequent to the IPO, Mego Financial has advanced funds
to the Company to pay servicing fees owed to PEC and amounts due others.
Although it may do so, it is not anticipated that Mego Financial will advance
funds to the Company or guarantee the Company's financing arrangements in the
future.

                                       28

<PAGE>   32
        In the absence of successful completion of the proposed private
placement and exchange offer the Company's Board of Directors believes that the
alternatives potentially available to the Company are limited and the Company
may be forced to consider bankruptcy proceedings. 

FINANCIAL CONDITION

February 28, 1998 compared to August 31, 1997

        Cash and cash equivalents decreased 48.4% to $3.2 million at February
28, 1998 from $6.1 million at August 31, 1997 primarily as a result of higher
levels of loans held for sale at February 28, 1998.

        Restricted cash deposits increased 45.7% to $10.0 million at February
28, 1998 from $6.9 million at August 31, 1997 primarily due to the number of
loans sold and securitized in prior periods.

        Loans held for sale, net, increased to $55.8 million at February 28,
1998 from $9.5 million at August 31, 1997 primarily as a result of the Company's
increased loan originations and the timing of loan sales, with no securitization
transaction during the three and six months ended February 28, 1998.

        Changes in the allowance for credit losses and the allowance for credit
losses on loans sold with recourse for the three and six months ended February
28, 1998 consist of the following (thousands of dollars):
<TABLE>
<CAPTION>

<S>                                                                              <C>
Balance at November 30, 1997                                                     $      8,699
    Provision for credit losses                                                           817
    Reductions to the provision due to securitizations or loans sold without             (111)
    recourse
    Reductions due to charges to allowance for credit losses                               (4)
                                                                                 ------------
Balance at February 28, 1998                                                     $      9,401
                                                                                 ============
</TABLE>


<TABLE>
<CAPTION>
<S>                                                                              <C>
Balance at August 31, 1997                                                       $      7,114
    Provision for credit losses                                                         2,519
    Reductions to the provision due to securitizations or loans sold without             (223)
    recourse
    Reductions due to charges to allowance for credit losses                               (9)
                                                                                 -------------
Balance at February 28, 1998                                                     $      9,401
                                                                                 ============
</TABLE>


        The allowance for credit losses and the allowance for credit losses on
loans sold with recourse consist of the following at these dates:
<TABLE>
<CAPTION>

                                                                AUGUST 31,       FEBRUARY 28,
                                                                   1997              1998
                                                               ------------      ------------ 
                                                                   (thousands of dollars)
<S>                                                            <C>               <C>         
Allowance for credit losses                                    $        100      $        887
Allowance for credit losses on loans sold with recourse               7,014             8,514
                                                               ------------      ------------
    Total                                                      $      7,114      $      9,401
                                                               ============      ============
</TABLE>


        The increase in the allowance for credit losses and the allowance for
credit losses on loans sold with recourse is primarily due to higher anticipated
losses on Title I Loans. Although the Company believes it has made reasonable
estimates of the losses on Title I Loans, there can be no assurance that the
actual losses will not vary from these estimates.

                                       29

<PAGE>   33
        Mortgage related securities decreased $15.0 million to $91.3 million at
February 28, 1998 from $106.3 million at August 31, 1997 primarily due to the
revaluation adjustments to the carrying value. See Note 7 of Notes to Condensed
Financial Statements.

        Mortgage servicing rights decreased $793,000 to $8.7 million at February
28, 1998 from $9.5 million at August 31, 1997 due to a reversal of servicing
rights of approximately $1.2 million as a result of the consummation of the
transactions under the Excess Yield Agreement. See Note 3 to Notes to Condensed
Financial Statements.

        Other receivables decreased $3.1 million to $4.8 million at February 28,
1998 from $7.9 million at August 31, 1997 primarily due to a payment of deferred
charges due to the Company from whole loan sales prior to August 31, 1997.

        Prepaid debt expenses increased $2.4 million to $4.8 million at February
28, 1998 from $2.4 million at August 31, 1997 primarily due to the debt expense
related to the additional $40.0 million of subordinated notes issued in October
1997.

        Prepaid commitment fees increased $1.5 million to $3.9 million at
February 28, 1998 from $2.3 million at August 31, 1997 due to costs associated
with the December 1997 letter agreement, providing, among other things,, for
certain amendments to the Master Purchase Agreement.

        The deferred income tax asset was $2.2 million at February 28, 1998
while no such benefit was previously reported. Prior to the Spin-off, federal
income taxes were included in the Due to Mego Financial caption since Mego
Financial filed a consolidated tax return. Based on the Company's restructuring
and the Company's past ability to create income, management believes that it may
be able to utilize the tax benefits over the next several years.

        Other assets decreased 44.8% to $439,000 at February 28, 1998 from
$795,000 at August 31, 1997 primarily due to a reclassification of accrued fees
on securitizations to other receivables of $541,000.

        Notes and contracts payable increased $21.2 million to $56.8 million at
February 28, 1998 from $35.6 million at August 31, 1997 due to the increased
borrowings by the Company to fund loan originations as a result of the overall
growth in the Company's business.

        Accounts payable and accrued liabilities decreased $4.5 million to $13.4
million at February 28, 1998 from $17.9 million at August 31, 1997 primarily due
to the adjustment of the Company's payable to Mego Financial. See Note 5 of
Notes to Condensed Financial Statements.

        Allowance for credit losses on loans sold with recourse increased $1.5
million to $8.5 million at February 28, 1998 from $7.0 million at August 31,
1997 primarily due to increased loan sales. Recourse to the Company on sales of
loans is governed by the agreements between the purchasers and the Company. The
allowance for credit losses on loans sold with recourse represents the Company's
estimate of its probable future credit losses to be incurred over the lives of
the loans considering estimated future FHA insurance recoveries on Title I
Loans. No allowance for credit losses on loans sold with recourse is established
on loans sold through securitizations, as the Company has no recourse obligation
under those securitization agreements for credit losses and estimated credit
losses on loans sold through securitizations are considered in the Company's
valuation of its residual interest securities.

        Stockholders' equity decreased $25.1 million to $28.0 million at
February 28, 1998 from $53.1 million at August 31, 1997 as a result of the net
loss of $32.5 million during the six months ended February 28, 1998, partially
offset by an increase in additional paid-in capital related to a federal income
tax benefit which was a result of the Spin-off and the adjustment of the
Company's payable to Mego Financial. See Note 5 of Notes to Condensed Financial
Statements.


                                       30
<PAGE>   34
RECENT ACCOUNTING PRONOUNCEMENTS


        The FASB issued SFAS No. 128, "Earnings per Share," ("SFAS 128") in
February 1997, effective for financial statements issued after December 15,
1997. The statement provides simplified standards for the computation and
presentation of earnings per share ("EPS"), making EPS comparable to
international standards. SFAS 128 requires dual presentation of "Basic" and
"Diluted" EPS, by entities with complex capital structures, replacing "Primary"
and "Fully-diluted" EPS under APB Opinion No. 15. See Note 6 of Notes to
Condensed Financial Statements for further discussion and SFAS 128 pro forma
calculations.

        In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131").  SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS No.
131 establishes standards of reporting by publicly-held business enterprises and
disclosure of information about operating segments in annual financial
statements and, to a lesser extent, in interim financial reports issued to
shareholders. SFAS Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997. As both SFAS Nos. 130 and 131 deal with financial
statement disclosure, the Company does not anticipate the adoption of these new
standards will have a material impact on its financial position, results of
operations or cash flows. The Company has not yet determined what its reporting
segments will be under SFAS 131.

                                       31

<PAGE>   35



PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

               On February 23, 1998, an action was filed in the United States
District Court for the Northern District of Georgia by Robert J. Feeney, as a
purported class action against the Company and Jeffrey S. Moore, the Company's
President and Chief Executive Officer. The complaint alleges, among other
things, that the defendants violated the federal securities laws in connection
with the preparation and issuance of certain of the Company's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the Common Stock between April 11, 1997 and December 18, 1997, and
seeks damages in an unspecified amount, costs, attorney's fees and such other
relief as the court my deem just and proper. The Company believes it has
meritorious defenses to this lawsuit and that any resolution of this lawsuit
will not have a material adverse effect on the business or financial condition
of the Company.

        In the ordinary course of its business, the Company is, from time to
time, named in lawsuits. The Company believes that it has meritorious defenses
to these lawsuits and that resolution of these matters will not have a material
adverse effect on the business or financial condition of the Company.

ITEM 5.  OTHER
        Jeremy Wiesen has been a Director of the Company since consummation of
the IPO in November 1996 and subsequently resigned in March 1998.

        Christopher M. G. DeWinter resigned in March 1998 as Vice
President--Corporate Development of the Company.

        Jack Elrod resigned in April 1998 as Vice President--Loan Administration
of the Company.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 EXHIBIT NUMBER                                   DESCRIPTION

     10.70        Credit Agreement between the Company and Textron Financial
                  Corporation dated October 22, 1997.

     10.71        Excess Yield and Servicing Rights and Assumption Agreement
                  between the Company and Greenwich Capital Markets, Inc. dated
                  January 22, 1998

     10.72        Amended and Restated Credit Agreement dated as of February 19,
                  1998 among the Company, the Lenders Party Thereto and The
                  First National Bank of Chicago.

     10.73        Amendment to Services and Consulting Agreement between the
                  Company and Preferred Equities Corporation dated January 20,
                  1998.

     10.74        Amendment to Loan Program Sub-Servicing Agreement between the
                  Company and Preferred Equities Corporation dated January 20,
                  1998.

     10.75        Agreement between the Company and Preferred Equities
                  Corporation, dated February 9, 1998, regarding assignment of
                  rights related to the Loan Program Sub-Servicing Agreement to
                  Greenwich Capital Markets, Inc.

     10.76        Amendment to Excess Yield and Servicing Rights and Assumption
                  Agreement between the Company and Greenwich Capital Markets,
                  Inc. dated February 10, 1998

     10.77        Second Amendment to Excess Yield and Servicing Rights and
                  Assumption Agreement between the Company and Greenwich Capital
                  Markets, Inc. dated February, 1998

     27.1         Financial Data Schedule (for SEC use only).

        No reports on Form 8-K were filed during the period. A report on Form
8-K dated March 30, 1998 was filed on March 31, 1998 to report that the
Company's Board of Directors revoked and rescinded its actions previously taken
changing the fiscal year end to December 31 and determined that the Company's
fiscal year end shall revert back to August 31. A report on Form 8-K dated May
19, 1998 was filed on May 19, 1998 to report: (i) a press release announcing the
Company's proposal to engage in a series of transactions to recapitalize the
Company and (ii) that as a result of subsequent events, the Company's
independent auditors, Deloitte & Touche LLP, have reissued their report with
respect to the Company's financial statements as of August 31, 1996 and 1997 and
the three years in the period ended August 31, 1997 to include an explanatory
paragraph related to the Company's ability to continue as a going concern.

                                       32

<PAGE>   36




                                          SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to be signed on its behalf by
the undersigned thereunto duly authorized.


                                        MEGO MORTGAGE CORPORATION


                                        By: /s/ James L. Belter
                                           -------------------------------------
                                           James L. Belter
                                           Executive Vice President
                                           Treasurer and Chief Financial Officer







Date:   May 20, 1998



                                       33