MEGO MORTGAGE CORP, S-1/A, 1996-11-14

MEGO MORTGAGE CORP
S-1/A, 1996-11-14
MISCELLANEOUS BUSINESS CREDIT INSTITUTION

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1996

REGISTRATION NO. 333-13421
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

MEGO MORTGAGE CORPORATION
(Name of Registrant as Specified in its Charter)
---------------------

<TABLE>
<S> <C> <C>
DELAWARE 6162 88-0286042
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

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1000 PARKWOOD CIRCLE, SUITE 500
ATLANTA, GEORGIA 30339
(770) 952-6700

(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
JAMES L. BELTER
EXECUTIVE VICE PRESIDENT
MEGO MORTGAGE CORPORATION
1000 PARKWOOD CIRCLE, SUITE 500
ATLANTA, GEORGIA 30339
(770) 952-6700

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY OF COMMUNICATIONS TO:

<TABLE>
<S> <C>
GARY EPSTEIN, ESQ. STEVEN R. FINLEY, ESQ.
FERN S. WATTS, ESQ. GIBSON, DUNN & CRUTCHER LLP
GREENBERG, TRAURIG, HOFFMAN, 200 PARK AVENUE
LIPOFF, ROSEN & QUENTEL, P.A. NEW YORK, NEW YORK 10166
1221 BRICKELL AVENUE (212) 351-4000
MIAMI, FLORIDA 33131 (FACSIMILE) (212) 351-4035
(305) 579-0500
(FACSIMILE) (305) 579-0717
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1996

PROSPECTUS

$40,000,000
MEGO MORTGAGE CORPORATION [LOGO]

% SENIOR SUBORDINATED NOTES DUE 2001

Mego Mortgage Corporation (the "Company") is offering hereby (the
"Offering") $40.0 million principal amount of its % Senior Subordinated Notes
due 2001 (the "Notes"). Interest on the Notes will be payable semiannually on
and of each year, commencing , 1997. The Notes
are not redeemable at any time prior to , , except that, until ,
1998, the Company may redeem, at its option, up to 35% of the original principal
of the Notes at the redemption price set forth herein plus accrued interest to
the date of redemption with the net proceeds of one or more Public Equity
Offerings (as defined herein), if at least 65% of the original principal amount
of the Notes remain outstanding after such redemption. On or after ,
, the Notes are redeemable at the option of the Company in whole or in
part, at the redemption prices set forth herein plus accrued interest to the
date of redemption. Upon the occurrence of a Change of Control (as defined
herein), holders of the Notes will have the right to require the Company to
repurchase their Notes, in whole or in part, at a purchase price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date. The Notes will be general unsecured obligations of
the Company, subordinated in right of payment to all Senior Indebtedness (as
defined herein) of the Company. In addition, the obligations of the Company
under the Notes will be jointly and severally guaranteed (Subsidiary Guarantees,
as defined herein) on an unsecured, subordinated basis by each of the Company's
future Restricted Subsidiaries, other than Special Purpose Subsidiaries (each as
defined herein). The Subsidiary Guarantees will be subordinated in right of
payment to all Senior Indebtedness of the Subsidiary Guarantors. As of August
31, 1996, after giving pro forma effect to the offering of the Notes and the
Common Stock Offering (as defined herein) and the application of the net
proceeds therefrom, the outstanding Senior Indebtedness of the Company, on a
consolidated basis, would have been approximately $932,000. There is no
established trading market for the Notes and the Company does not intend to
apply for a listing of the Notes on any national securities exchange. See
"Description of the Notes."

Concurrent with the Offering by the Company, the Company is offering
2,000,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), of the Company (the "Common Stock Offering"). The sale of the Notes
being offered hereby is contingent upon the completion of the Common Stock
Offering.

THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 9 HEREOF FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK
HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

<TABLE>
<CAPTION>
======================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
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<S> <C> <C> <C>
Per Note............................ % % %
Total............................... $ $ $
======================================================================================================
</TABLE>

(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $375,000.
------------------------
The Notes are offered by the Underwriters, subject to receipt and
acceptance by the Underwriters, approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offers and to reject orders in whole or
in part. It is expected that delivery of the Notes will be made through the
facilities of The Depository Trust Company on or about , 1996.
------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. OPPENHEIMER & CO., INC.

The date of this Prospectus is , 1996

<PAGE> 3

MEGO MORTGAGE CORPORATION
MAP

MAP OF THE CONTINENTAL UNITED STATES SHOWING TOP SIX STATES, HEADQUARTERS AND
BRANCH OFFICES.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, all
information in this Prospectus gives effect to a 1,600-for-1 stock split
effected in October 1996.

THE COMPANY

Mego Mortgage Corporation (the "Company") is a specialized consumer finance
company that originates, purchases, sells and services consumer loans consisting
primarily of home improvement loans secured by liens on the improved property.
Through its network of independent correspondent lenders ("Correspondents") and
home improvement construction contractors ("Dealers"), the Company initially
originated only home improvement loans insured under the Title I credit
insurance program ("Title I Loans") of the Federal Housing Administration (the
"FHA"). 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 uninsured home improvement loans and debt consolidation loans
("Conventional Loans") through its Correspondents in May 1996. For the three
months ended August 31, 1996, such loans totalled $11.2 million and constituted
22.5% of the Company's total loan originations.

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

The Company's loan originations increased to $139.4 million during the year
ended August 31, 1996 from $87.8 million during the year ended August 31, 1995
and $8.2 million during the six months in which it originated loans in the year
ended August 31, 1994. The Company's revenues increased to $25.0 million for the
year ended August 31, 1996 from $13.6 million for the year ended August 31, 1995
and $751,000 for the year ended August 31, 1994. For the year ended August 31,
1996, the Company had net income of $6.9 million compared to $3.6 million for
the year ended August 31, 1995. As a result of its substantial growth in loan
originations, the Company has operated since March 1994, and expects to continue
to operate for the foreseeable future, on a negative cash flow basis.

The Company sells substantially all the loans it originates through either
whole loan sales to third party institutional purchasers or securitizations at a
yield below the stated interest rate on the loans, retaining the right to
service the loans and receive any amounts in excess of the yield to the
purchasers. The Company completed its first two securitizations of Title I Loans
in March and August 1996 totalling $133.0 million and expects to sell a
substantial portion of its loan production through securitizations in the
future. At August 31, 1996, the Company serviced $209.5 million of loans it had
sold, and $4.7 million of loans it owned.

3
<PAGE> 5

Company also intends to increase its number of active Correspondents and Dealers
by greater penetration of existing markets, because of its broader product line,
and through expansion into new geographic markets. The Company anticipates that
as it expands its lending operations it will realize economies of scale, thereby
reducing its average loan origination costs and enhancing its profitability. In
addition, the Company intends to continue to sell its loan production through
securitizations as opportunities arise. Through access to securitization, the
Company believes that it has the ability to sell higher volumes of loans on more
favorable terms than through whole loan sales. See "Business -- Business
Strategy."

The Company was incorporated under the laws of the State of Delaware in
1992. The Company's principal executive offices are located at 1000 Parkwood
Circle, Suite 500, Atlanta, Georgia 30339, and its telephone number is (770)
952-6700.

THE OFFERING

Amount offered...................... $40.0 million aggregate principal
amount.

Maturity date....................... , 2001.

Interest payment dates.............. and of each
year, commencing , 1997.

Subsidiary Guarantees............... The obligations of the Company under
the Notes will be jointly and severally
guaranteed by each of the future
Restricted Subsidiaries, other than
Special Purpose Subsidiaries. See
"Description of the Notes -- Subsidiary
Guarantees."

Optional redemption................. The Notes are not redeemable by the
Company prior to , ,
except that, until , 1998,
the Company may redeem, at its option,
up to 35% of the original principal
amount of the Notes at the redemption
price set forth herein plus accrued
interest to the date of redemption with
the net proceeds of one or more Public
Equity Offerings if at least 65% of the
original principal amount of the Notes
remains outstanding after such
redemption. On or after ,
, the Notes will be redeemable at
the option of the Company in whole or
in part, at the redemption prices set
forth herein, plus accrued interest to
the date of redemption. See
"Description of the Notes -- Optional
Redemption."

Mandatory redemption................ None.

Ranking............................. The Notes will be general unsecured
obligations of the Company,
subordinated in right of payment to all
existing and future Senior Indebtedness
of the Company and will be senior in
right of payment to all Indebtedness
(as defined herein) of the Company that
by its terms is expressly subordinated
in right of payment to the Notes. Each
Subsidiary Guarantee will be a general
unsecured obligation of the Subsidiary
Guarantor, subordinated in right of
payment to all Senior Indebtedness of
such Subsidiary Guarantor and will be
senior in right of payment to all
Indebtedness of such Subsidiary
Guarantor that by its terms is
expressly subordinated in right of
payment to the Subsidiary

4
<PAGE> 6

Guarantee. As of August 31, 1996, after
giving pro forma effect to the issuance
of the Notes and the Common Stock
Offering and the application of the net
proceeds therefrom, the outstanding
Senior Indebtedness of the Company, on
a consolidated basis, would have been
approximately $932,000.

Change of Control................... Upon a Change of Control, holders of
the Notes will have the option to
require the Company to repurchase up to
all outstanding Notes of the holders
requiring such repurchase at 101% of
their principal amount, plus accrued
interest to the date of repurchase.
There can be no assurance that the
Company will have the funds available
to repurchase the Notes in the event of
a Change of Control.

Certain covenants................... The Indenture (as defined herein)
pursuant to which the Notes will be
issued will contain certain covenants
that, among other things, limit the
ability of the Company and its
subsidiaries to incur certain
indebtedness, pay dividends and make
other distributions, engage in
transactions with affiliates, sell
assets (including stock of
subsidiaries), issue subsidiary
preferred stock, create certain liens,
engage in mergers or consolidations and
enter into any arrangement that would
impose certain restrictions on the
ability of subsidiaries to make
dividend and other payments to the
Company. See "Description of the
Notes -- Certain Covenants."

Amendment or waiver of Indenture
provisions.......................... Certain provisions of the Indenture,
including those related to Change of
Control, may be amended or waived with
the consent of the holders of at least
the majority in principal amount of
then outstanding Notes.

Use of proceeds..................... The Company intends to use the
aggregate net proceeds of the Offering
and the Common Stock Offering to
provide capital to originate and
securitize loans, to repay Intercompany
Debt and to pay down the amounts
outstanding under the Company's lines
of credit. See "Use of Proceeds."

CONCURRENT OFFERING OF COMMON STOCK

Concurrent with the Offering, the Company is offering 2,000,000 shares of
Common Stock (plus up to an additional 300,000 shares to cover over-allotments,
if any) by a separate prospectus in the Common Stock Offering. The consummation
of the Offering and the Common Stock Offering are conditioned upon each other.
In connection with the Common Stock Offering, the Company has applied for
quotation of the Common Stock on The Nasdaq National Market under the symbol
"MMGC."

5
<PAGE> 7

RISK FACTORS

Investment in the Notes offered hereby involves a high degree of risk. Each
prospective investor should carefully consider all of the matters described
herein under "Risk Factors," including, among others: risks relating to
subordination and leverage; risks relating to control by Mego Financial;
consequences of a change of control; risks related to the Company's dependence
on securitization transactions; the fact that the Company has operated, and
expects to continue to operate, on a negative cash flow basis; risks relating to
changes in interest rates; risks associated with capitalized excess servicing
rights and valuation of mortgage related securities; risks relating to possible
termination of servicing rights; contingent risks including the risks relating
to losses from loan delinquencies and other loan defaults; risks relating to the
Company's limited operating history; risks inherent in the implementation of the
Company's growth strategy; risks relating to the Company's dependence on credit
enhancement; risks relating to dependence on financing and need for
additional financing; risks relating to the Company's concentration of
operations in California and Florida; legislative and regulatory risks; risks
related to fraudulent conveyances and preferential transfers; risks related to
permissible operation through subsidiaries; risks relating to the Company's
dependence on management, Mego Financial and PEC; risks associated with
competition; the absence of a public market for the Notes; and factors
inhibiting a takeover of the Company.

RELATIONSHIP WITH MEGO FINANCIAL

Mego Financial Corp. ("Mego Financial"), a publicly traded company,
currently owns 100% of the outstanding Common Stock. Upon completion of the
Common Stock Offering, Mego Financial will own approximately 83.3% of the
outstanding Common Stock (approximately 81.3% if the underwriters of the Common
Stock Offering exercise their over-allotment option in full). As a result of its
ownership interest, upon completion of the Common Stock Offering, Mego Financial
will have voting control on all matters submitted to stockholders of the
Company, including the election of directors and the approval of extraordinary
corporate transactions. See "Principal Stockholders." In order to fund the
Company's past operations and growth, and in conjunction with filing
consolidated tax returns, the Company incurred debt and other obligations
("Intercompany Debt") to Mego Financial and its subsidiary Preferred Equities
Corporation ("PEC"). The amount of Intercompany Debt was $8.5 million at August
31, 1995 and $12.8 million at August 31, 1996. The Company intends to use a
portion of the aggregate net proceeds from the Offering and the Common Stock
Offering to repay Intercompany Debt. It is not anticipated that Mego Financial
will continue to provide funds to the Company or guarantee the Company's
indebtedness following consummation of the Offering. The Company also has
agreements with PEC for the provision of management services and loan servicing
and an agreement with Mego Financial for tax sharing. See "Use of Proceeds" and
"Certain Transactions."

6
<PAGE> 8

SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The summary financial information set forth below should be read in
conjunction with the financial statements, related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF AUGUST 31, 1996
----------------- ------------------------
1994(1) 1995 ACTUAL AS ADJUSTED(5)
------- ------- ------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,610 $ 4,610
Excess servicing rights............................... 904 14,483 12,121 12,121
Mortgage related securities(2)........................ -- -- 22,944 22,944
Total assets.......................................... 5,122 24,081 50,606 86,173
Total liabilities..................................... 983 13,300 32,905 46,827
Total stockholder's equity............................ 4,139 10,781 17,701 39,346
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
1994(1) 1995 1996
------- ------- --------
<S> <C> <C> <C>
OPERATING DATA:
Loans originated.............................................. $8,164 $87,751 $139,367
Weighted average interest rate on loans originated............ 14.18 % 14.55% 14.03%
Servicing portfolio (end of year):
Company-owned loans......................................... $1,471 $ 3,720 $ 4,698
Sold loans.................................................. 6,555 88,566 209,491
------ ------- --------
Total............................................... $8,026 $92,286 $214,189
====== ======= ========
Delinquency period(6):
31-60 days past due......................................... 2.06 % 2.58% 2.17%
61-90 days past due......................................... 0.48 0.73 0.85
91 days and over past due................................... 0.36 0.99 4.53(7)
91 days and over past due, net of claims filed(8)........... 0.26 0.61 1.94
Claims filed with HUD(9)...................................... 0.10 0.38 2.59
Amount of FHA insurance available (end of year)............... $ 813 $ 9,552 $ 21,205(10)
Amount of FHA insurance available as a percentage of loans
serviced (end of year)...................................... 10.13 % 10.35% 9.90%
Ratio of earnings to fixed charges(11)........................ N/A 7.69x 2.29x(12)
</TABLE>

7
<PAGE> 9

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

(1) The Company commenced originating loans in March 1994.
(2) Mortgage related securities consist of certificates representing interests
retained by the Company in securitization transactions.
(3) The results of operations of the Company are included in the consolidated
federal income tax returns filed by Mego Financial, the Company's sole
stockholder. Mego Financial allocates income taxes to the Company
calculated on a separate return basis. See "Certain Transactions."
(4) Shares used in computing pro forma net income per share include the
weighted average of common stock outstanding during the period. There were
no common stock equivalents. Historical per share data is not included
because the data is not considered relevant or indicative of the ongoing
operations of the Company. Net income utilized in the calculation of pro
forma net income per share has been reduced by an estimated pro forma
interest expense in the amount of $1,544,000 and a related tax benefit of
$587,000 based upon the application of a 13% interest rate to the Company's
average balance of non-interest bearing debt payable to Mego Financial. Pro
forma net income per share would change by $0.01 with a 1% change in the
interest rate utilized.
(5) As adjusted to give effect to (i) the sale of the Notes offered hereby
(after deducting underwriting discounts and estimated expenses of the
Offering), (ii) the sale of the 2,000,000 shares of Common Stock pursuant
to the Common Stock Offering (at an assumed initial public offering price
of $12.00 per share and after deducting underwriting discounts and
estimated expenses of the Common Stock Offering) and (iii) the application
of the estimated net proceeds from the Offering and the Common Stock
Offering as described under "Use of Proceeds."
(6) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(7) During fiscal 1996, the processing and payment of claims filed with HUD
were delayed. See "Business -- Loan Servicing."
(8) Represents the dollar amount of delinquent loans net of delinquent Title I
Loans for which claims have been filed with HUD and payment is pending as a
percentage of total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the date indicated.
(9) Represents the dollar amount of delinquent Title I Loans for which claims
have been filed with HUD and payment is pending as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(10) If all claims filed with HUD had been processed and paid as of period end,
the amount of FHA insurance available would have been reduced to
$16,215,000, which as a percentage of loans serviced would have been 7.77%.
(11) Earnings include pretax income, the portion of rents representative of the
interest factor and interest on debt. Fixed charges include interest on
indebtedness, prepaid commitment fees and the portion of rents
representative of the interest factor.

(12) Ratio computed giving pro forma effect for the total additional interest
expense resulting from the proposed issuance by the Company of the Notes at
an assumed interest rate of 13% in lieu of the interest expense recorded by
the Company under its existing lines of credit intended to be repaid with
the proceeds of the Offering and the Common Stock Offering.

8
<PAGE> 10

RISK FACTORS

Investment in the Notes offered hereby involves a high degree of risk,
including the risks described below. Each prospective investor should carefully
consider the following risk factors inherent in and affecting the business of
the Company and this offering before making an investment decision. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in the Prospectus generally. Actual
events or results may differ as a result of various factors, including, without
limitation, the risk factors set forth below and the matters set forth in the
Prospectus generally.

SUBORDINATION AND LEVERAGE

The Notes (including the Subsidiary Guarantees) will be subordinated in
right of payment to all existing and future Senior Indebtedness, including all
warehouse indebtedness and all other indebtedness for borrowed money. The
Company currently has significant outstanding indebtedness and subsequent to the
Offering, the Company will be significantly leveraged. As of August 31, 1996,
after giving effect to the Offering and the Common Stock Offering and the
application of the net proceeds therefrom, the Company would have had
outstanding indebtedness of approximately $40.9 million, of which approximately
$932,000 would have been Senior Indebtedness to which the Notes are
subordinated. See "Capitalization." In addition, subject to the limitations set
forth in the Indenture, the Company and its future Subsidiaries (as defined
herein) may incur substantial amounts of additional indebtedness, much of which
is expected to constitute Senior Indebtedness. By reason of the subordination of
the Notes, in the event of insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of the Company or any Subsidiary
Guarantor (as defined herein) or upon default in payment with respect to or
acceleration of any Senior Indebtedness of the Company or any Subsidiary
Guarantor or an event of default with respect to certain Senior Indebtedness
continuing for up to 179 days, the assets of the Company or the Subsidiary
Guarantor would be available to pay the amounts due on the Notes only after such
Senior Indebtedness had been paid in full. The Company is a party to certain
warehouse facilities for the financing of its loan originations, which
facilities are secured by the loans financed thereby. The Company also has
certain additional secured credit facilities and, subject to the limitations set
forth in the Indenture, may have additional amounts of secured indebtedness in
the future. The Notes (including the Subsidiary Guarantees) are effectively
subordinated to all such secured obligations to the extent of the collateral,
irrespective of whether payments on the Notes (including the Subsidiary
Guarantees) are otherwise permitted to be made under the subordination
provisions in the Indenture prior to payment of such other indebtedness in full.
Upon certain events of default under such facilities, the lenders could elect to
declare all amounts outstanding, together with accrued and unpaid interest
thereon, to be immediately due and payable. If the Company were unable to repay
those amounts, the lenders could proceed against the collateral granted them to
secure that indebtedness. If any of such indebtedness were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay in full that indebtedness and the other indebtedness of the Company,
including the Notes.

The Company's ability to make payments of principal and interest on, or to
refinance its indebtedness (including the Notes) depends on its future operating
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. The degree to which the
Company is leveraged could have important consequences to the holders of the
Notes, including (i) the Company's vulnerability to adverse general economic and
industry conditions, (ii) the Company's ability to obtain additional financing
for future working capital expenditures (including loan originations), general
corporate purposes or other purposes, and (iii) the dedication of a substantial
portion of the Company's cash flow from operations to the payment of principal
and interest on indebtedness, thereby reducing the funds available for
operations and future business opportunities.

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CONTROL BY MAJORITY STOCKHOLDER

Upon completion of the Common Stock Offering, the Company's current sole
stockholder, Mego Financial, will beneficially own approximately 83.3% of the
outstanding shares of Common Stock (approximately 81.3% if the underwriters of
the Common Stock Offering exercise their over-allotment option in full) and will
therefore be able to elect the entire Board of Directors and control all matters
submitted to stockholders for a vote, all fundamental corporate matters,
including the selection of management and key personnel, whether the Company
engages in any mergers, acquisitions or other business combinations or whether
Mego Financial, at some time in the future, divests all or any portion of its
interest in the Company by means of a distribution to its stockholders or
otherwise. The Common Stock Offering has been structured in such a way as to
facilitate the ability of Mego Financial, should it so determine in the future,
to effect a subsequent tax free distribution of all or a portion of Mego
Financial's shares in the Company to its shareholders, although there is no
assurance that any such distribution will occur. The Company has been advised
that Mego Financial may seek a ruling from the Internal Revenue Service, as is
customary, that such a distribution would be tax free. There is no assurance
that it will obtain such a ruling. Pursuant to the Amended and Restated
Certificate of Incorporation of the Company (the "Certificate of Incorporation")
and an agreement between Mego Financial and the Company, no additional shares of
Common Stock may be issued by the Company that would reduce Mego Financial's
interest below 80% without Mego Financial's written approval, so long as Mego
Financial owns at least 80% of the issued and outstanding Common Stock of the
Company (the "Eighty Percent Period"). In addition, although the Certificate of
Incorporation provides for the issuance of one or more series of preferred stock
from time to time, during the Eighty Percent Period no shares of any other class
of capital stock may be issued without Mego Financial's written approval during
such period, nor may the Company invest in or form any corporation without such
approval. Amendments to the Company's bylaws and changes to the Board are also
subject to such approval during the Eighty Percent Period. Any decision as to
whether any transactions of the type mentioned above ultimately occur will be
solely within the discretion of Mego Financial. See "Principal Stockholders."

CONSEQUENCES OF CHANGE OF CONTROL

Upon the occurrence of a Change of Control, the holders of the Notes would
be entitled to require the Company to repurchase up to all outstanding Notes of
the holders requiring such repurchase at a purchase price equal to 101% of the
principal amount of such Notes plus accrued and unpaid interest thereon to the
date of repurchase. Failure by the Company to make such a repurchase would
result in a default under the Indenture. In addition, the future indebtedness of
the Company and the Subsidiaries may contain prohibitions on the occurrence of
certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of the Notes of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness due to the financial
effect of such repurchase on the Company or otherwise, even if the Change of
Control itself does not cause a default. In the event of a Change of Control,
there can be no assurance that the Company would have sufficient assets to
repurchase the Notes and to satisfy its other obligations under the Notes and
any such other indebtedness or be permitted to make such repurchase in
compliance with the subordination provisions in the Indenture. See "Description
of the Notes -- Change of Control."

LIQUIDITY -- DEPENDENCE ON SECURITIZATION TRANSACTIONS

The values of and markets for the sale of the 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 the size of the secondary
market for home improvement 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 entered into its first two securitization transactions, which
involve the pooling and sale of loans, in March 1996 and August 1996 and intends
to continue to sell loans through securitization transactions

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<PAGE> 12

from time to time as opportunities arise. Pursuant to these securitizations,
pass-through certificates evidencing interests in the pools of loans were sold
in public offerings. There can be no assurance that the Company will be able to
securitize its loan production efficiently. 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. Adverse changes in the
securitization market could impair the Company's ability to originate and sell
loans through securitizations on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's results of
operations and financial condition. Furthermore, the Company's quarterly
operating results can fluctuate significantly as a result of the timing and
level of securitizations.

LIQUIDITY -- NEGATIVE CASH FLOW

As a result of the substantial growth in loan originations, the Company has
operated since March 1994, and expects to continue to operate for the
foreseeable future, on a negative cash flow basis. During the year ended August
31, 1996, the Company operated on a negative cash flow basis using $15.3 million
in operations that was funded primarily from borrowings, due primarily to an
increase in loans originated and the Company's sale of loans. In connection with
whole loan sales and securitizations, 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 incurs significant expenses in connection with securitizations and
incurs tax liabilities as a result of the gain on sale. The Company must
maintain external sources of cash to fund its operations and pay its taxes and
therefore must maintain warehouse lines of credit and other external funding
sources. If the capital sources of the Company were to decrease, the rate of
growth of the Company would be negatively affected. See "-- Dependence on Mego
Financial and PEC."

The pooling and servicing agreements relating 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 principal amount of the loans in the related pool
to exceed the aggregate principal balance of the outstanding investor
certificates. Such over-collateralization amounts serve as credit enhancement
for the related trust and therefore are available to absorb losses realized on
loans held by such trust. 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 the guarantee of the
related senior interests and are a condition to obtaining insurance and an
AAA/Aaa rating thereon. In addition, such retention delays cash distributions
that otherwise would flow to the Company through its retained interest, thereby
adversely affecting the flow of cash to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

After giving pro forma effect to the Offering and the Common Stock
Offering, the Company would have had net income of $6.0 million for the year
ended August 31, 1996 and its ratio of earnings to fixed charges would have been
2.29x. However, this ratio is not necessarily indicative of the adequacy of the
Company's cash flow from operating activities to cover fixed charges because net
income consists largely of non-cash items. There can be no assurance that cash
from operations will be sufficient to enable it to make required interest
payments on its debt obligations and other required payments, and the Company
may encounter liquidity problems which could affect its ability to meet such
obligations while attempting to withstand competitive pressures. See "Selected
Financial Data."

INTEREST RATE RISKS

Changes in interest rates affect the Company's business in a variety of
ways, including decreased demand for loans during periods of higher interest
rates, fluctuations in profits derived from the difference between

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<PAGE> 13

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

Changes in interest rates during the period between the time an interest
rate is established on a loan and the time such loan is sold affect the revenues
realized by the Company from loans. In connection with the origination of loans,
the Company issues loan commitments for periods of up to 45 days in the case of
Correspondents and 90 days in the case of Dealers. Furthermore, the period of
time between the closing on a loan and the sale of such loan generally ranges
from 10 to 90 days. Increases in interest rates during these periods will result
in lower gains (or even losses) on sales of loans than would be recorded if
interest rates had remained stable or had declined. Changes in interest rates
after the sale of loans also affect the profits realized by the Company with
respect to loan sale transactions in which the yield to the purchaser is based
on an adjustable rate. During the years ended August 31, 1995 and 1996, the
Company sold loans under an agreement which provides for the yield to the
purchaser to be adjusted monthly to a rate equal to 200 basis points over the
one-month London Interbank Offered Rate ("LIBOR"). An increase in LIBOR would
result in a decrease in the Company's future income from such sold loans
resulting in a charge to earnings in the period of adjustment. Although through
August 31, 1996 the Company has not suffered losses in connection with the sale
of Title I Loans or Conventional Loans as a result of interest rate changes,
there can be no assurance that such losses will not occur in the future. To
date, the Company has not hedged its interest rate risk, although it may do so
in the future. To the extent that the Company engages in hedging transactions,
there can be no assurance that it will be successful in mitigating the adverse
impact of changes in interest rates.

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

CAPITALIZED EXCESS SERVICING RIGHTS AND VALUATION OF MORTGAGE RELATED SECURITIES

At August 31, 1996, the Company's statement of financial condition
reflected excess servicing rights of $12.1 million, mortgage related securities
of $22.9 million and mortgage servicing rights of $3.8 million. The Company
derives a significant portion of its income by realizing gains upon the sale of
loans due to the excess servicing rights associated with such loans recorded at
the time of sale and the capitalization of mortgage servicing rights recorded at
origination. Excess servicing rights as capitalized on the Company's statement
of financial condition represent the excess of the interest rate payable by an
obligor on a loan over the interest rate passed through to the purchaser
acquiring an interest in such loan, less the Company's normal servicing fee and
other applicable recurring fees.

The Company records gains on sale of loans through securitizations and
whole loan sales based in part on the estimated fair value of the mortgage
related securities (residual and interest only securities) retained by the
Company and on the estimated fair value of retained mortgage servicing rights
related to such loans. When loans are sold, the Company recognizes as current
revenue the present value of the excess servicing rights expected to be realized
over the anticipated average life of loans sold less future estimated credit
losses relating to the loans sold. Mortgage related securities consist of
certificates representing the excess of the interest rate payable by an obligor
on a sold loan over the yield on pass-through certificates sold pursuant to a
securitization transaction, after payment of servicing and other fees. The
capitalized excess servicing rights, and capitalized mortgage servicing rights
and valuation of mortgage related securities are computed using

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<PAGE> 14

prepayment, default and interest rate assumptions that the Company believes are
reasonable. The amount of revenue recognized upon the sale of loans will vary
depending on the assumptions utilized. The weighted average discount rate used
to determine the present value of the balance of capitalized excess servicing
rights and capitalized mortgage servicing rights reflected on the Company's
statement of financial condition at August 31, 1995 and 1996 was approximately
12%. Capitalized excess servicing rights are amortized over the lesser of the
estimated or actual remaining life of the underlying loans as an offset against
the excess servicing rights component of servicing income actually received in
connection with such loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

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

Increases in interest rates or higher than anticipated rates of loan
prepayments or credit losses on the underlying loans of the Company's mortgage
related securities or similar securities may require the Company to write down
the value of such mortgage related securities and result in a material adverse
impact on the Company's results of operations and financial condition. The
Company is not aware of an active market for the mortgage related securities,
excess servicing rights or mortgage servicing rights. No assurance can be given
that the mortgage related securities, capitalized excess servicing rights or
mortgage servicing rights could in fact be sold at their carrying value, if at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

In order to provide availability under its warehouse line of credit, during
the years ended August 31, 1995 and 1996, the Company sold an aggregate of
approximately $175.8 million of loans under an agreement which provides for the
yield to the purchaser to be adjusted monthly to a rate equal to 200 basis
points over LIBOR. The Company is not obligated to reacquire and the purchaser
is not obligated to resell such loans. In March 1996 and August 1996, in order
to fix the yield on such loans, the Company reacquired $77.7 million and $36.2
million, respectively, of such loans and included the loans in pools of loans
sold in its first two securitization transactions. As a result of the
reacquisitions and subsequent sales in the securitization transactions, the
gains on sale and excess servicing rights recognized upon the initial sales of
the loans in such periods were recalculated without any material adverse effect
on the Company's earnings. The Company anticipates that in the future it may
sell and then reacquire loans to be resold pursuant to securitizations, which
will result in recalculation of the initial gain on sale and excess servicing
rights. Any such recalculation in such periods could have a material adverse
effect on the Company's earnings in the period of recalculation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

POSSIBLE TERMINATION OF SERVICING RIGHTS

The pooling and servicing agreements relating to the Company's
securitization transactions contain provisions with respect to the maximum
permitted loan delinquency rates and loan default rates, which, if

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exceeded, would allow the termination of the Company's right to service the
related loans. At September 30, 1996, the default rates on the pool of loans
sold in the March 1996 securitization transaction exceeded the permitted limit
set forth in the related pooling and servicing agreement. Accordingly, this
condition could result in the termination of the Company's servicing rights with
respect to that pool of loans by the trustee, the master servicer or the
insurance company providing credit enhancement for that transaction. The
mortgage servicing rights on this pool of loans were approximately $1.4 million
at August 31, 1996. Although the insurance company has indicated that it, and to
its knowledge the trustee and the master servicer, has no present intention to
terminate the Company's servicing rights, no assurance can be given that one or
more of such parties will not exercise its right to terminate. In the event of
such termination, there would be an adverse effect on the valuation of the
Company's mortgage servicing rights. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Possible Termination of
Servicing Rights."

CONTINGENT RISKS

Loan delinquencies and other loan defaults by obligors expose the Company
to risks of loss and reduced net earnings. The loan delinquency and default
risks to which the Company's business is subject become more acute in an
economic slowdown or recession. During such periods, loan delinquencies and
other defaults generally increase. In addition, significant declines in market
values of the properties that secure loans serviced by the Company reduce
homeowners' equity in their homes and their borrowing power, thereby increasing
the likelihood of delinquencies and defaults. Because most of the Company's
borrowers generally lack significant equity in their homes, the likelihood of
default may be further increased. This lack of equity also increases the risk
that, upon the occurrence of a customer default, the Company would be unlikely
to recover more than the amount insured (if any).

Although the Company sells substantially all loans which it originates on a
limited recourse basis, the Company retains some degree of risk on substantially
all loans sold. In connection with whole loan sales, the excess servicing
payable to the Company is subordinated to the payment of scheduled principal and
interest due to the purchasers of such loans. The Company is required under the
loan sale documentation to establish reserves which are typically based on a
percentage of the principal balances of such loans and funded from the excess
servicing spread received by the Company. If a reserve falls below the required
level, the Company is obligated under the loan sale documentation to restore the
reserve from the servicing spread received by the Company, thereby reducing the
stream of revenue from the servicing spread. Similarly, in connection with loan
securitizations, the residual certificates retained by the Company are
subordinated to the payment of scheduled principal and interest on the senior
certificates issued by the securitization trust. In the event that payments
received on the loans are insufficient to make scheduled payments of principal
and interest on the senior certificates, the amounts otherwise distributable
with respect to the residual certificates will be used to cover the shortfall,
thereby reducing the stream of revenues from such residual certificates.
Although the Company believes it maintains adequate reserves for potential
losses from delinquencies and defaults, there can be no assurance that such
levels of reserves will be adequate in the future. In addition, documents
governing the Company's securitizations and whole loan sales require the Company
to commit to reacquire or replace loans that do not conform to the
representations and warranties made by the Company at the time of sale. When
borrowers are delinquent in making monthly payments on loans included in a
securitization trust, the Company is required to advance interest payments with
respect to such delinquent loans to the extent that the Company deems such
advances ultimately recoverable. These advances require funding by the Company
but have priority of repayment from the succeeding month's collections. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Business -- Loan
Servicing -- Sale of Loans" and Note 2 of Notes to Financial Statements.

During the period of time that loans are held pending sale, the Company is
subject to the various business risks associated with the lending business,
including the risk of borrower default, the risk of foreclosure and the risk
that a rapid increase in interest rates would result in a decline in the value
of loans to potential purchasers. To date, 95% of the loans originated by the
Company qualify under Title I of the National Housing Act pursuant to which 90%
of the principal balances of such loans are insured by the FHA; however, the
Company bears the risk of delinquencies and defaults with respect to the
uninsured portion of such loans. Moreover,

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even as to the insured portion, the amount of reimbursement to which the Company
is entitled pursuant to Title I is limited to the amount of insurance coverage
in its reserve account established by the FHA. The amount of insurance coverage
in a lender's reserve account is equal to 10% of the original principal amount
of all Title I Loans originated and reported for insurance coverage by the
lender less the amount of all insurance claims approved for payment in
connection with losses on such loans and less amounts transferred in connection
with sales of loans. The Company also would sustain a loss on loans if defaults
occur that are not cured and proceeds from FHA insurance or the foreclosure on
and disposition of property securing a defaulted loan are less than the amounts
due on the loan plus carrying and other costs. Furthermore, Title I sets forth
requirements to be satisfied by the lender in connection with the origination of
Title I Loans and the submission of claims for insurance. The exhaustion of the
reserves or the Company's failure to comply with Title I requirements could
result in denial of payment by FHA.

As a percentage of the total serviced portfolio, the principal balance of
loans contractually past due 91 days or more has increased from 0.99% as of
August 31, 1995 to 4.53% as of August 31, 1996. This rise in delinquencies, all
of which pertain to the portfolio of Title I Loans, represents an expected
seasoning of the portfolio. This increase includes approximately 2.59% of the
serviced portfolio pursuant to which claims have been filed with HUD. As of
August 31, 1996 the Company had received payment on 83 claims filed with HUD
aggregating $1.3 million. As of August 31, 1996, none of the Company's
Conventional Loans was more than 30 days contractually past due.

The Company began originating Conventional Loans through its Correspondents
in May 1996. For the three months ended August 31, 1996, such loans totalled
$11.2 million and constituted 22.5% of the Company's total loan originations.
During the period of time that such loans are held for sale, the Company bears
the risk of delinquencies and defaults with respect to the entire principal
amount of and interest on such loans and the risk that the realizable value of
the property securing such loans will not be sufficient to repay the borrower's
obligations to the Company. Significant defaults under these loans could have a
material adverse effect on the Company's results of operations and financial
condition. The Company's Conventional Loan program provides for loan amounts up
to $60,000 with fixed rates of interest and terms up to 20 years. The proceeds
of these loans are utilized to pay for home improvements and for consolidation
of existing debt. The Company has focused on those borrowers who have
demonstrated excellent payment history on their existing credit. Heavier
reliance in the approval of these loans has been placed on the credit worthiness
of the borrowers as opposed to underlying collateral value of the properties.
The Company takes a lien, generally junior in priority, on each of the
properties, however on average the total debt to market value, including the
Company's loan, has been 110%.

In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that liability
with respect to any currently asserted claims or legal actions is not likely to
be material to the Company's results of operations or financial condition;
however, any claims asserted in the future may result in legal expenses or
liabilities which could have a material adverse effect on the Company's results
of operations and financial condition.

LIMITED OPERATING HISTORY

The Company began originating Title I Loans in March 1994 and began
offering Conventional Loans in May 1996. The Company's prospects must be
considered in light of the risks, delays, expenses and difficulties frequently
encountered in connection with an early-stage business in a highly-regulated,
competitive environment. No assurance can be given that the Company will
successfully implement any of its plans or develop its current operations in a
timely or effective manner or whether the Company will be able to continue to
generate significant revenues or operate profitably.

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RISKS RELATING TO GROWTH STRATEGY

The Company's strategic plan contemplates the continued expansion of its
mortgage lending operations. The Company's ability to continue implementing its
expansion strategy depends on its ability to increase the volume of loans it
originates while maintaining credit quality and managing its resulting growth.
The Company's ability to increase its volume of loans will depend on, among
other factors, its ability to (i) obtain and maintain increasingly larger lines
of credit, (ii) securitize pools of loans for sale, (iii) offer attractive
products to prospective borrowers, (iv) attract and retain qualified
underwriting, servicing and other personnel, (v) market its loan products
successfully and (vi) establish and maintain relationships with Correspondents
and Dealers in states in which the Company is currently active and in additional
states. The Company's ability to manage growth as it pursues its expansion
strategy will be dependent upon, among other things, its ability to (i) maintain
appropriate procedures, policies and systems to ensure that the Company's loan
portfolio does not have an unacceptable level of credit risk and loss, (ii)
satisfy its need for additional financing on reasonable terms, (iii) manage the
costs associated with expanding its infrastructure and (iv) continue operating
in competitive, economic, regulatory and judicial environments that are
conducive to the Company's business activities. As part of its expansion
strategy, the Company has begun to offer a more diversified product line,
including Conventional Loans which expose the Company to greater risks than
Title I Loans. There can be no assurance that the Company will be able to
continue to grow successfully.

DEPENDENCE ON CREDIT ENHANCEMENT

In order to gain access to the securitization market, the Company has
relied on credit enhancements provided by a monoline insurance carrier to
guarantee outstanding senior interests in the related securitization trusts to
enable it to obtain an AAA/Aaa rating for such interests. The Company has not
attempted to structure a mortgage loan pool for sale through a securitization
based solely on the internal credit characteristics of the pool or the Company's
credit. In the absence of such credit enhancements, the Company would be unable
to market its loans through securitizations at reasonable rates. Any substantial
reductions in the size or availability of the securitization market for the
Company's loans, or the unwillingness or inability of insurance companies to
insure the senior interests in the Company's loan pools, could have a material
adverse effect on the Company's results of operations and financial condition.
Furthermore, a downgrading of the insurer's credit rating or its withdrawal of
credit enhancement could have a material adverse effect on the Company's results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

DEPENDENCE ON FINANCING; NEED FOR ADDITIONAL FINANCING

The Company's business operations require continued access to adequate
credit facilities. The Company is dependent on the availability of credit
facilities for the origination of loans prior to their sale. The Company has a
financing arrangement for the financing of Title I and Conventional Loan
originations prior to the sale of such loans, which provides for a warehouse
line of credit of up to $20.0 million which expires in August 1997. At August
31, 1996, an aggregate of $3.3 million was outstanding under such line of credit
and $16.7 million was available for borrowing. In addition, at August 31, 1996,
the Company had a $10.0 million facility for the financing of excess servicing
rights and mortgage related securities, of which $10.0 million was outstanding
on that date. The revolving loan has an 18-month revolving credit period
expiring in December 1997, followed by a 30-month amortization period. In
September 1996, the Company entered into a repurchase agreement with a financial
institution pursuant to which it pledged the interest only certificates from its
two 1996 securitizations in exchange for a $3.0 million advance. In November
1996, the Company entered into an agreement with the same financial institution
for the purchase of $2.0 billion of loans over a five-year period. The Company
has also received a commitment from the financial institution for up to $11.0
million, reduced by any amounts advanced under the repurchase agreement, for the
financing of the interest only and residual certificates from future
securitizations. In the event that the proceeds received by the Company from the
Offering and the Common Stock Offering together with cash flow from operations
and its existing credit facilities prove to be insufficient to meet the
Company's capital requirements, the Company may be required to seek additional
financing. There can be no assurance that such financing will be available on
favorable

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terms, or at all. To the extent that the Company were not successful in
maintaining or replacing existing financing or obtaining additional financing,
or selling its loans or receivables, it would have to curtail its activities,
which would have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 11 of Notes to Financial
Statements.

INCOME TAXES

The Company files a consolidated federal income tax return with its parent,
Mego Financial. Income taxes for the Company are provided for on a separate
return basis. As part of its former tax sharing arrangement, the Company
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. Under a new tax sharing agreement with Mego
Financial, the Company will record a liability to Mego Financial calculated on a
separate company basis. The Company accounts for taxes under SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), which requires an asset and
liability approach. 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.

CONCENTRATION OF OPERATIONS

Approximately 36.2% of the dollar volume of the Company's servicing
portfolio at, and approximately 28.5% of the dollar volume of loans originated
by the Company during the year ended, August 31, 1996 were secured by properties
located in California. Although the Company is expanding its network nationally,
significant portions of the Company's servicing portfolio and loan originations
are likely to remain concentrated in California for the foreseeable future.
Consequently, the Company's results of operations and financial condition are
dependent upon general trends in the California economy and its residential real
estate market. The California economy has experienced a slowdown or recession
over the last several years that has been accompanied by a sustained decline in
the California real estate market. Residential real estate market declines may
adversely affect the value of the properties securing loans to the extent that
the principal balances of such loans, together with any primary financing on the
mortgaged properties, will equal or exceed the value of the mortgaged
properties. In addition, California historically has been vulnerable to certain
natural disaster risks, such as earthquakes and erosion-caused mudslides, which
are not typically covered by the standard hazard insurance policies maintained
by borrowers. Uninsured disasters may adversely impact borrowers' ability to
repay loans made by the Company. The existence of adverse economic conditions or
the occurrence of such natural disasters in California could have a material
adverse effect on the Company's results of operations and financial condition.

In addition, approximately 12.5% of the dollar volume of the Company's
servicing portfolio at, and approximately 15.0% of the dollar volume of loans
originated by the Company during the year ended, August 31, 1996 were secured by
properties located in Florida. As a result, the Company's results of operations
and financial condition are dependent upon general trends in the Florida economy
and its residential real estate market.

LEGISLATIVE AND REGULATORY RISKS

Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits would have a material adverse effect on the demand for loans of the
kind offered by the Company.

The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions

17
<PAGE> 19

imposing requirements and restrictions on part or all of its operations. The
Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act and Regulation
B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970, as amended, the
Federal Real Estate Settlement Procedures Act ("RESPA") and Regulation X, the
Home Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as
well as other federal and state statutes and regulations of, and examinations
by, the Department of Housing and Urban Development ("HUD") and state regulatory
authorities with respect to originating, processing, underwriting, selling,
securitizing and servicing loans. These rules and regulations, among other
things, impose licensing obligations on the Company, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment and
interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these requirements
can lead to loss of approved status, termination or suspension of servicing
contracts without compensation to the servicer, demands for indemnification or
mortgage loan repurchases, certain rights of rescission for mortgage loans,
class action lawsuits and administrative enforcement actions.

Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive. See "Business -- Government Regulation."

To date, a substantial portion of the loans originated by the Company have
been Title I Loans. Accordingly, a substantial part of the Company's business is
dependent on the continuation of the Title I Loan program, which is federally
funded. In August 1995, bills were introduced in both houses of the United
States Congress that would, among other things, abolish HUD, of which the FHA is
a part, reduce federal spending for housing and community development activities
and eliminate the Title I Loan program. Other changes to HUD have been proposed,
which, if adopted, could affect the operation of the Title I Loan program.
Discontinuation of or a significant reduction in the Title I Loan program or the
Company's authority to originate loans under the Title I Loan program could have
a material adverse effect on the Company's results of operations and financial
condition.

FRAUDULENT CONVEYANCES AND PREFERENTIAL TRANSFERS

The ability of the holders of the Notes or the Trustee (as defined herein)
to enforce the Subsidiary Guarantees may be limited by certain fraudulent
conveyance and similar laws. Various fraudulent conveyance and similar laws have
been enacted for the protection of creditors and may be utilized by a court of
competent jurisdiction to avoid the Subsidiary Guarantees or to subordinate the
obligations of the Company under the Notes or the obligations of any Subsidiary
Guarantor under its Subsidiary Guarantee to obligations (including trade
payables) that do not otherwise constitute Senior Indebtedness. The requirements
for establishing a fraudulent conveyance vary depending on the law of the
jurisdiction which is being applied. Generally, if in a bankruptcy,
reorganization, rehabilitation or similar proceeding in respect of the Company
or a Subsidiary Guarantor, or in a lawsuit by or on behalf of creditors against
the Company or a Subsidiary Guarantor, a court were to find that (i) the Company
or a Subsidiary Guarantor, as the case may be, incurred indebtedness in
connection with the Notes (including the Subsidiary Guarantees) with the intent
of hindering, delaying or defrauding current or future creditors of the Company
or the Subsidiary Guarantor, as the case may be, or (ii) the Company or a
Subsidiary Guarantor, as the case may be, received less than reasonably
equivalent value or fair consideration for incurring such indebtedness, as the
case may be, and either (a) was insolvent at the time of the incurrence of such
indebtedness, (b) was rendered insolvent by reason of incurring such
indebtedness, (c) was at such time engaged or about to engage in a business or
transaction for which its assets constituted unreasonably small capital or (d)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, such court could, with respect to the Company or
the Subsidiary Guarantor, as the case may be, declare void in whole or in part
the obligations of the Company or such

18
<PAGE> 20

Subsidiary Guarantor in connection with the Notes (including the Subsidiary
Guarantees) and/or subordinate claims with respect to the Notes to all other
debts of the Company or the Subsidiary Guarantors, as applicable. If the
obligations of the Company or the Subsidiary Guarantors were subordinated, there
can be no assurance that after payment of the other debts of the Company or the
Subsidiary Guarantors, there would be sufficient assets to pay such subordinated
claims with respect to the Notes and the Subsidiary Guarantees.

Generally, for purposes of the foregoing, an entity will be considered
insolvent if the sum of its respective debts is greater than the fair saleable
value of all of its property at a fair valuation or if the present fair saleable
value of its assets is less than the amount that will be required to pay its
probable liability on its existing debts, as they become absolute and mature.

Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Subsidiary Guarantor within 90 days after any payment by the
Company or such Subsidiary Guarantor with respect to the Notes or a Subsidiary
Guarantee, respectively, or if the Company or such Subsidiary Guarantor
anticipated becoming insolvent at the time of such payment, all or a portion of
such payment could be avoided as a preferential transfer and the recipient of
such payment could be required to return such payment.

PERMISSIBLE OPERATION THROUGH SUBSIDIARIES

Although the Company currently has no Subsidiaries, it is permitted to
conduct future operations through Subsidiaries. If it forms or acquires
Subsidiaries in the future, the Company may be required to rely, at least in
part, upon payment from its Subsidiaries to generate the funds necessary to meet
its obligations, including the payment of interest on and principal of the
Notes. The ability of the Subsidiaries to make such payments will be subject to,
among other things, applicable state laws, and may be subject to certain net
worth maintenance requirements under warehouse credit facilities of subsidiaries
that are permitted under the Indenture. See "Description of the Notes -- Certain
Covenants -- Limitation on Restrictions of Distributions from Restricted
Subsidiaries." Claims of creditors of the Company's Subsidiaries will generally
have priority as to the assets of such Subsidiaries over the claims of the
Company.

Although the Subsidiary Guarantees provide the Note holders with a direct
claim against the assets of the Subsidiary Guarantors, enforcement of the
Subsidiary Guarantees against any Subsidiary Guarantors would be subject to
certain "suretyship" defenses available to guarantors generally, and such
enforcement would also be subject to certain defenses available to the
Subsidiary Guarantors in certain circumstances. See " --Fraudulent Conveyances
and Preferential Transfers." Although the Indenture contains waivers of most
"suretyship" defenses, certain of those waivers may not be enforced by a court
in a particular case. To the extent that the Subsidiary Guarantees are not
enforceable, the Notes would be effectively subordinated to all liabilities of
the Company's Subsidiaries, including trade payables of such Subsidiaries,
whether or not such liabilities otherwise constitute Senior Indebtedness under
the Indenture. See " -- Subordination and Leverage," above.

DEPENDENCE ON MANAGEMENT

Certain of the Company's loan agreements with financial institutions
contain provisions to the effect that if at least three of the four senior
members of management of the Company do not continue to hold such positions or
control the Company, whether due to death, disability, resignation or otherwise,
the lenders have the right to declare the loans in default. In addition, one of
such agreements also provides that the lender has the right to declare the loan
in default upon the death of, or any reduction of the management responsibility
of, more than one of these four senior managers. In such event, there is no
assurance that the lenders will consider replacement managers acceptable to them
and not declare such instruments in default. The Company has not entered into
employment agreements with any of such senior managers.

DEPENDENCE ON MEGO FINANCIAL AND PEC

The Company has been dependent on Mego Financial to provide, among other
things, (i) funds for operations without interest and (ii) guarantees of the
Company's financing arrangements. The Company

19
<PAGE> 21

anticipates that no further financing or guarantees will be made by Mego
Financial following the completion of the Offering. There can be no assurance
that the absence of such financing or guarantees will not have a material
adverse effect on the Company, particularly as the Company seeks to grow. In
addition, the Company has been dependent on its affiliate, PEC, to provide
management services, routine loan collection services and management information
systems, including services of certain of its executive officers. There can be
no assurance that PEC will continue to provide such services. The loss of such
services could have a material adverse effect on the Company if suitable
replacements are not made.

COMPETITION

The consumer finance industry is highly competitive. Competitors in the
consumer finance business include mortgage banking companies, commercial banks,
credit unions, thrift institutions, credit card issuers and finance companies.
Certain of the Company's competitors are substantially larger, have greater name
recognition and have more capital and other resources than the Company.
Competition in the home improvement and debt consolidation loan business can
take many forms including convenience in obtaining a loan, customer service,
marketing and distribution channels and interest rates. In addition, the current
level of gains realized by the Company and its existing competitors on the sale
of loans could attract additional competitors to this market with the possible
effect of lower gains on loan sales resulting from increased loan origination
competition. According to a report issued by HUD, the Company was the fourth
largest lender of Title I Loans, based on volume of loans originated, for the
quarter ended June 30, 1996. Due to the variance in the estimates of the size of
the conventional home improvement loan market, the Company is unable to
accurately estimate its competitive position in that market.

The Company depends largely on its Correspondents and Dealers for its
originations of loans. The Company's competitors also seek to establish
relationships with the Company's Correspondents and Dealers, none of whom is
required to deal exclusively with the Company. The Company's future results may
become more exposed to fluctuations in the volume and cost of its loans
resulting from competition from other purchasers of such loans, market
conditions and other factors.

PORTION OF PROCEEDS TO BENEFIT MAJORITY STOCKHOLDER

The Company intends to use a portion of the aggregate net proceeds of the
Offering and the Common Stock Offering to repay Intercompany Debt owed to Mego
Financial. See "Use of Proceeds."

ABSENCE OF PUBLIC MARKET FOR THE NOTES

Prior to the Offering, there has been no public market for the Notes. There
can be no assurance that an active trading market for the Notes will develop or
that, if developed, it will be sustained after the Offering or that it will be
possible to resell the Notes at or above the initial public offering price. The
market price of the Notes could be subject to significant fluctuations in
response to the Company's operating results and other factors. In addition, the
market in recent years has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of companies. Such fluctuations, and general economic and market conditions, may
adversely affect the market price of the Notes. The Notes will not be listed on
any securities exchange or quoted on The Nasdaq National Market. See "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Underwriting."

FACTORS INHIBITING TAKEOVER

As Mego Financial will continue to own in excess of 80% of the Common Stock
after the Common Stock Offering, no takeover would be successful without its
consent. Changes in the management or ownership of Mego Financial or a reduction
in the number of shares owned by Mego Financial, however, could have an effect
on the likelihood of a takeover. However, the Certificate of Incorporation
provides that no additional shares of Common Stock may be issued that would
reduce Mego Financial's interest below 80% without its written approval during
the Eighty Percent Period. In addition, although the Certificate of
Incorporation

20
<PAGE> 22

provides for the issuance of one or more series of preferred stock from time to
time, during the Eighty Percent Period no shares of any other class of capital
stock may be issued without Mego Financial's written approval. Even in the event
that at some later date Mego Financial's percentage ownership in the Company is
significantly reduced, certain provisions of the Company's Certificate of
Incorporation and Amended and Restated Bylaws (the "Bylaws") may be deemed to
have anti-takeover effects and may delay, defer or prevent a takeover attempt
that a stockholder might consider in its best interest. The Company's
Certificate of Incorporation authorizes the Board to determine the rights,
preferences, privileges and restrictions of unissued series of preferred stock
and to fix the number of shares of any series of preferred stock and the
designation of any such series, without any vote or action by the Company's
stockholders. Thus, the Board may authorize and issue shares of preferred stock
with voting or conversion rights that could adversely affect the voting or other
rights of holders of the Common Stock. In addition, the issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of the Company, since the terms of the preferred stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of the preferred stock. Other provisions of the Company's
Certificate of Incorporation and Bylaws (i) provide that special meetings of the
stockholders may be called only by the Board of Directors or upon the written
demand of the holders of not less than 30% of the votes entitled to be cast at a
special meeting and (ii) establish certain advance notice procedures for
nomination of candidates for election as directors by stockholders and for
stockholder proposals to be considered at annual stockholders' meetings. Mego
Financial could also vote to amend the Company's Certificate of Incorporation or
Bylaws without the vote of any other holders of the Common Stock. Upon the
occurrence of a Change of Control, the holders of the Notes will be entitled to
require the Company to repurchase up to all outstanding Notes of the holders
requiring such repurchase. This provision would further inhibit any takeover of
the Company. See "Description of the Notes -- Change of Control."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Notes offered hereby,
after deducting underwriting discounts and estimated expenses of the Offering,
are estimated to be approximately $37.6 million. The net proceeds to the Company
from the Common Stock Offering, based upon an assumed initial public offering
price of $12.00 per share and after deducting underwriting discounts and
estimated expenses of the Common Stock Offering, are estimated to be
approximately $21.6 million ($25.0 million if the underwriters of the Common
Stock Offering exercise their over-allotment option in full).

The Company currently intends to use approximately $12.8 million of the
aggregate net proceeds received by the Company from the Offering and the Common
Stock Offering to repay Intercompany Debt which does not bear interest and is
due on demand and approximately $13.3 million to reduce the amounts outstanding
under the Company's warehouse and revolving lines of credit, which currently
bear interest at rates ranging from 1.0% to 2.0% over the prime rate and which
expire in August 1997 and December 1997, respectively. The remaining net
proceeds will be used to provide capital to originate and securitize loans.
Pending such use, the net proceeds received by the Company will be invested in
high quality, short term interest-bearing investment and deposit accounts.

21
<PAGE> 23

CAPITALIZATION

The following table sets forth the capitalization of the Company at August
31, 1996, and as adjusted as of such date to give effect to (i) the sale of the
Notes offered hereby (after deducting underwriting discounts and estimated
expenses of the Offering), (ii) the sale of the 2,000,000 shares of Common Stock
pursuant to the Common Stock Offering (at an assumed initial public offering
price of $12.00 per share and after deducting underwriting discounts and
estimated expenses of the Common Stock Offering) and (iii) the application of
the net proceeds from the Offering and the Common Stock Offering as described
under "Use of Proceeds." This table should be read in conjunction with the
financial statements, the related notes and the other financial information
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AUGUST 31, 1996
-------------------
AS
ACTUAL ADJUSTED
------- -------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Warehouse line of credit............................................... $ 3,265 $ --(1)
Revolving line of credit............................................... 10,000 --(1)
Other notes and contracts payable...................................... 932 932
% senior subordinated notes due 2001................................. -- 40,000
Intercompany debt...................................................... 12,813 --
------- -------
Total debt..................................................... $27,010 $40,932
======= =======
Stockholder's equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares
issued and outstanding.............................................. $ -- $ --
Common stock, $.01 par value; 50,000,000 shares authorized; 10,000,000
shares issued and outstanding, actual and 12,000,000 shares issued
and outstanding, as adjusted(2)..................................... 100 120
Additional paid-in capital............................................. 8,550 30,175
Retained earnings...................................................... 9,051 9,051
------- -------
Total stockholder's equity............................................. 17,701 39,346
------- -------
Total capitalization........................................... $44,711 $80,278
======= =======
</TABLE>

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

(1) The Company intends to use a portion of the net proceeds of the Offering and
the Common Stock Offering to reduce the amounts outstanding under these
lines of credit. Such lines of credit may remain available for future use.
(2) Does not include 925,000 shares of Common Stock reserved for issuance upon
the exercise of stock options available to be granted under the Company's
Stock Option Plan or 300,000 shares of Common Stock issuable pursuant to
the underwriters' over-allotment option in the Common Stock Offering. See
"Management -- Company Stock Option Plan" and "Underwriting."

22
<PAGE> 24

PRO FORMA SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the year ended
August 31, 1996 on a pro forma basis to give effect to the estimated pro forma
interest expense of the Company's proposed offering of $40,000,000 of Notes at
an assumed interest rate of 13% in lieu of the interest expense recorded by the
Company under its existing notes and contracts payable without giving effect for
any earnings factor on funds not applied to pay off existing debt.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AUGUST 31, 1996
-------------------
PRO
ACTUAL FORMA
------- -------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNT)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest income, net................................................... $ 988 $ 2,104
Other revenues......................................................... 24,039 24,039
------- -------
Total revenues................................................. 25,027 26,143
------- -------
Costs and expenses:
Other interest......................................................... 167 5,200
Other costs and expenses............................................... 13,705 13,705
------- -------
Total costs and expenses....................................... 13,872 18,905
------- -------
Income before income taxes............................................... 11,155 7,238
Income taxes............................................................. 4,235 2,750
------- -------
Net income............................................................... $ 6,920 $ 4,488
======= =======
Net income per share..................................................... $ 0.45
=======
</TABLE>

23
<PAGE> 25

SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected Statement of Operations data and Statement of Financial
Condition data set forth below have been derived from the financial statements
of the Company. The financial statements as of and for the years ended August
31, 1994, 1995 and 1996 have been audited by Deloitte & Touche LLP, independent
auditors, and are included elsewhere in this Prospectus. The selected financial
information set forth below should be read in conjunction with the financial
statements, the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1994(1) 1995 1996
------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans........................................... $ 579 $12,233 $17,994
Net unrealized gain on mortgage related securities(2)........... -- -- 2,697
Loan servicing income........................................... -- 873 3,348
Interest income, net of interest expense of $107, $468 and
$1,116....................................................... 172 473 988
------- ------- -------
Total revenues.......................................... 751 13,579 25,027
------- ------- -------
Costs and expenses:
Provision for credit losses..................................... 96 864 1,510
Depreciation and amortization................................... 136 403 394
Other interest.................................................. 22 187 167
General and administrative:
Payroll and benefits......................................... 975 3,611 5,031
Commissions and selling...................................... 13 552 2,013
Professional services........................................ -- 177 732
Servicing fees paid to affiliate............................. 13 232 709
Management services by affiliate............................. 442 690 671
FHA insurance................................................ 11 231 572
Other........................................................ 554 713 2,073
------- ------- -------
Total costs and expenses................................ 2,262 7,660 13,872
------- ------- -------
Income (loss) before income taxes(3).............................. (1,511) 5,919 11,155
Income taxes(3)................................................... -- 2,277 4,235
Net income (loss)................................................. $(1,511) $ 3,642 $ 6,920
======= ======= =======
Pro forma net income per share(4)................................. $ 0.60
=======
</TABLE>

<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF AUGUST 31, 1996
---------------- ------------------------
1994(1) 1995 ACTUAL AS ADJUSTED(5)
------ ------- ------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,610 $ 4,610
Excess servicing rights............................... 904 14,483 12,121 12,121
Mortgage related securities(2)........................ -- -- 22,944 22,944
Total assets.......................................... 5,122 24,081 50,606 86,173
Total liabilities..................................... 983 13,300 32,905 46,827
Total stockholder's equity............................ 4,139 10,781 17,701 39,346
</TABLE>

24
<PAGE> 26

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1994(1) 1995 1996
------ ------- --------
<S> <C> <C> <C>
OPERATING DATA:
Loans originated......................................... $8,164 $87,751 $139,367
Weighted average interest rate on loans originated....... 14.18% 14.55% 14.03%
Servicing portfolio (end of year):
Company-owned loans.................................... $1,471 $ 3,720 $ 4,698
Sold loans............................................. 6,555 88,566 209,491
------ ------- -------
Total.......................................... $8,026 $92,286 $214,189
====== ======= =======
Delinquency period(6):
31-60 days past due.................................... 2.06% 2.58% 2.17%
61-90 days past due.................................... 0.48 0.73 0.85
91 days and over past due.............................. 0.36 0.99 4.53(7)
91 days and over past due, net of claims filed(8)...... 0.26 0.61 1.94
Claims filed with HUD(9)................................. 0.10 0.38 2.59
Amount of FHA insurance available (end of year).......... $ 813 $ 9,552 $ 21,205(10)
Amount of FHA insurance available as a percentage
of loans serviced (end of year)........................ 10.13% 10.35% 9.90%(10)
Ratio of earnings to fixed charges(11)................... N/A 7.69x 2.29x(12)
</TABLE>

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

25
<PAGE> 27

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

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

GENERAL

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

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

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

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

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

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. The range of values attributable to the factors used in
determining fair value is broad. Although the Company believes that it has made
reasonable estimates of the fair value of the mortgage related securities, the
rate of prepayments and default rates utilized are estimates, and actual
experience may vary from its estimates.

The present value of expected net cash flows from the sale of loans is
recorded at the time of sale as excess servicing rights and mortgage related
securities. Excess servicing rights are amortized as a charge to income, as
payments are received on the retained interest differential over the estimated
life of the underlying loans. The expected cash flows used to determine the
excess servicing rights asset and mortgage related securities have been reduced
for potential losses, net of FHA insurance recoveries, under recourse provisions

26
<PAGE> 28

of the sales agreements. The allowance for credit losses on loans sold with
recourse represents the Company's estimate of losses to be incurred in
connection with the recourse provisions of the sales agreements.

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

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

The Company discounts cash flows on its loan sales at the rate it believes
an independent third-party purchaser would require as a rate of return. The cash
flows were discounted to present value using discount rates which averaged 12.0%
for the years ended August 31, 1994, 1995 and 1996. The Company has developed
its assumptions based on experience with its own portfolio, available market
data and ongoing consultation with its financial advisors.

Total costs and expenses consist primarily of general and administrative
expenses, depreciation and amortization, and provision for credit losses. PEC, a
wholly-owned subsidiary of Mego Financial, provides loan servicing and
management services to the Company the costs of which are charged to general and
administrative expenses. See "Certain Transactions" and Note 14 of Notes to
Financial Statements.

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

RESULTS OF OPERATIONS

Fiscal 1996 Compared to Fiscal 1995

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

27
<PAGE> 29

The following table sets forth certain data regarding loans originated by
the Company during fiscal 1995 and 1996.

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

See Notes 2 and 5 of Notes to Financial Statements.

Total revenues increased 84.3% to $25.0 million for fiscal 1996 from $13.6
million for fiscal 1995. The increase was primarily the result of the increased
volume of loans originated and the sale of such loans. The following table sets
forth the principal balance of loans sold or securitized and related gain on
sale data for fiscal 1995 and 1996.

<TABLE>
<CAPTION>
YEAR ENDED AUGUST
31,
------------------
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Principal amount of loans sold:
Title I................................................................. $85,363 $127,414
Conventional............................................................ -- 10,494
------- --------
Total........................................................... $85,363 $137,908
======= ========
Gain on sale of loans..................................................... $12,233 $ 17,994
Net unrealized gain on mortgage related securities........................ -- 2,697
------- --------
Gain on sale of loans and unrealized gain on mortgage related
securities.............................................................. $12,233 $ 20,691
======= ========
Gain on sale of loans as a percentage of principal balance of loans
sold.................................................................... 14.3% 13.0%
Gain on sale of loans and unrealized gain on mortgage related securities
as a percentage of principal balance of loans sold...................... 14.3% 15.0%
</TABLE>

See Note 2 of Notes to Financial Statements.

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

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

28
<PAGE> 30

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

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

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

Payroll and benefits expense increased 39.3% to $5.0 million for fiscal
1996 from $3.6 million for fiscal 1995. The number of employees increased from
105 as of fiscal year end 1995 to 170 as of fiscal year end 1996, due to
increased staff necessary to support the business expansion and improve quality
control.

Commissions and selling expenses increased 264.7% to $2.0 million for
fiscal 1996 from $552,000 for fiscal 1995 while loan originations increased by
$51.6 million from fiscal 1995 to 1996. The sales network expanded to
substantially all states, adding new personnel and offices to further the loan
origination growth strategy.

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

Servicing fees paid to affiliate increased 205.6% to $709,000 for fiscal
1996 from $232,000 for fiscal 1995. The increase was a result of the increase in
the size of the loan portfolio serviced by PEC. Management services by affiliate
decreased 2.9% to $671,000 for fiscal 1996 from $690,000 for fiscal 1995. These
expenses represent services provided by PEC, including executive, accounting,
legal, management information, data processing, human resources, advertising and
promotional materials. During fiscal 1995 and 1996, the Company incurred
interest expense to PEC of $5,000 and $29,000, respectively, which amounts were
included in other interest expense. During fiscal 1995 and 1996, the Company
paid PEC for developing certain computer programming, incurring costs of $36,000
and $56,000, respectively. See Note 14 of Notes to Financial Statements.

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

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

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

29
<PAGE> 31

As a result of the foregoing, net income increased 90.0% to $6.9 million
for fiscal 1996 from $3.6 million for fiscal 1995.

Fiscal 1995 Compared to Fiscal 1994

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

The following table sets forth certain data regarding Title I Loans
originated by the Company during fiscal 1994 and 1995.

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------
1994 1995
------------------ -------------------
<S> <C> <C> <C> <C>
Principal amount of loans:
Correspondents...................................... $5,251,647 64.3% $63,792,680 72.7%
Dealers............................................. 1,492,318 18.3 23,957,829 27.3
Bulk purchase....................................... 1,420,150 17.4 -- --
---------- ----- ----------- -----
Total....................................... $8,164,115 100.0% $87,750,509 100.0%
========== ===== =========== =====
Number of loans:
Correspondents...................................... 338 47.4% 3,437 59.1%
Dealers............................................. 164 23.0 2,381 40.9
Bulk purchase....................................... 211 29.6 -- --
---------- ----- ----------- -----
Total....................................... 713 100.0% 5,818 100.0%
========== ===== =========== =====
</TABLE>

The Company sold $85.4 million in principal balance of loans during fiscal
1995, recognizing a gain on sale of loans of $12.2 million. The Company sold
$6.6 million in principal balance of loans during fiscal 1994 recognizing a gain
on sale of loans of $579,000. As a percentage of loans sold, gain on sale of
loans was 14.3% during fiscal 1995 compared to 8.8% during fiscal 1994. The
increase in gain on sale was primarily a result of increased volume of loans
sold and a wider differential between the stated interest rate on the loans and
the yield to purchasers. The weighted average gross excess spread on sold loans
was 5.6% and 6.2% for fiscal 1994 and 1995, respectively. The weighted average
discount rate used in the determination of the gain on sale for both periods was
12%.

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

Interest income, net of interest expense, increased 175.0% to $473,000
during fiscal 1995 from $172,000 during fiscal 1994. The increase was primarily
the result of the growth in the size of the portfolio of loans held for sale of
151.3% to $3.7 million at August 31, 1995 from $1.5 million at August 31, 1994.

The provision for credit losses increased 800.0% to $864,000 for fiscal
1995 from $96,000 for fiscal 1994 due to increased loan originations. Provision
for credit losses relating to unsold loans is recorded as expense in amounts
sufficient to maintain the allowance at a level considered adequate to provide
for anticipated losses resulting from liquidation of outstanding loans. The
provision for credit losses is based upon periodic analysis of the portfolio,
economic conditions and trends, historical credit loss experience, borrowers'
ability to repay, collateral values, and estimated FHA insurance recoveries on
Title I Loans.

30
<PAGE> 32

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

Other interest expense increased 750.0% to $187,000 for fiscal 1995 from
$22,000 for fiscal 1994 as a result of increased capitalized lease obligations.

Total general and administrative expenses increased 209.1% to $6.2 million
for fiscal 1995 from $2.0 million for fiscal 1994. The increase was primarily a
result of increased payroll related to the hiring of additional personnel in
contemplation of the expansion and projected growth of the Company's business
and costs related to the opening of additional offices. Commissions and selling
expenses increased to $552,000 for fiscal 1995 from $13,000 for fiscal 1994 due
to the expansion of the sales network and facilities to support increased loan
origination growth. Included in general and administrative expenses were
servicing fees paid to PEC in the amount of $13,000 and $232,000 for fiscal 1994
and 1995, respectively, and management fees paid to PEC in the amount of
$442,000 and $690,000 for fiscal 1994 and 1995, respectively. See Note 14 of
Notes to Financial Statements. FHA insurance expense increased to $231,000 for
fiscal 1995 from $11,000 for fiscal 1994 due to increased volume of Title I Loan
originations.

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

Effective September 1, 1994, the Company adopted SFAS No. 122 which
requires that a mortgage banking enterprise recognize as separate assets the
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. The effect of adopting SFAS No. 122 on the Company's
financial statements was to increase income before income taxes by $1.1 million
for fiscal 1995.

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

FINANCIAL CONDITION

August 31, 1996 Compared to August 31, 1995

Cash decreased 41.1% to $443,000 at August 31, 1996 from $752,000 at August
31, 1995 primarily as a result of the timing of loan originations, sales, and
borrowings.

Restricted cash deposits increased 76.7% to $4.5 million at August 31, 1996
from $2.5 million at August 31, 1995 due to increased volume of loans serviced
for others pursuant to agreements which restrict a small percentage of cash
relative to the volume of loans serviced, as well as loan payments collected
from borrowers.

Loans held for sale, net increased 25.4% to $4.6 million at August 31, 1996
from $3.7 million at August 31, 1995 primarily as a result of increased loan
originations from $87.8 million for fiscal 1995 to $139.4 million for fiscal
1996, and the timing of loan sales.

Excess servicing rights decreased 16.3% to $12.1 million at August 31, 1996
from $14.5 million at August 31, 1995. Excess servicing rights are calculated
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar rights. The Company believes
that the excess servicing rights recognized at the time of sale do not exceed
the amount that would be received if such rights were sold at fair market value
in the marketplace. The decrease in excess servicing rights was primarily a
result of loans sold with excess servicing rights recognized which were
reacquired and included in the fiscal 1996 securitizations as well as normal
amortization of such excess servicing rights. The excess cash flow created
through securitization which had been recognized as excess servicing rights on
loans reacquired and securitized are included in the cost basis of the mortgage
related securities.

Mortgage related securities were $22.9 million at August 31, 1996 as a
result of the Company's securitization transactions during fiscal 1996. There
was no corresponding asset at August 31, 1995. See Note 2 of Notes to Financial
Statements.

31
<PAGE> 33

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

Property and equipment, net, increased 101.6% to $865,000 at August 31,
1996 from $429,000 at August 31, 1995 due to increased purchases of office
equipment related to facility expansion.

Notes and contracts payable increased 873.7% to $14.2 million at August 31,
1996 from $1.5 million at August 31, 1995 due to increased levels of mortgage
servicing rights and mortgage related securities created through loan
securitization which were available for financing to meet the Company's cash
requirements. The Company has a $10.0 million revolving facility for the
financing of mortgage related securities.

Accounts payable and accrued liabilities increased 81.6% to $4.1 million at
August 31, 1996 from $2.2 million at August 31, 1995, primarily as a result of
increases in accrued payroll, interest and other unpaid operational costs.

Allowances for credit losses and for loans sold with recourse increased
slightly by 3.8% to $920,000 at August 31, 1996 from $886,000 at August 31,
1995. Loans sold with recourse which were reacquired and included in the 1996
securitizations decreased the need for this allowance while increased loan sales
increased the allowance requirements. Recourse to the Company on sales of loans
is governed by the agreements between the purchasers and the Company. The
allowance for credit losses on loans sold with recourse represents the Company's
estimate of its probable future credit losses to be incurred over the lives of
the loans considering estimated future FHA insurance recoveries on Title I
Loans. No allowance for credit losses on loans sold with recourse is established
on loans sold through securitizations, as the Company has no recourse obligation
under those securitization agreements. Estimated credit losses on loans sold
through securitizations are considered in the Company's valuation of its
residual interest securities.

Due to parent company increased 41.9% to $12.0 million at August 31, 1996
from $8.5 million at August 31, 1995. The increase was primarily attributable to
the increase in the federal tax provision owed to Mego Financial as a result of
the filing of a consolidated federal tax return.

Stockholder's equity increased 64.2% to $17.7 million at August 31, 1996
from $10.8 million at August 31, 1995 as a result of net income of $6.9 million
during fiscal 1996.

August 31, 1995 Compared to August 31, 1994

Cash decreased 8.7% to $752,000 at August 31, 1995 from $824,000 at August
31, 1994 primarily as a result of the timing of loan originations, sales and
borrowings.

Restricted cash deposits were $2.5 million at August 31, 1995 due to
activity on loans serviced for others pursuant to agreements which restrict a
small percentage of cash relative to the volume of loans serviced, as well as
loan payments collected from borrowers. There was no corresponding asset at
August 31, 1994.

Loans held for sale, net, increased 151.3% to $3.7 million at August 31,
1995 from $1.5 million at August 31, 1994 primarily as a result of timing of
loan sales and growth in loan originations.

Excess servicing rights increased 1,502.1% to $14.5 million at August 31,
1995 from $904,000 at August 31, 1994. Excess servicing rights are calculated
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar rights. The Company believes
that the excess servicing rights recognized at the time of sale do not exceed
the amount that would be received if such rights were sold at fair market value
in the marketplace. The increase in excess servicing rights was primarily a
result of increases in loans sold with excess servicing rights.

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

32
<PAGE> 34

Notes and contracts payable increased 128.9% to $1.5 million at August 31,
1995 from $637,000 at August 31, 1994 due to increased borrowings under the
Company's warehouse line of credit and the timing of loan sales.

Accounts payable and accrued liabilities increased 699.6% to $2.2 million
at August 31, 1995 from $280,000 at August 31, 1994, primarily as a result of
increases in accrued payroll, interest and other operational costs, due to
expansion and growth of the Company.

Allowances for credit losses and for loans sold with recourse increased to
$886,000 at August 31, 1995 from $66,000 at August 31, 1994, primarily due to
increased loans held for sale and loans sold under recourse provisions. Recourse
to the Company on sales of loans is governed by the agreements between the
purchasers and the Company. The allowance for credit losses on loans sold with
recourse represents the Company's estimate of its probable future credit losses
to be incurred over the lives of the loans, considering estimated future FHA
insurance recoveries on Title I Loans.

Due to parent company was $8.5 million at August 31, 1995. There was no
corresponding liability at August 31, 1994. Advances from Mego Financial plus
income tax provisions owed to Mego Financial were the primary components of this
liability. See Note 14 of Notes to Financial Statements.

Stockholder's equity increased 160.5% to $10.8 million at August 31, 1995
from $4.1 million at August 31, 1994 as a result of net income of $3.6 million
during fiscal 1995, compared to a net loss of $1.5 million in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash of $443,000 at August 31, 1996 compared to cash of
$752,000 at August 31, 1995.

The Company's cash requirements arise from loan originations, payments of
operating and interest expenses and deposits to reserve accounts related to loan
sale transactions. Loan originations are initially funded principally through
the Company's $20.0 million warehouse line of credit pending the sale of loans
in the secondary market. Substantially all of the loans originated by the
Company are sold. Net cash used in the Company's operating activities for the
years ended August 31, 1995 and 1996 was approximately $11.8 million and $15.3
million, respectively. This use was funded primarily from the reinvestment of
proceeds from the sale of loans in the secondary market totaling approximately
$85.0 million and $135.5 million for the years ended August 31, 1995 and 1996,
respectively. The loan sale transactions required the subordination of certain
cash flows payable to 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 a reserve account to the extent
of the subordination requirements. The subordination requirements generally
provide that the excess interest spread is payable to the reserve account until
a specified percentage of the principal balances of the sold loans is
accumulated therein.

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

Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market, are essential for
the continuation of the Company's loan origination operations. At August 31,
1996, the Company had a $20.0 million warehouse line of credit (the "Warehouse
Line") for the financing of loan originations which expires in August 1997. At
August 31, 1996, $3.3 million was outstanding under the Warehouse Line and $16.7
million was available. The Warehouse Line bears interest at the prime rate plus
1.0% per year and is secured by loans prior to sale. The agreement with the
lender requires the Company to maintain a minimum tangible net worth of $12.5
million plus 50% of the Company's cumulative

33
<PAGE> 35

net income after May 1, 1996, and a minimum level of profitability of at least
$500,000 per rolling six month period. In addition, the Company had a $10.0
million revolving credit facility from the same lender, with respect to which
$10.0 million was outstanding on that date. This facility was secured by a
pledge of the Company's excess servicing rights and the interest only and
residual class certificates ("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. The
revolving loan has an 18-month revolving credit period followed by a 30-month
amortization period, and requires the Company to maintain a minimum tangible net
worth of $12.5 million plus 50% of the Company's cumulative net income after May
1, 1996, and a minimum level of profitability of at least $500,000 per rolling
six month period. Borrowings under the revolving loan cannot exceed the lesser
of (i) 40% of the Company's excess servicing rights and Certificates or (ii) six
times the aggregate of the excess servicing rights and Certificate payments
actually received by the Company over the most recent three-month period. While
the Company believes that it will be able to maintain its existing credit
facilities and obtain replacement financing as its credit arrangements mature
and additional financing, if necessary, there can be no assurance that such
financing will be available on favorable terms, or at all.

From time to time, the Company has sold loans through whole loan sales. In
August 1994, the Company entered into an agreement with a bank pursuant to which
an aggregate of $38.3 million in principal amount of loans had been sold at
December 31, 1995, for an amount equal to their remaining principal balance and
accrued interest. Pursuant to the agreement, the purchaser is entitled to
receive interest at a rate equal to the sum of 187.5 basis points and the yield
paid on four-year Federal Government Treasury obligations at the time of the
sale. The Company retained the right to service the loans and the right to
receive the difference (the "Excess Interest") between the sold loans' stated
interest rate and the yield to the purchaser. The Company is required to
maintain a reserve account equal to 1.0% of the declining principal balance of
the loans sold pursuant to the agreement funded from the Excess Interest
received by the Company less its servicing fee to fund shortfalls in collections
from borrowers who default in the payment of principal or interest.

In April 1995, the Company entered into a continuing agreement with a
financial institution pursuant to which an aggregate of approximately $175.8
million in principal amount of loans had been sold at August 31, 1996 for an
amount equal to their remaining principal balances. Pursuant to the agreement,
the purchaser is entitled to receive interest at a variable rate equal to the
sum of 200 basis points and the one-month LIBOR rate as in effect from time to
time. 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 2.5% of the proceeds received by the Company from the sale of
loans pursuant to the agreement plus the Excess Interest received by the Company
less its servicing fee to fund shortfalls in collections from borrowers who
default in the payment of principal or interest. In May 1995 and June 1995, the
Company reacquired an aggregate of approximately $25.0 million of such Title I
Loans for an amount equal to their remaining principal balance, which were sold
to a financial institution. In March 1996 and August 1996, the Company
reacquired an additional $77.7 million and $36.2 million, respectively, of the
Title I Loans in connection with its first two securitization transactions. In
September 1996, the Company entered into a repurchase agreement with the
financial institution pursuant to which the Company pledged the interest only
certificates from its two 1996 securitizations in exchange for a $3.0 million
advance. In November 1996, the Company entered into an agreement with the same
financial institution, providing for the purchase of up to $2.0 billion of loans
over a five-year period. Pursuant to the agreement, Mego Financial issued to the
financial institution four-year warrants to purchase 1,000,000 shares of Mego
Financial's common stock at an exercise price of $7.125 per share. The agreement
also provides (i) that so long as the aggregate principal balance of loans
purchased by the financial institution and not resold to third parties exceeds
$100.0 million, the financial institution shall not be obligated to purchase,
and the Company shall not be obligated to sell, loans under the agreement and
(ii) that the percentage of conventional loans owned by the financial
institution at any one time and acquired pursuant to the agreement shall not
exceed 65% of the total amount of loans owned by the financial institution at
such time and acquired pursuant to the agreement. The value of the warrants,
estimated at $3.0 million (0.15% of the commitment amount) as of the commitment
date, will be charged to the Company and amortized as the commitment for the
purchase of loans is utilized. The financial institution has also committed to
provide the Company with a separate one-year facility of up to $11.0 million,
less any amounts

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advanced under the repurchase agreement, for the financing of the interest only
and residual certificates from future securitizations.

In May 1995, the Company entered into an agreement with a bank pursuant to
which an aggregate of $25.0 million in principal amount of loans had been sold
at June 30, 1995 for an amount equal to their remaining principal balance.
Pursuant to the agreement, the purchaser is entitled to receive interest at a
rate equal to the sum of 190 basis points and the yield paid on four-year
Federal Government Treasury obligations at the time of the sale. The Company
retained the right to service the loans and the right to receive the Excess
Interest. The agreement requires the Company to maintain a reserve account equal
to 1.0% of the declining principal balance of the loans sold pursuant to the
agreement funded from the Excess Interest received by the Company less its
servicing fee to fund shortfalls in collections from borrowers who default in
the payment of principal or interest.

In furtherance of the Company's strategy to sell loans through
securitizations, in March 1996 and August 1996, the Company completed its first
two securitizations pursuant to which it sold pools of $84.2 million and $48.8
million, respectively, of Title I Loans. The Company previously reacquired at
par $77.7 million and $36.2 million of such loans, respectively. Pursuant to
these securitizations, pass-through certificates evidencing interests in the
pools of loans were sold in a public offering. The Company continues to
subservice the sold loans and is entitled to receive from payments in respect of
interest on the sold loans a servicing fee equal to 1.25% of the balance of each
loan with respect to the March transaction and 1.0% with respect to the August
transaction. In addition, with respect to both transactions, the Company
received certificates (carried as "Mortgage related securities" on the Company's
statement of financial condition), representing the interest differential, after
payment of servicing and other fees, between the interest paid by the obligors
of the sold loans and the yield on the sold certificates. 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.

During fiscal 1995 and fiscal 1996, the Company used cash of $11.8 million
and $15.3 million, respectively, in operating activities. During fiscal 1995 and
fiscal 1996, the Company provided cash of $12.0 million and $15.6 million,
respectively, in financing activities. During fiscal 1995 and fiscal 1996, the
Company used cash of $274,000 and $637,000, respectively, in investing
activities, which was substantially expended for office equipment and
furnishings and data processing equipment.

The Company believes that funds from operations and financing activities,
borrowings under its existing credit facilities and the net proceeds from the
Offering and the Common Stock Offering will be sufficient to satisfy its
contemplated cash requirements for at least twelve months following the
consummation of the Offering.

POSSIBLE TERMINATION OF SERVICING RIGHTS

As described in Note 8 of Notes to Financial Statements, the pooling and
servicing agreements relating to the Company's securitization transactions
contain provisions with respect to the maximum permitted loan delinquency rates
and loan default rates, which, if exceeded, would allow the termination of the
Company's right to service the related loans. At September 30, 1996, the default
rates on the pool of loans sold in the March 1996 securitization transaction
exceeded the permitted limit set forth in the related pooling and servicing
agreement. Accordingly, this condition could result in the termination of the
Company's servicing rights with respect to that pool of loans by the trustee,
the master servicer or the insurance company providing credit enhancement for
that transaction. The mortgage servicing rights on this pool of loans were
approximately $1.4 million at August 31, 1996. Although the insurance company
has indicated that it has, and to its knowledge, the trustee and the master
servicer have, no present intention to terminate the Company's servicing rights,
no assurance can be given that one or more of such parties will not exercise its
right to terminate. In the event of such termination, there would be an adverse
effect on the valuation of the Company's mortgage servicing rights and the
results of operations in the amount of the mortgage servicing rights ($1.4
million before tax and $870,000 after tax at August 31, 1996) on the date of
termination. The Company has taken certain steps designed to reduce the default
rates on this pool of loans as well as its other

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loans. These steps include the hiring of a divisional manager 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 this pool of loans and the renegotiation of the
terms of certain delinquent accounts in this pool of loans within the guidelines
promulgated by HUD.

EFFECTS OF CHANGING PRICES AND INFLATION

The Company's operations are sensitive to increases in interest rates and
to inflation. Increased borrowing costs resulting from increases in interest
rates may not be immediately recoverable from prospective purchasers. The
Company's loans held for sale consist primarily of fixed-rate long term
installment contracts that do not increase or decrease as a result of changes in
interest rates charged to the Company. In addition, delinquency and loss
exposure may be affected by changes in the national economy. See Note 4 of Notes
to Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

At August 31, 1995, effective September 1, 1994, the Company adopted SFAS
No. 122, which requires that a mortgage banking enterprise recognize as separate
assets the rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. The effect of adopting SFAS No. 122 on the
Company's financial statements was to increase income before income taxes by
$1.1 million for the year ended August 31, 1995. The fair value of capitalized
mortgage servicing rights was estimated by taking the present value of expected
net cash flows from mortgage servicing using assumptions the Company believes
market participants would use in their estimates of future servicing income and
expense, including assumptions about prepayment, default and interest rates.
Capitalized mortgage servicing rights are amortized in proportion to and over
the period of estimated net servicing income. The estimate of fair value was
based on a 100 basis points per year servicing fee, reduced by estimated costs
of servicing, and using a discount rate of 12% in 1995. The Company has
developed its assumptions based on experience with its own portfolio, available
market data and ongoing consultation with its investment bankers.

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

The FASB has issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which establishes financial accounting and
reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. SFAS No. 123 is generally effective for fiscal
years beginning after December 15, 1995. The Company intends to provide the pro
forma and other additional disclosures about stock-based employee compensation
plans in its 1997 financial statements as required by SFAS No. 123.

SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125") was issued by the FASB in
June 1996. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
It requires that liabilities and derivatives incurred or obtained by transferors
as part of a transfer of financial assets be initially measured at fair value.
SFAS No. 125 also requires that servicing assets be measured by allocating the
carrying amount between the assets sold and retained interests based on their
relative fair values at the date of transfer. Additionally, this statement
requires that the servicing assets and liabilities be subsequently measured by
(a) amortization in proportion to and over the period of estimated net servicing
income and (b) assessment for asset impairment or increased obligation based on
their fair values. The statement will require that the Company's existing and
future excess servicing receivables be measured at fair market value and be
reclassified as interest only strip securities and accounted

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for in accordance with SFAS No. 115. As required by the statement, the Company
will adopt the new requirements effective January 1, 1997. It is not anticipated
that upon implementation, the statement will have any material impact on the
financial statements of the Company, as the book value of the Company's excess
servicing rights and mortgage related securities approximates fair value.

SEASONALITY

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

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BUSINESS

GENERAL

The Company is a specialized consumer finance company that originates,
purchases, sells and services consumer loans consisting primarily of home
improvement loans secured by liens on the improved property. Through its network
of Correspondents and Dealers, the Company initially originated only Title I
Loans. The Title I program provides for insurance of 90% of the principal
balance of the loan, and certain other costs. The Company began offering
Conventional Loans through its Correspondents in May 1996. For the three months
ended August 31, 1996, such loans totalled $11.2 million which represents 22.5%
of the Company's total loan originations for that quarter.

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

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

The Company's loan originations increased to $139.4 million during the
fiscal year ended August 31, 1996 from $87.8 million during the fiscal year
ended August 31, 1995 and $8.2 million during the six months in which it
originated loans in the fiscal year ended August 31, 1994. The Company's
revenues increased to $25.0 million for the year ended August 31, 1996 from
$13.6 million for the fiscal year ended August 31, 1995 and $751,000 for the
fiscal year ended August 31, 1994. For the year ended August 31, 1996, the
Company had net income of $6.9 million compared to $3.6 million for the year
ended August 31, 1995. As a result of the substantial growth in loan
originations, the Company has operated since March 1994, and expects to continue
to operate for the foreseeable future, on a negative cash flow basis.

The Company sells substantially all the loans it originates through either
whole loan sales to third party institutional purchasers or securitizations at a
yield below the stated interest rate on the loans, retaining the right to
service the loans and receive any amounts in excess of the guaranteed yield to
the purchasers. The Company completed its first two securitizations of Title I
Loans in March and August 1996 totalling $133.0 million and expects to sell a
substantial portion of its loan production through securitizations in the
future. At August 31, 1996, the Company serviced $209.5 million of loans it had
sold, and $4.7 million of loans it owned.

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HOME IMPROVEMENT LOAN INDUSTRY

According to data released by the Commerce Department's Bureau of the
Census, expenditures for home improvement and repairs of residential properties
have exceeded $100.0 billion per year since 1992 with 1995 expenditures
estimated at $112.6 billion. The Company targets the estimated $40.0 billion of
those expenditures which are for owner-occupied single-family properties where
improvements are performed by professional remodelers. As the costs of home
improvements escalate, home owners are seeking financing as a means to improve
their property and maintain and enhance its value. The National Association of
Home Builders Economics Forecast in 1995 estimates that home improvement
expenditures will exceed $200.0 billion by the year 2003. Two types of home
improvement financing are available to borrowers, the Title I program
administered by the FHA, which is authorized to partially insure qualified
lending institutions against losses, and uninsured loans where the lender relies
more heavily on the borrower's creditworthiness, debt capacity and the
underlying collateral. Both types of loans are generally secured with a real
estate mortgage lien on the property improved.

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

According to the FHA, the amount of single family Title I Loans originated
has grown from $375.0 million during 1988 to $1.3 billion during 1995. Based on
FHA data, the Company estimates that it had an 8.6% market share of the property
improvement Title I loan market in calendar 1995. Out of approximately 3,100
lenders participating in the program in 1995, according to FHA data, the Company
was the third largest originator of property improvement Title I Loans. Under
Title I, the payment of approximately 90% of the principal balance of a loan is
insured by the United States of America in the event of a payment default. The
Title I program generally limits the maximum amount of the loan to $25,000 and
restricts the type of eligible improvements and the use of the loan proceeds.
Under Title I, only property improvement loans to finance the alteration, repair
or improvement of existing single family, multifamily and non-residential
structures are allowed. The FHA does not review individual loans at the time of
approval. In the case of a Title I Loan less than $7,500, no equity is required
in the property to be improved and the loan may be unsecured.

BUSINESS STRATEGY

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

Product Extension and Expansion

The Company intends to continue to review its loan programs and introduce
new loan products to meet the needs of its customers. The Company will also
evaluate products or programs that it believes are

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

Expansion of Correspondent Operations

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

Expansion of Dealer Operations

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

Nationwide Geographic Expansion

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

Maximization of Flexibility in Loan Sales

The Company employs a two-pronged strategy of disposing of its loan
originations primarily through securitizations and, to a lesser extent, through
whole loan sales. By employing this dual strategy, the Company

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has the flexibility to better manage its cash flow, diversify its exposure to
the potential volatility of the capital markets and maximize the revenues
associated with the gain on sale of loans given market conditions existing at
the time of disposition. The Company has recently been approved by FNMA as a
seller/servicer of Title I Loans, as a result of which the Company is eligible
to sell such loans to FNMA on a servicing retained basis.

LOAN PRODUCTS

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

Conventional Loans

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

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

Title I Loan Program

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

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

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

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

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

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

LENDING OPERATIONS

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

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

The Dealer Division originates Dealer Title I Loans through a network of
Dealers, consisting of home improvement construction contractors approved by the
Company, by acquiring individual retail installment contracts ("Installment
Contracts") from Dealers. An Installment Contract is an agreement between the
Dealer and the borrower pursuant to which the Dealer performs the improvements
to the property and the borrower agrees to pay in installments the price of the
improvements. Before entering into an Installment Contract with a borrower, the
Dealer assists the borrower in submitting a loan application to the Company. If

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the loan application is approved, the Dealer enters into an Installment Contract
with the borrower, the Dealer assigns the Installment Contract to the Company
upon completion of the home improvements and the Company, upon receipt of the
requisite loan documentation (described below) and completion of a satisfactory
telephonic interview with the borrower, pays the Dealer pursuant to the terms of
the Installment Contract. The Dealer Division maintains 13 branch offices
located in Montvale, New Jersey, Kansas City, Missouri, Las Vegas, Nevada,
Austin, Texas, Oklahoma City, Oklahoma, Seattle, Washington, Waterford,
Michigan, Columbus, Ohio, Elmhurst, Illinois, Philadelphia, Pennsylvania,
Denver, Colorado, Woodbridge, Virginia and Bowie, Maryland through which it
conducts its marketing to Dealers in the state in which the branch is located as
well as certain contiguous states. The Dealer Division is operated with a vice
president of operations responsible for loan processing and underwriting, two
regional managers, and 13 field representatives supervised by the Vice
President-National Marketing who are responsible for marketing to Dealers. At
August 31, 1996, the Company had a network of approximately 435 active Dealers
doing business in 32 states. The Company intends to commence offering
Conventional Loans through its Dealer Division.

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

The Company pays its Correspondents premiums on the loans it purchases
based on the credit score of the borrower and the interest rate on the
respective loan. Additional premiums are paid to Correspondents based on the
volume of loans purchased from such Correspondents in a monthly period. During
fiscal 1996 the Company originated $94.2 million of loans from Correspondents
and paid total premiums of $2.8 million or 3.0% of such loans.

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

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

43
<PAGE> 45

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

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------
1994 1995 1996
------------------ ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Total Loan Applications:
Number processed....................................... 3,512 27,608 42,236
Number approved........................................ 1,984 15,956 20,910
Approval ratio......................................... 56.5% 57.8% 49.5%
Loan Originations:
Principal balance of loans:
Correspondents:
Title I.............................................. $5,251,647 64.3% $63,792,680 72.7% $ 82,596,197 59.3%
Conventional......................................... -- -- -- -- 11,582,108 8.3
---------- ----- ----------- ----- ------------ -----
Total Correspondents............................. 5,251,647 64.3 63,792,680 72.7 94,178,305 67.6
---------- ----- ----------- ----- ------------ -----
Dealers................................................ 1,492,318 18.3 23,957,829 27.3 45,188,721 32.4
Bulk purchase.......................................... 1,420,150 17.4 -- -- -- --
---------- ----- ----------- ----- ------------ -----
Total............................................ $8,164,115 100.0% $87,750,509 100.0% $139,367,026 100.0%
========== ===== =========== ===== ============ =====
Number of Loans:
Correspondents:
Title I.............................................. 338 47.4% 3,437 59.1% 4,382 50.9%
Conventional......................................... -- -- -- -- 392 4.6
---------- ----- ----------- ----- ------------ -----
Total Correspondents............................. 338 47.4 3,437 59.1 4,774 55.5
---------- ----- ----------- ----- ------------ -----
Dealers................................................ 164 23.0 2,381 40.9 3,836 44.5
Bulk purchase.......................................... 211 29.6 -- -- -- --
---------- ----- ----------- ----- ------------ -----
Total............................................ 713 100.0% 5,818 100.0% 8,610 100.0%
========== ===== =========== ===== ============ =====
Average principal balance of loans..................... $ 11,430 $ 15,083 $ 16,187
Weighted average interest rate on loans originated..... 14.18% 14.55% 14.03%
Weighted average term of loans originated (months)..... 175 188 198
</TABLE>

LOAN PROCESSING AND UNDERWRITING

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

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

Based upon FICO score default predictors and the Company's internal CIP
score, loans are classified by the Company into gradations of descending credit
risks and quality, from "A" credits to "D" credits, with subratings within those
categories. Quality is a function of both the borrowers creditworthiness, and
the extent of the value of the collateral, which is typically a second lien on
the borrower's primary residence. "A+" credits generally have a FICO score
greater than 680. An applicant with a FICO score of less than 620 would be rated
a "C" credit unless the loan-to-value ratio was 75% or less which would raise
the credit risk to the Company to a "B" or better depending on the borrower's
debt service capability. Depending on loan size, typical loan-to-value ratios
for "A" and "B" credits range from 90% to 125%, while loan-to-value ratios for
"C" and "D" credits range from 60% up to 90% with extraordinary compensating
factors.

The Company's underwriters review the applicant's credit history, based on
the information contained in the application as well as reports available from
credit reporting bureaus and the Company's CIP score, to determine the
applicant's acceptability under the Company's underwriting guidelines. Based on
the under-

44
<PAGE> 46

writer's approval authority level, certain exceptions to the guidelines may be
made when there are compensating factors subject to approval from a corporate
officer. The underwriter's decision is communicated to the Correspondent or
Dealer and, if approved, fully explains the proposed loan terms. The Company
endeavors to respond to the Correspondent or Dealer on the same day the
application is received.

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

Conventional Loans

The Company has implemented policies for its Conventional Loan program that
are designed to minimize losses by adhering to high credit quality standards or
requiring adequate loan-to-value levels. The Company will only make Conventional
Loans to borrowers with an "A" or "B" credit grade using the CIP. Through August
31, 1996, the Company's portfolio of Conventional Loans originated through its
Correspondent Division had been evaluated as an "A" credit risk and had a
weighted average (i) FICO score of 661, (ii) gross debt to income ratio of 38%,
(iii) interest rate of 14.04% and (iv) loan-to-value ratio of 110%, as well as
an average loan amount of $28,569. Substantially all of the Conventional Loans
originated to date by the Company are secured by first or second mortgage liens
on single family, owner occupied properties.

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

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

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

Title I Loans

The Title I Loans originated by the Company are executed on forms meeting
FHA requirements as well as federal and state regulations. Loan applications and
Installment Contracts are submitted to the Company's processing headquarters for
credit verification. The information provided in loan applications is first
verified by, among other things, (i) written confirmations of the applicant's
income and, if necessary, bank deposits, (ii) a formal credit bureau report on
the applicant from a credit reporting agency, (iii) a title report, (iv) if
necessary, a real estate appraisal and (v) if necessary, evidence of flood
insurance. Appraisals for Title I Loans, when necessary, are generally prepared
by pre-approved independent appraisers that meet the Company's standards for
experience, education and reputation. Loan applications are also reviewed to

45
<PAGE> 47

ascertain whether or not they satisfy the Company's underwriting criteria,
including loan-to-value ratios (if non-owner occupied), borrower income
qualifications, employment stability, purchaser requirements and necessary
insurance and property appraisal requirements. The Company will make Title I
Loans to borrowers with an "A" to "C" credit grade based on CIP score and lien
position. Since the implementation of the CIP scoring system in February 1996,
through August 31, 1996, the Company's portfolio of Title I Loans originated
through its Correspondent and Dealer Divisions had been evaluated as a "C+" and
"B" credit risk, respectively, and had a weighted average FICO score of 637 and
645, respectively. The Company's underwriting guidelines for Title I Loans meet
FHA's underwriting criteria. Completed loan packages are sent to the Company's
Underwriting Department for predisbursement auditing and funding.

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

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

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

QUALITY CONTROL

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

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

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

46
<PAGE> 48

Production as well as senior management. The Company also employs a Physical
Inspection Group that is responsible for monitoring the inspection of all homes
which are the subject of home improvement loans. Non-compliance is tracked by
loan source and serves as another method of evaluating a loan source
relationship.

The Company has expended substantial amounts in developing its Quality
Control and Compliance Department. The Company recognizes the need to monitor
its operations continually as it experiences substantial growth. Feedback from
these departments provides senior management with the information necessary to
take corrective action when appropriate, including the revision and expansion of
its operating policies and procedures.

LOAN PRODUCTION TECHNOLOGY SYSTEMS

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

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

LOAN SERVICING

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

47
<PAGE> 49

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

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

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

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

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

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

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<PAGE> 50

The following table sets forth certain information regarding the Company's
loan servicing for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1994(1) 1995 1996
------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing portfolio at beginning of year................ $ -- $ 8,026 $ 92,286
Additions to servicing portfolio........................ 8,164 87,751 139,367
Reductions in servicing portfolio(2).................... 138 3,491 17,464
------ ------- --------
Servicing portfolio at end of year...................... $8,026 $92,286 $214,189
====== ======= ========
Servicing portfolio (end of year):
Company-owned loans................................... 1,471 3,720 4,698
Sold loans............................................ 6,555 88,566 209,491
------ ------- --------
Total......................................... $8,026 $92,286 $214,189
====== ======= ========
</TABLE>

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

(1) The Company commenced originating loans in March 1994.
(2) Reductions result from scheduled payments, prepayments and write-offs during
the period.

The following table sets forth the delinquency and Title I insurance claims
experience of loans serviced by the Company as of the dates indicated:

<TABLE>
<CAPTION>
AUGUST 31,
------------------------------------
1994(1) 1995 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Delinquency period(2)
31-60 days past due................................... 2.06% 2.58% 2.17%
61-90 days past due................................... 0.48 0.73 0.85
91 days and over past due............................. 0.36 0.99 4.53(3)
91 days and over past due, net of claims filed(4)..... 0.26 0.61 1.94
Claims filed with HUD(5)................................ 0.10 0.38 2.59%
Number of Title I insurance claims...................... 1 23 255
Total servicing portfolio at end of period.............. $8,026 $ 92,286 $ 214,189
Amount of FHA insurance available....................... 813 9,552 21,205(6)
Amount of FHA insurance available as a percentage of
loans serviced (end of year).......................... 10.13% 10.35% 9.90%(6)
Losses on liquidated loans(7)........................... $ -- $ 16.8 $ 32.0
</TABLE>

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

(1) The Company commenced originating loans in March 1994.
(2) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(3) During the year ended August 31, 1996, the processing and payment of claims
filed with HUD was delayed.
(4) Represents the dollar amount of delinquent loans net of delinquent Title I
Loans for which claims have been filed with HUD and payment is pending as a
percentage of total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the date indicated.
(5) Represents the dollar amount of delinquent Title I Loans for which claims
have been filed with HUD and payment is pending as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(6) If all claims with HUD had been processed as of period end, the amount of
FHA insurance available would have been reduced to $16,215,000, which as a
percentage of loans serviced would have been 7.77%.
(7) A loss is recognized upon receipt of payment of a claim or final rejection
thereof. Claims paid in a period may relate to a claim filed in an earlier
period. Since 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

49
<PAGE> 51

liquidated Title I Loans related to 83 of the 338 Title I insurance claims
made by the Company since commencing operations through August 31, 1996.
Losses on liquidated loans 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 Company has received an average amount equal to 96.87% of the
outstanding principal balance of Title I Loans for which claims have been made,
each payment including certain interest and costs. The processing and payment of
claims filed with HUD have been delayed for a number of reasons including (i)
furloughs experienced by HUD personnel in December 1995 and January 1996, (ii)
the growth in the volume of Title I Loans originated from approximately $750
million in 1994 to $1.3 billion in 1995 without a corresponding increase in HUD
personnel to service claims and (iii) the transition of processing operations to
regional centers during the second and third quarters of 1996. It is expected
that once appropriate staffing and training have been completed at HUD regional
centers, the timeframe for payment of HUD claims will be significantly
shortened.

Sale of Loans

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

The following table sets forth certain data regarding Title I Loans sold by
the Company during the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------
1994(1) 1995 1996
------ ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal amount of loans sold to third party
purchasers........................................ $6,555 $85,363 $137,908(2)
Gain on sales of loans to third party purchasers.... 579 12,233 17,994
Net unrealized gain on mortgage related
securities........................................ -- -- 2,697
Weighted average stated interest rate on loans sold
to third party purchasers......................... 14.15% 14.53% 14.09%
Weighted average pass-through interest rate on loans
sold to third party purchasers.................... 8.54 8.36 7.50
Weighted average excess spread retained on loans
sold.............................................. 5.61 6.17 6.59
</TABLE>

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

(1) The Company commenced originating loans in March 1994.
(2) Includes $10.5 million of Conventional Loans.

At August 31, 1995 and 1996, the Company's statement of financial condition
reflected excess servicing rights of approximately $14.5 million and $12.1
million, respectively. The Company also retains mortgage related securities
through securitization transactions. At August 31, 1996, the Company's statement
of financial condition reflected $22.9 million of mortgage related securities.
The Company derives a significant portion of its income by realizing gains upon
the sale of loans and loan participations due to the excess servicing rights
associated with such loans. Excess servicing rights represent the excess of the
interest rate payable by a borrower on a loan over the interest rate passed
through to the purchaser of an interest in the loan, less the Company's normal
servicing fee and other applicable recurring fees. Mortgage related securities
consist of certificates representing the excess of the interest rate payable by
an obligor on a sold loan over the yield on pass through certificates sold
pursuant to a securitization transaction, after payment of servicing and

50
<PAGE> 52

other fees. When loans are sold, the Company recognizes as current revenue the
present value of the excess servicing rights expected to be realized over the
anticipated average life of the loans sold less future estimated credit losses
relating to the loans sold. The capitalized excess servicing rights and
valuation of mortgage related securities are computed using prepayment, default
and interest rate assumptions that the Company believes are reasonable based on
experience with its own portfolio, available market data and ongoing
consultation with industry participants. The amount of revenue recognized by the
Company upon the sale of loans or loan participations will vary depending on the
assumptions utilized. The weighted average discount rate used to determine the
present value of the balance of capitalized excess servicing rights reflected on
the Company's statement of financial condition at August 31, 1995 and 1996 was
approximately 12.0%.

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

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

In furtherance of the Company's strategy to sell loans through
securitizations, in March 1996 and August 1996, the Company completed its first
two securitizations pursuant to which it sold pools of $84.2 million and $48.8
million, respectively, of Title I Loans. The Company previously reacquired at
par $77.7 million and $36.2 million of such loans, respectively. Pursuant to
these securitizations, pass-through certificates evidencing interests in the
pools of loans were sold in a public offering. The Company continues to
subservice the sold loans and is entitled to receive from payments in respect of
interest on the sold loans a servicing fee equal to 1.25% of the balance of each
loan with respect to the March transaction and 1.0% with respect to the August
transaction. In addition, with respect to both transactions, the Company
received certificates (carried as "Mortgage related securities" on the Company's
balance sheet), representing the interest differential, after payment of
servicing and other fees, between the interest paid by the obligors of the sold
loans and the yield on the sold certificates. 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.

The Company typically earns net interest income during the "warehouse"
period between the closing or assignment of a loan and its delivery to a
purchaser. On loans held for sale, the Company earns interest at long-term
rates, financed by lines of credit which bear interest at short-term interest
rates. Normally, short-term interest rates are lower than long-term interest
rates and the Company earns a positive spread on its loans

51
<PAGE> 53

held for sale. The average warehouse period for a loan ranges from six to 90
days, and the balance of loans in warehouse was approximately $3.7 million and
$4.6 million as of August 31, 1995 and 1996, respectively. The Company's
interest income, net of interest expense was $473,000 and $988,000 for the years
ended August 31, 1995 and 1996, respectively.

SEASONALITY

COMPETITION

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

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

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

GOVERNMENT REGULATION

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

The Company presently is subject to the rules and regulations of, and
examinations by, HUD, FHA and other federal and state regulatory authorities
with respect to originating, underwriting, funding, acquiring,

52
<PAGE> 54

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

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

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

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

EMPLOYEES

As of August 31, 1996, the Company had 170 employees, including six
executive officers, 78 managerial and staff professional personnel, 13 marketing
and sales specialists and 73 general administrative and support personnel and
loan processors. None of the Company's employees is represented by a collective
bargaining unit. The Company believes that its relations with its employees are
satisfactory.

PROPERTIES

In order to accommodate the Company's growth, a lease of new corporate
headquarters was executed in April 1996 for 45,950 square feet at 1000 Parkwood
Circle, Atlanta, Georgia. This lease is for an initial six year term expiring
August 2002 with a conditional option to extend the term to August 2007. After
an initial partial rent abatement period of six months, monthly rentals will be
$73,711 plus a pro rata share of any operating expense increase. This lease rate
will escalate 2% per year throughout the term of the lease. The Company also
leases 10,478 square feet of office space at its prior headquarters location in
Atlanta, Georgia, at a rental of $13,193 per month, pursuant to a lease that
expires in March 1999. The Company intends to sublease this office space for the
remaining term of its lease. The Company also leases office space on short-term
or month-to-month leases in Kansas City, Missouri, Austin, Texas, Montvale, New
Jersey, Oklahoma City, Oklahoma, Seattle, Washington, Waterford, Michigan,
Columbus, Ohio, Elmhurst, Illinois, Philadelphia, Pennsylvania, Denver,
Colorado, Woodbridge, Virginia and Bowie, Maryland.

LEGAL PROCEEDINGS

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.

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<PAGE> 55

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Jerome J. Cohen............................ 68 Chairman of the Board and Chief Executive
Officer
Jeffrey S. Moore........................... 38 President, Chief Operating Officer and
Director
James L. Belter............................ 49 Executive Vice President and Chief
Financial Officer
Michael G. Ebinger......................... 40 Vice President, National Marketing
David A. Cleveland......................... 39 Vice President and Chief Accounting Officer
Robert Nederlander......................... 63 Director
Herbert B. Hirsch.......................... 60 Director
Don A. Mayerson............................ 69 Director
Spencer I. Browne.......................... 46 Director Nominee
Jeremy Wiesen.............................. 54 Director Nominee
</TABLE>

Jerome J. Cohen has been Chairman of the Board of the Company since April
1995 and Chief Executive Officer of the Company since June 1992. Mr. Cohen has
been the President and a Director of Mego Financial since January 1988. Since
April 1992, Mr. Cohen has been a Director of Atlantic Gulf Communities Inc.,
formerly known as General Development Corporation, a publicly held company
engaged in land development, land sales and utility operations in Florida and
Tennessee. Mr. Cohen does not currently serve on a full time basis in his
capacities with the Company.

Jeffrey S. Moore has been the President of the Company since April 1995 and
Chief Operating Officer since December 1993. In addition, Mr. Moore has served
as a director of the Company since June 1992. Prior to being elected President,
Mr. Moore served as an Executive Vice President of the Company from June 1992 to
March 1995. Mr. Moore was the founder and from August 1984 until March 1992,
served as President, Chief Executive Officer and a director of Empire Funding
Corp., a privately-held, nationwide consumer finance company specializing in
originating, purchasing, selling and servicing FHA Title I and other home
improvement mortgage loans. Mr. Moore serves as a director of the Title One Home
Improvement Lenders Association and is a member of its Legislative and
Regulatory Affairs Committee.

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

Michael G. Ebinger has served as Vice President of National Marketing since
June 1995. From January 1995 to June 1995, Mr. Ebinger served as Director of
National Accounts of the Correspondent Division. From 1989 to 1994, Mr. Ebinger
served as Director of National Accounts for the home improvement division of
Greentree Financial Corporation, where he developed and managed the national
account program which created a network of over 1,000 home improvement
contractors. From 1987 to 1989, he served as West Coast Regional Manager for
VIPCO, a division of Crane Plastics, a manufacturer of replacement vinyl siding.
From 1986 to 1987, he served as National Accounts Manager for Security Pacific
Financial Services Corporation in

54
<PAGE> 56

its Manufacturer Funding Division and was responsible for the marketing of its
indirect home improvement loan programs to home improvement contractors.

David A. Cleveland has been Vice President and Chief Accounting Officer of
the Company since October 1996. Mr. Cleveland has been Chief Accounting Officer
of Mego Financial since October 1996. From June 1990 to July 1996, Mr. Cleveland
served as Senior Vice President and Controller of PriMerit Bank, a federal
savings bank. Mr. Cleveland does not currently serve on a full time basis in his
capacities with the Company.

Robert Nederlander has been a Director of the Company since September 1996.
Mr. Nederlander has been the Chairman of the Board and Chief Executive Officer
of Mego Financial since January 1988. Mr. Nederlander has been Chairman of the
Board of Riddell Sports Inc. since April 1988 and was Riddell Sports Inc.'s
Chief Executive Officer from April 1988 through March 1993. From February 1992
until June 1992, Mr. Nederlander was also Riddell Sports Inc.'s interim
President and Chief Operating Officer. Since November 1981, Mr. Nederlander has
been President and a Director of the Nederlander Organization, Inc., owner and
operator of one of the world's largest chains of legitimate theaters. He served
as the Managing General Partner of the New York Yankees from August 1990 until
December 1991, and has been a limited partner since 1973. Since October 1985,
Mr. Nederlander has been President of the Nederlander Television and Film
Productions, Inc.; Vice Chairman of the Board from February 1988 to early 1993
of Vacation Spa Resorts, Inc., an affiliate of Mego Financial; and Chairman of
the Board of Allis-Chalmers Corp. from May 1989 to 1993, when he became Vice
Chairman. In 1995, Mr. Nederlander became a director of HFS Incorporated. In
October 1996, Mr. Nederlander became a director of News Communications, Inc., a
publisher of community oriented free circulation newspapers. Mr. Nederlander was
a senior partner in the law firm of Nederlander, Dodge and Rollins in Detroit,
Michigan, from 1960 to 1989.

Herbert B. Hirsch has been a Director of the Company since the Company's
formation in June 1992. Mr. Hirsch has been the Senior Vice President, Chief
Financial Officer, Treasurer and a Director of Mego Financial since January
1988. Mr. Hirsch served as Vice President and Treasurer of the Company from June
1992 to September 1996.

Don A. Mayerson has been a Director of the Company since the Company's
formation in June 1992. Mr. Mayerson has been the Secretary of Mego Financial
since January 1988 and the Executive Vice President and General Counsel of Mego
Financial since April 1988. Mr. Mayerson served as Vice President, General
Counsel and Secretary of the Company from June 1992 to September 1996.

Spencer I. Browne has been nominated and has agreed to become a Director of
the Company upon consummation of the Offering. For more than five years prior to
September 1996, Mr. Browne held various executive and management positions with
several publicly traded companies engaged in businesses related to the
residential and commercial mortgage loan industry. From August 1988 until
September 1996, Mr. Browne served as President, Chief Executive Officer and a
director of Asset Investors Corporation ("AIC"), a New York Stock Exchange
("NYSE") traded company he co-founded in 1986. He also served as President,
Chief Executive Officer and a director of Commercial Assets, Inc., an American
Stock Exchange traded company affiliated with AIC, from its formation in October
1993 until September 1996. In addition, from June 1990 until March 1996, Mr.
Browne served as President and a director of M.D.C. Holdings, Inc., an NYSE
traded company and the parent company of a major homebuilder in Colorado.

Jeremy Wiesen has been nominated and has agreed to become a Director of the
Company upon consummation of the Offering. Mr. Wiesen has been an Associate
Professor of Business Law and Accounting at the Leonard N. Stern School of
Business at New York University since 1972.

The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board of Directors. The Company's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified. The Company reimburses all directors for
their expenses in connection with their activities as directors of the Company.
Directors of the Company who are also employees of the Company do not receive
additional compensation for their services as directors. Members of the Board of
Directors of the Company who are not employees of the Company receive an annual
fee of $20,000 for four Board meetings per year plus $2,500 for each additional
meeting attended in person and $1,000 for each additional telephonic meeting
attended. Directors are also reimbursed for their expenses incurred in attending
meetings of the Board of Directors and its committees.

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<PAGE> 57

Upon the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will have an Audit Committee, Executive
Committee and Stock Option Committee. The following is a brief description of
the Company's committees and identification of the members thereof:

Audit Committee. The members of the Audit Committee will initially be
Robert Nederlander, Jeremy Wiesen and Spencer I. Browne. The Audit Committee's
functions include recommending to the Board the engagement of the Company's
independent certified public accountants, reviewing with the accountants the
plan and results of their audit of the Company's financial statements and
determining the independence of the accountants.

Executive Committee. The members of the Executive Committee will initially
be Jerome J. Cohen, Jeffrey S. Moore and Robert Nederlander. The Executive
Committee will have the authority to exercise all of the powers of the Board to
the extent permitted by the Delaware General Corporation Law.

Stock Option Committee. The members of the Stock Option Committee will
initially be Jeremy Wiesen and Spencer I. Browne. The Stock Option Committee
will have the authority to approve the grant of options under the Company's
Stock Option Plan to any employee of the Company who, on the last day of the
taxable year of the Company, is (i) the Chief Executive Officer of the Company
or who is acting in such capacity, (ii) among the four highest compensated
officers of the Company and its affiliates (other than the Chief Executive
Officer), or (iii) otherwise considered to be a "Covered Employee" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.

Mego Financial and the Company have restated certain of their previously
issued financial statements, including certain financial statements upon which
their independent auditors had rendered unqualified opinions. See Note 16 of
Notes to Financial Statements. As a result of the restatement of Mego
Financial's financial statements and certain trading in Mego Financial's common
stock, the Commission has commenced a formal investigation to determine, among
other things, whether Mego Financial, and/or its officers and directors,
violated applicable federal securities laws in connection with the preparation
and filing of Mego Financial's previously issued financial statements or such
trading. Certain of such officers and directors are also officers and/or
directors of the Company. Possible penalties for violation of federal securities
laws include civil remedies, such as fines and injunctions, as well as criminal
sanctions. There can be no assurance that Mego Financial and/or its officers and
directors will not be found to have violated the federal securities laws or that
the Company will not be affected by the investigation or any sanction.

KEY EMPLOYEES

Robert Bellacosa -- Mr. Bellacosa, age 54, has served as Vice
President -- Financial Management since October 1993 and Secretary since
September 1996. From May 1989 to October 1993, Mr. Bellacosa served as Senior
Vice President of Accounting for Del-Val Capital Corp. From May 1985 to May
1989, he served as Vice President of Security Capital Credit Corp. where he was
responsible for loan administration of commercial real estate and term
receivable lending functions. From 1974 to 1985, he served as Vice President for
Aetna Business Credit, Inc. which was purchased by Barclays American Business
Credit, Inc. and was responsible for the management of loan administration for
special term receivables.

Jack Elrod -- Mr. Elrod, age 40, has served as Vice President -- Loan
Administration since May 1995. From March 1994 to May 1995, Mr. Elrod served as
a Senior Underwriter for ITT Financial Corporation. From March 1993 to March
1994, he served as Branch Manager for Commercial Credit Corporation and from
January 1977 to February 1993, he served as Assistant Vice President and
District Manager of Household Finance Corporation.

Samuel Schultz -- Mr. Schultz, age 47, has served as Vice
President -- Credit Quality since June 1996 and as Vice President of the
Company's Dealer Division Operations from December 1993 until June 1996. Mr.
Schultz was a consultant to the Company from June 1993 until December 1993. From
September 1990 to June 1993, he served as Vice President of Underwriting for
Empire Funding Corp., a nationwide consumer finance company specializing in the
purchase of FHA Title I and other home improvement mortgage loans. From February
1988 to September 1990, he served as a Senior Manager for Avco Financial
Services. From

56
<PAGE> 58

October 1985 to February 1988, he served as a Department Manager for Associates
Financial Services Inc. Prior to 1985, and since 1971, Mr. Schultz's experience
includes collections and originations of consumer finance loans for Postal
Finance, Turner Mortgage and other consumer finance companies.

Yancy Lockie -- Mr. Lockie, age 33, has served as Vice President -- Dealer
Division Operations since July 1996. From September 1993 to June 1996, Mr.
Lockie served as Manager of Real Estate Underwriting for NationsCredit Financial
Services and was responsible for underwriting of real estate and indirect home
improvement loans for 245 branches and from December 1990 to August 1993, he
served as Branch Manager for NationsCredit Financial Services. From 1987 to
November 1990, he served as a Senior Assistant Manager and Senior Underwriter
for Household Finance Corporation.

John Kostelich -- Mr. Kostelich, age 33, has served as Vice
President -- Project Management since June 1996 and is responsible for
developing and implementing the Company's policies and procedures for new and
diversified loan products. From June 1995 to June 1996, Mr. Kostelich served as
Director of Compliance for the Company. From 1985 to 1995, he served in various
positions for ITT Consumer Financial Corporation, including Director of Quality
Control and Correspondent Support Operations, Senior Compliance Officer, in
which he managed special projects for the Chairman of the company, Regional
Manager and Branch Manager.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and each
of the three other executive officers whose annual salary and bonus during the
fiscal years presented exceeded $100,000 (the "Named Executive Officers"). As of
August 31, 1996, no stock options had been granted or were outstanding.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------- ------------------------
OTHER NUMBER OF
FISCAL ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2) COMPENSATION
- ------------------------------ ------ -------- ------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jerome J. Cohen(3)............ 1994 $ 75,000 $ -- $ -- -- $ --
Chairman of the Board and 1995 64,388 -- -- -- --
Chief Executive Officer 1996 65,748 -- -- -- --
Jeffrey S. Moore.............. 1994 $126,771 $ -- $ 5,400 25,000 $ --
President and Chief 1995 200,003 -- 13,963 -- --
Operating Officer 1996 200,003 86,084 13,625 -- --
James L. Belter............... 1994 $ 98,079 $ -- $ -- 15,000 $ --
Executive Vice President and 1995 150,003 50,000 1,510 -- --
Chief Financial Officer 1996 159,080 50,000 4,330 -- --
Michael G. Ebinger............ 1994 $ -- $ -- $ -- -- $ --
Vice President 1995 55,320 -- 5,609 15,000 --
1996 110,011 11,500 -- -- --
</TABLE>

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

(1) Other annual compensation consists of car allowances, contributions to
401(k) plans and moving expenses.
(2) Represents options to purchase shares of Mego Financial's common stock paid
as compensation for services rendered to the Company.
(3) Mr. Cohen's compensation is included in the management fees paid to PEC. See
"Certain Transactions."

EMPLOYMENT AGREEMENT

The Company has entered into an employment agreement with Jeffrey S. Moore
which expires on December 31, 1998 and which provides for an annual base salary
of $200,000. In addition, Mr. Moore is to

57
<PAGE> 59

receive an incentive bonus each calendar year equal to 1.5% of the Company's
after tax income, provided that certain scheduled sales goals are met, as well
as deferred compensation of 1% of the gain on sale from sales of loans during
such year, payable in 48 equal installments. In the event payments of the
incentive bonus and deferred compensation due in any year exceed $500,000, then
the excess over $500,000 is only payable with the approval of the Company's
Board of Directors.

COMPANY STOCK OPTION PLAN

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

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

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<PAGE> 60

The following table sets forth information with respect to options to be
granted under the Plan upon consummation of the Common Stock Offering to (i)
each Named Officer and (ii) each director and nominee for director. All of the
options are incentive stock options (other than the options being granted to
Spencer I. Browne and Jeremy Wiesen), are being granted with an exercise price
equal to the offering price, are subject to the consummation of the Common Stock
Offering and are being granted in 1996.

<TABLE>
<CAPTION>
NAME OF GRANTEE NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Robert Nederlander........................................................... 25,000
Jerome J. Cohen.............................................................. 100,000
Jeffrey S. Moore............................................................. 300,000
James L. Belter.............................................................. 100,000
Herbert B. Hirsch............................................................ 25,000
Don A. Mayerson.............................................................. 25,000
Michael G. Ebinger........................................................... 50,000
Spencer I. Browne............................................................ 25,000
Jeremy Wiesen................................................................ 25,000
----------------
Total.............................................................. 675,000
=============
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company does not currently have a Compensation Committee. Mr. Cohen
participated in deliberations concerning compensation of executive officers
during fiscal 1996. Mr. Cohen's compensation was determined by the Board of
Directors of Mego Financial.

BONUS PLAN

The Company does not currently have a bonus plan but anticipates it may
adopt a bonus plan pursuant to which an aggregate of not in excess of 2 1/2% of
pretax income will be distributed to officers and key employees.

PRINCIPAL STOCKHOLDERS

Mego Financial currently owns 10,000,000 shares of Common Stock (after
giving effect to the 1,600-for-one stock split), representing 100% of all the
issued and outstanding Common Stock of the Company. After giving effect to the
issuance of the Common Stock pursuant to the Common Stock Offering, Mego
Financial will own approximately 83.3% of the issued and outstanding Common
Stock of the Company (approximately 81.3% if the underwriters of the Common
Stock Offering exercise their over-allotment option in full).

The following table sets forth, as of the date of this Prospectus,
information with respect to the beneficial ownership of the common stock of Mego
Financial by (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of common stock of Mego Financial, (ii)
each director and director nominee of the Company, (iii) each of the Named
Executive Officers and (iv) all directors, director nominees and executive
officers of the Company as a group. Unless otherwise noted, the

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<PAGE> 61

Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of common stock of Mego Financial
beneficially owned by them.

<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP
ATTRIBUTABLE TO
THE COMPANY
-------------------
AMOUNT AND NATURE OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OFFERING OFFERING
- ----------------------------------------------------------- -------------------- -------- --------
<S> <C> <C> <C>
Robert Nederlander(2)...................................... 2,133,697 11.4% 9.5%
Eugene I. Schuster and Growth Realty Inc. ("GRI")(3)....... 1,933,634 10.4 8.7
Jerome J. Cohen(4)......................................... 1,127,823 6.1 5.1
Jeffrey S. Moore(5)........................................ 15,000 * *
James L. Belter(6)......................................... 9,000 * *
Michael G. Ebinger(7)...................................... 3,000 * *
Herbert B. Hirsch(8)....................................... 1,699,623 9.1 7.6
Don A. Mayerson(9)......................................... 824,414 4.4 3.7
Spencer I. Browne(10)...................................... 10,000 * *
Jeremy Wiesen(11).......................................... -- -- --
All executive officers and directors of the Company as a
group (9 persons)(12).................................... 5,822,557 30.2 25.2

</TABLE>

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

* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options and warrants. Each beneficial owner's
percentage ownership is determined by assuming that options and warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this Prospectus have
been exercised.

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

(3) 321 Fisher Building, Detroit, Michigan 48202. Consists of 1,683,634 shares
held of record by GRI, a wholly-owned subsidiary of Venture Funding, Ltd.
of which Mr. Schuster is a principal shareholder, Director and Chief
Executive Officer, and 250,000 shares issuable upon the exercise of
warrants held by an affiliate of Mr. Schuster which are presently
exercisable.

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

(5) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 15,000
shares issuable under an option granted pursuant to the Mego Financial
Stock Option Plan, to the extent exercisable within the next 60 days.

(6) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 9,000
shares issuable under an option granted pursuant to the Mego Financial
Stock Option Plan, to the extent exercisable within the next 60 days.

(7) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 3,000
shares issuable under an option granted pursuant to the Mego Financial
Stock Option Plan, to the extent exercisable within the next 60 days.

(8) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 21,000 shares
issuable under an option granted pursuant to the Mego Financial Stock
Option Plan, to the extent exercisable within the next 60 days, and 200,000
shares issuable upon the exercise of warrants held by Mr. Hirsch which are
presently exercisable. Excludes 10,000 shares held by the daughter of Mr.
Hirsch as custodian for a

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<PAGE> 62

minor child as to which he disclaims beneficial ownership, and 21,666
shares held by a family trust, as to which he disclaims beneficial
ownership.

(9) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Includes
21,000 shares issuable under an option granted pursuant to the Mego
Financial Stock Option Plan, to the extent exercisable within the next 60
days, and 100,000 shares issuable upon the exercise of warrants held by Mr.
Mayerson which are presently exercisable. Excludes 56,667 shares owned by
Mr. Mayerson's spouse, as to which he disclaims beneficial ownership.

(10) 1660 Holly Street, Denver, Colorado 80220.

(11) 254 East 68th Street, New York, New York 10021.

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

CERTAIN TRANSACTIONS

The Company has entered into the following transactions with its affiliates
in the past three years. The Company believes that each of these transactions is
on terms at least as favorable to the Company as those which could have been
negotiated with an unaffiliated third party.

TAX SHARING AND INDEMNITY AGREEMENT

After the Offering, the results of operations of the Company will continue
to be included in the tax returns filed by Mego Financial's affiliated or
combined group for federal income tax purposes. The members of the group,
including the Company, currently are parties to a tax allocation arrangement
that allocates the liability for those taxes among them. Effective on
consummation of the Offering, the Company and Mego Financial will enter into a
tax allocation and indemnity agreement. Under that agreement, for periods ending
after the Offering, the tax liability of the Company will be allocated pursuant
to a method that would impose on the Company liability for an amount that
corresponds to the liability that the Company would incur if it filed a separate
tax return. In addition, the agreement provides that the Company and Mego
Financial each will indemnify the other under certain circumstances.

MANAGEMENT AGREEMENT WITH PEC

The Company and PEC were parties to a management services arrangement (the
"Management Arrangement") pursuant to which certain executive, accounting,
legal, management information, data processing, human resources, advertising and
promotional personnel of PEC provide services to the Company on an as needed
basis. The Management Arrangement provided for the payment by the Company of a
management fee to PEC in an amount equal to the direct and indirect expenses of
PEC related to the services rendered by its employees to the Company, including
an allocable portion of the salaries and expenses of such employees based upon
the percentage of time such employees spend performing services for the Company.
For the years ended August 31, 1994, 1995 and 1996, $442,000, $690,000 and
$671,000, respectively, of the salaries and expenses of certain employees of PEC
were attributable to and paid by the Company in connection with services
rendered by such employees to the Company. In addition, during the years ended
August 31, 1994, 1995 and 1996, the Company paid PEC for developing certain
computer programming, incurring costs of $130,000, $36,000 and $56,000,
respectively.

The Company has entered into a formal management agreement with PEC,
effective as of September 1, 1996, pursuant to which PEC has agreed to provide
the following services to the Company for an aggregate annual fee of
approximately $967,000 payable monthly: strategic planning, management and tax;
accounting and finance; legal; management information systems; insurance
management; human resources; and purchasing. Either party has the right to
terminate all or any of these services upon 90 days' notice with a corresponding
reduction in fees.

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<PAGE> 63

SERVICING AGREEMENT WITH PEC

The Company had an arrangement with PEC pursuant to which it paid servicing
fees of 50 basis points of the principal balance of loans serviced per year. For
the years ended August 31, 1994, 1995 and 1996, the Company paid servicing fees
to PEC of $13,000, $232,000 and $709,000, respectively. The Company has entered
into a servicing agreement with PEC, effective as of September 1, 1996,
providing for the payment of servicing fees of 50 basis points of the principal
balance of loans serviced per year. For the years ended August 31, 1995 and
1996, the Company incurred interest expense in the amount of $85,000 and
$29,000, respectively, related to fees payable to PEC for these services. The
interest rates were based on PEC's average cost of funds and equalled 11.8% in
1995 and 10.68% in 1996.

FUNDING AND GUARANTEES BY MEGO FINANCIAL

In order to fund the Company's past operations and growth, and in
conjunction with filing consolidated returns, the Company incurred Intercompany
Debt to Mego Financial. For the years ended August 31, 1995 and 1996, the amount
of Intercompany Debt owed to Mego Financial was $8.5 million and $12.0 million,
respectively. Mego Financial has guaranteed the Company's obligations under the
Warehouse Line, the Revolving Loan and the Company's new office lease. Such
guarantees currently extend for the term of the loans and the lease. The Company
has not paid any compensation to Mego Financial for such guarantees.

It is not anticipated that Mego Financial will continue to provide funds to
the Company or guarantee the Company's indebtedness or other obligations
following consummation of the Offering.

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<PAGE> 64

DESCRIPTION OF THE NOTES

GENERAL

The Notes are to be issued under an Indenture, to be dated as of
, 1996 (the "Indenture"), between the Company and American Stock Transfer &
Trust Company, as Trustee (the "Trustee"). A copy of the form of the Indenture
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act of 1939, as amended.

Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 40 Wall Street, New York, New
York 10005), except that, at the option of the Company, payment of interest may
be made by check mailed to the address of the Holders as such address appears in
the Note register.

The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Company may require payment of an amount sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.

TERMS OF THE NOTES

The Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all Senior Indebtedness of the Company, will
be limited to $40,000,000 aggregate principal amount, and will mature on
, 2001. The Notes will bear interest at the rate shown on the cover page
hereof from , 1996, or from the most recent date to which interest
has been paid or provided for, payable semiannually to Holders of record at the
close of business on the or immediately preceding the interest
payment date on and of each year, commencing , 1997.
The Company will pay interest on overdue principal at 1% per year in excess of
such rate and will pay interest on overdue installments of interest at such
higher rate to the extent lawful. Interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months.

SUBSIDIARY GUARANTEES

The Notes will be unconditionally guaranteed (a "Subsidiary Guarantee") by
all future Subsidiaries of the Company other than Special Purpose Subsidiaries
(together, the "Subsidiary Guarantors", and each of them, a "Subsidiary
Guarantor"), unless any such Subsidiary is designated an "Unrestricted
Subsidiary" in accordance with the terms of the Indenture. Each Subsidiary
Guarantor's obligations under its Subsidiary Guarantee will be unsecured
obligations of such Subsidiary Guarantor, subordinated in right of payment to
all Senior Indebtedness of such Subsidiary Guarantor, and will be joint and
several with the obligations of each other Subsidiary Guarantor under its
Subsidiary Guarantee of the Notes. In addition, the Indenture will provide that,
in the event the Company designates a Restricted Subsidiary to be an
Unrestricted Subsidiary, then such Restricted Subsidiary will be released and
relieved of any obligations under its Subsidiary Guarantee; provided that such
designation is conducted in accordance with the applicable provisions of the
Indenture. See "-- Certain Covenants -- Restricted Payments", "-- Certain
Definitions -- Unrestricted Subsidiary" and "-- Investments."

The Indenture will include a covenant by the Company to cause each future
Restricted Subsidiary (other than a Special Purpose Subsidiary) to execute a
Subsidiary Guarantee. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited so as to reduce the risk that they would be
found to constitute a fraudulent conveyance under applicable law. See "Risk
Factors -- Fraudulent Conveyances and Preferential Transfers."

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<PAGE> 65

SUBORDINATION

The Indebtedness represented by the Notes and the Subsidiary Guarantees
will be subordinated in right of payment to all existing and future Senior
Indebtedness of the Company and the Subsidiary Guarantors, respectively,
including without limitation all obligations of the Company or any Subsidiary
Guarantor under any Warehouse Facility, and will be senior in right of payment
to all future Indebtedness of the Company and the Subsidiary Guarantors that by
its terms is expressly subordinated in right of payment to the Notes or the
Subsidiary Guarantees as described in the Indenture ("Junior Subordinated
Obligations"). As of August 31, 1996, the Company had approximately $14.2
million of Senior Indebtedness outstanding and had no Subsidiaries. See
"Capitalization." Although the Indenture contains limitations on the amount of
additional Indebtedness which the Company and the Restricted Subsidiaries may
incur, the amount of such Indebtedness is likely to be substantial, and
substantially all such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitations on Indebtedness."

If any Senior Indebtedness is disallowed, avoided or subordinated pursuant
to the provisions of Section 548 of the Bankruptcy Law or any applicable state
fraudulent conveyance law, such Indebtedness nevertheless will constitute Senior
Indebtedness for purposes of the Indenture.

The Company may not pay the principal of, premium, if any, or interest on,
the Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem, defease or otherwise retire
any Notes (collectively, "pay" or a "payment" with respect to the Notes) if (i)
any Senior Indebtedness of the Company is not paid when due or (ii) any other
default on any such Senior Indebtedness occurs and the maturity thereof has been
accelerated in accordance with its terms, unless, in either case, (x) the
default has been cured or waived and any such acceleration has been rescinded or
(y) such Senior Indebtedness has been paid in full. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
preceding sentence) with respect to any Designated Senior Indebtedness of the
Company pursuant to which the maturity thereof may be accelerated immediately
without further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not pay the Notes for a period (a "Payment Blockage Period") commencing upon the
receipt by the Company and the Trustee of written notice of such default from
the Representative of any Designated Senior Indebtedness specifying an election
to effect a Payment Blockage Period (a "Blockage Notice") and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Person or Persons who
gave such Blockage Notice, (ii) by repayment in full of such Designated Senior
Indebtedness or (iii) because the default giving rise to such Blockage Notice is
no longer continuing). Notwithstanding the provisions described in the
immediately preceding sentence (but subject to the provisions contained in the
next preceding sentence), unless the holders of such Designated Senior
Indebtedness or the Representative of such holders shall have accelerated the
maturity of such Designated Senior Indebtedness, the Company may resume payments
on the Notes after such Payment Blockage Period. Not more than one Blockage
Notice may be given in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period.

Upon any payment or distribution of the assets of the Company to creditors
upon a total or partial liquidation or total or partial dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property (whether voluntary or
involuntary), (i) the holders of Senior Indebtedness of the Company will be
entitled to receive payment in full before the holders of the Notes are entitled
to receive any payment, and (ii) until the Senior Indebtedness of the Company is
paid in full, any payment to which the Holders of the Notes would be entitled
but for this provision will be made to holders of Senior Indebtedness as their
interests may appear, except that Holders may receive shares of stock or
Indebtedness of the Company that is subordinated to Senior Indebtedness of the
Company to at least the same extent as the Notes.

No Subsidiary Guarantor may make any payment under its Subsidiary Guarantee
with respect to any payment with respect to the Notes if (i) any Senior
Indebtedness of any Subsidiary Guarantor is not paid when due or (ii) any other
default on any such Senior Indebtedness occurs and the maturity thereof has been

64
<PAGE> 66

accelerated in accordance with its terms, unless, in either case, (x) the
default has been cured or waived and any such acceleration has been rescinded or
(y) such Senior Indebtedness has been paid in full. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
preceding sentence) with respect to any Designated Senior Indebtedness of any
Subsidiary Guarantor pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods,
such Subsidiary Guarantor may not make any payment with respect to the Notes for
a period (a "Subsidiary Guarantor Payment Blockage Period") commencing upon the
receipt by the Subsidiary Guarantor and the Trustee of written notice of such
default from the Representative of any Designated Senior Indebtedness of such
Subsidiary Guarantor specifying an election to effect a Subsidiary Guarantor
Payment Blockage Period (a "Subsidiary Guarantor Blockage Notice") and ending
179 days thereafter (or earlier if such Subsidiary Guarantor Payment Blockage
Period is terminated (i) by written notice to the Trustee and the Subsidiary
Guarantors from the Person or Persons who gave such Subsidiary Guarantor
Blockage Notice, (ii) by repayment in full of such Designated Senior
Indebtedness of such Subsidiary Guarantor or (iii) because the default giving
rise to such Subsidiary Guarantor Blockage Notice is no longer continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the next preceding sentence and the
next paragraph), unless the holders of such Senior Indebtedness of such
Subsidiary Guarantor or the Representative of such holders shall have
accelerated the maturity of such Designated Senior Indebtedness of such
Subsidiary Guarantor, such Subsidiary Guarantor may resume payments under its
Subsidiary Guarantee after such Subsidiary Guarantor Payment Blockage Period.
Not more than one Subsidiary Guarantor Blockage Notice may be given with respect
to the Subsidiary Guarantors in any consecutive 360-day period, irrespective of
the number of defaults with respect to Designated Senior Indebtedness of the
Subsidiary Guarantors during such period.

Upon any payment or distribution of the assets of any Subsidiary Guarantor
to creditors upon a total or partial liquidation or total or partial dissolution
of the Subsidiary Guarantor or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Subsidiary Guarantor or its
property (whether voluntary or involuntary), (i) the holders of Senior
Indebtedness of such Subsidiary Guarantor will be entitled to receive payment in
full before the holders of the Notes are entitled to receive any payment, and
(ii) until the Senior Indebtedness of such Subsidiary Guarantor is paid in full,
any payment to which the Holders of the Notes would be entitled but for this
provision will be made to holders of Senior Indebtedness of such Subsidiary
Guarantor as their interests may appear, except that Holders may receive shares
of stock or Indebtedness that is subordinated to Senior Indebtedness of the
Subsidiary Guarantor to at least the same extent as the Subsidiary Guarantees.

In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Subsidiary Guarantor shall be
received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of Senior
Indebtedness of such Person, and shall be paid or delivered by the Trustee or
such Holders, as the case may be, to the holders of such Senior Indebtedness
remaining unpaid or unprovided for or to their Representative, ratably according
to the aggregate amounts remaining unpaid on account of the Senior Indebtedness
held or represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay or to provide for
the payment of all such Senior Indebtedness in full after giving effect to any
concurrent payment or distribution to the holders of such Senior Indebtedness.

If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Senior Indebtedness
or any Representative thereof of the acceleration. If the Trustee provides such
notice, the Trustee also will notify the Company of the acceleration.

By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, holders of the Notes may recover less, ratably, than
other creditors of the Company or the Subsidiary Guarantors (including trade
creditors), or may recover nothing.

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<PAGE> 67

OPTIONAL REDEMPTION

The Notes will not be redeemable prior to , , except as
provided below. Thereafter, the Notes will be redeemable, at the Company's
option, in whole or in part, at any time or from time to time, upon not less
than 30 nor more than 60 calendar days' prior notice mailed by first-class mail
to each Holder's registered address, at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set forth
below:

<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
-------------------------------------------------------------------------- ----------
<S> <C>
</TABLE>

In addition, at any time and from time to time prior to , 1998,
the Company may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Public Equity Offerings, at
a redemption price (expressed as a percentage of principal amount) of %
plus accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that the aggregate principal amount
of the Notes that remain outstanding after each such redemption is at least
equal to 65% of the original principal amount of the Notes.

In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.

SINKING FUND

There will be no mandatory sinking fund for the Notes.

MANDATORY OFFERS TO PURCHASE THE NOTES

The Indenture will require the Company to purchase all of the outstanding
Notes tendered by the Holders upon the occurrence of a Change of Control and to
offer to purchase a portion of the outstanding Notes under certain other
circumstances. See "Change of Control" and "Certain Covenants -- Limitations on
Asset Sales."

CHANGE OF CONTROL

Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company repurchase such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date).

A "Change of Control" will be deemed to have occurred:

(i) upon any merger or consolidation of the Company or Parent with or
into any person or any sale, transfer or other conveyance, whether direct
or indirect, of all or substantially all of the assets of the Company or
Parent (in each case on a consolidated basis), in one transaction or a
series of related transactions, if, in the case of any such merger or
consolidation, the securities of the Company or Parent, as applicable, that
are outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of the Company or
Parent are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or

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<PAGE> 68

exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent, immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation, provided, however, that the sale by the Company,
its Subsidiaries or Parent from time to time of Receivables in the ordinary
course of business shall not be treated hereunder as a sale of all or
substantially all the assets of the Company or Parent;

(ii) when any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), other than any or all of the Excluded Persons, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of (A) more than 40% of the then outstanding
shares of Voting Stock of the Company or (B) more than 40% (or, if the
Excluded Persons, in the aggregate, then hold more than 40% of the
outstanding shares of Voting Stock of the Parent, more than 45%) of the
then outstanding shares of Voting Stock of the Parent; or

(iii) when, during any period of 24 consecutive months after the Issue
Date, individuals who at the beginning of any such 24-month period
constituted the Board of Directors of the Company or the board of directors
of Parent (together with any new directors whose election by such Board or
board or whose nomination for election by the stockholders of the Company
or Parent, as applicable, was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously
so approved), cease for any reason to constitute a majority of the Board of
Directors of the Company or the board of directors of Parent, as
applicable, then in office.

Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (i) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date); (ii) the
circumstances and relevant facts regarding such Change of Control (including, in
the case of any merger, consolidation or sale of all or substantially all
assets, information with respect to pro forma results of operations, cash flow
and capitalization after giving effect to such Change of Control); (iii) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (iv) the instructions determined by
the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.

The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other applicable securities laws or
regulations in connection with the repurchase of Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the covenant described
hereunder by virtue thereof.

The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer of "all or substantially all" of the assets of the Company
has occurred. However, a sale of Receivables in the ordinary course of business
will not constitute a Change of Control, regardless of the magnitude of such
sale.

The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the Indenture, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital

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structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to Incur additional Indebtedness and Preferred Stock of
Subsidiaries are contained in the covenants described under "-- Certain
Covenants -- Limitation on Indebtedness," "-- Certain Covenants -- Limitation on
Liens" and "-- Certain Covenants -- Limitation on Preferred Stock of
Subsidiaries." Such restrictions can be waived only with the consent of the
Holders of a majority in principal amount of the Notes then outstanding. Except
for the limitations contained in such covenants, however, the Indenture will not
contain any covenant or provision that may afford Holders of the Notes
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger, spin-off or similar transaction that may adversely affect
such Holders.

Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased or prepaid upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. If a Change of Control should occur, the rights of
the Holders to receive payment for their Notes would be subject to the prior
rights of the holders of any Senior Indebtedness. See "Subordination." Finally,
the Company's ability to pay cash to the Holders of Notes following the
occurrence of a Change of Control may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. The provisions under
the Indenture relating to the Company's obligation to make an offer to
repurchase the Notes as a result of a Change of Control may be waived or
modified with the written consent of the Holders of a majority in principal
amount of the Notes. As a result, a Holder may not be able to avail itself of
its right to require the Company to repurchase the Notes upon a Change of
Control.

SAME-DAY SETTLEMENT AND PAYMENT

Settlement for the Notes will be made in immediately available funds. All
payments of principal, premium, if any, and interest will be made by the Company
in immediately available funds. The Notes will trade in the Same-Day Funds
Settlement System of The Depository Trust Company ("DTC") until maturity, and
secondary market trading activity for the Notes will therefore settle in
immediately available funds.

CERTAIN COVENANTS

Set forth below are descriptions of certain covenants set forth in the
Indenture.

Limitation on Indebtedness. (a) The Company will not Incur, and the
Company will not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness or Disqualified Stock if, on the date of such
Incurrence and after giving effect thereto, the Consolidated Leverage Ratio
exceeds 2.0 to 1.0.

(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:

(1) Permitted Warehouse Indebtedness and Guarantees by the Company of
any Permitted Warehouse Indebtedness of Restricted Subsidiaries, provided
that (i) on the date of such Incurrence and giving effect to any such
Incurrence, the aggregate principal amount of Permitted Warehouse
Indebtedness permitted under this clause (1), together with the amount of
all then outstanding Warehouse Indebtedness (other than Permitted Warehouse
Indebtedness) of the Company and its Restricted Subsidiaries permitted
under clause (a) above, shall not exceed 300% of Consolidated Net Worth at
such time, and (ii) that to the extent any such Indebtedness ceases to
constitute Permitted Warehouse Indebtedness of the Company or a Restricted
Subsidiary, such event shall be deemed to constitute the Incurrence of such
Indebtedness (and any such Guarantees, but without duplication) by the
Company or such Subsidiary, as the case may be;

(2) the Notes and the Subsidiary Guarantees;

(3) Hedging Obligations directly related to: (i) Indebtedness
permitted to be Incurred by the Company or the Restricted Subsidiaries
pursuant to the Indenture; (ii) Receivables held by the Company or its
Restricted Subsidiaries pending sale or that have been sold pursuant to a
Warehouse

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Facility; or (iii) Receivables with respect to which the Company or any
Restricted Subsidiary has an outstanding purchase or offer commitment,
financing commitment or security interest;

(4) Indebtedness outstanding on the Issue Date (other than Permitted
Warehouse Indebtedness and Guarantees thereof, which shall be permissible
under this paragraph (b) only pursuant to clause (1) above);

(5) Indebtedness or Disqualified Stock issued to and held by the
Company or a Wholly Owned Restricted Subsidiary; provided, however, that
any subsequent issuance or transfer of any Capital Stock that results in
any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned
Restricted Subsidiary or any subsequent transfer of such Indebtedness or
Disqualified Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) will be deemed, in each case, to constitute the Incurrence of
such Indebtedness or issuance of such Disqualified Stock by the issuer
thereof;

(6) Indebtedness or Disqualified Stock of a Restricted Subsidiary
Incurred on or prior to the date on which such Subsidiary was acquired by
the Company, other than Indebtedness or Disqualified Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company; provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of Indebtedness pursuant to paragraph (a)
above; and

(7) while no Default or Event of Default exists, Refinancing
Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a)
or clause (4) or (6) of this paragraph (b).

(c) Notwithstanding the foregoing, (i) the Company and its Restricted
Subsidiaries may not Incur any Indebtedness (other than the Notes and the
Subsidiary Guarantees) if such Indebtedness is subordinate or junior in ranking
in any respect to any Senior Indebtedness unless such Indebtedness is a Junior
Subordinated Obligation, (ii) the Company and its Restricted Subsidiaries shall
not Incur any Indebtedness if the proceeds thereof are used, directly or
indirectly, to Refinance any Junior Subordinated Obligations unless such
Indebtedness shall be subordinated to the Notes or the Subsidiary Guarantees, as
applicable, to at least the same extent as such Junior Subordinated Obligations,
and (iii) no Restricted Subsidiary that is not a Subsidiary Guarantor shall
incur, directly or indirectly, any Indebtedness. Unsecured Indebtedness is not
deemed to be subordinate or junior to secured Indebtedness merely because it is
unsecured.

(d) For purposes of determining compliance with the foregoing covenant: (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in good faith, will
classify such item of Indebtedness and be required to include the amount and
type of such Indebtedness in one of the above clauses; and (ii) an item of
Indebtedness may be divided and classified in more than one of the types of
Indebtedness described above.

Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any Restricted Subsidiary to Incur, directly or indirectly, any
Preferred Stock except:

(a) Preferred Stock issued to and held by the Company or a Wholly
Owned Restricted Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock that results in any such Wholly
Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted
Subsidiary or any subsequent transfer of such Preferred Stock (other than
to the Company or a Wholly Owned Restricted Subsidiary) will be deemed, in
each case, to constitute the Incurrence of such Preferred Stock by the
issuer thereof; and

(b) Preferred Stock of a Restricted Subsidiary Incurred or issued and
outstanding on or prior to the date on which such Restricted Subsidiary was
acquired by the Company, other than Preferred Stock Incurred or issued in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Restricted
Subsidiary or was acquired by the Company; provided, however, that on the
date of such acquisition and after giving effect thereto, the Company would
have been able to Incur at

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least $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "Limitation on Indebtedness."

Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Subsidiary), whether owned at the Issue Date or thereafter acquired, other
than Permitted Liens, without effectively providing that the Notes shall be
secured equally and ratably with (or prior to) the obligations so secured for so
long as such obligations are so secured.

Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (i) a Default shall have occurred and be continuing (or
would result therefrom); (ii) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"Limitation on Indebtedness"; or (iii) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of: (A) 33% of the Consolidated Adjusted Net Income accrued during the
period (treated as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the most recent fiscal
quarter prior to the date of such Restricted Payment for which financial
statements are available (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); and (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale after the Issue Date of (1)
Capital Stock of the Company (other than Disqualified Stock) or (2) debt
securities of the Company, but only if, when and to the extent such debt
securities have been converted into any such Capital Stock (other than, in each
case, an issuance or sale to a Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or to a trust established
by the Company or any of its Subsidiaries for the benefit of their employees).

(b) While no Default or Event of Default exists, the provisions of the
foregoing paragraph (a) shall not prohibit: (i) any purchase or redemption of
Capital Stock or Junior Subordinated Obligations of the Company to the extent
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to (A) a Subsidiary of the Company or (B) an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees, except to the extent that
the funds used by such plan or trust are attributable to employee
contributions); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from the calculation of amounts
under clause (iii)(B) of paragraph (a) above; (ii) any payment, purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
of Junior Subordinated Obligations made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Indebtedness of the Company that is
permitted to be Incurred pursuant to the covenant described under "Limitation on
Indebtedness"; provided, however, that, such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value shall be excluded in the
calculation of the amount of Restricted Payments; and (iii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with the covenant described
hereunder; provided, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments.

Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company or any Restricted Subsidiary, (b) to
make any loans or advances to the Company or any Restricted Subsidiary or (c) to
transfer any of its property or assets to the Company or any Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an agreement
in effect at the Issue Date and listed on a schedule to the Indenture; (ii) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement applicable to such Subsidiary prior to the date on which such
Subsidiary was acquired by the Company (other than an agreement entered into in
connection

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with, or in anticipation of, the transaction or series of related transactions
pursuant to which such Subsidiary became a Subsidiary or was acquired by the
Company) and outstanding on such date; (iii) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to any other agreement contained in
any amendment to an agreement referred to in clause (i) or (ii) of this covenant
or this clause (iii); provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such amendment are
no less favorable to the Holders than encumbrances and restrictions with respect
to such Restricted Subsidiary contained in the agreements referred to in clause
(i) or (ii) of the covenant described hereunder, as the case may be; (iv) any
such encumbrance or restriction consisting of customary non-assignment
provisions in leases governing leasehold interests to the extent such provisions
restrict the transfer of the lease or the property leased thereunder; (v) in the
case of clause (c) above, restrictions contained in security agreements or
mortgages securing Indebtedness of a Restricted Subsidiary otherwise permissible
under the Indenture to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages; (vi) with respect to
the ability of a Restricted Subsidiary to pay dividends or make any other
distributions on its Capital Stock to the Company, any Permitted Warehouse
Indebtedness Limitation; and (vii) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.

Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless: (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of any non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 85% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Temporary Cash Investments; (ii) an amount equal to 100%
of the Net Available Cash from such Asset Disposition is applied by the Company
(or such Restricted Subsidiary, as the case may be):

(A) first, to the extent the Company or such Restricted Subsidiary
elects either (x) to acquire Additional Assets or (y) to prepay, repay,
redeem or purchase Senior Indebtedness of the Company or such Restricted
Subsidiary, as the case may be (other than in either case Indebtedness owed
to the Company or an Affiliate of the Company), in each case within 180
days from the later of the date of such Asset Disposition or the receipt of
such Net Available Cash;

(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), for the Company to make an
offer to the Holders of the Notes to purchase Notes pursuant to and subject
to the conditions contained in the Indenture; and

(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to any
application not prohibited by the Indenture;

and (iii) at the time of such Asset Disposition no Default shall have occurred
and be continuing (or would result therefrom). Pending application of Net
Available Cash pursuant to this covenant, such Net Available Cash shall be
invested in Temporary Cash Investments.

For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption of Indebtedness (other than Junior Subordinated Obligations) of
the Company or any Restricted Subsidiary, and the release of the Company or such
Subsidiary from all liability on such Indebtedness, in connection with such
Asset Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Subsidiary into cash or Temporary Cash Investments.

(b) In the event of an Asset Disposition that requires an offer to purchase
the Notes, the Company will be required to purchase Notes tendered pursuant to
an offer by the Company for the Notes at a purchase price of 100% of their
principal amount plus accrued but unpaid interest in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
the Indenture. If the aggregate purchase price of Notes tendered pursuant to
such offer is less than the Net Available Cash allotted to the purchase

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thereof, the Company will be permitted to apply the remaining Net Available Cash
in accordance with clause (a)(ii)(C) above. The Company shall not be required to
make such an offer to purchase Notes pursuant to this covenant if the Net
Available Cash available therefor is less than $1,000,000 (which lesser amount
shall be carried forward for purposes of determining whether such an offer is
required with respect to any subsequent Asset Disposition).

(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to the
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the covenant
described hereunder, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant by virtue thereof.

Limitation on Affiliate Transactions. The Company will not, and will not
permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including without limitation the making of any loan, advance,
Guarantee or capital contribution to or for the benefit of, the purchase, sale,
lease or exchange of any property with, the entering into or amending of
employee compensation arrangements with, or the rendering of any service) with
or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction")
unless the terms thereof: (i) are in the ordinary course of business and
consistent with past practice; (ii) are fair to the Company or such Restricted
Subsidiary and are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not an Affiliate; (iii) if such
Affiliate Transaction involves an amount in excess of $500,000, (A) are set
forth in writing and (B) have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate Transaction; and
(iv) if such Affiliate Transaction involves an amount in excess of $3,000,000,
have been determined by a nationally recognized investment banking firm to be
fair, from a financial standpoint, to the Company and its Restricted
Subsidiaries.

The provisions of the foregoing paragraph shall not apply to (a)
transactions exclusively between or among the Company and any Wholly Owned
Restricted Subsidiary or between or among Wholly Owned Restricted Subsidiaries,
(b) any Restricted Payment permitted to be made under the covenant described
under "-- Limitation on Restricted Payments," (c) any employment or related
arrangement entered into by the Company or any Restricted Subsidiary in the
ordinary course of business on terms customary in the consumer finance business,
provided any such arrangement is approved by the disinterested members of the
Board of Directors, (d) customary directors fees and indemnities, and (e)
payments required by the Tax Sharing Agreement or any renewal thereof on
substantially similar terms, provided, however, in the case of each of the
foregoing clauses (a) through (d), that such transactions are not otherwise
prohibited by the Indenture. The provisions of clause (iv) of the foregoing
paragraph shall not apply to transactions between the Company and PEC pursuant
to agreements in effect on the Issue Date and described under "Certain
Transactions" and renewals thereof on substantially similar terms.

Merger and Consolidation. The Company will not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
related transactions, all or substantially all its assets to, any Person,
unless: (i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the United
States of America or any State thereof and the Successor Company (if not the
Company) shall expressly assume, by an indenture supplemental thereto, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all of the
Company's obligations under the Notes and the Indenture; (ii) immediately after
giving effect to such transaction (and treating any Indebtedness that becomes an
obligation of the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been Incurred by such Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Successor Company would be able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"Limitation on Indebtedness;" (iv) immediately after giving effect to such
transaction, the Successor Company shall have Consolidated Net Worth in an
amount that is not less than the Consolidated Net Worth of the Company prior to
such transaction; and (v) the Company

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shall have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture.

The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company, in the case of a
lease, shall not be released from the obligation to pay the principal of,
premium, if any, and interest on the Notes.

The Indenture will provide that no Restricted Subsidiary may consolidate
with or merge with or into (whether or not such Restricted Subsidiary is the
surviving Person) another Person, whether or not affiliated with such Restricted
Subsidiary, unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Restricted Subsidiary) assumes all the obligations of such Restricted
Subsidiary, pursuant to a supplemental indenture, in form and substance
satisfactory to the Trustee, under the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii) such
Restricted Subsidiary, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction) equal to or greater than the Consolidated Net
Worth of such Restricted Subsidiary immediately preceding the transaction; and
(iv) the Restricted Subsidiary would be permitted, immediately after giving
effect to such transaction, to Incur at least $1.00 of additional Indebtedness
pursuant to paragraph (a) in the covenant described above under the caption
"Certain Covenants -- Limitation on Indebtedness"; provided that the foregoing
provisions will not restrict the ability of a Subsidiary to consolidate or merge
with the Company or a Wholly Owned Restricted Subsidiary.

The Indenture will provide that, in the event of a sale or other
disposition of all of the assets of any Subsidiary (other than to or with the
Company or a Wholly Owned Restricted Subsidiary), by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the Capital
Stock of any Subsidiary (other than to the Company or a Wholly Owned Restricted
Subsidiary), then such Restricted Subsidiary (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
Capital Stock of such Subsidiary) or the corporation acquiring the property (in
the event of a sale or other disposition of all of the assets of such Restricted
Subsidiary) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Cash Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture.

Limitation on Investment Company Status. The Company shall not take, and
shall not permit any Restricted Subsidiary to take, any action, or otherwise
permit to exist any circumstance, that would require the Company or such
Restricted Subsidiary to register as an "investment company" under the
Investment Company Act of 1940, as amended.

Line of Business. The Company will not, and will not permit any Subsidiary
to, engage in any line of business that is not a Related Business.

Payments for Consent. The Indenture will provide that neither the Company
nor any Restricted Subsidiary will, directly or indirectly, pay or cause to be
paid any consideration, whether by way of interest, fee or otherwise, to any
Holder of any Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.

SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the Trustee and
Holders with such annual reports, quarterly reports and such other information,
documents and reports as are specified in Sections 13 and 15(d) of the Exchange
Act and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports under
such Sections.

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DEFAULTS

An Event of Default is defined in the Indenture as: (i) a default in the
payment of interest on the Notes when due, continued for 30 days; (ii) a default
in the payment of principal of and premium, if any, on any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration of acceleration or otherwise; (iii) the failure by the Company or
any Subsidiary Guarantor to comply with any of its obligations in the covenants
described under "Change of Control," "Subsidiary Guarantees" or under "Certain
Covenants -- Merger and Consolidation," or "-- Limitation on Sales of Assets and
Subsidiary Stock"; (iv) the failure by the Company or any Subsidiary Guarantor
to comply with any of its obligations in the covenants described above under
"Certain Covenants -- Limitation on Affiliate Transactions", "-- Limitation on
Indebtedness," "-- Limitation on Preferred Stock of Restricted Subsidiaries,"
"-- Limitation on Liens," "-- Limitation on Restricted Payments," "-- Limitation
on Restrictions on Distributions from Restricted Subsidiaries," "-- Limitation
on Investment Company Status" or "-- SEC Reports" and 30 days or more shall have
expired after a Senior Officer of the Company first becomes aware of such
failure; (v) the failure by the Company or any Subsidiary Guarantor to comply
for 30 days after notice with its other agreements contained in the Indenture;
(vi) Indebtedness of the Company or any Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $2,000,000 (the "cross acceleration provision"); (vii)
certain events of bankruptcy, insolvency or reorganization of the Company or a
Subsidiary (the "bankruptcy provisions"); (viii) any judgment or decree for the
payment of money in excess of $1,000,000 is rendered against the Company or a
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed (the "judgment default provision"); or
(ix) any Subsidiary Guarantee ceases to be effective (except if permitted by the
Indenture), is held to be invalid in a judicial proceeding or its validity is
contested by the Company or any Restricted Subsidiary. However, a default under
clause (v) will not constitute an Event of Default until the Trustee or the
Holders of 25% in principal amount of the outstanding Notes notify the Company
of the Default and the Company does not cure such Default within the time
specified after receipt of such notice.

If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of, premium, if any, and accrued but unpaid interest on all the Notes
to be due and payable. Upon such a declaration, such principal, premium, if any,
and interest shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Company occurs and is continuing, the principal of, premium, if any, and any
accrued but unpaid interest on all the Notes will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders of the Notes. Under certain circumstances, the
Holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences.

Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes unless
such Holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium, if any, or interest when due, no Holder may
pursue any remedy with respect to the Indenture or the Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such Holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or

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the Indenture or that the Trustee determines is unduly prejudicial to the rights
of any other Holder or that would involve the Trustee in personal liability.

The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder of the Notes notice
of the Default within 60 days after it occurs. Except in the case of a Default
in the payment of principal of, premium, if any, or interest on any Note, the
Trustee may withhold notice if and so long as a committee of its trust officers
determines that withholding notice is not opposed to the interest of the
Holders. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30 days after a
Senior Officer of the Company or any Subsidiary becomes aware of the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company or such Subsidiary is taking or
proposes to take in respect thereof.

AMENDMENTS AND WAIVERS

Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past Default or compliance with any provisions
may be waived with the consent of the Holders of a majority in principal amount
of the Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected thereby, no amendment or waiver may, among other
things, (i) reduce the amount of Notes whose Holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption or acceleration of any
Note or change the time at which any Note may be redeemed as described under
"Optional Redemption", (v) make any Note payable in money other than that stated
in the Note, (vi) impair the right of any Holder to receive payment of principal
of, premium, if any, and interest on such Holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Notes, (vii) make any change to the provisions of
the Indenture relating to subordination of the Notes, (viii) release any
Subsidiary Guarantee of the Notes (except in connection with any such Subsidiary
being designated an Unrestricted Subsidiary or its Capital Stock or assets being
disposed of, in each case to the extent permissible under the Indenture), or
(ix) make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions.

Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
or any Subsidiary Guarantor under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Notes, to secure the Notes, to add to the covenants of the Company for
the benefit of the Holders or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
Holder or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.

The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.

After an amendment under the Indenture becomes effective, the Company will
mail to Holders a notice briefly describing such amendment. However, the failure
to give such notice to all Holders, or any defect therein, will not impair or
affect the validity of the amendment.

TRANSFER

A Holder will be able to register the transfer of or exchange the Notes
only in accordance with the provisions of the Indenture. The Company may require
payment of a sum sufficient to cover any tax,

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assessment or other governmental charge payable in connection with certain
registrations of transfers and exchanges.

DEFEASANCE

The Company and the Subsidiary Guarantors at any time may terminate all
their respective obligations under the Notes, the Subsidiary Guarantees and the
Indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and
to maintain a registrar and paying agent in respect of the Notes. The Company at
any time may terminate its obligations under "Change of Control" and under the
covenants described under "Certain Covenants" (other than the covenant described
under "-- Merger and Consolidation"), the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Subsidiaries and the
judgment default provision described under "-- Defaults" and the limitations
contained in clauses (iii) and (iv) under "Certain Covenants -- Merger and
Consolidation" ("covenant defeasance").

The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto (other than an Event of Default with
respect to the obligations referred to in the first sentence of the immediately
preceding paragraph). If the Company exercises its covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default under
the provisions described in the last sentence of the foregoing paragraph.

In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee unencumbered money or
U.S. Government Obligations for the payment of principal of, premium, if any,
and interest on the Notes to redemption or maturity, as the case may be, and
must comply with certain other conditions, including delivery to the Trustee of
an Opinion of Counsel to the effect that Holders will not recognize income, gain
or loss for federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law).

CONCERNING THE TRUSTEE

American Stock Transfer & Trust Company is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.

The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder, unless
such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.

GOVERNING LAW

The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.

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BOOK-ENTRY, DELIVERY AND FORM

The Notes will initially be issued in the form of one or more Global Notes
(the "Global Note"). The Global Note will be deposited on the Issue Date with
The Depository Trust Company (the "Depositary") or its custodian and registered
in the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Note Holder").

The Company has been advised by the Depositary that the Depositary is a
limited-purpose trust company that was created to hold securities for its
participating organizations (collectively, the "Participants" or the
"Depositary's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the
Underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.

The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Underwriters with portions of the
principal amount of the Global Note and (ii) ownership of the Notes evidenced by
the Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Notes evidenced by the Global Note will be limited to such extent.

So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note for the purposes of receiving payment on the
Notes, receiving notices, and for all other purposes under the Indenture and the
Notes. Beneficial owners of Notes evidenced by the Global Note will not be
considered the owners or Holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records of the
Depositary or for maintaining, supervising or reviewing any records of the
Depositary relating to the Notes. Accordingly, each person owning a beneficial
interest in the Global Note must rely on the procedures of the Depositary, and,
if such person is not a Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights of a holder
under the Indenture. The Company understands that under existing industry
practices, in the event that the Company requests any action of holders or that
an owner of a beneficial interest in the Global Note desires to give or take any
action which a holder is entitled to give or take under the Indenture, the
Depositary would authorize the Participants holding the relevant beneficial
interest to give or take such action and such Participants would authorize
beneficial owners owning through such Participants to give or take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.

Payments in respect of the principal of, and premium, if any, and interest
on any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of the Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's

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Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depositary's Participants or the Depositary's Indirect Participants.

If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
other than global form, or (iii) there shall have occurred and be continuing a
Default or an Event of Default with respect to any of the Notes represented by
the Global Note, then, upon surrender by the Global Note Holder of its Global
Note, Notes in certificated form will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Notes.

Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.

CERTAIN DEFINITIONS

"Additional Assets" means: (i) any operating property or assets (including
Receivables, but excluding Indebtedness and Capital Stock of the acquiring
Person) used or useful in a Related Business; (ii) the Capital Stock of a Person
that becomes a Restricted Subsidiary as a result of the acquisition of such
Capital Stock by the Company or another Restricted Subsidiary; or (iii) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clause (ii) or (iii) is primarily engaged in a Related Business.

"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; provided that a
Person shall be deemed to have such power with respect to the Company if such
Person is the beneficial owner of Capital Stock representing 10% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable). The terms "controlling" and "controlled" have meanings
correlative to the foregoing.

"Asset Disposition" means (i) any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of the definition as a "disposition"), but excluding any merger,
consolidation or sale of assets of the Company subject to and permitted by the
first paragraph of the covenant described under "Certain Covenants -- Merger and
Consolidation," of: (a) any shares of Capital Stock of a Subsidiary (other than
director's qualifying shares or shares required by applicable law to be held by
a Person other than the Company or a Subsidiary); (b) all or substantially all
the assets of, or of any division or line of business of the Company or any
Restricted Subsidiary; (c) any other assets of the Company or any Restricted
Subsidiary with a book or fair market value, together with other assets disposed
of in the same or related transactions, exceeding $500,000; or (d) any Excess
Spread Receivables (other than, in the case of clauses (a), (b), (c) or (d)
above, (1) a disposition of Receivables in the ordinary course of business, (2)
a disposition by a Restricted Subsidiary to the Company or by the Company or a
Subsidiary to a Wholly Owned Restricted Subsidiary or (3) any grant of a
Permitted Lien) or (ii) the issuance of Capital Stock by any Restricted
Subsidiary to any Person other than the Company or any Wholly Owned Restricted
Subsidiary.

"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.

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"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.

"Business Day" means each day which is not a Legal Holiday.

"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP. The amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.

"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.

"Code" means the Internal Revenue Code of 1986, as amended.

"Consolidated Adjusted Net Income" means, for any period, (a) Consolidated
Net Income minus (b) gain on sale of loans and net unrealized gain on mortgage
related securities, plus (c) provision for credit losses, amortization and
depreciation (including amortization of excess servicing rights), in each case
for such period and for the Company and its Restricted Subsidiaries.

"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries, excluding (A) Permitted Warehouse Indebtedness and
Guarantees thereof permitted to be Incurred pursuant to clause (b)(1) of the
covenant described under "Certain Covenants -- Limitation on Indebtedness," (B)
Hedging Obligations permitted to be Incurred pursuant to clause (b)(3) of the
covenant described under "Certain Covenants -- Limitation on Indebtedness" and
(C) Junior Subordinated Obligations of the Company to (ii) the Consolidated Net
Worth of the Company.

"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries for such period determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income: (i) any net income of any person if such Person is
not a Restricted Subsidiary, except that (A) subject to the exclusion contained
in clause (iv) below, the Company's equity in the net income of any such Person
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such period
to the Company or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to a Restricted
Subsidiary, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income; (ii) any net income (or
loss) of any Person acquired by the Company or a Restricted Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition; (iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income to the extent that cash could have been distributed
by such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution paid to another Restricted Subsidiary, to
the limitation contained in this clause) and (B) the Company's equity in a net
loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain (but not loss) realized
upon the sale or other disposition of any assets of the Company or its
consolidated Restricted Subsidiaries (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise disposed of in
the ordinary course of business and any gain (but not loss) realized upon the
sale or other disposition of any Capital Stock of any Person; (v) extraordinary
gains or losses; and (vi) the cumulative effect of a change in accounting
principles, in each case determined in accordance with GAAP.

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"Consolidated Net Worth" means the consolidated stockholders' equity of the
Company and its Subsidiaries, as determined in accordance with GAAP, as of the
end of the most recent fiscal quarter of the Company for which financial
statements are available, less (i) all write-ups by the Company or any
Restricted Subsidiary (other than write-ups resulting from foreign currency
translations, write-ups of tangible assets of a going concern business made
within 12 months after acquisition thereof and write-ups of Excess Spread
Receivables or mortgage servicing rights in accordance with GAAP), (ii) all
Investments in unconsolidated Subsidiaries or Persons that are not Restricted
Subsidiaries (except Temporary Cash Investments), (iii) all unamortized debt
discount and expense and unamortized deferred charges of the Company and its
Restricted Subsidiaries, in each case as of such date and (iv) any amounts
attributable to Disqualified Stock. The "Consolidated Net Worth" of a Restricted
Subsidiary means the consolidated net worth of such Subsidiary and its
Subsidiaries (if any), determined on an equivalent basis. For purposes of this
definition, "deferred charges" does not include deferred taxes, costs associated
with mortgage servicing rights and loan origination costs, in each case to the
extent deferred in accordance with GAAP).

"Currency Agreement" means, with respect to any Person, any foreign
exchange contract, currency swap agreement or other similar agreement to which
such Person is a party or a beneficiary.

"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.

"Designated Senior Indebtedness" means, as of any date of determination,
any Senior Indebtedness if the unpaid principal amount thereof, or the amount of
Senior Indebtedness committed to be extended by the lender or lenders under the
related credit facility, equals or exceeds $1,000,000 on such date.

"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security in to which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holders thereof, in each case in whole
or in part on or prior to the first anniversary of the Stated Maturity of the
Notes.

"Eligible Excess Spread Receivables" means Excess Spread Receivables of the
Company and its Restricted Subsidiaries, other than (i) any Excess Spread
Receivables created as the result of the securitization or sale of other Excess
Spread Receivables, and (ii) any Excess Spread Receivables attributable to any
whole loan sale of Receivables, unless the Person or Persons holding such
Receivables (a) is a GSE or (b) has then outstanding senior unsecured and
unsupported long-term debt rated Baa2 or better by Moody's Investors Service,
Inc. and BBB or better by Standard & Poor's Ratings Group.

"Excess Spread" means (i) with respect to a "pool" of Receivables that has
been sold to a trust or other Person in a securitization, the excess of (a) the
weighted average coupon on each pool of Receivables sold over (b) the sum of the
pass-through interest rate plus a normal servicing fee, a trustee fee, an
insurance fee and an estimate of annual future credit losses related to such
assets, in each case calculated in accordance with any applicable GAAP, and (ii)
with respect to Receivables that have been sold to a Person in a whole loan
sale, the cash flow of the Company and its Restricted Subsidiaries from such
Receivables, net of, to the extent applicable, a normal servicing fee, a trustee
fee, an insurance fee and an estimate of annual future credit losses related to
such assets, in each case calculated in accordance with any applicable GAAP.

"Excess Spread Receivables" of a Person means the contractual or
certificated right to Excess Spread capitalized on such Person's consolidated
balance sheet (the amount of which shall be the present value of the Excess
Spread, calculated in accordance with GAAP, net of any allowance for losses on
loans sold with recourse or other liability allocable thereto, to the extent not
otherwise reflected in such amount). Excess Spread Receivables (a) include
mortgage backed securities attributable to Receivables sold by the Company or
any Subsidiary, and (b) do not include any mortgage servicing rights.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

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"Excluded Person" means (i) any Existing Holder, (ii) any corporation or
limited liability company controlled by one or more Existing Holders, (iii) any
partnership the general partners of which are or are corporations controlled by
one or more Existing Holders and (iv) any trust of which any Existing Holder is
the trustee and at least 80% of the beneficial interests in which are owned by
such Existing Holder and the spouse or lineal descendants of such Existing
Holder. For purposes of this definition, "control" means the beneficial
ownership of at least 80% of the Voting Stock of a Person.

"Existing Holders" means Robert Nederlander, Eugene I. Schuster, Jerome J.
Cohen, Herbert B. Hirsch and Don A. Mayerson.

"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board, (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession
and (iv) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the SEC and releases of the
Emerging Issues Task Force.

"GSE" means Federal National Mortgage Association or Federal Home Loan
Mortgage Corporation.

"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" means any person Guaranteeing any
obligation.

"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.

"Holders" or "Noteholders" means the Person in whose name a Note is
registered on the Registrar's books.

"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.

"Indebtedness" means, with respect to any Person on any date of
determination (without duplication): (i) the principal of and premium, if any,
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (including any such obligations under repurchase agreements,
but excluding trade accounts payable and expense accruals arising in the
ordinary course of business not overdue by more than 60 days); (iv) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction; (v) the amount of all
obligations of such Person with respect to the redemption, repayment or

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other repurchase of any Disqualified Stock (but excluding any accrued dividends)
or, in the case of a Subsidiary of such Person, any Preferred Stock (but
excluding any accrued dividends); (vi) Warehouse Indebtedness; (vii) in
connection with each sale of any Excess Spread Receivables, the maximum
aggregate claim (if any) that the purchaser thereof could have against such
Person if the payments anticipated in connection with such Excess Spread
Receivables are not collected; (viii) all obligations of the type referred to in
clauses (i) through (vii) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee; (ix) all obligations of the type referred to in clauses (i)
through (viii) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; and (x) to the
extent not otherwise included in this definition, Hedging Obligations of such
Person. Notwithstanding the foregoing, "Indebtedness" shall not include
obligations under the Tax Sharing Agreement or any renewal or other modification
thereof that complies with the covenant described under "Certain
Covenants -- Limitation on Affiliate Transactions." Except in the case of
Warehouse Indebtedness (the amount of which shall be determined in accordance
with the definition thereof), the amount of unconditional Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above. The amount of any Indebtedness
under clause (viii) of this definition shall be equal to the amount of the
outstanding obligation for which such Person is responsible or liable, directly
or indirectly, including by way of Guarantee. Notwithstanding the foregoing, any
securities issued in a securitization by a special purpose owner trust or
similar entity formed by or on behalf of a Person and to which Receivables have
been sold or otherwise transferred by or on behalf of such Person or its
Restricted Subsidiaries shall not be treated as Indebtedness of such Person or
its Restricted Subsidiaries under the Indenture, regardless of whether such
securities are treated as indebtedness for tax purposes, provided (1) neither
the Company nor any of its Restricted Subsidiaries (other than Special Purpose
Subsidiaries) (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness), except
for credit support in the form of "over-collateralization" of the senior
certificates issued in, or subordination of or recourse to all or a portion of
Excess Spread Receivables attributable to, such securitization, in each case to
the extent reflected in the book value of such Excess Spread Receivables, or (b)
is directly or indirectly liable (as a guarantor or otherwise), and (2) no
default with respect to such securities (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.

"Interest-only Certificate" means a certificate issued in a securitization
of a pool of Receivables which pays a fixed or floating interest rate on a
notional principal amount.

"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Company or any Restricted
Subsidiary against fluctuations in interest rates.

"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business, other than
Receivables, that are recorded as trade accounts on the balance sheet of the
lender) or other extensions of credit (including by way of Guarantee or similar
arrangement) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, Indebtedness
(including Receivables) or other similar instruments issued by, such Person. For
purposes of the definitions of "Unrestricted Subsidiary" and "Restricted
Payment" and the covenant described under "Certain Covenants -- Limitation on
Restricted Payments," (i) "Investment" shall include the greater of the fair
market value and the book value of the Investments by the Company and its
Restricted Subsidiaries in such Subsidiary at the time it is so designated; and
(ii) any property transferred to or from a Person shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.

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"Issue Date" means the date on which the Notes are originally issued.

"Junior Subordinated Obligation" is defined under "Subordination."

"Legal Holiday" means any Saturday, Sunday or other day on which banks in
the States of New York or Georgia are authorized or obligated by law to be
closed for business.

"Lien" means (i) any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof) and (ii) any claim (whether direct or
indirect through subordination or other structural encumbrance) against any
Excess Spread Receivables sold or otherwise transferred by such Person to a
buyer, unless such Person is not liable for any losses thereon.

"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payment received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP as a consequence of
such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be, repaid out of the
proceeds from such Asset Disposition, and (iii) the deduction of appropriate
amounts provided by the seller as a reserve, in accordance with GAAP, against
any liabilities associated with the property or other assets disposed of in such
Asset Disposition and retained by the Company or any Restricted Subsidiary after
such Asset Disposition.

"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.

"Non-Recourse Debt" means indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides a Guarantee or other credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), (b) is directly or indirectly liable (as the
primary obligor or otherwise), or (c) constitutes the lender; and (ii) no
default with respect to which (including any rights that the holders thereof may
have to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries (other than the Notes and the
Subsidiary Guarantees) to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity.

"Parent" means Mego Financial and its successors, but only while such
company beneficially owns 40% or more of the Voting Stock of the Company.

"PEC" means Preferred Equities Corporation and its successors.

"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary: (i) in a Wholly Owned Restricted Subsidiary or a Person that, upon
the making of such Investment, will become a Wholly Owned Restricted Subsidiary;
provided, however, that the primary business of such Wholly Owned Restricted
Subsidiary is a Related Business; (ii) in another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Wholly Owned Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iii) while no Default or Event of
Default exists, any Investment in Persons engaged in a Related Business,
provided the aggregate amount of all Investments made by the Company and its
Restricted Subsidiaries after the Issue Date that constitute Permitted
Investments under this clause (iii)(and, without

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limitation, not including Permitted Investments under clause (i) above), on any
date (the "date of determination"), may not exceed the sum of (a) $6,000,000,
plus (b) the excess, if any, of (A) 25% of Consolidated Net Income during the
period (treated as one accounting period) from the beginning of the first fiscal
quarter commencing after the Issue Date to the end of the fiscal quarter ended
most recently prior to the date of determination for which financial statements
are available (or, in case such Consolidated Net Income shall be a deficit,
zero), over (B) the aggregate amount of Restricted Payments made by the Company
and its Restricted Subsidiaries after the Issue Date (other than a Restricted
Payment permitted to be made pursuant to clause (i) or (ii) of paragraph (b) of
the covenant described above under "Certain Covenants -- Limitation on
Restricted Payments"), (iv) in the form of Temporary Cash Investments; (v) in
the form of receivables (other than Receivables) owing to the Company or any
Restricted Subsidiary if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; (vi) in
the form of payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business; (vii)
in the form of loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary in an aggregate amount not to exceed $250,000 outstanding at any
time; (viii) in the form of stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (ix) in
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock", provided the amount thereof does not exceed 10% of
Consolidated Net Worth; (x) in the form of Receivables of the Company or any
Restricted Subsidiary; and (xi) in the form of Excess Spread Receivables,
subordinated certificates or Interest-only Certificates arising from a
securitization or sale of Receivables by the Company or any of its Wholly Owned
Restricted Subsidiaries (including any securitization of a "pool" of receivables
that, in addition to Receivables, also includes loans, leases or other
receivables of Persons other than the Company or any Wholly Owned Restricted
Subsidiary).

"Permitted Liens" means, with respect to the Company and any Restricted
Subsidiary: (i) pledges or deposits by such Person under worker's compensation
laws, unemployment insurance laws or similar legislation, or good faith deposits
in connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds to which such Person is
a party, or deposits as security for contested taxes or for the payment of rent,
in each case Incurred in the ordinary course of business; (ii) Liens imposed by
law, such as carriers', warehousemen's and mechanics' Liens, in each case for
amounts not yet due or being contested in good faith by appropriate proceedings
or other Liens arising out of judgments or awards against such Person with
respect to which such Person shall then be proceeding with an appeal or other
proceedings for review; (iii) Liens for property taxes not yet subject to
penalties for nonpayment or which are being contested in good faith and by
appropriate proceedings; (iv) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property, or
leases, subleases or other Liens incidental to the conduct of the business of
such Person or to the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use in
the operation of the business of such Person; (v) Liens securing Indebtedness of
such Person Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, equipment (including vehicles) of such
Person (but excluding Capital Stock of another Person); provided, however, that
the Lien may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness secured by
the Lien may not be Incurred more than 180 days after the later of the
acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (vi) Liens
on Receivables of the Company or a Restricted Subsidiary, as the case may be, to
secure Indebtedness permitted under the provisions described in clause (b)(1)
under "-- Certain Covenants -- Limitation on Indebtedness"; (vii) Liens on
Excess Spread Receivables (or on the Capital Stock of any

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Person substantially all the assets of which are Excess Spread Receivables);
provided, however, that no such Liens may encumber Eligible Excess Spread
Receivables of the Company and its Restricted Subsidiaries in an amount equal to
the sum of (1) the Specified Percentage in effect at the creation of such Lien
(the "determination date") of the unpaid principal amount as of the
determination date of the Notes and all other unsecured Indebtedness of the
Company and its Restricted Subsidiaries that does not constitute Junior
Subordinated Obligations (collectively, the "Specified Unsecured Indebtedness";
the amount under this subclause (1) being the "Base Set Aside"), plus (2) 25% of
the excess, if any, of (x) the total amount of Eligible Excess Spread
Receivables shown on the balance sheet of the Company and its Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the determination date, over (y) the Base Set Aside, provided that the sum of
the Base Set Aside plus the amount in this clause (2) (the "Excess Set Aside")
shall not exceed 200% of Specified Unsecured Indebtedness, plus (3) 10% of the
excess, if any, of (x) the amount under the foregoing subclause (2)(x), over (y)
the sum of the Base Set Aside plus the Excess Set Aside; (viii) Liens existing
on the Issue Date and listed on a schedule to the Indenture; (ix) Liens on
property or shares of Capital Stock of another Person at the time such other
Person becomes a Restricted Subsidiary of such Person; provided, however, that
(A) such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming a Subsidiary or being designated a
Restricted Subsidiary and (B) such Liens may not extend to any other property
owned by such Person or any of its Restricted Subsidiaries; (x) Liens on
property at the time such Person or any of its Restricted Subsidiaries acquires
the property, including any acquisition by means of a merger or consolidation
with or into such Person or a Restricted Subsidiary of such Person; provided,
however, that (A) such Liens are not created, incurred or assumed in connection
with, or in contemplation of, such acquisition and (B) such Liens may not extend
to any other property owned by such Person or any of its Restricted
Subsidiaries; (xi) Liens securing Indebtedness or other obligations of a
Restricted Subsidiary of such Person owing to such Person or a Wholly Owned
Restricted Subsidiary of such Person; (xii) Liens (other than on any Excess
Spread Receivables) securing Hedging Obligations of the Company or such
Restricted Subsidiary so long as such Hedging Obligations relate to Indebtedness
that is, and is permitted under the Indenture to be, secured by a Lien on the
same property securing such Hedging Obligations; (xiii) Liens to secure any
Refinancing (or successive Refinancings) as a whole, or in part, of any
Indebtedness of the Company or such Restricted Subsidiary secured by any Lien
referred to in the foregoing clauses (v), (viii) and (ix); provided, however,
that (A) such new Lien shall be limited to all or part of the same property that
secured the original Lien (plus improvements to or on such property), (B) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (1) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clause (v), (viii) or (ix),
as the case may be, at the time the original Lien became a Permitted Lien and
(2) an amount necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or replacement and
(C) the Average Life of such Indebtedness is not decreased, and (xiv) any Lien
in the form of "over-collateralization" of the senior certificates issued in, or
subordination of or recourse to all or a portion of Excess Spread Receivables of
the Company or any Subsidiary attributable to a securitization of Receivables,
in each case to the extent reflected in the book value of such Excess Spread
Receivables, which Lien is in favor of the holders of other interests in the
trust relating to such securitization, provided, however, that notwithstanding
any of the foregoing clauses, no Lien on Eligible Excess Spread Receivables,
other than a Lien permissible under the foregoing clauses (vii) and (xiv), shall
be a Permitted Lien. Notwithstanding the foregoing, "Permitted Liens" will not
include any Lien described in clause (v), (ix) or (x) above to the extent such
Lien applies to any Additional Assets acquired directly or indirectly from Net
Available Cash pursuant to the covenant described under "Certain
Covenants -- Limitation on Sale of Assets and Subsidiary Stock." Without
limitation, for purposes of clause (vii) of this definition, the Incurrence of
any Indebtedness (or an increase in the amount of any Indebtedness) secured by a
Lien on Excess Spread Receivables shall be considered the incurrence of a new
Lien on such Excess Spread Receivables, irrespective of whether a Lien securing
other Indebtedness (or a lesser amount of Indebtedness) already exists on such
assets at the time of such Incurrence.

"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets
being financed are eligible to be recorded as held for sale on the

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consolidated balance sheet of the Company and its Restricted Subsidiaries in
accordance with GAAP, (ii) Warehouse Indebtedness constitutes Permitted
Warehouse Indebtedness only (a) if, in the case of Warehouse Indebtedness under
a Purchase Facility, recourse with respect to the obligations of the Company and
its Restricted Subsidiaries under such Warehouse Facility is limited to the
Receivables financed thereby or (b) in the case of any other Warehouse
Indebtedness, to the extent of the lesser of (A) the amount advanced by the
lender with respect to the Receivables financed under the Warehouse Facility,
and (B) the principal amount of such Receivables, and (iii) any such
Indebtedness has not been outstanding in excess of 360 days.

"Permitted Warehouse Indebtedness Limitation" means, with respect to any
Warehouse Indebtedness of any Restricted Subsidiary, any covenant in the credit
documents under which such Warehouse Indebtedness is incurred to maintain the
consolidated net worth of such Restricted Subsidiary at a specified dollar
amount, provided that such covenant does not require such consolidated net worth
to be maintained at a level in excess of 85% of the consolidated net worth of
such Restricted Subsidiary shown on the most recently available consolidated
balance sheet of such Restricted Subsidiary at the time such credit documents
are entered into, amended or renewed. For purposes of this definition,
"consolidated net worth" shall be determined in accordance with GAAP.

"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.

"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such corporation.

"Principal" of a Note means the principal of the Note payable on the Note
which is due or overdue or is to become due at the relevant time.

"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.

"Purchase Facility" means any Warehouse Facility pursuant to which the
Company or a Restricted Subsidiary sells Receivables to a financial institution
or other Person and retains a right of first refusal (or a right with similar
effect) upon the subsequent resale of such Receivables by such financial
institution.

"Receivables" means loans, leases and receivables purchased or originated
by the Company or any Restricted Subsidiary in the ordinary course of business;
provided, however, that for purposes of determining the amount of a Receivable
at any time, such amount shall be determined in accordance with GAAP,
consistently applied, as of the most recent practicable date.

"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.

"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced, (iii) such Refinancing Indebtedness has an aggregate principal
amount (or, if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or, if Incurred
with original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance costs)
under the Indebtedness being Refinanced, and (iv) in the case of Refinancing
Indebtedness that Refinances any Junior Subordinated Obligations, such
Refinancing Indebt-

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edness constitutes a Junior Subordinated Obligation; provided further, however,
that Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary
that Refinances Indebtedness of the Company or another Subsidiary or (y)
Indebtedness of the Company or a Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.

"Related Business" means any consumer lending business or any financial
service business directly relating to such business.

"Representative" means, with respect to any Senior Indebtedness, any holder
thereof or any agent, trustee or other representative for any such holder.

"Restricted Payment" with respect to any Person means: (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (A) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), and (B)
dividends or distributions payable solely to the Company or a Wholly Owned
Restricted Subsidiary; (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by any Person or
of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock); (iii) the payment,
purchase, repurchase, redemption, defeasance or other acquisition or retirement
for value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any Junior Subordinated Obligations of the Company or any
Restricted Subsidiary; or (iv) the making of any Investment (other than a
Permitted Investment) in any Person. Notwithstanding the foregoing, solely for
purposes of calculating the aggregate amount of "other Restricted Payments since
the Issue Date," as used in clause (iii) of paragraph (a) of the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments," any
Investment that constitutes a Permitted Investment under clause (iii) of the
definition of "Permitted Investment" shall be considered a Restricted Payment
(but such a Permitted Investment shall not be considered a Restricted Payment
for any other purpose).

"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.

"SEC" means the Securities and Exchange Commission.

"Senior Indebtedness" means principal of and interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or a Subsidiary, as applicable, to the
extent postpetition interest is allowed in such proceeding) and premium, if any,
on (a) any Indebtedness of the Company or any Restricted Subsidiary of the type
referred to in clause (i), (ii), (iii), (iv) or (vi) of the definition of
"Indebtedness," or (b) all Guarantees by the Company or any Restricted
Subsidiary with respect to Indebtedness referred to in the foregoing clause (a),
unless, in the case of clause (a) or (b), the instrument under which such
Indebtedness is incurred expressly provides that it is pari passu with or
subordinated in right of payment to the Notes (in the case of Indebtedness being
Incurred by the Company) or the Subsidiary Guarantee of such Restricted
Subsidiary (in the case of Indebtedness being Incurred by any Restricted
Subsidiary). Notwithstanding the foregoing, Senior Indebtedness shall not
include (a) any liability for federal, state, local, foreign or other taxes, (b)
any Indebtedness of the Company or any Restricted Subsidiary to any Affiliates
(including obligations under the Tax Sharing Agreement, as amended from time to
time), (c) any trade accounts payable and expense accruals, (d) any Indebtedness
that is Incurred in violation of the Indenture, and (e) Indebtedness owed for
compensation or for services rendered.

"Special Purpose Subsidiary" means a Restricted Subsidiary formed in
connection with a securitization of Receivables (i) all the Capital Stock of
which (other than directors' qualifying shares and shares held by other Persons
to the extent such shares are required by applicable law to be held by a Person
other than the Company or a Restricted Subsidiary) is owned by the Company or
one or more Restricted Subsidiaries, (ii) that has no assets other than Excess
Spread Receivables created in such securitization, (iii) that conducts no
business other than holding such Excess Spread Receivables, and (iv) that has no
Indebtedness (other than short-term Indebtedness to the Company or any Wholly
Owned Restricted Subsidiary attributable to the

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purchase by such Restricted Subsidiary from the Company or such Wholly Owned
Restricted Subsidiary of such Receivables, which Indebtedness is paid in full
upon closing of such securitization).

"Specified Percentage" means (i) at any time prior to the date that is 6
months after the Issue Date, 0%, (ii) subject to clause (i), at any time prior
to the date that is 12 months after the Issue Date, 20%, (iii) subject to
clauses (i) and (ii), at any time prior to the date that is 18 months after the
Issue Date, 40%, (iv) subject to clauses (i), (ii) and (iii), at any time prior
to the date that is 24 months after the Issue Date, 90%, and (v) at any other
time, 125%.

"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).

"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Wholly Owned Subsidiaries of such Person or (iii) one or
more Wholly Owned Subsidiaries of such Person. Unless otherwise specified,
"Subsidiary" means a Subsidiary of the Company.

"Tax Sharing Agreement" means the tax allocation and indemnity agreement,
dated as of , 1996, by and between Mego Financial and the Company,
without regard to any amendments, supplements or other modifications thereof
after the Issue Date.

"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed as to principal and interest by the United States of
America or any agency thereof and maturing within 180 days after acquisition
thereof; (ii) investments in demand deposit accounts or time deposit accounts,
certificates of deposit and money market deposits maturing within 180 days of
the date of acquisition thereof issued by a bank or trust company that is not an
Affiliate of the Company and that is organized under the laws of the United
States of America or any state thereof, which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $500,000,000 and has
outstanding debt which is rated "AA" (or similar equivalent rating) or higher by
at least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker-dealer or mutual fund distributor; (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above; (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America with a rating of "P-1" or higher
according to Moody's Investors Service, Inc. or "A-1" or higher according to
Standard & Poor's Ratings Group; and (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or Moody's Investors Service,
Inc.

"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless (a) such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated or (b) any such Subsidiary has outstanding
any Indebtedness other than Non-Recourse Debt; provided, however, that such
designation would be a permitted Restricted Investment under

88
<PAGE> 90

the covenant described under " -- Certain Covenants -- Limitation on Restricted
Payments". The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under " -- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default or Event of Default
shall have occurred and be continuing or would result therefrom (giving pro
forma effect to the Incurrence of the Indebtedness of such Subsidiary). Any such
designation by the Board of Directors shall be evidenced by the Company to the
Trustee by promptly filing with the Trustee a copy of the board resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions. If any Subsidiary at
any time shall fail to meet the foregoing requirements for designation as an
Unrestricted Subsidiary, it shall thereafter be designated as a Restricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be Incurred by such Subsidiary as of such date.

"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.

"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.

"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the purchase or
origination of Receivables by the Company or a Restricted Subsidiary of the
Company for the purpose of pooling such Receivables prior to securitization or
sale in the ordinary course of business, including any Purchase Facilities.

"Warehouse Indebtedness" means the consideration received by the Company or
its Restricted Subsidiaries under a Warehouse Facility with respect to
Receivables until such time such Receivables are (i) securitized, (ii)
repurchased by the Company or its Restricted Subsidiaries or (iii) sold by the
counterpart under the Warehouse Facility to a Person who is not an Affiliate of
the Company.

"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned by
the Company or one or more Wholly Owned Restricted Subsidiaries.

"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than directors' qualifying shares and shares held by other Persons to the
extent such shares are required by applicable law to be held by a Person other
than the Company or a Subsidiary) is owned by the Company or one or more Wholly
Owned Subsidiaries.

89
<PAGE> 91

UNDERWRITING

Subject to the terms and conditions contained in an underwriting agreement
with respect to the Offering among the Company and the underwriters named below
(the "Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc. and
Oppenheimer & Co., Inc. are acting as representatives (the "Representatives"),
each of the Underwriters has severally agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriters, the respective aggregate
principal amount of the Notes set forth opposite their names below.

<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NAME AMOUNT OF NOTES
-------------------------------------------------------------------- -------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ............................. $
Oppenheimer & Co., Inc. ............................................
---------
Total..................................................... $40,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The Underwriters are committed to
purchase all of the Notes if any are purchased.

The Underwriters propose to offer the Notes directly to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of % of
the principal amount. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of % of the principal amount on sales to certain
other dealers. The offering of the Notes is made for delivery when, as and if
accepted by the Underwriters and is subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of the Notes. After the
initial public offering of the Notes, the public offering price and other
selling terms may be changed by the Underwriters.

Prior to the Offering, there has been no public trading market for the
Notes and there can be no assurance that any active trading market will develop
for the Notes or, if developed, will be maintained.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the federal securities laws, or
to contribute to payments that the Underwriters may be required to make in
respect thereof.

Oppenheimer & Co., Inc. has provided from time to time, and expects to
provide in the future, investment banking and financial services to the Company
and its affiliates, for which Oppenheimer & Co., Inc. has received and will
receive customary fees and commissions.

LEGAL MATTERS

The legality of the Notes offered hereby will be passed upon for the
Company by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., Miami,
Florida. Gibson, Dunn & Crutcher LLP, New York, New York has acted as counsel
for the Underwriters in connection with the Offering.

EXPERTS

The financial statements included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and elsewhere in the registration statement, and are so included in
reliance upon their authority as experts in accounting and auditing.

90
<PAGE> 92

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement") under
the Securities Act, with respect to the Notes offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement.
For further information with respect to the Company and the Notes offered
hereby, reference is hereby made to such Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement, including all exhibits thereto,
may be obtained from the Commission's principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the
Commission, or may be examined without charge at the offices of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. In addition, copies of the Registration
Statement and related documents may be obtained from the Commission's web site
at http://www.sec.gov.

Upon completion of the Offering and the Common Stock Offering, the Company
will be subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith will file annual and quarterly
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected, and copies of
such material may be obtained upon payment of prescribed fees, at the
Commission's Public Reference Section at the addresses set forth above.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements of the Company which have been certified
by its independent public accountants.

91
<PAGE> 93

MEGO MORTGAGE CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Statements of Financial Condition -- August 31, 1995 and 1996....................... F-3
Statements of Operations -- Years Ended August 31, 1994, 1995 and 1996.............. F-4
Statements of Cash Flows -- Years Ended August 31, 1994, 1995 and 1996.............. F-5
Statements of Stockholder's Equity -- Years Ended August 31, 1994, 1995 and 1996.... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 94

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
Mego Mortgage Corporation
Las Vegas, Nevada

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

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

In our opinion, such financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of August 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended August 31, 1996 in conformity with generally
accepted accounting principles.

As discussed in Note 16 to the financial statements, the accompanying 1994
financial statements have been restated.

As discussed in Note 2 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights effective September 1, 1994.

DELOITTE & TOUCHE LLP

Las Vegas, Nevada
October 28, 1996

F-2
<PAGE> 95

MEGO MORTGAGE CORPORATION

STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Cash....................................................................... $ 752 $ 443
Cash deposits, restricted.................................................. 2,532 4,474
Loans held for sale, net of allowance for credit losses of $74 and $95..... 3,676 4,610
Mortgage related securities, at fair value................................. -- 22,944
Excess servicing rights.................................................... 14,483 12,121
Mortgage servicing rights.................................................. 1,076 3,827
Other receivables.......................................................... 142 59
Property and equipment, net of accumulated depreciation of $108 and $279... 429 865
Organizational costs, net of amortization.................................. 675 482
Other assets............................................................... 316 781
------- -------
TOTAL ASSETS..................................................... $24,081 $50,606
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes and contracts payable.............................................. $ 1,458 $14,197
Accounts payable and accrued liabilities................................. 2,239 4,066
Allowance for credit losses on loans sold with recourse.................. 886 920
Due to parent company.................................................... 8,453 11,994
Due to affiliated company................................................ -- 819
State income taxes payable............................................... 264 909
------- -------
Total liabilities................................................ 13,300 32,905
------- -------
Stockholder's equity:
Common Stock -- $.01 par value per share
Authorized -- 50,000,000 shares
Issued and outstanding -- 10,000,000 shares........................... 100 100
Additional paid in capital............................................... 8,550 8,550
Retained earnings........................................................ 2,131 9,051
------- -------
Total stockholder's equity....................................... 10,781 17,701
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....................... $24,081 $50,606
======= =======
</TABLE>

See notes to financial statements.

F-3
<PAGE> 96

MEGO MORTGAGE CORPORATION

STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1994 1995 1996
----------- ------- -----------
(AS
RESTATED --
NOTE 16)
<S> <C> <C> <C>
REVENUES
Gain on sale of loans................................ $ 579 $12,233 $ 17,994
Net unrealized gain on mortgage related securities... -- -- 2,697
Loan servicing income................................ -- 873 3,348
Interest income, net of interest expense of $107,
$468, and $1,116.................................. 172 473 988
------- ------- -------
Total revenues............................... 751 13,579 25,027
------- ------- -------
COSTS AND EXPENSES
Provision for credit losses.......................... 96 864 1,510
Depreciation and amortization........................ 136 403 394
Other interest....................................... 22 187 167
General and administrative:
Payroll and benefits.............................. 975 3,611 5,031
Commissions and selling........................... 13 552 2,013
Professional services............................. -- 177 732
Servicing fees paid to affiliate.................. 13 232 709
Management services by affiliate.................. 442 690 671
FHA insurance..................................... 11 231 572
Other............................................. 554 713 2,073
------- ------- -------
Total costs and expenses..................... 2,262 7,660 13,872
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES...................... (1,511) 5,919 11,155
INCOME TAXES........................................... -- 2,277 4,235
------- ------- -------
NET INCOME (LOSS)...................................... $(1,511) $ 3,642 $ 6,920
======= ======= =======
PRO-FORMA NET INCOME PER SHARE (Note 2) (Unaudited).... $ 0.60
=======
Weighted average number of common shares outstanding
(Note 2)............................................. 10,000,000
=======
</TABLE>

See notes to financial statements.

F-4
<PAGE> 97

MEGO MORTGAGE CORPORATION

STATEMENTS OF CASH FLOW
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-----------------------------------
1994 1995 1996
------------- -------- --------
(AS
RESTATED--
NOTE 16)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. ($1,511) $ 3,642 $ 6,920
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Additions to mortgage servicing rights....................................... -- (1,176) (3,306)
Additions to excess servicing rights......................................... (904) (14,098) (20,563)
Net unrealized gain on mortgage related securities........................... -- -- (2,697)
Provisions for estimated credit losses....................................... 96 864 1,510
Deferred income taxes........................................................ -- 230 673
Depreciation and amortization expense........................................ 136 403 394
Amortization of excess servicing rights...................................... -- 519 2,144
Amortization of mortgage servicing rights.................................... -- 100 555
Accretion of residual interest in mortgage related securities................ -- -- (243)
Repayments of mortgage related securities.................................... -- -- 92
Loans originated for sale, net of loan fees.................................. (8,164) (87,751) (139,367)
Repayments on loans held for sale............................................ 116 131 504
Proceeds from sale of loans.................................................. 6,397 84,952 135,483
Changes in operating assets and liabilities:
Increase in cash deposits, restricted...................................... -- (2,532) (1,942)
(Increase) decrease in other assets, net................................... (342) 375 1,248
Increase in state income taxes payable..................................... -- 264 670
Increase in other liabilities, net......................................... 279 1,959 1,827
Additions to due to affiliated company..................................... 1,547 3,581 2,100
Payments on due to affiliated company...................................... (2,052) (3,305) (1,281)
-------- -------- --------
Total adjustments....................................................... (2,891) (15,484) (22,199)
-------- -------- --------
Net cash used in operating activities................................... (4,402) (11,842) (15,279)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................. (263) (274) (637)
-------- -------- --------
Net cash used in investing activities................................... (263) (274) (637)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes and contracts payable........................ 6,275 77,178 146,448
Payments on notes and contracts payable........................................ (5,638) (76,357) (133,709)
Additions in due to parent company............................................. -- 10,836 8,368
Payments on due to parent company.............................................. -- (2,613) (5,500)
Receipt of common stock subscription........................................... 4,500 -- --
Increase in additional paid-in capital......................................... -- 3,000 --
-------- -------- --------
Net cash provided by financing activities............................... 5,137 12,044 15,607
-------- -------- --------
NET INCREASE (DECREASE) IN CASH.................................................. 472 (72) (309)
CASH -- BEGINNING OF YEAR........................................................ 352 824 752
-------- -------- --------
CASH -- END OF YEAR.............................................................. $ 824 $ 752 $ 443
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................................... $ 38 $ 618 $ 964
======== ======== ========
Income taxes................................................................. $ -- $ 3 $ 25
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
In connection with the securitization of loans and creation of mortgage related
securities, the Company retained an interest only security and a residual
interest security............................................................ $ -- $ -- $ 20,096
======== ======== ========
In connection with the organization of the Company, the Company's parent issued
475,000 shares of its Common Stock to an unrelated entity for services
rendered..................................................................... $ 650 $ -- $ --
======== ======== ========
</TABLE>

See notes to financial statements.

F-5
<PAGE> 98

MEGO MORTGAGE CORPORATION

STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995 AND 1996
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID IN EARNINGS
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 1, 1993................... 10,000,000 $100 $4,900 $ -- $ 5,000
Additional paid-in capital..................... -- -- 650 -- 650
Net loss for the year ended August 31, 1994 (as
restated -- Note 16)......................... -- -- -- (1,511) (1,511)
---------- ---- ------ ------- -------
BALANCE AT AUGUST 31, 1994 (AS RESTATED -- NOTE
16).......................................... 10,000,000 100 5,550 (1,511) 4,139
Additional paid-in capital..................... -- -- 3,000 -- 3,000
Net income for the year ended August 31,
1995......................................... -- -- -- 3,642 3,642
---------- ---- ------ ------- -------
BALANCE AT AUGUST 31, 1995..................... 10,000,000 100 8,550 2,131 10,781
Net income for the year ended August 31,
1996......................................... -- -- -- 6,920 6,920
---------- ---- ------ ------- -------
BALANCE AT AUGUST 31, 1996..................... 10,000,000 $100 $8,550 $ 9,051 $17,701
========== ==== ====== ======= =======
</TABLE>

See notes to financial statements.

F-6
<PAGE> 99

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996

1. NATURE OF OPERATIONS

Mego Mortgage Corporation (the Company) was incorporated on June 12, 1992,
in the State of Delaware. The authorized capital stock of the Company is
50,000,000 shares of Common Stock with a par value of $.01 per share. The
Company issued a total of 10,000,000 shares of its capital stock to Mego
Financial Corp. (Mego Financial), a New York corporation, for $5,000,000 and
became a wholly-owned subsidiary of Mego Financial. The Company, through its
loan correspondents and home improvement contractors, is primarily engaged in
the business of originating, selling, servicing and pooling home improvement
loans, 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 that 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 and equity loans
through its network of loan correspondents.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Deposits, Restricted -- Restricted cash represents cash on deposit
which is restricted in accordance with the loan sale agreements and
untransmitted funds received from collection of loans which have not as yet been
disbursed to the purchasers of such loans in accordance with the loan sale
agreements.

Loans Held for Sale -- Loans held for sale are carried at the lower of
aggregate cost or market value in the accompanying Statements of Financial
Condition, net of allowance for credit losses. Loan origination fees and direct
origination costs are deferred until the loan is sold.

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

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

In accordance with the provisions of SFAS 115, the Company classifies
residual interest securities and interest only securities as trading securities
which are recorded at fair value with any unrealized gains or losses recorded in
the results of operations in the period of the change in fair value. Valuations
at origination and at each reporting period are based on discounted cash flow
analyses. The cash flows are estimated as the excess

F-7
<PAGE> 100

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

Revenue Recognition-Gain on Sale of Loans -- Gain on sale of loans includes
the gain on sale of mortgage related securities and the gain on sale of loans
held for sale. In accordance with Emerging Issues Task Force (EITF) Issue No.
88-11, the gain on sale of mortgage related securities is determined by an
allocation of the cost of the securities based on the relative fair value of the
securities sold and the securities retained. The Company retains an interest
only strip security and a residual interest security.

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

In discounting cash flows related to loan sales, the Company defers
servicing income at annual rates of 1% to 1.25% and discounts cash flows on its
sales at the rate it believes a purchaser would require as a rate of return. The
cash flows were discounted to present value using discount rates which averaged
12% for the years ended August 31, 1994, 1995, and 1996. The Company has
developed its assumptions based on experience with its own portfolio, available
market data and ongoing consultation with its investment bankers.

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

Mortgage Servicing Rights -- At August 31, 1995, effective September 1,
1994, the Company adopted the provisions of SFAS No. 122 "Accounting for
Mortgage Servicing Rights -- an amendment of SFAS No. 65" (SFAS 122) which
requires that a mortgage banking enterprise recognize as separate assets the
rights to service mortgage loans for others however those servicing rights are
acquired. The effect of adopting SFAS No. 122 on the Company's financial
statements was to increase income before income taxes by $1,076,000 for the year
ended August 31, 1995. The fair value of capitalized mortgage servicing rights
is estimated by calculating the present value of expected net cash flows from
mortgage servicing using assumptions the Company believes market participants
would use in their estimates of future servicing income and expense, including
assumptions about prepayment, default and interest rates. Mortgage servicing
rights are amortized in proportion to and over the period of estimated net
servicing income. The estimate of fair value was based on

F-8
<PAGE> 101

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

a 125 basis points per annum servicing fee reduced by estimated costs of
servicing using a discount rate of 12% for the year ended August 31, 1996, and a
100 basis points per annum servicing fee reduced by estimated costs of servicing
using a discount rate of 12% for the year ended August 31, 1995. At August 31,
1995 and August 31, 1996, the book value of mortgage servicing rights
approximated fair value. The Company periodically reviews mortgage servicing
rights to determine impairment. This review is performed on a disaggregated
basis, based upon date of origination. Impairment is recognized in a valuation
allowance for each pool in the period of impairment. The Company has developed
its assumptions based on experience with its own portfolio, available market
data and ongoing consultation with its investment bankers.

Allowance for Credit Losses -- Provision for credit losses relating to
unsold loans is recorded as expense in amounts sufficient to maintain the
allowance at a level considered adequate to provide for anticipated losses
resulting from liquidation of outstanding loans. The provision for credit losses
is based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay,
collateral values, and estimated Federal Housing Authority (FHA) insurance
recoveries on Title I Loans.

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

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

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

Allowance for Credit Losses on Loans Sold with Recourse -- Recourse to the
Company on sales of loans is governed by the agreements between the purchasers
and the Company. The allowance for credit losses on loans sold with recourse
represents the Company's estimate of its probable future credit losses to be
incurred over the lives of the loans, considering estimated future FHA insurance
recoveries on Title I Loans. No allowance for credit losses on loans sold with
recourse is established on loans sold through securitizations, as the Company
has no recourse obligation under those securitization agreements. Estimated
credit losses on loans sold through securitizations are considered in the
Company's valuation of its residual interest securities.

Proceeds from the sale of loans with recourse provisions were $6,397,000,
$84,952,000, and $118,082,000 for the years ended August 31, 1994, 1995, and
1996, respectively.

Interest Income -- Interest income is recorded as earned. Interest income
represents the interest earned on loans held for sale during the period prior to
their securitization or other sale, mortgage related securities, and short term
investments. In accordance with EITF Issue No. 89-4, the Company computes an
effective yield based on the carrying amount of each mortgage related security
and its estimated future cash flow. This yield is then used to accrue interest
income on the mortgage related security.

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

F-9
<PAGE> 102

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Loan Servicing Income -- Fees for servicing loans originated or acquired by
the Company and sold with servicing rights retained are generally based on a
stipulated percentage of the outstanding principal balance of such loans and are
recognized when earned. Interest received on loans sold, less amounts paid to
investors, is reported as loan servicing income. Capitalized mortgage servicing
rights and excess servicing rights are amortized systematically to reduce loan
servicing income to an amount representing normal servicing income and the
present value discount. Late charges and other miscellaneous income are
recognized when collected. Costs to service loans are recorded to expense as
incurred.

Income Taxes -- The Company files a consolidated federal income tax return
with its parent, 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.

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.

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

In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the stock.

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

SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 125) was issued by FASB in June 1996.
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. This statement also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. It requires that
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value. SFAS 125 also
requires that servicing assets be measured by allocating the carrying amount
between the assets sold and retained interests based on their relative fair
values at the date of transfer. Additionally, this statement requires that the
servicing assets and liabilities be subsequently measured by (a) amortization in
proportion to and over the period of estimated net servicing income and (b)
assessment for asset impairment or increased obligation based on their fair
values. The statement will require that the Company's existing and future excess
servicing receivables be measured at fair market value and be reclassified as
interest only strip securities and accounted for in accordance with

F-10
<PAGE> 103

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

SFAS 115. As required by the statement, the Company will adopt the new
requirements effective January 1, 1997. It is not anticipated that upon
implementation, the statement will have any material impact on the financial
statements of the Company, as the book value of the Company's excess servicing
rights and mortgage related securities approximates fair value.

Stock Split -- The accompanying financial statements retroactively reflect
a 1,600 for 1 stock split, an increase in authorized shares of common stock to
50,000,000, and the establishment of a $.01 par value per share effective
October 28, 1996.

Pro Forma Net Income Per Share (Unaudited) -- Shares used in computing pro
forma net income per share include the weighted average of common stock
outstanding during the period, adjusted for the 1,600 for 1 stock split. There
were no common stock equivalents. Historical per share data is not included on
the Statements of Operations because the data is not considered relevant or
indicative of the ongoing operations of the Company. Net income utilized in the
calculation of pro forma net income per share has been reduced by an estimated
pro forma interest expense in the amount of $1,544,000 and a related tax benefit
of $587,000 based upon the application of a 13% interest rate to the Company's
average balance of non-interest bearing debt payable to Mego Financial. Pro
forma net income per share would change by $0.01 with a 1% change in the
interest rate utilized.

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

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure 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.

3. FAIR VALUES OF FINANCIAL INSTRUMENTS

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

F-11
<PAGE> 104

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
CARRYING ESTIMATED FAIR
VALUE VALUE
-------- --------------
<S> <C> <C>
Financial Assets:
Cash(a)...................................................... $ 443 $ 443
Loans held for sale, net(b).................................. 4,610 5,371
Mortgage related securities(c)............................... 22,944 22,944
Excess servicing rights(c)................................... 12,121 12,121
Mortgage servicing rights(c)................................. 3,827 3,827
Financial Liabilities:
Notes and contracts payable(d)............................... 14,197 14,197
</TABLE>

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

(a) Carrying value was used as the estimate of fair value.
(b) Since it is the Company's business to sell loans it originates, the fair
value was estimated by using outstanding commitments from investors
adjusted for non-qualified loans and the collateral securing such loans.
(c) The fair value was estimated by discounting future cash flows of the
instruments using discount rates, default, loss and prepayment assumptions
based upon available market data, opinions from investment bankers and
portfolio experience.
(d) Notes payable generally are adjustable rate, indexed to the prime rate;
therefore, carrying value approximates fair value. Contracts payable
represent capitalized equipment leases with a weighted average interest
rate of 9.48%, which approximates fair value.

At August 31, 1996, the Company had $59,597,000 in outstanding commitments
to originate and purchase loans and no other off-balance sheet financial
instruments. A fair value of the commitments was estimated at $6.8 million by
calculating a theoretical gain or loss on the sale of a funded loan adjusted for
an estimate of loan commitments not expected to fund, considering the difference
between investor yield requirements and the committed loan rates. The estimated
fair value is not necessarily representative of the actual gain to be recorded
on such loan sales in the future.

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

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

F-12
<PAGE> 105

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. CONCENTRATIONS OF RISK

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

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

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

Geographic Concentrations -- The Company's servicing portfolio and loans
sold with recourse are geographically diversified within the United States. The
Company services mortgage loans in 47 states and the District of Columbia. At
August 31, 1996, 36% of the dollar value of loans serviced had been originated
in California, and 13% in Florida. No other state accounted for more than 10% of
the servicing portfolio. The risk inherent in such concentrations is dependent
upon regional and general economic stability which affects property values and
the financial stability of the borrowers.

Credit Risk -- The Company is exposed to on-balance sheet credit risk
related to its loans held for sale and mortgage related securities. The Company
is exposed to off-balance sheet credit risk related to loans which the Company
has committed to originate and loans sold under recourse provisions. The
outstanding balance of loans sold with recourse provisions totaled $88,566,000
and $81,458,000 at August 31, 1995 and 1996, respectively.

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

F-13
<PAGE> 106

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

5. LOANS HELD FOR SALE, ALLOWANCE FOR CREDIT LOSSES, LOAN ORIGINATIONS, AND
LOANS SERVICED

Loans held for sale, net of allowance for credit losses, consisted of the
following (thousands of dollars):

<TABLE>
<CAPTION>
AUGUST 31,
---------------
1995 1996
------ ------
<S> <C> <C>
Loans held for sale.................................................. $3,750 $4,705
Less allowance for credit losses..................................... (74) (95)
------ ------
Total...................................................... $3,676 $4,610
====== ======
</TABLE>

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

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
---------------------
1994 1995 1996
---- ---- -------
<S> <C> <C> <C>
Balance at beginning of year.................................... $-- $ 96 $ 960
Provisions for credit losses.................................... 96 864 1,510
Reductions due to reacquisition and securitization.............. -- -- (1,455)
--- ---- ------
Balance at end of year.......................................... $96 $960 $ 1,015
=== ==== ======
Allowance for credit losses..................................... $30 $ 74 $ 95
Allowance for credit losses on loans sold with recourse......... 66 886 920
--- ---- ------
Total................................................. $96 $960 $ 1,015
=== ==== ======
</TABLE>

During 1996, $113,917,000 of loans sold under recourse provisions were
repurchased and securitized as further described in Note 2. Reductions due to
reacquisition and securitization represent the allowance for credit losses on
loans sold with recourse transferred to the cost basis of the mortgage related
securities as a result of these transactions.

F-14
<PAGE> 107

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
AUGUST 31,
------------------
1995 1996
------- --------
<S> <C> <C>
Amount of Title I Loan originations............................... $87,751 $127,785
Amount of conventional loan originations.......................... -- 11,582
------- --------
Total................................................... $87,751 $139,367
======= ========
Loans serviced (including loans securitized, loans sold to
investors and loans held for sale)
Title I Loans................................................... $92,286 $202,766
Conventional loans.............................................. -- 11,423
------- --------
Total................................................... $92,286 $214,189
======= ========
</TABLE>

6. MORTGAGE RELATED SECURITIES

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

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

<TABLE>
<S> <C>
Interest only securities................................................... $ 4,602
Residual interest securities............................................... 18,342
-------
Total............................................................ $22,944
=======
</TABLE>

No mortgage related securities were owned during 1995.

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

<TABLE>
<S> <C>
Balance at beginning of year............................................... $ --
Additions due to securitizations, at cost.................................. 20,096
Net unrealized gain........................................................ 2,697
Accretion of residual interest............................................. 243
Principal reductions....................................................... (92)
-------
Balance at end of year........................................... $22,944
=======
</TABLE>

7. EXCESS SERVICING RIGHTS

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

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-------------------------
1994 1995 1996
---- ------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ -- $ 904 $ 14,483
Plus additions.............................................. 904 14,098 20,563
Less amortization........................................... -- (519) (2,144)
Less amounts related to loans repurchased, securitized and
transferred to mortgage related securities................ -- -- (20,781)
---- ------- -------
Balance at end of year............................ $904 $14,483 $ 12,121
==== ======= =======
</TABLE>

F-15
<PAGE> 108

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

As of August 31, 1994, 1995 and 1996, excess servicing rights consisted of
excess cash flows on serviced loans totaling $6,555,000, $88,566,000 and
$81,458,000, yielding weighted average interest rates of 12.9%, 13.3% and 12.8%,
and net of normal servicing and pass-through fees with weighted average
pass-through yields to the investor of 8.5%, 8.4% and 8.1%, respectively. These
loans were sold under recourse provisions as described in Note 2.

During 1996, $113,917,000 of loans sold were repurchased and securitized as
further described in Note 2. Excess servicing rights related to the loans
repurchased and securitized of $20,781,000 were transferred to the cost basis of
the mortgage related securities as a result of these transactions.

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

8. MORTGAGE SERVICING RIGHTS

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

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
----------------------
1994 1995 1996
---- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................... $ -- $ -- $1,076
Plus additions................................................. -- 1,176 3,306
Less amortization.............................................. -- (100) (555)
---- ------ ------
Balance at end of year............................... $ -- $1,076 $3,827
==== ====== ======
</TABLE>

As indicated in Note 2, the Company adopted the provisions of SFAS 122
effective September 1, 1994.

The Company had no valuation allowance for mortgage servicing rights during
1994, 1995 and 1996, as the cost basis of mortgage servicing rights approximated
fair value.

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

F-16
<PAGE> 109

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (thousands of dollars):

<TABLE>
<CAPTION>
AUGUST 31,
--------------
1995 1996
----- ------
<S> <C> <C>
Office equipment and furnishings..................................... $ 337 $ 640
EDP equipment........................................................ 166 470
Vehicles............................................................. 34 34
----- ------
537 1,144
Less accumulated depreciation........................................ (108) (279)
----- ------
Total property and equipment, net.......................... $ 429 $ 865
===== ======
</TABLE>

10. OTHER ASSETS

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

<TABLE>
<CAPTION>
AUGUST 31,
--------------
1995 1996
----- ------
<S> <C> <C>
Deferred borrowing costs............................................. $ 129 $ 216
Software costs, net of amortization (See Note 14).................... 127 154
Other................................................................ 60 411
---- ----
Total...................................................... $ 316 $ 781
==== ====
</TABLE>

11. NOTES AND CONTRACTS PAYABLE

Notes and contracts payable consisted of the following (thousands of
dollars):

<TABLE>
<CAPTION>
AUGUST 31,
----------------
1995 1996
------ -------
<S> <C> <C>
Note payable -- warehouse line of credit............................ $1,039 $ 3,265
Note payable -- revolving line of credit............................ -- 10,000
Other............................................................... 419 932
------ -------
Total..................................................... $1,458 $14,197
====== =======
</TABLE>

Notes payable at August 31, 1996 included $3,265,000 of borrowings
outstanding under a Warehousing Credit and Security Agreement with a lender that
provides available credit facilities up to $20,000,000. The outstanding
borrowings bear interest at the bank's prevailing prime rate plus 1% (9.25% at
August 31, 1996) and are collateralized by security interests in the Company's
loans held for sale. The warehouse line of credit matures on August 9, 1997.

At August 31, 1996, the Company had a $10,000,000 revolving line of credit
with the same lender maturing on June 30, 2000, bearing interest at the bank's
prevailing prime rate plus 2% (10.25% at August 31, 1996). This facility was
secured by a pledge of the Company's excess servicing rights and mortgage
related securities. The facility has an 18 month revolving credit period
expiring on approximately December 31, 1997, followed by a 30 month payment
period. Borrowings under this facility cannot exceed the lesser of (a) 40% of
the Company's excess servicing rights and mortgage related securities or (b) 6
times the aggregate of the excess servicing rights and mortgage related
securities payments actually received by the Company over the most recent 3
month period. The agreement contains certain restrictions, including but not
limited to, restrictions on additional indebtedness and restrictions on capital
distributions, through minimum tangible net worth requirements of $12.5 million
plus 50% of cumulative net income since May 1, 1996 (50% of cumulative net
income for the period May 1, 1996 to August 31, 1996 was $1.1 million).

F-17
<PAGE> 110

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Both the warehouse line of credit and the revolving line of credit are
subject to a requirement of the maintenance of a minimum tangible net worth of
$12,500,000 plus 50% of cumulative net income since May 1, 1996 and a minimum
level of profitability of at least $500,000 per rolling six month period. Both
lines of credit have been guaranteed by Mego Financial.

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

Scheduled maturities of the Company's contracts payable of $932,000 at
August 31, 1996 are as follows (thousands of dollars):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------
TOTAL 1997 1998 1999 2000 2001
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 932 $255 $272 $221 $179 $5
</TABLE>

12. ADDITIONAL PAID-IN CAPITAL

In 1995, Mego Financial contributed $3,000,000 to the Company as additional
paid-in capital. During fiscal 1994, Mego Financial contributed $650,000 to the
Company as additional paid-in capital through the issuance of 475,000 shares of
common stock of Mego Financial. The Mego Financial common stock was issued to an
unrelated company for its services in obtaining the necessary HUD approval,
state licensing and other matters in connection with the organization of the
Company. The value of the Mego Financial stock was based upon the closing bid
price of Mego Financial stock as of the date of the agreement with the third
party, reduced by (a) an estimate of the costs which would be incurred to
register the stock to allow its sale to the public; and (b) an estimate of the
discount a seller would incur upon selling a large block of shares. The Company
reduced the due to parent company account as a result of this transaction.

13. COMMITMENTS AND CONTINGENCIES

The Company leases an office under the terms of an operating lease that
expires March 31, 1999. During fiscal 1994, 1995 and 1996, the Company's rent
expense related to this lease was $54,000, $154,000 and $164,000, respectively.
In April 1996, the Company executed an operating lease for its main offices in a
second location which it will occupy in late 1996. The 1996 lease commences
September 1, 1996, expires August 31, 2002, and is guaranteed by Mego Financial.
Future minimum rental payments under these operating leases are set forth below
(thousands of dollars):

<TABLE>
<S> <C>
FOR THE YEARS ENDED AUGUST 31,
1997........................................................................ $ 943
1998........................................................................ 1,071
1999........................................................................ 1,005
2000........................................................................ 939
2001........................................................................ 957
Thereafter.................................................................. 978
------
Total............................................................. $5,893
======
</TABLE>

In the general course of business the Company, at various times, has been
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 affect on the business or financial condition of the Company.

F-18
<PAGE> 111

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

14. RELATED PARTY TRANSACTIONS

During the years ended August 31, 1994, 1995, and 1996, Preferred Equities
Corporation (PEC), a wholly-owned subsidiary of Mego Financial, provided certain
services to the Company including loan servicing and collection for a cost of
$13,000, $232,000, and $709,000, respectively. In addition, the affiliate
provided services including executive, accounting, legal, management
information, data processing, human resources, advertising and promotional
materials (management services) totaling $442,000, $690,000, and $671,000 which
amounts were included in general and administrative expenses for the years ended
August 31, 1994, 1995, and 1996, respectively. Included in other interest
expense for the years ended August 31, 1995 and 1996, are $85,000 and $29,000
related to advances from PEC.

During the years ended August 31, 1994, 1995 and 1996, the Company paid PEC
for developing certain computer programming (see Note 10), incurring costs of
$130,000, $36,000 and $56,000, respectively. The Company is amortizing these
costs over a five year period. During fiscal 1994, 1995 and 1996, amortization
of $13,000, $26,000 and $29,000, respectively, was included in expense. The
Company's agreement with PEC regarding loan servicing and collection services
charges the Company an annual rate of 0.5% of outstanding loans serviced by PEC
calculated and paid on a monthly basis. The costs charged to the Company for
management services provided by PEC represent an estimate of the costs incurred
by PEC which would have been incurred by the Company had it been operating as a
stand alone entity.

Management believes the allocation methodologies for services performed by
PEC is reasonable and is representative of an approximation of the expense the
Company would incur if it operated as a stand alone entity, unrelated to PEC.

At August 31, 1995 and 1996, the Company had a non-interest bearing
liability to Mego Financial of $8,453,000 and $11,994,000, respectively, for
federal income taxes and cash advances, which is due on demand and has not as
yet been paid. At August 31, 1996, the Company had a non-interest bearing
liability to PEC of $819,000 relating to charges for services to the Company.

Activity in due to parent company consisted of the following (thousands of
dollars):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST
31,
--------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Balance at beginning of year............................... $ -- $ -- $ 8,453
Provision for federal taxes................................ -- 2,013 3,566
Cash advances from parent.................................. -- 9,053 5,475
Repayments of advances..................................... -- (2,613) (5,500)
------ ------- -------
Balance at end of year........................... $ -- $ 8,453 $11,994
====== ======= =======
Average balance during the year............................ $ -- $ 2,275 $11,874
====== ======= =======
</TABLE>

The Company anticipates issuing common stock and subordinated debt to the
public to support its cash flow needs in the future. Subsequent to these
transactions, it is not anticipated that Mego Financial will continue to provide
funds to the Company or guarantee its indebtedness. At August 31, 1996, Mego
Financial has no contractual obligation to provide such support other than its
guaranty of the warehouse line of credit, revolving credit loan and operating
leases described in Notes 11 and 13.

F-19
<PAGE> 112

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

15. INCOME TAXES

As described in Note 2, the Company records 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. For
the years ended August 31, 1994, 1995 and 1996, income tax expense has been
computed as follows (thousands of dollars):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST
31,
--------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Income (loss) before income taxes.......................... $(1,511) $5,919 $11,155
======= ====== =======
Federal income taxes at 34% of income...................... $ -- $2,013 $ 3,793
State income taxes, net of federal income tax benefit...... -- 264 442
------- ------ -------
Income tax expense......................................... $ -- $2,277 $ 4,235
======= ====== =======
</TABLE>

Income tax expense is comprised of the following (thousands of dollars):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Current..................................................... $ -- $2,047 $3,562
Deferred.................................................... -- 230 673
------- ------ ------
Total............................................. $ -- $2,277 $4,235
======= ====== ======
</TABLE>

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

<TABLE>
<CAPTION>
AUGUST 31,
-------------
1995 1996
---- ------
<S> <C> <C>
Deferred tax liabilities:
Difference between book and tax carrying value of assets............ $ -- $ 98
Unrealized gain on mortgage related securities...................... -- 1,025
Mortgage servicing rights........................................... 591 164
Other............................................................... 16 2
---- ------
607 1,289
---- ------
Deferred tax assets:
Allowances for credit losses........................................ 366 386
Difference between book and tax carrying value of assets............ 11 --
---- ------
377 386
---- ------
Net deferred tax liability.................................. $230 $ 903
==== ======
</TABLE>

16. RESTATEMENT

Subsequent to the issuance of its financial statements for the year ended
August 31, 1994, the Company determined that certain adjustments were required
to be made to the previously reported amounts as of and for the year ended
August 31, 1994.

F-20
<PAGE> 113

MEGO MORTGAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company accounts for its sales of loans under SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities" and SFAS No. 91 which require that
certain estimates and assumptions (such as the impact of prepayments,
cancellations and the discount period and rate) be made in order to compute the
present value of the income stream to be received over the estimated lives of
the loans sold by the Company. The Company determined that the estimates and
assumptions it used previously required revision. The net effect of the
restatement for the year ended August 31, 1994 was a decrease in income before
income taxes of $421,000. The effect on the Statement of Financial Condition at
August 31, 1994, was primarily a reduction of excess servicing rights.

The Company determined that it erroneously included certain expenses in
deferred organizational costs related to the fiscal year ended August 31, 1994.
Accordingly, costs and expenses were understated by $725,000 and amortization of
the organizations costs was overstated by $3,000. The effect of this restatement
on the Statement of Operations was to reduce income before income taxes in 1994
by $722,000. The effect of this restatement on the Statement of Financial
Condition of the Company at August 31, 1994, was to reduce other assets by
$722,000.

The restatement also included other miscellaneous adjustments. A summary of
the effect of the restatement on the Statement of Operations for the year ended
August 31, 1994 is as follows (thousands of dollars):

<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
Gain on sale of loans......................................... $ 1,206 $ 579
Interest income............................................... 298 279
Interest expense.............................................. 57 107
Provision for credit losses................................... 133 96
Depreciation and amortization................................. 189 136
Commissions and selling....................................... -- 13
General and administrative.................................... 1,471 1,995
Net loss...................................................... (368) (1,511)
</TABLE>

17. SUBSEQUENT EVENT (UNAUDITED)

In September 1996, the Company received a commitment from a financial
institution providing for the purchase of up to $2.0 billion of loans over a
five year period. Upon closing of the final agreement, Mego Financial will issue
to the financial institution four-year warrants to purchase 1,000,000 shares of
Mego Financial's common stock at an exercise price of $7.125 per share. The
value of the warrants, estimated at $3.0 million (0.15% of the commitment
amount) as of the commitment date, will be recorded as a commitment fee and
charged to expense as the commitment is utilized. The financial institution has
also agreed to provide the Company a separate one year facility of up to $11.0
million, less any amounts advanced under a separate $3.0 million repurchase
agreement, for the financing of the interest only and residual certificates from
future securitizations.

F-21
<PAGE> 114

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

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

------------------------------
TABLE OF CONTENTS
------------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 9
Use of Proceeds............................ 21
Capitalization............................. 22
Pro Forma Selected Financial Data.......... 23
Selected Financial Data.................... 24
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................ 26
Business................................... 38
Management................................. 54
Principal Stockholders..................... 59
Certain Transactions....................... 61
Description of the Notes................... 63
Underwriting............................... 90
Legal Matters.............................. 90
Experts.................................... 90
Additional Information..................... 91
Index to Financial Statements.............. F-1
</TABLE>

UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------

$40,000,000

MEGO (LOGO)

MEGO MORTGAGE CORPORATION

% SENIOR SUBORDINATED
NOTES DUE 2001
------------------------------
PROSPECTUS
------------------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
OPPENHEIMER & CO., INC.

, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 115

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 12,122
NASD filing fee........................................................... 4,500
Printing expenses......................................................... 100,000
Accounting fees and expenses.............................................. 90,000
Legal fees and expenses................................................... 125,000
Fees and expenses (including legal fees) for qualifications under state
securities laws......................................................... 5,000
Trustee's fees and expenses............................................... 15,000
Miscellaneous............................................................. 23,378
--------
Total........................................................... $375,000
========
</TABLE>

All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145(a) of the Delaware General Corporation Law (the "GCL") provides
that a Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.

Section 145(b) of the GCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.

Section 145 of GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsection (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation may purchase and maintain insurance on behalf of a
director or officer of the

II-1
<PAGE> 116

corporation against any liability asserted against such officer or director and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the corporation would have the power to indemnify him or
her against such liabilities under Section 145.

As permitted by Section 102(b)(7) of the GCL, the Company's Amended and
Restated Certificate of Incorporation provides that a director shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. However, such provision does not eliminate or
limit the liability of a director for acts or omissions not in good faith or for
breaching his or her duty of loyalty, engaging in intentional misconduct or
knowingly violating a law, paying a dividend or approving a stock repurchase
which was illegal, or obtaining an improper personal benefit. A provision of
this type has no effect on the availability of equitable remedies, such as
injunction or rescission, for breach of fiduciary duty.

The Company's Bylaws require the Company to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.

In addition, the Company's Bylaws require the Company to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification may
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.

Any indemnification (unless ordered by a court) made by the Company may be
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct as set forth
above. Such determination must be made (i) by the Board by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders.

To the extent that a director, officer, employee or agent of the Company
has been successful on the merits or otherwise in defense of any covered action,
suit or proceeding, or in defense of any covered claim, issue or matter therein,
he will be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.

Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the Company in advance of the
final disposition of such action, suit or proceeding as authorized by

II-2
<PAGE> 117

the Board in the specific case upon receipt of an undertaking by or on behalf of
the director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Company as authorized in
the Amended and Restated Certificate of Incorporation. Such expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the Board deems appropriate.

The Company presently maintains policies of directors' and officers'
liability insurance in the amount of $30.0 million.

Pursuant to the Underwriting Agreement to be filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with the Offering, including
certain liabilities under the Securities Act of 1933, as amended.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

No securities that were not registered under the 1933 Act have been issued
or sold by the Registrant within the past three years.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Underwriting Agreement.
3.1(3) -- Amended and Restated Certificate of Incorporation of the Registrant.
3.2(3) -- By-laws of the Registrant, as amended.
4.1 -- Form of Note.
4.2 -- Form of Indenture.
5.1 -- Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A.
10.1(3) -- Stock Option Plan
10.2(1) -- Agreement for Line of Credit and Commercial Promissory Note between the
Registrant and First National Bank of Boston, dated January 4, 1994.
10.3(1) -- Agreement between the Registrant and Hamilton Consulting, Inc., dated January
31, 1994.
10.4(1) -- Loan Purchase and Sale Agreement dated March 22, 1994, between the Registrant as
Buyer, and Southwest Beneficial Finance, Inc. as Seller.
10.5(1) -- Master Loan Purchase and Servicing Agreement dated as of August 26, 1994,
between the Registrant as Seller, and First National Bank of Boston, as
Purchaser.
10.6(2) -- Master Loan Purchase and Servicing Agreement dated April 1, 1995, by and between
Greenwich Capital Financial Products, Inc. and the Registrant.
10.7(2) -- Participation and Servicing Agreement dated May 25, 1995, by and between
Atlantic Bank, N.A. and the Registrant.
10.8(2) -- Warehousing Credit and Security Agreement, dated as of August 11, 1995, between
the Registrant and First National Bank of Boston.
10.9(3) -- Form of Tax Allocation and Indemnity Agreement to be entered into between the
Registrant and Mego Financial Corp.
10.10(3) -- Loan Program Sub-Servicing Agreement between the Registrant and Preferred
Equities Corporation dated as of September 1, 1996.
10.11(3) -- Servicing Agreement by and among Mego Mortgage FHA Title I Loan Trust 1996-1,
First Trust of New York, National Association, as Trustee, Norwest Bank
Minnesota, N.A., as Master Servicer and the Registrant, as Servicer dated as of
March 21, 1996.
10.12(3) -- Loan Purchase Agreement between Financial Asset Securities Corp., as Purchaser,
and the Registrant, as Seller, dated as of March 21, 1996.
10.13* -- Indemnification Agreement among MBIA Insurance Corporation, as Insurer, the
Registrant, as Seller and Greenwich Capital Markets, Inc. as Underwriter, dated
as of March 29, 1996.
</TABLE>

II-3
<PAGE> 118

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
10.14(3) -- Pooling and Servicing Agreement, dated as of March 21, 1996, among the
Registrant, Financial Asset Securities Corp., as Depositor, First Trust of New
York, National Association, as Trustee and Contract of Insurance Holder and
Norwest Bank Minnesota, N.A., as Master Servicer.
10.15* -- Insurance Agreement among MBIA Insurance Corporation, as Insurer, Norwest Bank
Minnesota, N.A., as Master Servicer, the Registrant, as Seller, Servicer and
Claims Administrator, Financial Asset Securities Corp., as Depositor, Greenwich
Capital Financial Products, Inc., and First Trust of New York, National
Association, as Trustee and Contract of Insurance Holder, dated as of March 21,
1996.
10.16* -- Credit Agreement dated as of June 28, 1996 between the Registrant and First
National Bank of Boston as Agent.
10.17(3) -- Loan Purchase Agreement dated as of August 1, 1996 between Financial Asset
Securities Corp., as Purchaser, and the Registrant, as Seller.
10.18(3) -- Pooling and Servicing Agreement dated as of August 1, 1996 between Financial
Asset Securities Corp., as Purchaser, and the Registrant, as Seller.
10.19* -- Amendment No. 1 to Warehousing Credit and Security Agreement dated as of August
9, 1996 between the Registrant and First National Bank of Boston.
10.20(3) -- Office Lease by and between MassMutual and the Registrant dated April 1996.
10.21* -- Amendment to Master Loan Purchase and Servicing Agreement between Greenwich
Capital Financial Products, Inc. and the Registrant dated February 1, 1996.
10.22* -- Amendment No. 2 to Master Loan Purchase and Servicing Agreement between
Greenwich Capital Financial Products, Inc. and the Registrant dated July 1,
1996.
10.23(3) -- Services and Consulting Agreement between the Registrant and Preferred Equities
Corporation dated as of September 1, 1996.
10.24* -- Employment Agreement between the Registrant and Jeffrey S. Moore dated January
1, 1994.
10.25(3) -- Master Repurchase Agreement dated as of September 4, 1996 between the Registrant
and Greenwich Capital Markets, Inc.
10.26(3) -- Letter agreement dated October 1, 1996 between the Registrant and Greenwich
Capital Markets, Inc.
10.27(3) -- Amended and Restated Master Loan Purchase and Servicing Agreement dated as of
October 1, 1996 among the Registrant, Mego Financial Corp. and Greenwich Capital
Markets, Inc.
10.28(3) -- Form of Agreement to be entered into between the Registrant and Mego Financial
Corp.
10.29(3) -- Commitment letter between the Registrant and Greenwich Capital Markets, Inc.
dated September 17, 1996.
12.1(3) -- Computation of Ratio of Earnings to Fixed Charges.
21.1(3) -- Subsidiaries of the Registrant.
23.1 -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (included
in its opinion filed as Exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP.
23.3(3) -- Consent of Director Nominees.
24.1* -- Power of Attorney.
25.1 -- Statement of Eligibility of Trustee.
27.1(3) -- Financial Data Schedule (for SEC use only)
</TABLE>

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

* Previously filed

(1) Filed as part of the Form 10-K for the fiscal year ended August 31, 1994 of
Mego Financial Corp. and incorporated herein by reference.
(2) Filed as part of the Form 10-K for the fiscal year ended August 31, 1995 of
Mego Financial Corp. and incorporated herein by reference.

(3) Filed as part of the Registration Statement on Form S-1 filed by the Company
on September 20, 1996, as amended (File No. 333-12443), and incorporated
herein by reference.

II-4
<PAGE> 119

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE> 120

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on November 13, 1996.

MEGO MORTGAGE CORPORATION

By: /s/ JEROME J. COHEN
------------------------------------
Jerome J. Cohen,
Chairman of the Board and Chief
Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<C> <S> <C>
/s/ JEROME J. COHEN Chairman of the Board and November 13, 1996
- --------------------------------------------- Chief Executive Officer
JEROME J. Cohen

/s/ JEFFREY S. MOORE* President, Chief Operating November 13, 1996
- --------------------------------------------- Officer and Director
Jeffrey S. Moore

/s/ JAMES L. BELTER* Executive Vice President November 13, 1996
- --------------------------------------------- and Chief Financial
James L. Belter Officer

/s/ ROBERT NEDERLANDER* Director November 13, 1996
- ---------------------------------------------
Robert Nederlander

/s/ HERBERT B. HIRSCH* Director November 13, 1996
- ---------------------------------------------
Herbert B. Hirsch

/s/ DON A. MAYERSON Director November 13, 1996
- ---------------------------------------------
Don A. Mayerson

*By: /s/ JEROME J. COHEN
- ---------------------------------------------
Jerome J. Cohen
Attorney-in-fact
</TABLE>

II-6

<PAGE> 1
EXHIBIT 1.1

MEGO MORTGAGE CORPORATION

__% SENIOR SUBORDINATED NOTES DUE 2001

UNDERWRITING AGREEMENT

______, 1996

<PAGE> 2

UNDERWRITING AGREEMENT

________, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
OPPENHEIMER & CO., INC.
c/o FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
1001 19th Street North
Arlington, Virginia 22209

Dear Sirs:

Mego Mortgage Corporation (the "Company") confirms its agreement with
Friedman, Billings, Ramsey & Co., Inc. and Oppenheimer & Co., Inc., as
underwriters (collectively, the "Underwriters"), with respect to the sale by
the Company and the purchase by the Underwriters of $40,000,000 aggregate
principal amount of the Company's __% Senior Subordinated Notes due 2001 (the
"Notes"). The Notes will be issued pursuant to an indenture, dated as of
________, 1996 (the "Indenture") between the Company and _____, as trustee (the
"Trustee").

The Company understands that the Underwriters propose to make a public
offering of the Notes as soon as the Underwriters deem advisable after this
Agreement has been executed and delivered.

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1 (No. 333-13421) and a
related preliminary prospectus for the registration of the Notes under the
Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations thereunder (the "Securities Act Regulations"). The Company has
prepared and filed such amendments thereto, if any, and such amended
preliminary prospectuses, if any, as may have been required to the date hereof,
and will file such additional amendments thereto and such amended prospectuses
as may hereafter be required. The registration statement has been declared
effective under the Securities Act by the Commission. The registration
statement as amended at the time it became effective (including all information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) of the Securities Act Regulations) is
hereinafter called the "Registration Statement." Any registration statement
filed pursuant to Rule 462(b) of the Securities Act Regulations is hereinafter
called the "Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the 462(b) Registration Statement. Each
prospectus included in the registration statement, or amendments thereof,
before it became effective under the Securities Act and any prospectus filed
with the Commission by the Company with the consent of the Underwriters
pursuant to Rule 424(a) of the Securities Act Regulations is hereinafter called
the "Preliminary Prospectus." The term "Prospectus" means the final
prospectus, as first filed with the Commission pursuant to paragraph (1) or (4)
of Rule 424(b) of the Securities Act Regulations. The Commission has not
issued any order preventing or suspending the use of any Preliminary
Prospectus.

<PAGE> 3

The Company and the Underwriters agree as follows:

1. Sale and Purchase: Upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
agrees to sell to each of the Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company the respective
aggregate principal amount of Notes set forth opposite the name of such
Underwriter on Schedule I to this Agreement, in each case at a purchase price
of ___% of the principal amount thereof, plus accrued interest, if any, from
___, 1996 to the Closing Time (as defined below). The Underwriters may from
time to time increase or decrease the public offering price after the initial
public offering to such extent as the Underwriters may determine.

2. Payment and Delivery: Payment of the purchase price for the Notes
shall be made to the Company by wire transfer or certified or official bank
check payable in federal (same-day) funds at the office of Gibson, Dunn &
Crutcher LLP, 200 Park Avenue, New York, New York 10166 (unless another place
shall be agreed upon by the Underwriters and the Company) against delivery of
the certificates for the Notes to you for your account. Such payment and
delivery shall be made at 10:00 a.m., New York City time, on the third (fourth,
if pricing occurs after 4:30 p.m. New York City time) business day after the
date hereof (unless another time, not later than ten business days after such
date, shall be agreed to by the Underwriters and the Company). The time at
which such payment and delivery are actually made is hereinafter sometimes
called the "Closing Time." Certificates for the Notes shall be delivered to
the Underwriters in definitive form registered in such names and in such
denominations as the Underwriters shall specify. For the purpose of expediting
the checking of the certificates for the Notes by the Underwriters, the Company
agrees to make such certificates available to the Underwriters for such purpose
at least one full business day preceding the Closing Time.

3. Representations and Warranties of the Company: The Company represents
and warrants to each Underwriter that:

(a) each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Securities Act and
no stop order suspending the effectiveness of the Registration Statement
or any Rule 462(b) Registration Statement has been issued under the
Securities Act and no proceedings for that purpose have been instituted
or are pending or, to the knowledge of the Company, are contemplated by
the Commission, and any request on the part of the Commission for
additional information has been complied with;

(b) the Registration Statement complies and the Prospectus and any
further amendments or supplements thereto will, when they become
effective or are filed with the Commission, as the case may be, comply in
all material respects with the requirements of the Securities Act and the
Securities Act Regulations and the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act") and the rules and regulations
thereunder (the "Trust Indenture Act Regulations"); the Registration
Statement did not, and any amendment thereto will not, in each case as of
the applicable effective date, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the
Prospectus

<PAGE> 4

and any amendment or supplement thereto will not, as of the applicable
filing date and at Closing Time, contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes
no warranty or representation with respect to any statement contained in
the Registration Statement or the Prospectus in reliance upon and in
conformity with information concerning the Underwriters and furnished in
writing by or on behalf of the Underwriters to the Company expressly for
use in the Registration Statement or the Prospectus;

(c) the Prospectus delivered to the Underwriters for use in
connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T;

(d) the Company had at the date indicated the duly authorized and
outstanding capitalization set forth in the Prospectus under the caption
"Capitalization"; all of the issued and outstanding shares of capital
stock of the Company have been duly and validly authorized and issued and
are fully paid and non-assessable; the Company is a corporation duly
organized and validly existing under the laws of the State of Delaware,
with full power and authority to own its properties and conduct its
business as described in the Registration Statement and the Prospectus,
and to execute and deliver this Agreement and the Indenture and issue the
Notes; the Company has no subsidiaries;

(e) except as disclosed in the Registration Statement and the
Prospectus with respect to the possible termination of servicing rights,
the Company is not in breach of, or in default under (nor has any event
occurred which with notice, lapse of time, or both would constitute a
breach of, or default under), its certificate of incorporation or
by-laws or in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, bank loan or credit agreement or other agreement or
instrument to which the Company is a party or by which it is bound,
except for such breaches or defaults which would not have a material
adverse effect on the operations, business or condition of the Company,
and the execution, delivery and performance of this Agreement and the
Indenture and the issuance of the Notes and consummation of the
transactions contemplated hereby and thereby will not conflict with, or
result in any breach of or constitute a default under (nor constitute any
event which with notice, lapse of time, or both would constitute a breach
of, or default under), (i) any provision of the certificate of
incorporation or by-laws of the Company, or (ii) any provision of any
license, indenture, mortgage, deed of trust, bank loan or credit
agreement or other agreement or instrument to which the Company is a
party or by which it or its properties may be bound or affected, or under
any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company, except in the case
of this clause (ii) for such breaches or defaults which would not have a
material adverse effect on the operations, business or condition of the
Company;

(f) the Indenture has been duly authorized by the Company and when
executed and delivered by the Company and the Trustee will be a legal,
valid and binding agreement of the Company enforceable in accordance with
its terms, except as may be limited by

<PAGE> 5

bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, and by general principles of
equity;

(g) the Notes have been duly authorized by the Company and when
executed by the Company, authenticated by the Trustee and delivered
against payment therefor as contemplated by this Agreement, will
constitute legal, valid and binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits
of the Indenture, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and by general principles of equity;

(h) this Agreement has been duly authorized, executed and delivered
by the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, and by general principles of
equity, and except to the extent that the indemnification provisions of
Section 8 hereof may be limited by federal or state securities laws and
public policy considerations in respect thereof;

(i) the Notes and the Indenture conform in all material respects to
the description thereof contained in the Registration Statement and
Prospectus;

(j) no approval, authorization, consent or order of or filing with
any federal, state or local governmental or regulatory commission, board,
body, authority or agency is required in connection with the execution,
delivery and performance of the Indenture and the sale of the Notes as
contemplated hereby other than (A) such as have been obtained or made, or
will have been obtained or made at the Closing Time, under the Securities
Act and the Trust Indenture Act, and (B) any necessary qualification
under the securities or blue sky laws of the various jurisdictions in
which the Notes are being offered by the Underwriters;

(k) Deloitte & Touche LLP, whose reports on the financial statements
of the Company are filed with the Commission as part of the Registration
Statement and Prospectus, are independent public accountants as required
by the Securities Act and the Securities Act Regulations;

(l) the Company has all necessary licenses, authorizations, consents
and approvals and has made all necessary filings required under any
federal, state or local law, regulation or rule, and has obtained all
necessary authorizations, consents and approvals from other persons,
required in order to conduct its business, except to the extent that any
failure to have any such licenses, authorizations, consents or approvals,
to make any such filings or to obtain any such authorizations, consents
or approvals would not, alone or in the aggregate, have a material
adverse effect on the business, properties, prospects, results of
operations or condition of the Company; the Company is not in violation
of, or in default under, any such license, authorization, consent or
approval or any federal, state, local or foreign law, regulation or rule
or any decree, order or judgment applicable to the

<PAGE> 6

Company the effect of which could be material and adverse to the
business, properties, prospects, results of operations or condition of
the Company;

(m) all legal or governmental proceedings, contracts or documents of
a character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
have been so described or filed as required;

(n) except as disclosed in the Registration Statement and the
Prospectus with respect to the Commission's investigation of Mego
Financial Corp. (the Company's parent), there are no actions, suits or
proceedings pending or, to the Company's knowledge, threatened against
the Company or any of its properties, at law or in equity, or before or
by any federal, state, local or foreign governmental or regulatory
commission, board, body, authority or agency which could result in a
judgment, decree or order having a material adverse effect on the
business, condition, prospects or property of the Company;

(o) the financial statements, including the notes thereto, included
in the Registration Statement and the Prospectus present fairly the
financial position of the Company as of the dates indicated and the
results of operations and changes in financial position and cash flow of
the Company for the periods specified; such financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as
indicated in the notes thereto);

(p) subsequent to the effective date of the Registration Statement
and the date of the Prospectus, and except as may be otherwise stated in
the Registration Statement or Prospectus, there has not been (A) any
material and unfavorable change, financial or otherwise, in the business,
properties, prospects, results of operations or condition (financial or
otherwise), present or prospective, of the Company, (B) any transaction,
other than in the ordinary course of business, which is material to the
Company, contemplated or entered into by the Company or (C) any
obligation, contingent or otherwise, directly or indirectly incurred by
the Company, other than in the ordinary course of business, which is
material to the Company;

(q) the Company has complied with, and is and will be in compliance
with, the provisions of that certain Florida act relating to disclosure
of doing business with Cuba, codified as Section 517.075 of the Florida
statutes, and the rules and regulations thereunder (collectively, the
"Cuba Act") or is exempt therefrom;

(r) the Company is not, and upon the sale of the Notes as herein
contemplated and the application of the net proceeds therefrom as
described in the Prospectus under the caption "Use of Proceeds," will not
be, an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940,
as amended (the "1940 Act");

(s) there are no persons with registration or other similar rights
to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the Securities Act;

<PAGE> 7

(t) any certificate signed by any officer of the Company delivered
to the Underwriters or to counsel for the Underwriters pursuant to or in
connection with this Agreement shall be deemed a representation and
warranty by the Company to the Underwriters as to the matters covered
thereby; and

(u) The Company has prepared and filed with the Commission a
registration statement on Form S-1 (No. 333-12443) including a prospectus
(including any amendments or supplements thereto, the "Common Stock
Registration Statement") registering up to 2,300,000 shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"),
in connection with the proposed public offering of the Common Stock.

4. Certain Covenants of the Company: The Company hereby agrees with each
Underwriter:

(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Notes for offering and sale under the
securities or blue sky laws of such states as the Underwriters may
designate and to maintain such qualifications in effect as long as
required for the distribution of the Notes, provided that the Company
shall not be required to qualify as a foreign corporation or to consent
to the service of process under the laws of any such state or subject
itself to taxation as doing business in any jurisdiction (except service
of process with respect to the offering and sale of the Notes);

(b) to prepare the Prospectus in a form approved by the Underwriters
and file such Prospectus with the Commission pursuant to Rule 424(b) not
later than 10:00 a.m. (New York City time), on the second business day
following the execution and delivery of this Agreement and to furnish
promptly (and with respect to the initial delivery of such Prospectus,
not later than 10:00 a.m. (New York City time) on the day following the
execution and delivery of this Agreement) to the Underwriters as many
copies of the Prospectus (or of the Prospectus as amended or
supplemented if the Company shall have made any amendments or
supplements thereto after the effective date of the Registration
Statement) as the Underwriters may reasonably request for the purposes
contemplated by the Securities Act Regulations, which Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T;

(c) to advise the Underwriters promptly and (if requested by the
Underwriters) to confirm such advice in writing, when the Registration
Statement has become effective and when any post-effective amendment
thereto becomes effective under the Securities Act Regulations;

(d) to advise the Underwriters promptly, confirming such advice in
writing, of (i) the happening of any event known to the Company within
the time during which a Prospectus relating to the Notes is required to
be delivered under the Securities Act Regulations which, in the judgment
of the Company, would require the making of any

7
<PAGE> 8

change in the Prospectus then being used so that the Prospectus would
not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading, (ii) any request by the Commission for amendments
or supplements to the Registration Statement or Prospectus or for
additional information with respect thereto, or (iii) the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus, or of the suspension of
the qualification of the Notes for offering or sale in any jurisdiction,
or of the initiation or threatening of any proceedings for any of such
purposes and, if the Commission or any other government agency or
authority should issue any such order, to make every reasonable effort to
obtain the lifting or removal of such order as soon as possible; to
prepare and furnish, at the Company's expense, to the Underwriters
promptly any proposed amendments or supplements to the Registration
Statement or Prospectus as may be necessary and to file no such amendment
or supplement to which the Underwriters shall reasonably object in
writing;

(e) to furnish to the Underwriters for a period of five years from
the date of this Agreement (i) copies of all annual, quarterly and
current reports supplied to holders of the Notes, (ii) copies of all
reports filed by the Company with the Commission and (iii) such other
information as the Underwriters may reasonably request regarding the
Company;

(f) to furnish promptly to the Underwriters three signed copies of
the Registration Statement, as initially filed with the Commission, and
of all amendments thereto (including all exhibits thereto) and such
number of conformed copies of the foregoing as the Underwriters may
reasonably request;

(g) to apply the net proceeds from the sale of the Notes in the
manner set forth under the caption "Use of Proceeds" in the Prospectus;

(h) to pay all expenses, fees and taxes (other than any transfer
taxes and the fees and disbursements of counsel for the Underwriters
except as set forth under Section 5 hereof and clauses (iii) and (iv)
below) in connection with (i) the preparation and filing of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and
any amendments or supplements thereto, and the printing and furnishing of
copies of each thereof to the Underwriters and to dealers (including
costs of mailing and shipment), (ii) the preparation, issuance,
execution, authentication and delivery of the Notes, (iii) the printing
of this Agreement and any dealer agreements, and the reproduction
and/or printing and furnishing of copies of each thereof to dealers
(including costs of mailing and shipment), (iv) the qualification of the
Notes for offering and sale under state laws and the determination of
their eligibility for investment under state law as aforesaid (including
the reasonable legal fees and filing fees and other disbursements of
counsel for the Underwriters) and the printing and furnishing of copies
of any blue sky surveys or legal investment surveys to the Underwriters
and to dealers, (v) any filing for review of the public offering of the
Notes by the NASD, (vi) the fees and expenses of any transfer agent

<PAGE> 9

or registrar for the Notes, (vii) any fees payable to investment rating
agencies with respect to the Notes and (viii) the performance of the
Company's other obligations hereunder;

(i) to furnish to the Underwriters, during the period referred to in
clause (i) of paragraph (d) above, not less than two business days before
filing with the Commission subsequent to the effective date of the
Prospectus, a copy of any document proposed to be filed with the
Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"); and

(j) to make generally available to its Note holders as soon as
practicable after the effective date of the Registration Statement an
earning statement (in form, at the option of the Company, complying with
the provisions of Rule 158 under the Securities Act) covering a period of
12 months beginning after the effective date of the Registration
Statement.

5. Reimbursement of the Underwriters' Expenses: If the Notes are not
delivered for any reason other than the termination of this Agreement pursuant
to the first two paragraphs of Section 7 hereof or the default by the
Underwriters in their obligations hereunder, the Company shall reimburse the
Underwriters for all of their reasonable out-of-pocket expenses relating to the
transactions contemplated hereby, including the reasonable fees and
disbursements of their counsel.

6. Conditions of the Underwriters' Obligations: The obligations of the
Underwriters hereunder are subject to the accuracy of the representations and
warranties on the part of the Company on the date hereof and at the Closing
Time, the performance by the Company of its obligations hereunder and to the
following conditions:

(a) The Company shall furnish to the Underwriters at the Closing
Time an opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A., counsel for the Company, addressed to the Underwriters and dated
the Closing Time and in form satisfactory to Gibson, Dunn & Crutcher LLP,
counsel for the Underwriters, stating that:

(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware with full corporate power and authority to own
its properties and to conduct its business and to execute and
deliver this Agreement and the Indenture and to issue the Notes;

(ii) the Company is duly qualified or licensed by and is in
good standing in each jurisdiction in which the character or
location of its assets or properties or the nature of its business
makes such qualification necessary and in which the failure,
individually or in the aggregate, to be so licensed or qualified
could have a material adverse effect on the operations, business
or condition of the Company;

<PAGE> 10

(iii) this Agreement has been duly authorized, executed and
delivered by the Company;

(iv) the Indenture has been duly authorized, executed and
delivered by the Company, and, assuming due authorization,
execution and delivery by the Trustee, is a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and by general principles of equity;
the Indenture has been duly qualified under the Trust Indenture
Act;

(v) the Notes have been duly authorized, executed and
delivered by the Company and, assuming due authentication thereof
by the Trustee and upon payment therefor and delivery in accordance
with this Agreement, will be legal, valid and binding obligations
of the Company enforceable in accordance with their terms and
entitled to the benefits of the Indenture, except as may be limited
by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and by general principles of equity;

(vi) the Company has an authorized capitalization as set forth
in the Registration Statement and the Prospectus; the outstanding
shares of capital stock of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable, and,
to the best of such counsel's knowledge, the Company has no
subsidiaries;

(vii) the Notes and the Indenture conform in all material
respects to the descriptions thereof contained in the Registration
Statement and Prospectus;

(viii) the statements under the captions "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," "Business -
Government Regulation," "Management-Employment Agreement,"
"Management-Company Stock Option Plan," "Certain Transactions" and
"Description of the Notes" in the Registration Statement and the
Prospectus, insofar as such statements constitute a summary of the
legal matters or documents referred to therein, constitute accurate
summaries thereof in all material respects and accurately present
the information called for with respect to such matters or
documents;

(ix) as of the effective date of the Registration Statement,
the Registration Statement and the Prospectus (except
as to the financial statements and other financial and statistical
data contained therein, as to which such counsel need express no
opinion) complied as to form in all material respects with the
requirements of the Securities Act Regulations;

(x) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no
stop order

<PAGE> 11

suspending the effectiveness of the Registration Statement has been
issued and no proceedings with respect thereto have been commenced
or threatened;

(xi) no approval, authorization, consent or order of or filing
with any federal, or to such counsel's knowledge, state or local
governmental or regulatory commission, board, body, authority or
agency is required in connection with the execution and delivery of
the Indenture and the sale and delivery of the Notes by the Company
as contemplated hereby other than such as have been obtained or
made under the Securities Act and the Trust Indenture Act and
except that such counsel need express no opinion as to any
necessary qualification under the state securities or blue sky laws
of the various jurisdictions in which the Notes are being offered
by the Underwriters;

(xii) the execution, delivery and performance of this
Agreement and the Indenture and the issuance of the Notes by the
Company and the consummation by the Company of the transactions
contemplated hereby and thereby do not and will not conflict with,
or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time, or both
would constitute a breach of or default under), (i) any provisions
of the certificate of incorporation or by-laws of the Company, (ii)
any provision of any material license, indenture, mortgage, deed of
trust, bank loan, credit agreement or other agreement or instrument
known to such counsel to which the Company is a party or by which
it or its properties may be bound or affected, or (iii) the
Securities Act or the rules and regulations of the Commission or
any other federal law or any decree, judgment or order applicable
to the Company, except in the case of clause (ii) for such
conflicts, breaches or defaults which have been waived or which
individually or in the aggregate would not have a material adverse
effect on the operations, business or condition of the Company;

(xiii) to such counsel's knowledge, there are no contracts,
licenses, agreements, leases or documents of a character which are
required to be filed as exhibits to the Registration Statement or
to be summarized or described in the Prospectus which have not been
so filed, summarized or described;

(xiv) to such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus with respect to the
possible termination of servicing rights, the Company is not in
breach of, or in default under (nor has any event occurred which
with notice, lapse of time, or both would constitute a breach of,
or default under), any license, indenture, mortgage, deed of trust,
bank loan or credit agreement or any other agreement or instrument
to which the Company is a party or by which it or its properties
may be bound or affected or under any law, regulation or rule or
any decree, judgment or order applicable to the Company, except
such breaches or defaults which would not have a material adverse
effect on the operations, business or condition of the Company;

11
<PAGE> 12

(xv) to such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus with respect to the
Commission's investigation of Mego Financial Corp., there are no
actions, suits or proceedings pending or threatened against the
Company or any of its properties, at law or in equity or before or
by any commission, board, body, authority or agency which are
required to be described in the Prospectus but are not so described;

(xvi) the form of certificate used to evidence the Notes
complies in all material respects with all applicable statutory
requirements and with any applicable requirements of the
certificate of incorporation and by-laws of the Company;

(xvii) to the best of such counsel's knowledge, there are no
persons with registration or other similar rights to have any
securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act; and

(xviii) the Company is not, and will not become upon and as a
result of the sale of the Notes and the application of the net
proceeds therefrom as described in the Prospectus under the caption
"Use of Proceeds," an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined
in the 1940 Act.

In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants of the Company and
representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such
counsel is not passing upon and does not assume responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectus (except as and to the extent stated
in subparagraphs (vii) and (viii) above), on the basis of the foregoing
nothing has come to the attention of such counsel that causes them to
believe that either the Registration Statement or any amendment thereto
at the time such Registration Statement or amendment became effective
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus contains any
untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being
understood that, in each case, such counsel need express no view
with respect to the financial statements and other financial and
statistical data included in the Registration Statement or Prospectus).

(b) The Underwriters shall have received from Deloitte & Touche LLP,
letters dated, respectively, as of the date of this Agreement and the
Closing Time, as the case may be, and addressed to the Underwriters in
the forms heretofore approved by the Underwriters.

12
<PAGE> 13

(c) The Underwriters shall have received at the Closing Time the
favorable opinion of Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters, dated the Closing Time, in form and substance satisfactory
to the Underwriters.

(d) No amendment or supplement to the Registration Statement or
Prospectus shall have been filed to which the Underwriters shall have
objected in writing.

(e) Prior to the Closing Time (i) no stop order suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus shall have
been issued by the Commission, and no suspension of the qualification of
the Notes for offering or sale in any jurisdiction, or of the initiation
or threatening of any proceedings for any of such purposes, has occurred;
and (ii) the Registration Statement and all amendments thereto, or
modifications thereof, if any, and the Prospectus and all amendments or
supplements thereto, or modifications thereof, if any, shall not contain
an untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they are made, not
misleading.

(f) Between the time of execution of this Agreement and the Closing
Time (i) no material and unfavorable change, financial or otherwise
(other than as disclosed in the Registration Statement and Prospectus),
in the business, condition or prospects of the Company shall occur or
become known and (ii) no transaction which is material and unfavorable to
the Company shall have been entered into by the Company.

(g) The Company will, at the Closing Time, deliver to the
Underwriters a certificate of two of its executive officers to the effect
that, to each of such officer's knowledge, the representations and
warranties of the Company set forth in this Agreement and the conditions
set forth in paragraph (e) and paragraph (f) have been met and are true
and correct as of such date.

(h) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.

(i) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any
statement in the Registration Statement and the Prospectus or any
amendment or supplement thereto as of the Closing Time as the
Underwriters may reasonably request.

(j) The Company shall perform such of its obligations under this
Agreement as are to be performed by the terms hereof at or before the
Closing Time.

(k) The Common Stock Registration Statement registering the Common
Stock shall have become effective under the Securities Act, and no stop
order suspending the effectiveness of the Common Stock Registration
Statement shall have been issued and no proceedings for that purpose
shall have been instituted or be threatened, pending or contemplated, and
the offering of the Common Stock shall have been consummated as
contemplated in the Common Stock Registration Statement at the Closing
Time.

13
<PAGE> 14

7. Termination: The obligations of the Underwriters hereunder shall be
subject to termination in the absolute discretion of the Underwriters, at any
time prior to the Closing Time, if trading in securities on the New York Stock
Exchange shall have been suspended or minimum prices shall have been
established on the New York Stock Exchange, or if a banking moratorium shall
have been declared either by the United States or New York State authorities,
or if the United States shall have declared war in accordance with its
constitutional processes or there shall have occurred any material outbreak or
escalation of hostilities or other national or international calamity or crisis
of such magnitude in its effect on the financial markets of the United States
as, in the judgment of the Underwriters, to make it impracticable to market the
Notes.

If the Underwriters elect to terminate this Agreement as provided in this
Section 7 the Company shall be notified promptly by letter or telegram.

If the sale to the Underwriters of the Notes, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted
under this Agreement or if such sale is not carried out because the Company
shall be unable to comply with any of the terms of this Agreement, the Company
shall not be under any obligation or liability under this Agreement (except to
the extent provided in Sections 4(h), 5 and 8 hereof) and the Underwriters
shall be under no obligation or liability to the Company under this Agreement
(except to the extent provided in Section 8 hereof).

8. Indemnity by the Company and the Underwriters:

(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter, and any person who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against any loss, expense, liability or claim (including
the reasonable cost of investigation) which, jointly or severally, any
Underwriter or controlling person may incur under the Securities Act, the
Exchange Act or otherwise, insofar as such loss, expense, liability or
claim arises out of or is based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus (the
term Prospectus for the purpose of this Section 8 being deemed to include
any Preliminary Prospectus, the Prospectus and the Prospectus as amended
or supplemented by the Company), or arises out of or is based upon
any omission or alleged omission to state a material fact required to be
stated in either such Registration Statement or Prospectus or necessary to
make the statements made therein, in light of the circumstances under
which they were made, not misleading, except insofar as any such loss,
expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in and
in conformity with information furnished in writing by the Underwriters to
the Company expressly for use in such Registration Statement or such
Prospectus or arises out of or is based upon any omission or alleged
omission to state a material fact in connection with such information
required to be stated in either such Registration Statement or Prospectus
or necessary to make such information not misleading.

14
<PAGE> 15

If any action is brought against any Underwriter or controlling
person in respect of which indemnity may be sought against the Company
pursuant to the preceding paragraph, such Underwriter shall promptly
notify the Company in writing of the institution of such action and the
Company shall assume the defense of such action, including the employment
of counsel and payment of expenses. The Underwriter or controlling
person shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the
expense of the Underwriter or such controlling person unless the
employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action or the Company
shall not have employed counsel to have charge of the defense of such
action within a reasonable time or such indemnified party or parties
shall have reasonably concluded (based on the advice of counsel) that
there may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company
shall not have the right to direct the defense of such action on behalf
of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by the Company and paid as incurred (it being
understood, however, that the Company shall not be liable for the
expenses of more than one separate counsel for the Underwriters or
controlling persons in any one action or series of related actions in the
same jurisdiction representing the indemnified parties who are parties to
such action). Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of
any such claim or action effected without its written consent.

(b) Each Underwriter agrees, severally and not jointly, to
indemnify, defend and hold harmless the Company, its directors and
officers and any person who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act from
and against any loss, expense, liability or claim (including the
reasonable cost of investigation) which, jointly or severally, the
Company or any such person may incur under the Securities Act, the
Exchange Act or otherwise, insofar as such loss, expense, liability or
claim arises out of or is based upon any untrue statement or alleged
untrue statement of a material fact contained in and in conformity with
information furnished in writing by the Underwriters to the Company
expressly for use in the Registration Statement (or in the Registration
Statement as amended by any post-effective amendment thereof by the
Company) or in a Prospectus, or arises out of or is based upon any
omission or alleged omission to state a material fact in connection with
such information required to be stated either in such Registration
Statement or Prospectus or necessary to make such information not
misleading.

If any action is brought against the Company or any such person in
respect of which indemnity may be sought against the Underwriters
pursuant to the foregoing paragraph, the Company or such person shall
promptly notify the Underwriters in writing of the institution of such
action and the Underwriters shall assume the defense of such action,
including the employment of counsel and payment of expenses. The Company
or such person shall have the right to employ its own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense
of the Company or such person unless the employment of such counsel shall
have been authorized in writing by the Underwriters in connection with
the defense of such action or the Underwriters shall not

<PAGE> 16

have employed counsel to have charge of the defense of such action
within a reasonable time or such indemnified party or parties shall have
reasonably concluded (based on the advice of counsel) that there may be
defenses available to it or them which are different from or additional to
those available to the Underwriters (in which case the Underwriters shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and
expenses shall be borne by the Underwriters and paid as incurred (it being
understood, however, that the Underwriters shall not be liable for the
expenses of more than one separate counsel in any one action or series of
related actions in the same jurisdiction representing the indemnified
parties who are parties to such action). Anything in this paragraph to the
contrary notwithstanding, no Underwriter shall be liable for any
settlement of any such claim or action effected without its written
consent.

(c) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 8 in respect of any losses, expenses, liabilities or claims
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses,
expenses, liabilities or claims (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand
and the Underwriters on the other hand from the offering of the Notes or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on
the other in connection with the statements or omissions which resulted
in such losses, expenses, liabilities or claims, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (net
of underwriting discounts and commissions but before deducting expenses)
received by the Company bear to the underwriting discounts and
commissions received by the Underwriters. The relative fault of the
Company on the one hand and of the Underwriters on the other shall be
determined by reference to, among other things, whether the untrue
statement or alleged untrue statement of a material fact or omission or
alleged omission relates to information supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the
losses, claims, damages and liabilities referred to above shall be deemed
to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any claim or
action.

(d) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in
subsection (c) above. Notwithstanding the provisions of this Section 8,
no Underwriter shall be required to contribute any amount in excess of
the amount by which the total price at which the Notes underwritten by it
and distributed to the public were offered to the public exceeds the
amount of any damages which such

16
<PAGE> 17

Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.

(e) The indemnity and contribution agreements contained in this
Section 8 and the covenants, warranties and representations of the
Company contained in this Agreement shall remain in full force and effect
regardless of any investigation made by or on behalf of the Underwriters,
or any person who controls the Underwriters within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, or by or on
behalf of the Company, its directors and officers or any person who
controls the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, and shall survive any termination
of this Agreement or the sale and delivery of the Notes. The Company and
the Underwriters agree promptly to notify the others of the commencement
of any litigation or proceeding against it and, in the case of the
Company, against any of the Company's officers and directors, in
connection with the sale and delivery of the Notes, or in connection with
the Registration Statement or Prospectus.

9. Substitution of Underwriters. If one or more of the Underwriters shall
fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 7) to purchase at the Closing Time
the Notes agreed to be purchased at the Closing Time by such Underwriter or
Underwriters, the other Underwriter may find one or more substitute
underwriters to purchase such Notes or make such other arrangements as such
other Underwriter may deem advisable or such other Underwriter may agree to
purchase such Notes, in each case upon the terms set forth in this Agreement.
If no such arrangements have been made by the close of business on the business
day following the Closing Time,

(a) if the aggregate principal amount of Notes to be purchased by
the defaulting Underwriter at the Closing Time shall not exceed 10% of
the aggregate principal amount of Notes that all the Underwriters are
obligated to purchase at the Closing Time, then the nondefaulting
Underwriter shall be obligated to purchase such Notes on the terms herein
set forth; provided, that in no event shall the aggregate principal amount
of Notes that any Underwriter has agreed to purchase pursuant to Section 1
be increased pursuant to this Section 9 by more than one-ninth of such
aggregate principal amount of Notes without the written consent of such
Underwriter, or

(b) if the aggregate principal amount of Notes to be purchased by
the defaulting Underwriters at the Closing Time shall exceed 10% of the
aggregate principal amount of Notes that all the Underwriters are
obligated to purchase at the Closing Time, then the Company shall be
entitled to an additional business day within which it may, but is not
obligated to, find one or more substitute underwriters reasonably
satisfactory to the Underwriters to purchase such Notes upon the terms
set forth in this Agreement.

<PAGE> 18

In any such case, either the Underwriters or the Company shall have the
right to postpone the Closing Time for a period of not more than five business
days in order that necessary changes and arrangements (including any necessary
amendments or supplements to the Registration Statement or Prospectus) may be
effected by the Underwriters and the Company. If the aggregate principal
amount of Notes to be purchased at the Closing Time by such defaulting
Underwriter or Underwriters shall exceed 10% of the aggregate principal amount
of Notes that all the Underwriters are obligated to purchase at the Closing
Time, and neither the nondefaulting Underwriter nor the Company shall make
arrangements pursuant to this Section within the period stated for the purchase
of the Notes that the defaulting Underwriter agreed to purchase, this Agreement
shall terminate with respect to the Notes to be purchased at the Closing Time
without liability on the part of any nondefaulting Underwriter to the Company
and without liability on the part of the Company, except in both cases as
provided in Sections 5, 7 and 8. The provisions of this Section shall not in
any way affect the liability of any defaulting Underwriter to the Company or
the nondefaulting Underwriter arising out of such default. A substitute
underwriter hereunder shall become an Underwriter for all purposes of this
Agreement.

10. Notices: Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Friedman, Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington,
Virginia 22209, Attention: Compliance Department; if to the Company, shall be
sufficient in all respects if delivered to the Company at the offices of the
Company at 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339, Attention:
Executive Vice President.

11. GOVERNING LAW; HEADINGS: THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES. The section headings in this Agreement have
been inserted as a matter of convenience of reference and are not a part of
this Agreement.

12. Parties at Interest: The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters and the Company and the
controlling persons, directors and officers referred to in Section 8 hereof, and
their respective successors, assigns, executors and administrators. No other
person, partnership, association or corporation (including a purchaser, as such
purchaser, from the Underwriters) shall acquire or have any right under or by
virtue of this Agreement.

13. Counterparts: This Agreement may be signed by the parties in
counterparts which together shall constitute one and the same agreement among
the parties.

<PAGE> 19

If the foregoing correctly sets forth the understanding among the Company
and the Underwriters, please so indicate in the space provided below for the
purpose, whereupon this letter shall constitute a binding agreement between the
Company and the Underwriters.

Very truly yours,

MEGO MORTGAGE CORPORATION

By
-------------------------------
Title:

Accepted and agreed to as
of the date first above
written:

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
on behalf of itself and Oppenheimer & Co., Inc.
By
-------------------------------------
Title:

<PAGE> 20

SCHEDULE I

<TABLE>
<CAPTION>
Aggregate Principal Amount
Underwriter of Notes to be Purchased
- ----------- --------------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.
Oppenheimer & Co., Inc................
-----------
Total........... $40,000,000
===========
</TABLE>

<PAGE> 1
Exhibit 4.1
Form of Face of Note.

MEGO MORTGAGE CORPORATION

......% SENIOR SUBORDINATED NOTES DUE 2001

No................... $..............

Mego Mortgage Corporation, a corporation duly organized and existing
under the laws of Delaware (herein called the "COMPANY", which term includes any
Successor Company under the Indenture hereinafter referred to), for value
received, hereby promises to pay to .........................., or registered
assigns, the principal sum of ....................... Dollars on
..........................., 2001, and to pay interest thereon from ..........,
1996 or from the most recent Interest Payment Date to which interest has been
paid or duly provided for, semi-annually on ................. and
.................. in each year, commencing ................, 1997, at the rate
of ......% per annum, until the principal hereof is paid or made available for
payment, and at the rate of 1% over the rate set forth above per annum on any
overdue principal and (to the extent that the payment of such interest shall be
legally enforceable) on any overdue installment of interest. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the close of business
on the Regular Record Date for such interest, which shall be
the ............... or ................ (whether or not a Business Day), as
the case may be, next preceding such Interest Payment Date. Any such interest
not so punctually paid or duly provided for will forthwith cease to be payable
to the Holder on such Regular Record Date and may either be paid to the Person
in whose name this Note (or one or more Predecessor Notes) is registered at
the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to
Holders of Notes not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be listed, and
upon such notice as may be required by such exchange, all as more fully
provided in said Indenture.

Payment of the principal of (and premium, if any) and any such
interest on this Note will be made at the office or agency of the Company
maintained for that purpose in the City of New York, Borough of Manhattan, in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts.

Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purpose.

IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed under its corporate seal.

Dated:

MEGO MORTGAGE CORPORATION

By......................
Attest:

................................

Form of Reverse of Note.

This Note is one of a duly authorized issue of securities of
the Company (herein called the "NOTES"), issued under an Indenture, dated as of
_____________ ___, 1996 (herein called the "INDENTURE"), among the Company, any
Person that may from time to time become a party thereto as a Subsidiary
Guarantor (as defined therein) by executing and delivering to the Trustee
a Joinder of Subsidiary Guarantor (as defined therein), and American Stock
Transfer & Trust Company, as Trustee (herein called the "TRUSTEE", which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee and the Holders of the Notes and of the terms upon
which the Notes are, and are to be, authenticated and delivered. This Note is
one of the Notes designated on the face hereof, limited in aggregate principal
amount to $40,000,000.

<PAGE> 2

The Notes are subject to redemption upon not less than 30
days' and not more than 60 days' notice by mail, at any time on or after
................., ........., as a whole or in part, at the election of the
Company, at the following Redemption Prices (expressed as percentages of the
principal amount): If redeemed during the 12-month period beginning
.................... of the years indicated,

<TABLE>
<CAPTION>
Redemption
Year Price
- ---- -----
<S> <C>
......... .......%
......... and thereafter .......%
</TABLE>

, together in the case of any such redemption with accrued interest to the
Redemption Date, but interest installments whose stated maturity is on or prior
to such Redemption Date will be payable to the Holders of such Notes, or one or
more Predecessor Notes, of record at the close of business on the relevant
Record Dates referred to on the face hereof, all as provided in the Indenture.

The Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the Notes at any time and from time to
time prior to ..............................., 1998, with the Net Cash Proceeds
received by the Company from one or more Public Equity Offerings at a redemption
price of ......% of the principal amount of the Notes redeemed, plus accrued and
unpaid interest thereon; provided, however, that at least 65% of the original
aggregate principal amount of Notes must remain outstanding after each such
redemption; and provided, further, that such redemption must occur within 60
days after the closing date of any such Public Equity Offering.

In the event of redemption of this Note in part only, a new
Note or Notes of like tenor for the unredeemed portion hereof will be issued in
the name of the Holder hereof upon the cancellation hereof.

Upon a Change of Control, the Holder of this Note will have
the right to cause the Company to repurchase all or any part of this Note (which
part must be $1,000 or any integral multiple thereof) at a repurchase price
equal to 101% of the principal amount of this Note plus accrued and unpaid
interest to the date of purchase (subject to the right of the Holders on the
relevant Regular Record Date to receive interest due on the relevant Interest
Payment Date) as provided in, and subject to the terms of, the Indenture. In
addition, this Note is subject to repurchase under certain circumstances upon
the occurrence of an Asset Disposition, all as provided in the Indenture.

The Notes are subordinated in right of payment, in the manner
and to the extent set forth in the Indenture, to the prior payment in full in
cash or cash equivalents of all Senior Indebtedness of the Company, whether
outstanding on the date of the Indenture or thereafter created, incurred,
assumed or guaranteed. Each Holder by his acceptance hereof agrees to be bound
by such provisions and authorizes and expressly directs the Trustee, on his
behalf, to take

<PAGE> 3

such action as may be necessary or appropriate to effectuate the subordination
provided for in the Indenture and appoints the Trustee his attorney-in-fact for
such purposes.

The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness evidenced by this Note and (b) certain
restrictive covenants, in each case upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Note.

If an Event of Default with respect to Notes shall occur and
be continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Notes to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the Notes at the
time Outstanding. The Indenture also contains provisions permitting the Holders
of specified percentages in principal amount of the Notes at the time
Outstanding, on behalf of the Holders of all Notes of such series, to waive
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Holders of this Note and of any Note issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Note.

No reference herein to the Indenture and no provision of this
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and any premium and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed.

As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Note is registrable in the
Note Register, upon surrender of this Note for registration of transfer at the
office or agency of the Company in any place where the principal of and any
premium and interest on this Note are payable, duly endorsed by, or accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Note Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Notes of like tenor, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.

The Notes are issuable only in registered form without coupons
in denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like aggregate principal amount of Notes of like tenor of a
different authorized denomination, as requested by the Holder surrendering the
same.

<PAGE> 4

No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the Company,
the Trustee nor any such agent shall be affected by notice to the contrary.

All terms used in this Note which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.

Form of Legend for Global Notes.

Any Global Note authenticated and delivered hereunder shall
bear a legend in substantially the following form:

"This Note is a Global Note within the meaning of the
Indenture hereinafter referred to and is registered in the name of a
Depositary or a nominee thereof. This Note may not be transferred to,
or registered or exchanged for Notes registered in the name of, any
Person other than the Depositary or a custodian thereof or a successor
of such Depositary or a custodian of such successor and no such
transfer may be registered, except in the limited circumstances
described in the Indenture. Every Note authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, this
Note shall be a Global Note subject to the foregoing, except in such
limited circumstances."

Form of Trustee's Certificate of Authentication.

The Trustee's certificate of authentication shall be in
substantially the following form:

This is one of the Notes designated and referred to in the
within-mentioned Indenture.

AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Trustee

By
------------------------------------
Authorized Officer

Form of Assignment and Election to Purchase.

<PAGE> 5

ASSIGNMENT

(TO BE EXECUTED BY THE REGISTERED HOLDER

IF SUCH HOLDER DESIRES TO TRANSFER THIS NOTE)

FOR VALUE RECEIVED _________________ hereby sells, assigns
and transfers unto _____________________________________________________.

PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE

(PLEASE PRINT NAME AND ADDRESS OF TRANSFEREE)

this Note, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint ___________________ Attorney to transfer this
Note on the Note Register, with full power of substitution.

Dated:

Signature of Holder Signature Guaranteed:

NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.

OPTION OF HOLDER TO ELECT PURCHASE

(CHECK AS APPROPRIATE)

[ ] In connection with the Change of Control Purchase Offer made pursuant to
Section 10.18 of the Indenture, the undersigned hereby elects to have

[ ] the entire principal amount

[ ] $ _______________ ($1,000 in principal amount or an
integral multiple thereof) principal amount of this Note repurchased by the
Company. The undersigned hereby directs the Trustee or Paying Agent to pay it or
an amount in cash equal to 101% of the principal amount indicated in the
preceding sentence plus accrued and unpaid interest thereon to the date of
purchase.

[] In connection with an Asset Disposition Purchase Offer made pursuant to
Section 10.13 of the Indenture, the undersigned hereby elects to have

[ ] the entire principal amount

[ ] $______________ ($1,000 in principal amount or an integral
multiple thereof) principal amount of this Note repurchased by the Company. The
undersigned hereby directs the Trustee or Paying Agent to pay it or
________________ an amount in cash equal to 100% of the principal amount
indicated in the preceding sentence, plus accrued and unpaid interest thereon,
if any, to the date of purchase.

Dated:

Signature of Holder Signature Guaranteed:

NOTICE: The signature to the foregoing must correspond to the Name as written
upon the face of this Note in every particular, without alteration or any change
whatsoever.

<PAGE> 1
EXHIBIT 4.2

__________________________

MEGO MORTGAGE CORPORATION

THE PERSONS WHO FROM TIME TO TIME BECOME

SUBSIDIARY GUARANTORS

AMERICAN STOCK TRANSFER & TRUST COMPANY, TRUSTEE

_______________

___%
SENIOR SUBORDINATED NOTES
DUE 2001

_______________

INDENTURE

DATED AS OF ____________________ __, 1996

_______________

__________________________

<PAGE> 2

TABLE OF CONTENTS
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ARTICLE ONE Definitions and Other Provisions of General Application . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 1.3 Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 1.4 Acts of Holders, Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 1.5 Notices, Etc., to Trustee and Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 1.6 Notice to Holders; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 1.7 Conflict with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 1.8 Effect of Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 1.9 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 1.10 Separability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 1.11 Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 1.12 Governing Law; Choice of Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 1.13 Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE TWO Note Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 2.1 Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 2.2 Form of Face of Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 2.3 Form of Reverse of Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 2.4 Form of Legend for Global Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 2.5 Form of Trustee's Certificate of Authentication . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 2.6 Form of Assignment and Election to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE THREE The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 3.1 Global Note; Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 3.2 Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 3.3 Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 3.4 Execution, Authentication, Delivery and Dating . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 3.5 Temporary Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 3.6 Registration; Registration of Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . 37
Section 3.7 Mutilated, Destroyed, Lost and Stolen Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 3.8 Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 3.9 Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 3.10 Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 3.11 Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

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ARTICLE FOUR Book-Entry Provisions for Global Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 4.1 Applicability of Article . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 4.2 Book-Entry Provisions For Global Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE FIVE Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 5.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 5.2 Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . . . . . . . . . 45
Section 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . . . . 45
Section 5.4 Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 5.5 Trustee May Enforce Claims Without Possession of Notes . . . . . . . . . . . . . . . . . . . . . 47
Section 5.6 Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 5.7 Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . . . . . . 48
Section 5.9 Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.10 Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.11 Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.12 Control by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.13 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.14 Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 5.15 Waiver of Usury, Stay or Extension Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE SIX The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 6.1 Certain Duties and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 6.2 Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 6.3 Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 6.4 Not Responsible for Recitals or Issuance of Notes . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.5 May Hold Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.6 Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.7 Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.8 Disqualification; Conflicting Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.9 Corporate Trustee Required; Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.10 Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.11 Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 6.12 Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . . . . . . . . 55
Section 6.13 Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . . . . . 55
Section 6.14 Appointment of Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

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ARTICLE SEVEN Holders' Lists and Reports by Trustee and Company . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 7.1 Company to Furnish Trustee Names and Addresses of Holders . . . . . . . . . . . . . . . . . . . 57
Section 7.2 Preservation of Information; Communications to Holders . . . . . . . . . . . . . . . . . . . . . 58
Section 7.3 Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 7.4 Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE EIGHT Subsidiary Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 8.1 Subsidiary Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 8.2 Nature of Subsidiary Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 8.3 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 8.4 Certain Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 8.5 No Subrogation; Certain Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 8.6 Bankruptcy No Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 8.7 Severability of Void Obligations under Subsidiary Guarantee . . . . . . . . . . . . . . . . . . 63
Section 8.8 Right of Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE NINE Amendments, Supplements and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 9.1 Supplemental Indentures Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . 64
Section 9.2 Supplemental Indentures with Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 9.3 Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 9.4 Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 9.5 Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 9.6 Reference in Notes to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 9.7 Notice of Supplemental Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
ARTICLE TEN Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 10.1 Payment of Principal, Premium and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 10.2 Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 10.3 Money for Notes Payments to Be Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 10.4 Statement by Officers as to Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 10.5 Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 10.6 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 10.7 Corporate Existence; Keeping of Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.9 Limitations on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.10 Limitation on Preferred Stock of Restricted Subsidiaries . . . . . . . . . . . . . . . . . . . . 72
Section 10.11 Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 10.12 Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . 74
Section 10.13 Limitation on Sales of Assets and Subsidiary Stock . . . . . . . . . . . . . . . . . . . . . . . 74
Section 10.14 Limitation on Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 77

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Section 10.15 Limitations on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.16 Limitation on Investment Company Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.17 Line of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.18 Offer to Purchase upon a Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.19 Payments for Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.20 Subsidiary Guaranties, Designation of Subsidiaries as Restricted or
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ARTICLE ELEVEN Merger, Consolidation and Transfer of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 11.1 Merger, Consolidation or Transfer of Assets of the Company . . . . . . . . . . . . . . . . . . . 83
Section 11.2 Merger, Consolidation or Transfer of Assets of Restricted Subsidiaries . . . . . . . . . . . . . 83
Section 11.3 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
ARTICLE TWELVE Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Section 12.1 Notes and Subsidiary Guarantees Subordinate to Senior Indebtedness . . . . . . . . . . . . . . 84
Section 12.2 Payment Over of Proceeds upon Dissolution, Etc . . . . . . . . . . . . . . . . . . . . . . . . 85
Section 12.3 No Payment When Senior Indebtedness In Default . . . . . . . . . . . . . . . . . . . . . . . . 85
Section 12.4 Payment Permitted if No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 12.5 Subrogation to Rights of Holders and Beneficiaries of Senior Indebtedness . . . . . . . . . . 87
Section 12.6 Provisions Solely to Define Relative Rights . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 12.7 Trustee to Effectuate Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Section 12.8 No Waiver of Subordination Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Section 12.9 Notice to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.10 Reliance on Judicial Order or Certificate of Liquidating Agent . . . . . . . . . . . . . . . . 89
Section 12.11 Trustee Not Fiduciary for Holders of Senior Indebtedness . . . . . . . . . . . . . . . . . . . 90
Section 12.12 Rights of Trustee as Holder of Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . 90
Section 12.13 Article Applicable to Paying Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
ARTICLE THIRTEEN Redemption of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 13.1 Applicability of Article . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 13.2 Optional Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 13.3 Election to Redeem; Selection by Trustee of Notes to Be Redeemed . . . . . . . . . . . . . . . . 91
Section 13.4 Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Section 13.5 Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Section 13.6 Notes Payable on Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Section 13.7 Notes Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

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ARTICLE FOURTEEN Defeasance and Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 14.1 Option to Effect Legal Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . 93
Section 14.2 Legal Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 14.3 Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 14.4 Conditions to Legal or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Section 14.5 Deposited Money and U.S. Government Obligations To Be Held in Trust; Other
Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Section 14.6 Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Section 14.7 Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
ARTICLE FIFTEEN Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Section 15.1 No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Section 15.2 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Section 15.3 Waiver of Trial by Jury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Exhibits
- --------
Exhibit A Form of Subsidiary Guarantee
Exhibit B Form of Joinder of Subsidiary Guarantor

Schedules
- ---------
Schedule 10.12 Liens Existing on Issue Date

</TABLE>

v
<PAGE> 7

CROSS-REFERENCE TABLE

<TABLE>
<CAPTION>
TRUST INDENTURE
ACT SECTION INDENTURE SECTION
----------- -----------------
<S> <C>
310 (a)(1)...................................... 6.9
(a)(2)...................................... 6.9
(a)(3)...................................... Not Applicable
(a)(4)...................................... Not Applicable
(a)(5)...................................... 6.9
(b)......................................... 1.5, 6.8, 6.9, 6.10, 6.11
(c)......................................... Not Applicable
311 (a)......................................... 6.13
(b)......................................... 6.13
(c)......................................... Not Applicable
312 (a)......................................... 7.1, 7.2
(b)......................................... 7.2
(c)......................................... 7.2
313 (a)......................................... 7.3
(b)(1)...................................... Not Applicable
(b)(2)...................................... 7.3
(c)......................................... 1.6, 7.3
(d)......................................... 7.3
314 (a)......................................... 1.5, 1.6, 7.4
(b)......................................... Not Applicable
(c)(1)...................................... 1.2
(c)(2)...................................... 1.2
(c)(3)...................................... Not Applicable
(d)......................................... Not Applicable
(e)......................................... 1.2
(f)......................................... Not Applicable
315 (a)......................................... 6.1
(b)......................................... 1.6, 6.2
(c)......................................... 6.1
(d)......................................... 6.1
(e)......................................... 5.14
316 (a)(last sentence).......................... 1.1 (definition of "Outstanding")
(a)(1)(A)................................... 5.12
(a)(1)(B)................................... 5.13
(a)(2)...................................... Not Applicable
(b)......................................... 5.7, 5.8
(c)......................................... 1.4(c)
317 (a)(1)...................................... 5.3
(a)(2)...................................... 5.4
(b)......................................... 6.6
318 (a)......................................... 1.7
(c)......................................... 1.7

</TABLE>

NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of the Indenture.

<PAGE> 8
INDENTURE, dated as of _______________ __, 1996, among MEGO
MORTGAGE CORPORATION, a corporation duly organized and existing under the laws
of the State of Delaware (herein called the COMPANY), having its principal
office at 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339, any Person
that may from time to time become a party hereto as a Subsidiary Guarantor (as
defined below) by executing and delivering to the Trustee aJoinder of Subsidiary
Guarantor (as defined below), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New
York corporation, as Trustee (herein called the TRUSTEE).

RECITALS OF THE COMPANY

A. The Company has duly authorized the execution and delivery
of this Indenture to provide for the issuance of $40,000,000 in principal amount
of its unsecured ___% Senior Subordinated Notes due 2001 (herein called the
NOTES), to be issued as in this Indenture provided.

B. Certain future Subsidiaries of the Company are required to
become parties hereto as Subsidiary Guarantors by executing and delivering to
the Trustee a Joinder of Subsidiary Guarantor (as defined below) and
guaranteeing the Notes and certain other obligations of the Company as set forth
in Article Eight below and included in the Notes (together with any such Joinder
of Subsidiary Guarantor, each a SUBSIDIARY GUARANTEE).

C. All things necessary to make this Indenture a valid
agreement of the Company, in accordance with its terms, have been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of
the Notes by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:

ARTICLE ONE

DEFINITIONS AND OTHER
PROVISIONS OF GENERAL APPLICATION

Section 1.1Definitions.

For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:

(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;

(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;

<PAGE> 9

(3) all accounting determinations hereunder shall be made, and
all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP;

(4) the words HEREIN, HEREOF and hereunder and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;

(5) the word INCLUDING is not limiting;

(6) references in this Indenture to any agreement, other
document or law AS AMENDED or AS AMENDED FROM TIME TO TIME, or to
AMENDMENTS of any document or law, shall include any amendments,
supplements, replacements, renewals or other modifications from time to
time, provided in the case of modifications to documents, such
modifications are permissible under this Indenture; and

(7) references in this Indenture to any law include
regulations promulgated thereunder from time to time.

ACT, when used with respect to any Holder, has the meaning
specified in Section 1.4.

ADDITIONAL ASSETS means: (i) any operating property or assets
(including Receivables, but excluding Indebtedness and Capital Stock of
the acquiring Person) used or useful in a Related Business; (ii) the
Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or (iii) Capital Stock constituting a
minority interest in any Person that at such time is a Restricted
Subsidiary; provided, however, that any such Restricted Subsidiary
described in clause (ii) or (iii) is primarily engaged in a Related
Business.

AFFILIATE of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of
this definition, CONTROL when used with respect to any Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by
contract or otherwise; provided that a Person shall be deemed to have
such power with respect to the Company if such Person is the beneficial
owner of Capital Stock representing 10% or more of the total voting
power of the Voting Stock (on a fully diluted basis) of the Company or
of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable). The terms CONTROLLING and CONTROLLED have
meanings correlative to the foregoing.

AFFILIATE TRANSACTION has the meaning specified in Section
10.14.

2
<PAGE> 10

APPLICABLE LAW means all applicable provisions of all (i)
constitutions, treaties, statutes, laws, rules, regulations
and ordinances of any Governmental Authority, (ii) Governmental
Approvals and (iii) orders, decisions, judgments, awards and decrees of
any Governmental Authority.

"ASSET DISPOSITION" means (i) any sale, lease, transfer or
other disposition (or series of related sales, leases, transfers or
dispositions) by the Company or any Restricted Subsidiary, including
any disposition by means of a merger, consolidation or similar
transaction (each referred to for the purposes of the definition as a
"DISPOSITION"), but excluding any merger, consolidation or sale of
assets of the Company subject to and permitted by Section 11.1 of: (a)
any shares of Capital Stock of a Subsidiary (other than director's
qualifying shares or shares required by applicable law to be held by a
Person other than the Company or a Subsidiary); (b) all or
substantially all the assets of, or of any division or line of business
of the Company or any Restricted Subsidiary; (c) any other assets of
the Company or any Restricted Subsidiary with a book or fair market
value, together with other assets disposed of in the same or related
transactions, exceeding $500,000; or (d) any Excess Spread Receivables
(other than, in the case of clauses (a), (b), (c) or (d) above, (1) a
disposition of Receivables in the ordinary course of business, (2) a
disposition by a Restricted Subsidiary to the Company or by the Company
or a Subsidiary to a Wholly Owned Restricted Subsidiary or (3) any
grant of a Permitted Lien) or (ii) the issuance of Capital Stock by any
Restricted Subsidiary to any Person other than the Company or any
Wholly Owned Restricted Subsidiary.

"ASSET DISPOSITION OFFER AMOUNT," "ASSET DISPOSITION PURCHASE
OFFER PERIOD," "ASSET DISPOSITION PURCHASE DATE," "ASSET DISPOSITION
PURCHASE PRICE" and "ASSET DISPOSITION PURCHASE NOTICE" are defined in
Section 10.13.

"AUTHENTICATING AGENT" means any Person authorized by the
Trustee pursuant to Section 6.14 to act on behalf of the Trustee to
authenticate Notes.

"AUTHORIZED OFFICER" means any officer of an Obligor
designated by a resolution of the Board of Directors to take certain
actions as specified in this Indenture.

"AVERAGE LIFE" means, as of the date of determination, with
respect to any Indebtedness or Preferred Stock, the quotient obtained
by dividing (i) the sum of the products of numbers of years from the
date of determination to the dates of each successive scheduled
principal payment of such Indebtedness or redemption or similar payment
with respect to such Preferred Stock multiplied by the amount of such
payment by (ii) the sum of all such payments.

"BANKRUPTCY CODE" means Title 11, U.S. Code or any similar
federal or state law for the relief of debtors.

"BENEFICIARY" has the meaning specified in Section 8.1.

3
<PAGE> 11

"BOARD OF DIRECTORS" means either the board of directors of
any Obligor or (except for purposes of Section 10.7 or 10.14) any duly
authorized committee of that board. Unless otherwise indicated, "BOARD
OF DIRECTORS" means the Board of Directors of the Company.

"BOARD RESOLUTION" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the relevant Obligor to have
been duly adopted by the Board of Directors, or by action of an
Authorized Officer designated as such pursuant to a resolution of the
Board of Directors, and to be in full force and effect on the date of
such certification, and delivered to the Trustee. Unless otherwise
indicated, "BOARD RESOLUTION" means a Board Resolution of the Company.

"BUSINESS DAY" means each day which is not a Legal Holiday.

"CAPITAL LEASE OBLIGATION" means an obligation that is
required to be classified and accounted for as a capital lease for
financial reporting purposes in accordance with GAAP. The amount of
Indebtedness represented by such obligation shall be the capitalized
amount of such obligation determined in accordance with GAAP, and the
Stated Maturity thereof shall be the date of the last payment of rent
or any other amount due under such lease prior to the first date upon
which such lease may be terminated by the lessee without payment of a
penalty.

"CAPITAL STOCK" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or
other equivalents of or interests in (however designated) equity
of such Person, including any Preferred Stock, but excluding any debt
securities convertible into such equity.

A "CHANGE OF CONTROL" will be deemed to have occurred:

(i) upon any merger or consolidation of the Company
with or into any person or any sale, transfer or other
conveyance, whether direct or indirect, of all or
substantially all of the assets of the Company or Parent (in
each case on a consolidated basis), in one transaction or a
series of related transactions, if, in the case of any such
merger or consolidation, the securities of the Company or
Parent, as applicable, that are outstanding immediately prior
to such transaction and which represent 100% of the aggregate
voting power of the Voting Stock of the Company or Parent are
changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are
changed into or exchanged for, in addition to any other
consideration, securities of the surviving corporation that
represent, immediately after such transaction, at least a
majority of the aggregate voting power of the Voting Stock of
the surviving corporation, provided, however, that the sale by
the Company, its Subsidiaries or Parent from time to time of
Receivables in the ordinary course of business shall not be
treated hereunder as a sale of all or substantially all the
assets of the Company or Parent;

4
<PAGE> 12

(ii) when any "PERSON" or "GROUP" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable), other than any or all of the
Excluded Persons, is or becomes the "BENEFICIAL OWNER" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that such person shall be deemed to have "BENEFICIAL
OWNERSHIP" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of (A)
more than 40% of the then outstanding shares of Voting Stock
of the Company; or (B) more than 40% (or, if the Excluded
Persons, in the aggregate, then hold more than 40% of the
outstanding shares of Voting Stock of the Parent, more than
45%) of the then outstanding shares of Voting Stock of the
Parent; or

(iii) when, during any period of 24 consecutive
months after the Issue Date, individuals who at the beginning
of any such 24-month period constituted the Board of Directors
of the Company or the board of directors of Parent (together
with any new directors whose election by such Board or board
or whose nomination for election by the stockholders of the
Company or Parent, as applicable, was approved by a vote of a
majority of the directors then still in office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved), cease for
any reason to constitute a majority of the Board of Directors
of the Company or the board of directors of Parent, as
applicable, then in office.

"CHANGE OF CONTROL PURCHASE DATE," "CHANGE OF CONTROL PURCHASE
NOTICE," "CHANGE OF CONTROL PURCHASE PRICE" and "CHANGE OF CONTROL
PURCHASE OFFER" are defined in Section 10.18.

"CODE" means the Internal Revenue Code of 1986, as amended.

"COMPANY" means the Person named as the "COMPANY" in the first
paragraph of this instrument until a successor Person shall have become
such pursuant to the applicable provisions of this Indenture, and
thereafter "COMPANY" shall mean such successor Person.

"COMPANY REQUEST" or "COMPANY ORDER" means a written request
or order signed in the name of each Obligor by its Chairman of the
Board, its Vice Chairman of the Board, its President, its Chief
Financial Officer or a Vice President, and by its Controller, an
Assistant Controller, its Secretary or an Assistant Secretary, and
delivered to the Trustee.

"CONSOLIDATED ADJUSTED NET INCOME" means, for any period, (a)
Consolidated Net Income minus (b) gain on sale of loans and net
unrealized gain on mortgage related securities, plus (c) provision for
credit losses, amortization and depreciation (including amortization of
excess servicing rights), in each case for such period and for the
Company and its Restricted Subsidiaries.

5
<PAGE> 13

"CONSOLIDATED LEVERAGE RATIO" as of any date of determination
means the ratio of (i) the aggregate amount of all Indebtedness of the
Company and its Restricted Subsidiaries, excluding (A) Permitted
Warehouse Indebtedness and Guarantees thereof permitted to be Incurred
pursuant to clause (b)(1) of Section 10.9, (B) Hedging Obligations
permitted to be Incurred pursuant to clause (b)(3) of Section 10.9 and
(C) Junior Subordinated Obligations of the Company, to (ii) the
Consolidated Net Worth of the Company.

"CONSOLIDATED NET INCOME" means, for any period, the net
income of the Company and its consolidated Subsidiaries for such period
determined in accordance with GAAP; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of
any person if such Person is not a Restricted Subsidiary, except that
(A) subject to the exclusion contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person during such period
to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause
(iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such
Consolidated Net Income; (ii) any net income (or loss) of any Person
acquired by the Company or a Restricted Subsidiary in a pooling of
interests transaction for any period prior to the date of such
acquisition; (iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income to the extent that cash could have been distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net
Income; (iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated Restricted
Subsidiaries (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person; (v) extraordinary gains
or losses; and (vi) the cumulative effect of a change in accounting
principles, in each case determined in accordance with GAAP.

"CONSOLIDATED NET WORTH" means the consolidated stockholders'
equity of the Company and its Subsidiaries, as determined in accordance
with GAAP, as of the end of the most recent fiscal quarter of the
Company for which financial statements are available, less (i) all
write-ups by the Company or any Restricted Subsidiary (other than
write-ups resulting from foreign currency translations, write-ups of
tangible assets of a going concern business made within 12 months after
acquisition thereof and write-ups of Excess

<PAGE> 14

Spread Receivables or mortgage servicing rights in accordance
with GAAP), (ii) all Investments in unconsolidated Subsidiaries or
Persons that are not Restricted Subsidiaries (except Temporary Cash
Investments), (iii) all unamortized debt discount and expense and
unamortized deferred charges of the Company and its Restricted
Subsidiaries, in each case as of such date, and (iv) any amounts
attributable to Disqualified Stock. The "Consolidated Net Worth" of a
Restricted Subsidiary means the consolidated net worth of such
Subsidiary and its Subsidiaries (if any), determined on an equivalent
basis. For purposes of this definition, "deferred charges" does not
include deferred taxes, costs associated with mortgage servicing rights
and loan origination costs, in each case to the extent deferred in
accordance with GAAP.

"CORPORATE TRUST OFFICE" means the office of the Trustee at
which at any particular time its corporate trust business shall be
principally administered, which office as of the date hereof is located
at 40 Wall Street, New York, New York 10005.

"COVENANT DEFEASANCE" has the meaning specified in Section
14.3.

"CURRENCY AGREEMENT" means, with respect to any Person, any
foreign exchange contract, currency swap agreement or other similar
agreement to which such Person is a party or a beneficiary.

"DEFAULT" means any event which is, or after notice or passage
of time or both would be, an Event of Default.

"DEFAULTED INTEREST" has the meaning specified in Section 3.8.

"DEPOSITARY" has the meaning specified in Section 3.1.

"DESIGNATED SENIOR INDEBTEDNESS" means, as of any date of
determination, any Senior Indebtedness if the unpaid principal amount
thereof, or the amount of Senior Indebtedness committed to be extended
by the lender or lenders under the related credit facility, equals or
exceeds $1,000,000 on such date.

"DISQUALIFIED STOCK" means, with respect to any Person, any
Capital Stock that by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable) or upon the
happening of any event (i) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise, (ii) is convertible
or exchangeable for Indebtedness or Disqualified Stock or (iii) is
redeemable at the option of the holders thereof, in each case in whole
or in part on or prior to the first anniversary of the Stated Maturity
of the Notes.

"ELIGIBLE EXCESS SPREAD RECEIVABLES" means Excess Spread
Receivables of the Company and its Restricted Subsidiaries, other than
(i) any Excess Spread Receivables created as the result of the
securitization or sale of other Excess Spread Receivables, and (ii) any
Excess Spread Receivables attributable to any whole loan sale of
Receivables, unless the Person or Persons holding such Receivables (a)
is a GSE or (b) has then

<PAGE> 15

outstanding senior unsecured and unsupported long-term debt
rated Baa2 or better by Moody's Investors Service, Inc. and BBB or
better by Standard & Poor's Ratings Group.

"EVENT OF DEFAULT" has the meaning specified in Section 5.1.

"EXCESS SPREAD" means (i) with respect to a "POOL" of
Receivables that has been sold to a trust or other Person in a
securitization, the excess of (a) the weighted average coupon on each
pool of Receivables sold over (b) the sum of the pass-through interest
rate plus a normal servicing fee, a trustee fee, an insurance fee and
an estimate of annual future credit losses related to such assets, in
each case calculated in accordance with any applicable GAAP, and (ii)
with respect to Receivables that have been sold to a Person in a whole
loan sale, the cash flow of the Company and its Restricted Subsidiaries
from such Receivables, net of, to the extent applicable, a normal
servicing fee, a trustee fee, an insurance fee and an estimate of
annual future credit losses related to such assets, in each case
calculated in accordance with any applicable GAAP.

"EXCESS SPREAD RECEIVABLES" of a Person means the contractual
or certificated right to Excess Spread capitalized on such Person's
consolidated balance sheet (the amount of which shall be the present
value of the Excess Spread, calculated in accordance with GAAP, net of
any allowance for losses on loans sold with recourse or other liability
allocable thereto, to the extent not otherwise reflected in such
amount). Excess Spread Receivables (a) include mortgage backed
securities attributable to Receivables sold by the Company or any
Subsidiary, and (b) do not include any mortgage servicing rights.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

"EXCLUDED PERSON" means (i) any Existing Holder, (ii) any
corporation or limited liability company controlled by one or more
Existing Holders, (iii) any partnership the general partners of which
are or are corporations controlled by one or more Existing Holders, and
(iv) any trust of which any Existing Holder is the trustee and at least
80% of the beneficial interests in which are owned by such Existing
Holder and the spouse or lineal descendants of such Existing Holder.
For purposes of this definition, "CONTROL" means the beneficial
ownership of at least 80% of the Voting Stock of a Person.

"EXISTING HOLDERS" means Robert Nederlander, Eugene I.
Schuster, Jerome J. Cohen, Herbert B. Hirsch and Don A. Mayerson.

"GAAP" means generally accepted accounting principles in the
United States of America as in effect from time to time, including
those set forth in (i) the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified
Public Accountants, (ii) statements and pronouncements of the Financial
Accounting Standards Board, (iii) such other statements by such other
entity as approved by a significant segment of the accounting
profession and (iv) the rules and regulations of the SEC governing the
inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to
Section 13 of the Exchange Act, including opinions and pronouncements
in staff accounting bulletins and similar

<PAGE> 16

written statements from the accounting staff of the SEC and
releases of the Emerging Issues Task Force.

"GLOBAL NOTE" means a Note bearing the legend prescribed in
Section 2.4 evidencing all or part of the Notes, authenticated and
delivered to the Depositary or its custodian, and registered in the
name of such Depositary or custodian.

"GLOBAL NOTE HOLDER" has the meaning specified in Section 3.1.

"GOVERNMENTAL APPROVAL" means an authorization, consent,
approval, permit, license, registration or filing with any Governmental
Authority.

"GOVERNMENTAL AUTHORITY" with respect to any Person, means any
nation (including an Indian nation), any state or other political
subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government, including any government authority, agency, department,
board, commission or instrumentality of the United States, any state of
the United States or any political subdivision thereof, and any
tribunal or arbitrator(s) of competent jurisdiction, in each case,
having jurisdiction or authority over such Person.

"GSE" means Federal National Mortgage Association or Federal
Home Loan Mortgage Corporation.

"GUARANTEE" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or
other obligation of any Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to
maintain financial statement conditions or otherwise) or (ii) entered
into for the purpose of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in
part); provided, however, that the term "GUARANTEE" shall not include
endorsements for collection or deposit in the ordinary course of
business. The term "GUARANTEE" used as a verb has a corresponding
meaning.

"GUARANTOR" means any person Guaranteeing any obligation.

"HEDGING OBLIGATIONS" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement or Currency
Agreement.

"HOLDERS" or "NOTEHOLDERS" means the Person in whose name a
Note is registered on the Registrar's books.

"INCUR" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital
Stock of a Person existing at the time such Person becomes a Subsidiary
(whether by merger, consolidation, acquisition or

9
<PAGE> 17

otherwise) shall be deemed to be Incurred by such Subsidiary
at the time it becomes a Subsidiary. The term "INCURRENCE" when used as
a noun shall have a correlative meaning. The accretion of principal of
a non-interest bearing or other discount security shall be deemed the
Incurrence of Indebtedness.

"INDEBTEDNESS" means, with respect to any Person on any date
of determination (without duplication): (i) the principal of and
premium, if any, in respect of (A) indebtedness of such Person
for money borrowed and (B) indebtedness evidenced by notes, debentures,
bonds or other similar instruments for the payment of which such Person
is responsible or liable; (ii) all Capital Lease Obligations of such
Person; (iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
of such Person and all obligations of such Person under any title
retention agreement (including any such obligations under repurchase
agreements, but excluding trade accounts payable and expense accruals
arising in the ordinary course of business not overdue by more than 60
days); (iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction; (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any
Disqualified Stock (but excluding any accrued dividends) or, in the
case of a Subsidiary of such Person, any Preferred Stock (but excluding
any accrued dividends); (vi) Warehouse Indebtedness; (vii) in
connection with each sale of any Excess Spread Receivables, the maximum
aggregate claim (if any) that the purchaser thereof could have against
such Person if the payments anticipated in connection with such Excess
Spread Receivables are not collected; (viii) all obligations of the
type referred to in clauses (i) through (vii) of other Persons and all
dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee;
(ix) all obligations of the type referred to in clauses (i) through
(viii) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person),
the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so
secured; and (x) to the extent not otherwise included in this
definition, Hedging Obligations of such Person. Notwithstanding the
foregoing, "INDEBTEDNESS" shall not include obligations under the Tax
Sharing Agreement or any renewal or other modification thereof that
complies with Section 10.14. Except in the case of Warehouse
Indebtedness (the amount of which shall be determined in accordance
with the definition thereof set forth in this Section), the amount of
unconditional Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as
described above. The amount of any Indebtedness under clause (viii) of
this definition shall be equal to the amount of the outstanding
obligation for which such Person is responsible or liable, directly or
indirectly, including by way of Guarantee. Notwithstanding the
foregoing, any securities issued in a securitization by a special
purpose owner trust or similar entity formed by or on behalf of a
Person and to which Receivables have been sold or otherwise transferred
by or on behalf of such Person or its Restricted Subsidiaries shall not
be treated as Indebtedness of such Person or its Restricted
Subsidiaries under this Indenture, regardless of whether such
securities are treated as indebtedness for tax purposes,

10
<PAGE> 18

provided (1) neither the Company nor any of its Restricted
Subsidiaries (other than Special Purpose Subsidiaries) (a) provides
credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), except for credit
support in the form of "overcollateralization" of the senior
certificates issued in, or subordination of or recourse to all or a
portion of Excess Spread Receivables attributable to, such
securitization, in each case to the extent reflected in the book value
of such Excess Spread Receivables, or (b) is directly or indirectly
liable (as a guarantor or otherwise), and (2) no default with respect
to such securities (including any rights that the holders thereof may
have to take enforcement action against an Unrestricted Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness of the Company or any of its Restricted Subsidiaries
to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity.

"INDENTURE" means this instrument as originally executed or as
it may from time to time be supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof, including, for all purposes of this instrument, and
any such supplemental indenture, the provisions of the Trust Indenture
Act that are deemed to be a part of and govern this instrument and any
such supplemental indenture, respectively.

"INTEREST-ONLY CERTIFICATE" means a certificate issued in a
securitization of a pool of Receivables which pays a fixed or floating
interest rate on a notional principal amount.

"INTEREST PAYMENT DATE" means the date on which any
installment of interest on the Notes becomes due and payable, as
provided in such Notes, the form of which is set forth in Section 2.2.

"INTEREST RATE AGREEMENT" means any interest rate swap
agreement, interest rate cap agreement, repurchase agreement, futures
contract or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations
in interest rates.

"INVESTMENT" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course
of business, other than Receivables, that are recorded as trade
accounts on the balance sheet of the lender) or other extensions of
credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness (including Receivables) or other similar
instruments issued by, such Person. For purposes of the definitions of
"UNRESTRICTED SUBSIDIARY" and "RESTRICTED PAYMENT" and Section 10.11,
(i) "INVESTMENT" shall include the greater of the fair market value and
the book value of the Investments by the Company and its Restricted
Subsidiaries in such Subsidiary at the time it is so designated and
(ii) any property transferred to or from a Person shall be valued at
its fair market value at the time of such transfer, in each case as
determined in good faith by the Board of Directors.

11
<PAGE> 19

"ISSUE DATE" means the date on which the Notes are originally
issued.

"JOINDER OF SUBSIDIARY GUARANTOR" means a Joinder of
Subsidiary Guarantor substantially in the form of Exhibit B.

"JUNIOR SUBORDINATED OBLIGATION" is any future Indebtedness of
the Company and the Subsidiary Guarantors that by its terms is
expressly subordinated in right of payment to the Notes and the
Subsidiary Guarantees to at least the same extent as described in
Article Twelve.

"LEGAL DEFEASANCE" has the meaning specified in Section 14.2.

"LEGAL HOLIDAY" means any Saturday, Sunday or other day on
which banks in the States of New York or Georgia are authorized or
obligated by law to be closed for business.

"LIEN" means (i) any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale
or other title retention agreement or lease in the nature thereof) and
(ii) any claim (whether direct or indirect through subordination or
other structural encumbrance) against any Excess Spread Receivables
sold or otherwise transferred by such Person to a buyer, unless such
Person is not liable for any losses thereon.

"MANAGEMENT SERVICES AGREEMENT" means the agreement, dated as
of _______________, 1996, between the Company and PEC, without regard
to any amendments, supplements or other modifications thereof after the
Issue Date.

"MATURITY", when used with respect to any Note, means the date
on which the principal of such Note or an installment of principal
becomes due and payable as therein or herein provided, whether at the
Stated Maturity or by declaration of acceleration, call for redemption,
upon repurchase or otherwise.

"MEGO FINANCIAL" means Mego Financial Corp., a New York
corporation.

"NET AVAILABLE CASH" from an Asset Disposition means cash
payments received therefrom (including any cash payment received by way
of deferred payment of principal pursuant to a note or installment
receivable or otherwise, but only as and when received, but excluding
any other consideration received in the form of assumption by the
acquiring Person of Indebtedness or other obligations relating to such
properties or assets or received in any other noncash form) in each
case net of (i) all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all federal,
state, provincial, foreign and local taxes required to be accrued as a
liability under GAAP as a consequence of such Asset Disposition, (ii)
all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset

12
<PAGE> 20

Disposition, or by applicable law be, repaid out of the
proceeds from such Asset Disposition, and (iii) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the property or
other assets disposed of in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition.

"NET CASH PROCEEDS," with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.

"NON-RECOURSE DEBT" means indebtedness (i) as to which neither
the Company nor any of its Restricted Subsidiaries (a) provides a
Guarantee or other credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as the primary
obligor or otherwise), or (c) constitutes the lender; and (ii) no
default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries (other than the Notes and the Subsidiary
Guarantees) to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated
maturity.

"NOTE REGISTER" has the meaning specified in Section 3.6.

"NOTE REGISTRAR" has the meaning specified in Section 3.6.

"OBLIGATIONS" has the meaning specified in Section 8.1.

"OBLIGOR" means the Company or any Guarantor.

"OFFICERS' CERTIFICATE" means a certificate signed by the
Chairman of the Board, a Vice Chairman of the Board, the President, the
Chief Financial Officer or a Vice President, and by the Treasurer, an
Assistant Treasurer, the Controller, an Assistant Controller, the
Secretary or an Assistant Secretary, of any Obligor, and delivered to
the Trustee. Unless otherwise indicted, "OFFICERS' CERTIFICATE" means
an Officers' Certificate of the Company.

"OPINION OF COUNSEL" means a written opinion of counsel, who
may be counsel for the Obligors and who shall be acceptable to the
Trustee.

"OUTSTANDING", when used with respect to Notes, means, as of
the date of determination, all Notes theretofore authenticated and
delivered under this Indenture, except:

(i) Notes theretofore cancelled by the Trustee
or delivered to the Trustee for cancellation;

<PAGE> 21

(ii) Notes for whose payment or redemption money in
the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent (other than any Obligor) in trust
or set aside and segregated in trust by the Company (if the
Company shall act as its own Paying Agent) for the Holders of
such Notes; provided that, if such Notes are to be redeemed,
notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee
has been made; and

(iii) Notes in exchange for or in lieu of which other
Notes have been authenticated and delivered pursuant to this
Indenture, other than any such Notes in respect of which there
shall have been presented to the Trustee proof satisfactory to
it that such Notes are held by a bona fide purchaser in whose
hands such Notes are valid obligations of the Company

provided, however, that in determining whether the Holders of the
requisite principal amount of the Outstanding Notes have given any
request, demand, authorization, direction, notice, consent or waiver
hereunder, Notes owned by the Company or any other Obligor upon the
Notes or any Affiliate of the Company or of such other Obligor shall be
disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or
waiver, only Notes which the Trustee knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good
faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect
to such Notes and that the pledgee is not the Company or any other
Obligor upon the Notes or any Affiliate of the Company or of such other
Obligor.

"PARENT" means Mego Financial and its successors, but only
while such company beneficially owns 40% or more of the Voting Stock of
the Company.

"PAYING AGENT" means any Person authorized by the Company to
pay the principal of or any premium or interest on any Notes on behalf
of the Company or, if the Company is acting as its own Paying Agent,
the Company.

"PAYMENT BLOCKAGE PERIOD" has the meaning specified in Section
12.3.

"PAYMENT BLOCKAGE NOTICE" has the meaning specified in Section
12.3.

"PEC" means Preferred Equities Corporation, a Nevada
corporation, and its successors.

"PEC AGREEMENTS" means the Management Services Agreement and
the Servicing Agreement.

"PERMITTED INVESTMENT" means an Investment by the Company or
any Restricted Subsidiary: (i) in a Wholly Owned Restricted Subsidiary
or a Person that, upon the making of such Investment, will become a
Wholly Owned Restricted Subsidiary; provided,

<PAGE> 22

however, that the primary business of such Wholly Owned
Restricted Subsidiary is a Related Business; (ii) in another Person if
as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially
all its assets to, the Company or a Wholly Owned Restricted Subsidiary;
provided, however, that such Person's primary business is a Related
Business; (iii) while no Default or Event of Default exists, any
Investment in Persons engaged in a Related Business, provided the
aggregate amount of all Investments made by the Company and its
Restricted Subsidiaries after the Issue Date that constitute Permitted
Investments under this clause (iii) (and, without limitation, not
including Permitted Investments under clause (i) above), on any date
(the "DATE OF DETERMINATION"), may not exceed the sum of (a)
$6,000,000, plus (b) the excess, if any, of (A) 25% of Consolidated Net
Income during the period (treated as one accounting period) from the
beginning of the first fiscal quarter commencing after the Issue Date
to the end of the fiscal quarter ended most recently prior to the date
of determination for which financial statements are available (or, in
case such Consolidated Net Income shall be a deficit, zero), over (B)
the aggregate amount of Restricted Payments made by the Company and its
Restricted Subsidiaries after the Issue Date (other than a Restricted
Payment permitted to be made pursuant to clause (i) or (ii) of
paragraph (b) of Section 10.11), (iv) in the form of Temporary Cash
Investments; (v) in the form of receivables (other than Receivables)
owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; (vi) in the
form of payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business; (vii) in the form of loans or advances to employees
made in the ordinary course of business consistent with past practices
of the Company or such Restricted Subsidiary in an aggregate amount not
to exceed $250,000 outstanding at any time; (viii) in the form of
stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments; (ix) in any
Person to the extent such Investment represents the non-cash portion of
the consideration received for an Asset Disposition as permitted
pursuant to Section 10.13, provided the amount thereof does not exceed
10% of Consolidated Net Worth; (x) in the form of Receivables of the
Company or any Restricted Subsidiary; and (xi) in the form of Excess
Spread Receivables, subordinated certificates or Interest-only
Certificates arising from a securitization or sale of Receivables by
the Company or any of its Wholly Owned Restricted Subsidiaries
(including any securitization of a "pool" of receivables that, in
addition to Receivables, also includes loans, leases or other
receivables of Persons other than the Company or any Wholly Owned
Restricted Subsidiary).

"PERMITTED LIENS" means, with respect to the Company and any
Restricted Subsidiary: (i) pledges or deposits by such Person under
worker's compensation laws, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States
government bonds to secure surety or appeal

<PAGE> 23

bonds to which such Person is a party, or deposits as security
for contested taxes or for the payment of rent, in each case Incurred
in the ordinary course of business; (ii) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for
amounts not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards against
such Person with respect to which such Person shall then be proceeding
with an appeal or other proceedings for review; (iii) Liens for
property taxes not yet subject to penalties for nonpayment or which are
being contested in good faith and by appropriate proceedings; (iv)
minor survey exceptions, minor encumbrances, easements or reservations
of, or rights of others for, licenses, rights of way, sewers, electric
lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real property, or leases,
subleases or other Liens incidental to the conduct of the business of
such Person or to the ownership of its properties which were not
Incurred in connection with Indebtedness and which do not in the
aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of such
Person; (v) Liens securing Indebtedness of such Person Incurred to
finance the construction, purchase or lease of, or repairs,
improvements or additions to, equipment (including vehicles) of such
Person (but excluding Capital Stock of another Person); provided,
however, that the Lien may not extend to any other property owned by
such Person or any of its Subsidiaries at the time the Lien is
Incurred, and the Indebtedness secured by the Lien may not be Incurred
more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full
operation of the property subject to the Lien; (vi) Liens on
Receivables of the Company or a Restricted Subsidiary, as the case may
be, to secure Indebtedness permitted under the provisions described in
clause (b)(1) of Section 10.9; (vii) Liens on Excess Spread Receivables
(or on the Capital Stock of any Person substantially all the assets of
which are Excess Spread Receivables); provided, however, that no such
Liens may encumber Eligible Excess Spread Receivables of the Company
and its Restricted Subsidiaries in an amount equal to the sum of (1)
the Specified Percentage in effect at the creation of such Lien (the
"DETERMINATION DATE") of the unpaid principal amount as of the
determination date of the Notes and all other unsecured Indebtedness of
the Company and its Restricted Subsidiaries that does not constitute
Junior Subordinated Obligations (collectively, the "SPECIFIED UNSECURED
INDEBTEDNESS"; the amount under this subclause (1) being the "BASE SET
ASIDE"), plus (2) 25% of the excess, if any, of (x) the total amount of
Eligible Excess Spread Receivables shown on the balance sheet of the
Company and its Restricted Subsidiaries, determined on a consolidated
basis in accordance with GAAP, as of the determination date, over (y)
the Base Set Aside, provided that the sum of the Base Set Aside plus
the amount in this clause (2) (the "EXCESS SET ASIDE") shall not exceed
200% of Specified Unsecured Indebtedness, plus (3) 10% of the excess,
if any, of (x) the amount under the foregoing subclause (2)(x), over
(y) the sum of the Base Set Aside plus the Excess Set Aside; (viii)
Liens existing on the Issue Date and listed on Schedule 10.12 to this
Indenture; (ix) Liens on property or shares of Capital Stock of another
Person at the time such other Person becomes a Restricted Subsidiary of
such Person; provided, however, that (A) such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
other Person becoming a Subsidiary or being designated a Restricted
Subsidiary and (B) such

16
<PAGE> 24

Liens may not extend to any other property owned by such
Person or any of its Restricted Subsidiaries; (x) Liens on property at
the time such Person or any of its Restricted Subsidiaries acquires the
property, including any acquisition by means of a merger or
consolidation with or into such Person or a Restricted Subsidiary of
such Person; provided, however, that (A) such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition and (B) such Liens may not extend to any other property
owned by such Person or any of its Restricted Subsidiaries; (xi) Liens
securing Indebtedness or other obligations of a Restricted Subsidiary
of such Person owing to such Person or a Wholly Owned Restricted
Subsidiary of such Person; (xii) Liens (other than on any Excess Spread
Receivables) securing Hedging Obligations of the Company or such
Restricted Subsidiary so long as such Hedging Obligations relate to
Indebtedness that is, and is permitted under this Indenture to be,
secured by a Lien on the same property securing such Hedging
Obligations; (xiii) Liens to secure any Refinancing (or successive
Refinancings) as a whole, or in part, of any Indebtedness of the
Company or such Restricted Subsidiary secured by any Lien referred to
in the foregoing clauses (v), (viii) and (ix); provided, however, that
(A) such new Lien shall be limited to all or part of the same property
that secured the original Lien (plus improvements to or on such
property), (B) the Indebtedness secured by such Lien at such time is
not increased to any amount greater than the sum of (1) the outstanding
principal amount or, if greater, committed amount of the Indebtedness
described in clause (v), (viii) or (ix), as the case may be, at the
time the original Lien became a Permitted Lien and (2) an amount
necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or
replacement and (C) the Average Life of such Indebtedness is not
decreased; and (xiv) any Lien in the form of "over-collateralization"
of the senior certificates issued in, or subordination of or recourse
to all or a portion of Excess Spread Receivables of the Company or any
Subsidiary attributable to, a securitization of Receivables, in each
case to the extent reflected in the book value of such Excess Spread
Receivables, which Lien is in favor of the holders of other interests
in the trust relating to such securitization, provided, however, that
notwithstanding any of the foregoing clauses, no Lien on Eligible
Excess Spread Receivables, other than a Lien permissible under the
foregoing clauses (vii) and (xiv), shall be a Permitted Lien.
Notwithstanding the foregoing, "Permitted Liens" will not include any
Lien described in clause (v), (ix) or (x) above to the extent such Lien
applies to any Additional Assets acquired directly or indirectly from
Net Available Cash pursuant to Section 10.13. Without limitation, for
purposes of clause (vii) of this definition, the Incurrence of any
Indebtedness (or an increase in the amount of any Indebtedness) secured
by a Lien on Excess Spread Receivables shall be considered the
incurrence of a new Lien on such Excess Spread Receivables,
irrespective of whether a Lien securing other Indebtedness (or a lesser
amount of Indebtedness) already exists on such assets at the time of
such Incurrence.

"PERMITTED WAREHOUSE INDEBTEDNESS" means Warehouse
Indebtedness in connection with a Warehouse Facility; provided,
however, that (i) the assets being financed are eligible to be recorded
as held for sale on the consolidated balance sheet of the Company and
its Restricted Subsidiaries in accordance with GAAP, (ii) Warehouse
Indebtedness constitutes Permitted Warehouse Indebtedness only (a) if,
in the case of

17
<PAGE> 25

Warehouse Indebtedness under a Purchase Facility, recourse
with respect to the obligations of the Company and its Restricted
Subsidiaries under such Warehouse Facility is limited to the
Receivables financed thereby or (b) in the case of any other Warehouse
Indebtedness, to the extent of the lesser of (A) the amount advanced by
the lender with respect to the Receivables financed under the Warehouse
Facility, and (B) the principal amount of such Receivables, and (iii)
any such Indebtedness has not been outstanding in excess of 360 days.

"PERMITTED WAREHOUSE INDEBTEDNESS LIMITATION" means, with
respect to any Warehouse Indebtedness of any Restricted Subsidiary, any
covenant in the credit documents under which such Warehouse
Indebtedness is incurred to maintain the consolidated net worth of such
Restricted Subsidiary at a specified dollar amount, provided that such
covenant does not require such consolidated net worth to be maintained
at a level in excess of 85% of the consolidated net worth of such
Restricted Subsidiary shown on the most recently available consolidated
balance sheet of such Restricted Subsidiary at the time such credit
documents are entered into, amended or renewed. For purposes of this
definition, "CONSOLIDATED NET WORTH" shall be determined in accordance
with GAAP.

"PERSON" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company,
trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.

"PLACE OF PAYMENT" means the place or places where the
principal of and any premium and interest on the Notes are payable as
specified in Section 10.2.

"PREDECESSOR NOTE" of any particular Note means every previous
Note evidencing all or a portion of the same debt as that evidenced by
such particular Note; and, for the purposes of this definition, any
Note authenticated and delivered under Section 3.7 in exchange for or
in lieu of a mutilated, destroyed, lost or stolen Note shall be deemed
to evidence the same debt as the mutilated, destroyed, lost or stolen
Note.

"PREFERRED STOCK" as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends, or as to
the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of Capital Stock
of any other class of such corporation.

"PRINCIPAL" of a Note means the principal of the Note payable
on the Note which is due or overdue or is to become due at the relevant
time.

"PUBLIC EQUITY OFFERING" means an underwritten primary public
offering of Common Stock of the Company pursuant to an effective
registration statement under the Securities Act.

<PAGE> 26

"PURCHASE DATE" means any Asset Disposition Purchase Date or
any Change of Control Purchase Date.

"PURCHASE FACILITY" means any Warehouse Facility pursuant to
which the Company or a Restricted Subsidiary sells Receivables to a
financial institution or other Person and retains a right of first
refusal (or a right with similar effect) upon the subsequent resale of
such Receivables by such financial institution.

"PURCHASE NOTICE" means any Asset Disposition Purchase Notice
or any Change of Control Purchase Notice.

"PURCHASE PRICE" means any Asset Disposition Purchase Price or
Change of Control Purchase Price.

"QUALIFIED STOCK" of any Person means any and all Capital
Stock of such Person other than Disqualified Stock.

"RECEIVABLES" means loans, leases and receivables purchased or
originated by the Company or any Restricted Subsidiary in the ordinary
course of business; provided, however, that for purposes of determining
the amount of a Receivable at any time, such amount shall be determined
in accordance with GAAP, consistently applied, as of the most recent
practicable date.

"REDEMPTION DATE", when used with respect to any Note to be
redeemed, means the date fixed for such redemption by or pursuant to
this Indenture.

"REDEMPTION PRICE", when used with respect to any Note to be
redeemed, means the price at which it is to be redeemed pursuant to
this Indenture.

"REFINANCE" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or
retire, or to issue other Indebtedness in exchange or replacement for,
such Indebtedness. "REFINANCED" and "REFINANCING" shall have
correlative meanings.

"REFINANCING INDEBTEDNESS" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing
on the Issue Date or Incurred in compliance with this Indenture,
including Indebtedness that Refinances Refinancing Indebtedness;
provided, however, that (i) such Refinancing Indebtedness has a Stated
Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) such Refinancing Indebtedness has an Average Life at
the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being Refinanced,
(iii) such Refinancing Indebtedness has an aggregate principal amount
(or, if Incurred with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount
(or, if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus fees and expenses, including
any premium and defeasance costs) under the Indebtedness being

<PAGE> 27

Refinanced, and (iv) in the case of Refinancing Indebtedness that
Refinances any Junior Subordinated Obligations, such Refinancing
Indebtedness constitutes a Junior Subordinated Obligation; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company or another Subsidiary or (y) Indebtedness of the Company or a
Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.

"REGULAR RECORD DATE" for the interest payable on any Interest
Payment Date on the Notes means the __________ or ___________ (whether
or not a Business Day), as the case may be, next preceding such
Interest Payment Date.

"RELATED BUSINESS" means any consumer lending business or any
financial service business directly relating to such business.

"REPRESENTATIVE" means, with respect to any Senior
Indebtedness, any holder thereof or any agent, trustee or other
representative for any such holder.

"RESPONSIBLE OFFICER", when used with respect to the Trustee,
means the chairman or any vice-chairman of the board of directors, the
chairman or any vice-chairman of the executive committee of the board
of directors, the chairman of the trust committee, the president, any
vice president, any assistant vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the
cashier, any assistant cashier, any senior trust officer, trust officer
or assistant trust officer, the controller or any assistant controller
or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any
other officer to whom such matter is referred because of his knowledge
of and familiarity with the particular subject.

"RESTRICTED PAYMENT" with respect to any Person means: (i) the
declaration or payment of any dividends or any other distributions of
any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or
similar payment to the direct or indirect holders of its Capital Stock
(other than (A) dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock), and (B) dividends or
distributions payable solely to the Company or a Wholly Owned
Restricted Subsidiary; (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company
held by any Person or of any Capital Stock of a Restricted Subsidiary
held by any Affiliate of the Company (other than a Wholly Owned
Restricted Subsidiary), including the exercise of any option to
exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock); (iii) the payment, purchase,
repurchase, redemption, defeasance or other acquisition or retirement
for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Junior Subordinated Obligations
of the Company or any Restricted Subsidiary; or (iv) the making of any
Investment (other than a Permitted Investment) in any Person.
Notwithstanding the foregoing, solely for purposes of calculating the
aggregate amount of "other Restricted Payments since the Issue Date,"
as used in clause (iii) of paragraph (a) of Section 10.11, any
Investment that constitutes a

<PAGE> 28

Permitted Investment under clause (iii) of the definition of
"PERMITTED INVESTMENT" shall be considered a Restricted Payment (but
such a Permitted Investment shall not be considered a Restricted
Payment for any other purpose).

"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.

"SEC" means the Securities and Exchange Commission.

"SECURITIES ACT" means the Securities Act of 1933, as amended.

"SENIOR INDEBTEDNESS" means principal of and interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company or a
Subsidiary, as applicable, to the extent postpetition interest is
allowed in such proceeding) and premium, if any, on (a) any
Indebtedness of the Company or any Restricted Subsidiary of the type
referred to in clause (i), (ii), (iii), (iv) or (vi) of the definition
of "Indebtedness," or (b) all Guarantees by the Company or any
Restricted Subsidiary with respect to Indebtedness referred to in the
foregoing clause (a), unless, in the case of clause (a) or (b), the
instrument under which such Indebtedness is incurred expressly provides
that it is pari passu with or subordinated in right of payment to the
Notes (in the case of Indebtedness being Incurred by the Company) or
the Subsidiary Guarantee of such Restricted Subsidiary (in the case of
Indebtedness being Incurred by any Restricted Subsidiary).
Notwithstanding the foregoing, Senior Indebtedness shall not include
(a) any liability for federal, state, local, foreign or other taxes,
(b) any Indebtedness of the Company or any Restricted Subsidiary to any
Affiliates (including obligations under the Tax Sharing Agreement, as
amended from time to time), (c) any trade accounts payable and expense
accruals, (d) any Indebtedness that is Incurred in violation of this
Indenture, and (e) Indebtedness owed for compensation or for services
rendered.

"SENIOR OFFICER" means the Chairman of the Board, a Vice
Chairman of the Board, the President, the Chief Financial Officer, a
Vice President, the Treasurer, the Controller, or the Secretary of the
Company,

"SERVICING AGREEMENT" means the agreement, dated as of
__________, 1996, between the Company and PEC, without regard to any
amendments, supplements or other modifications thereof after the Issue
Date.

"SPECIAL PURPOSE SUBSIDIARY" means a Restricted Subsidiary
formed in connection with a securitization of Receivables (i) all the
Capital Stock of which (other than directors' qualifying shares and
shares held by other Persons to the extent such shares are required by
applicable law to be held by a Person other than the Company or a
Restricted Subsidiary) is owned by the Company or one or more
Restricted Subsidiaries, (ii) that has no assets other than Excess
Spread Receivables created in such securitization, (iii) that conducts
no business other than holding such Excess Spread Receivables, and (iv)
that has no Indebtedness (other than short-term Indebtedness to the
Company or any Wholly Owned Restricted Subsidiary attributable to the
purchase by such Restricted

<PAGE> 29

Subsidiary from the Company or such Wholly Owned Restricted
Subsidiary of such Receivables, which Indebtedness is paid in full upon
closing of such securitization).

"SPECIAL RECORD DATE" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 3.8.

"SPECIFIED PERCENTAGE" means (i) at any time prior to the date
that is six months after the Issue Date, 0%, (ii) subject to clause
(i), at any time prior to the date that is 12 months after the Issue
Date, 20%, (iii) subject to clauses (i) and (ii), at any time prior to
the date that is 18 months after the Issue Date, 40%, (iv) subject to
clauses (i), (ii) and (iii), at any time prior to the date that is 24
months after the Issue Date, 90%, and (v) at any other time, 125%.

"STATED MATURITY" means, with respect to any security, the
date specified in such security as the fixed date on which the final
payment of principal of such security is due and payable, including
pursuant to any mandatory redemption provision (but excluding any
provision providing for the repurchase of such security at the option
of the holder thereof upon the happening of any contingency unless such
contingency has occurred).

"SUBSIDIARY" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than
50% of the total voting power of shares of Capital Stock or other
interests (including partnership interests) entitled (without regard to
the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Wholly Owned Subsidiaries of such Person or
(iii) one or more Wholly Owned Subsidiaries of such Person. Unless
otherwise specified, "SUBSIDIARY" means a Subsidiary of the Company.

"SUBSIDIARY GUARANTEE" has the meaning specified in the
recitals.

"SUBSIDIARY GUARANTOR" means all future Subsidiaries of the
Company other than Special Purpose Subsidiaries, unless any such
Subsidiary is designated an "Unrestricted Subsidiary" in accordance
with Section 10.20, each of which shall have executed and delivered to
the Trustee aJoinder of Subsidiary Guarantor.

"SUBSIDIARY GUARANTOR PAYMENT BLOCKAGE NOTICE" has the meaning
specified in Section 12.3.

"SUBSIDIARY GUARANTOR PAYMENT BLOCKAGE PERIOD" has the meaning
specified in Section 12.3.

"SUCCESSOR COMPANY" has the meaning specified in Section 11.1.

"TAX SHARING AGREEMENT" means the agreement, dated as of
__________, 1996, by and among Mego Financial, the Company, PEC and the
subsidiaries of PEC, without regard to any amendments, supplements or
other modifications thereof after the Issue Date.

<PAGE> 30

"TEMPORARY CASH INVESTMENTS" means any of the following: (i)
any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed as to principal and
interest by the United States of America or any agency thereof and
maturing within 180 days after acquisition thereof; (ii) investments in
demand deposit accounts or time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date
of acquisition thereof issued by a bank or trust company that is not an
Affiliate of the Company and that is organized under the laws of the
United States of America or any state thereof, which bank or trust
company has capital, surplus and undivided profits aggregating in
excess of $500,000,000 and has outstanding debt which is rated "AA" (or
similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a
registered broker-dealer or mutual fund distributor; (iii) repurchase
obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with
a bank meeting the qualifications described in clause (ii) above; (iv)
investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of
the United States of America with a rating of "P-1" or higher according
to Moody's Investors Service, Inc. or "A-1" or higher according to
Standard & Poor's Ratings Group; and (v) investments in securities with
maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by Standard & Poor's Ratings Group or
Moody's Investors Service, Inc.

"TRUSTEE" means the Person named as the "TRUSTEE" in the first
paragraph of this instrument until a successor Trustee shall have
become such pursuant to the applicable provisions of this Indenture,
and thereafter "TRUSTEE" shall mean or include each Person who is then
a Trustee hereunder, and if at any time there is more than one such
Person, "TRUSTEE" as used with respect to the Notes shall mean the
Trustee with respect to the Notes.

"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 as
in force at the date as of which this instrument was executed;
provided, however, that in the event the Trust Indenture Act of 1939 is
amended after such date, "TRUST INDENTURE ACT" means, to the extent
required by any such amendment, the Trust Indenture Act of 1939 as so
amended.

"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board of Directors in the manner
provided in Section 10.20 and (ii) any Subsidiary of an Unrestricted
Subsidiary.

"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or
certificates representing an ownership interest in such obligations) of
the United States of America (including any agency or instrumentality
thereof) for the payment of which the full faith

<PAGE> 31

and credit of the United States of America is pledged and
which are not callable at the issuer's option.

"VICE PRESIDENT", when used with respect to any Obligor or the
Trustee, means any vice president (but shall not include any assistant
vice president), whether or not designated by a number or a word or
words added before or after the title "vice president".

"VOTING STOCK" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person
then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof.

"WAREHOUSE FACILITY" means any funding arrangement with a
financial institution or other lender or purchaser exclusively to
finance the purchase or origination of Receivables by the Company or a
Restricted Subsidiary of the Company for the purpose of pooling such
Receivables prior to securitization or sale in the ordinary course of
business, including any Purchase Facilities.

"WAREHOUSE INDEBTEDNESS" means the consideration received by
the Company or its Restricted Subsidiaries under a Warehouse Facility
with respect to Receivables until such time such Receivables are (i)
securitized, (ii) repurchased by the Company or its Restricted
Subsidiaries or (iii) sold by the counterpart under the Warehouse
Facility to a Person who is not an Affiliate of the Company.

"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Restricted
Subsidiary all the Capital Stock of which (other than directors'
qualifying shares and shares held by other Persons to the extent such
shares are required by applicable law to be held by a Person other than
the Company or a Restricted Subsidiary) is owned by the Company or one
or more Wholly Owned Restricted Subsidiaries.

"WHOLLY OWNED SUBSIDIARY" means a Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable
law to be held by a Person other than the Company or a Subsidiary) is
owned by the Company or one or more Wholly Owned Subsidiaries.

Section 1.2 Compliance Certificates and Opinions.

Upon any application or request by any Obligor to the Trustee
to take any action under any provision of this Indenture, the Obligor shall
furnish to the Trustee such certificates and opinions as may be required under
the Trust Indenture Act. Each such certificate or opinion shall be given in the
form of an Officers' Certificate, if to be given by an officer of the Obligor,
or an Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirements set forth in
this Indenture.

24
<PAGE> 32

Every certificate or opinion (other than the Officers'
Certificate delivered under Section 10.4 hereof) with respect to compliance with
a condition or covenant provided for in this Indenture shall include:

(1) a statement that each individual signing such certificate
or opinion has read such covenant or condition and the definitions
herein relating thereto;

(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;

(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and

(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.

Section 1.3 Form of Documents Delivered to Trustee.

In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of any Obligor may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Obligor stating that the
information with respect to such factual matters is in the possession of the
Obligor, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.

Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.

Section 1.4 Acts of Holders, Record Dates.

(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided,

<PAGE> 33

such action shall become effective upon action by the requisite percentage of
Holders when such instrument or instruments are delivered to the Trustee and,
where it is hereby expressly required, to the Company. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "ACT" of the Holders signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Indenture
and (subject to Section 6.1) conclusive in favor of the Trustee and the Obligor,
if made in the manner provided in this Section.

Without limiting the generality of the foregoing, a Holder,
including a Depositary that is a Holder of a Global Note, may make, give or
take, by a proxy, or proxies, duly appointed in writing, any request, demand,
authorization, direction, notice, consent, waiver or other action provided or
permitted in this Indenture to be made, given or taken by Holders, and a
Depositary that is a Holder of a Global Note may provide its proxy or proxies to
the beneficial owners of interest in any such Global Note.

(b) The fact and date of the execution by any Person of any
such instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.

(c) The Company may, in the circumstances permitted by the
Trust Indenture Act, fix any day as the record date for the purpose of
determining the Holders of Notes entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote on
any action, authorized or permitted to be given or taken by Holders of Notes. If
not set by the Company prior to the first solicitation of a Holder of Notes made
by any Person in respect of any such action, or, in the case of any such vote,
prior to such vote, the record date for any such action or vote shall be the
30th day (or, if later, the date of the most recent list of Holders required to
be provided pursuant to Section 7.1) prior to such first solicitation or vote,
as the case may be. With regard to any record date for action to be taken by the
Holders Notes, only the Holders of Notes on such date (or their duly designated
proxies) shall be entitled to give or take, or vote on, the relevant action.

(d) The ownership of Notes shall be proved by the Note
Register.

(e) Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Note shall bind every future
Holder of the same Note and the Holder of every Note issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Note.

(f) Without limiting the foregoing, a Holder entitled
hereunder to give or take any action hereunder with regard to any particular
Note may do so with regard to all or any part

<PAGE> 34

of the principal amount of such Note or by one or more duly appointed agents
each of which may do so pursuant to such appointment with regard to all or any
different part of such principal amount.

Section 1.5 Notices, Etc., to Trustee and Company.

Except as otherwise expressly provided herein, any request,
demand, authorization, direction, notice, consent, waiver or Act of Holders or
other document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with,

(1) the Trustee by any Holder or by any Obligor shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust
Office, or

(2) any Obligor by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Obligor addressed to it at the address of the Company's
principal office specified in the first paragraph of this instrument or
at any other address previously furnished in writing to the Trustee by
such Obligor, Attention: [__________].

Section 1.6 Notice to Holders; Waiver.

Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each Holder affected by such event, at his address as it appears in the Note
Register, not later than the latest date (if any), and not earlier than the
earliest date (if any), prescribed for the giving of such notice. In any case
where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.

In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.

Section 1.7 Conflict with Trust Indenture Act.

If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act that is required under such Act to be a
part of and govern this Indenture, the latter provision shall control. If any
provision of this Indenture modifies or excludes any provision of the Trust
Indenture Act that may be so modified or excluded, the latter provision shall be
deemed to apply to this Indenture as so modified or to be excluded, as the case
may be.

<PAGE> 35

Section 1.8 Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.

Section 1.9 Successors and Assigns.

All covenants and agreements in this Indenture by the Company
shall bind its successors and assigns, whether so expressed or not.

Section 1.10 Separability Clause.

In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.

Section 1.11 Benefits of Indenture.

Nothing in this Indenture or in the Notes, express or implied,
shall give to any Person, other than (a) the parties hereto and their successors
hereunder and (b) the Holders, any benefit or any legal or equitable right,
remedy or claim under this Indenture.

Section 1.12 Governing Law; Choice of Forum.

(A) THIS INDENTURE AND THE NOTES WILL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE
APPLICATION OF THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.

(b) EACH OBLIGOR HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS INDENTURE AND THE NOTES, AND IRREVOCABLY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF
THE AFORESAID COURTS. EACH OBLIGOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
THEY MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

(c) Each Obligor hereby irrevocably appoints CT Corporation
Systems (the "PROCESS AGENT," which has consented thereto) with offices on the
date hereof at 1633 Broadway, New York, New York 10019, as Process Agent to
receive for and on behalf of

<PAGE> 36

such Obligor service of process in the County of New York relating to this
Indenture and the Notes. SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING
AGAINST ANY OBLIGOR MAY BE MADE ON THE PROCESS AGENT BY REGISTERED OR CERTIFIED
MAIL, RETURN RECEIPT REQUESTED, OR BY ANY OTHER METHOD OF SERVICE PROVIDED FOR
UNDER APPLICABLE LAWS IN EFFECT IN THE STATE OF NEW YORK, AND THE PROCESS AGENT
IS HEREBY AUTHORIZED AND DIRECTED TO ACCEPT SUCH SERVICE FOR AND ON BEHALF OF
SUCH OBLIGOR AND TO ADMIT SERVICE WITH RESPECT THERETO. SUCH SERVICE UPON THE
PROCESS AGENT SHALL BE DEEMED EFFECTIVE PERSONAL SERVICE ON SUCH OBLIGOR,
SUFFICIENT FOR PERSONAL JURISDICTION, 10 DAYS AFTER MAILING, AND SHALL BE LEGAL
AND BINDING UPON SUCH OBLIGOR FOR ALL PURPOSES, NOTWITHSTANDING ANY FAILURE OF
THE PROCESS AGENT TO MAIL COPIES OF SUCH LEGAL PROCESS TO SUCH OBLIGOR OR ANY
FAILURE ON THE PART OF SUCH OBLIGOR TO RECEIVE THE SAME. Each Obligor confirms
that it has instructed the Process Agent to mail to such Obligor, upon service
of process being made on the Process Agent pursuant to this Section, a copy of
the summons and complaint or other legal process served upon it, by registered
mail, return receipt requested, at such Obligor's address set forth in Schedule
105, or to such other address as such Obligor may notify the Process Agent in
writing. Each Obligor agrees that it will at all times maintain a process agent
to receive service of process in the County of New York on its behalf with
respect to this Indenture and the Notes. If for any reason the Process Agent or
any successor thereto shall no longer serve as such process agent or shall have
changed its address without notification thereof to the Trustee, such Obligor,
immediately after gaining knowledge thereof, irrevocably shall appoint a
substitute process agent acceptable to the Trustee in the County of New York and
advise the Trustee thereof.

(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR
ANY HOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OBLIGOR IN ANY OTHER
JURISDICTION.

Section 1.13 Legal Holidays.

In any case where any Interest Payment Date, Redemption Date
or Stated Maturity of any Note shall not be a Business Day at any Place of
Payment, then (notwithstanding any other provision of this Indenture or of the
Notes (other than a provision of the Notes which specifically states that such
provision shall apply in lieu of this Section)) payment of interest or principal
(and premium, if any) need not be made at such Place of Payment on such date,
but may be made on the next succeeding Business Day at such Place of Payment
with the same force and effect as if made on the Interest Payment Date or
Redemption Date, or at the Stated Maturity, provided that no interest shall
accrue with respect to such payment for the period from and after such Interest
Payment Date, Redemption Date or Stated Maturity, as the case may be.

<PAGE> 37

ARTICLE TWO

NOTE FORMS

Section 2.1 Forms Generally.

The Notes shall be in substantially the form set forth in this
Article, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Notes, as evidenced by their execution of the Notes.

Each Note issued after the execution and delivery by any
Subsidiary of aJoinder of Subsidiary Guarantor shall include provisions relating
to the Subsidiary Guarantee, which shall be substantially in the form of Exhibit
A.

The definitive Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers of the Obligor executing such Notes, as evidenced
by their execution of such Notes.

Section 2.2 Form of Face of Note.

MEGO MORTGAGE CORPORATION

......% SENIOR SUBORDINATED NOTES DUE 2001

No................... $..............

<PAGE> 38

at the close of business on the Regular Record Date for such interest, which
shall be the ............... or ................ (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for will forthwith cease to be
payable to the Holder on such Regular Record Date and may either be paid to the
Person in whose name this Note (or one or more Predecessor Notes) is registered
at the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to
Holders of Notes not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be listed, and
upon such notice as may be required by such exchange, all as more fully
provided in said Indenture.

Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.

IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed under its corporate seal.

Dated:

MEGO MORTGAGE CORPORATION

By......................

Attest:

................................
.

Section 2.3 Form of Reverse of Note.

This Note is one of a duly authorized issue of securities of
the Company (herein called the "NOTES"), issued under an Indenture, dated as of
_____________ ___, 1996 (herein called the "INDENTURE"), among the Company, any
Person that may from time to time become a party thereto as a Subsidiary
Guarantor (as defined therein) by executing and delivering to the Trustee
aJoinder of Subsidiary Guarantor (as defined therein), and American Stock
Transfer & Trust Company, as Trustee (herein called the "TRUSTEE", which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee and the Holders of the Notes and of the terms upon
which the Notes are, and are to be, authenticated and delivered. This Note is
one of the Notes designated on the face hereof, limited in aggregate principal
amount to $40,000,000.

31
<PAGE> 39

<TABLE>
<CAPTION>
Redemption
Year Price
- ---- -----
<S> <C>
......... .......%
......... and thereafter .......%
</TABLE>

In the event of redemption of this Note in part only, a new
Note or Notes of like tenor for the unredeemed portion hereof will be issued in
the name of the Holder hereof upon the cancellation hereof.

<PAGE> 40

such action as may be necessary or appropriate to effectuate the subordination
provided for in the Indenture and appoints the Trustee his attorney-in-fact for
such purposes.

If an Event of Default with respect to Notes shall occur and
be continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.

33
<PAGE> 41

All terms used in this Note which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.

Section 2.4 Form of Legend for Global Notes.

Any Global Note authenticated and delivered hereunder shall
bear a legend in substantially the following form:

Section 2.5 Form of Trustee's Certificate of Authentication.

The Trustee's certificate of authentication shall be in
substantially the following form:

This is one of the Notes designated and referred to in the
within-mentioned Indenture.

AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Trustee

By
------------------------------------
Authorized Officer

Section 2.6 Form of Assignment and Election to Purchase.

Each Note shall include the following form of Assignment and
Option of Holder to Elect Purchase:

<PAGE> 42

ASSIGNMENT

(TO BE EXECUTED BY THE REGISTERED HOLDER

IF SUCH HOLDER DESIRES TO TRANSFER THIS NOTE)

FOR VALUE RECEIVED _________________ hereby sells, assigns
and transfers unto _____________________________________________________.

PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE

(PLEASE PRINT NAME AND ADDRESS OF TRANSFEREE)

Dated:

Signature of Holder Signature Guaranteed:

NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.

OPTION OF HOLDER TO ELECT PURCHASE

(CHECK AS APPROPRIATE)

[ ] In connection with the Change of Control Purchase Offer made pursuant to
Section 10.18 of the Indenture, the undersigned hereby elects to have

[ ] the entire principal amount

[] In connection with an Asset Disposition Purchase Offer made pursuant to
Section 10.13 of the Indenture, the undersigned hereby elects to have

[ ] the entire principal amount

<PAGE> 43

100% of the principal amount indicated in the preceding sentence, plus accrued
and unpaid interest thereon, if any, to the date of purchase.

Dated:

Signature of Holder Signature Guaranteed:

NOTICE: The signature to the foregoing must correspond to the Name as written
upon the face of this Note in every particular, without alteration or any change
whatsoever.

ARTICLE THREE

THE NOTES

Section 3.1 Global Note; Depositary.

The Notes will initially be issued in the form of one or more
Global Notes. Each Global Note will be deposited on the Issue Date with The
Depository Trust Company (the "DEPOSITARY"), or the Trustee on its behalf, and
registered in the name of Cede & Co., as nominee of the Depositary (such nominee
being referred to herein as the "GLOBAL NOTE HOLDER").

Section 3.2 Amount.

The aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is $40,000,000.00 (Forty
Million Dollars and No Cents), except as for Notes authenticated and delivered
pursuant to Section 3.5, 3.6, 3.7, [4.2], 10.13, 10.18 or 13.7.

Section 3.3 Denominations.

The Notes shall be issuable in registered form without coupons
in denominations of $1,000 and any integral multiple thereof.

Section 3.4 Execution, Authentication, Delivery and
Dating.

The Notes shall be executed on behalf of each Obligor by its
Chairman of the Board, its Vice Chairman of the Board, its President or one of
its Vice Presidents, under its corporate seal reproduced thereon attested by its
Secretary or one of its Assistant Secretaries. The signature of any of these
officers on the Notes may be manual or facsimile.

Notes bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of any Obligor shall bind
the Obligor, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Notes or did
not hold such offices at the date of such Notes.

36
<PAGE> 44

At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Notes executed by each
Obligor to the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Notes, and the Trustee in accordance with
the Company Order shall authenticate and deliver such Notes.

Each Note shall be dated the date of its authentication.

No Note shall be entitled to any benefit under this Indenture
or be valid or obligatory for any purpose unless there appears on such Note a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature of an Responsible Officer, and such
certificate upon any Note shall be conclusive evidence, and the only evidence,
that such Note has been duly authenticated and delivered hereunder.
Notwithstanding the foregoing, if any Note shall have been authenticated and
delivered hereunder but never issued and sold by the Company, and the Company
shall deliver such Note to the Trustee for cancellation as provided in Section
3.10, for all purposes of this Indenture such Note shall be deemed never to have
been authenticated and delivered hereunder and shall never be entitled to the
benefits of this Indenture.

Section 3.5 Temporary Notes.

Pending the preparation of definitive Notes, the Obligors may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Notes which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Notes in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Notes may determine, as evidenced by their execution of
such Notes.

If temporary Notes are issued, the Company will cause
definitive Notes to be prepared without unreasonable delay. After the
preparation of definitive Notes, the temporary Notes shall be exchangeable for
definitive Notes upon surrender of the temporary Notes at the office or agency
of the Company in a Place of Payment, without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Notes the Obligors shall
execute and the Trustee shall authenticate and deliver in exchange therefor one
or more definitive Notes of any authorized denominations and of a like aggregate
principal amount and tenor. Until so exchanged the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Notes of such tenor.

Section 3.6 Registration; Registration of Transfer and
Exchange.

The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office being
herein sometimes collectively referred to as the "NOTE REGISTER") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Notes and of transfers of Notes. The Trustee is
hereby appointed "Note Registrar" for the purpose of registering Notes and
transfers of Notes as herein provided.

<PAGE> 45

Upon surrender for registration of transfer of any Note at the
office or agency in a Place of Payment, the Company shall execute, and the
Trustee shall authenticate and deliver, in the name of the designated transferee
or transferees, one or more new Notes of any authorized denominations and of a
like aggregate principal amount and tenor.

At the option of the Holder, Notes may be exchanged for other
Notes of any authorized denominations and of a like aggregate principal amount
and tenor, upon surrender of the Notes to be exchanged at such office or agency.
Whenever any Notes are so surrendered for exchange, the Company shall execute,
and the Trustee shall authenticate and deliver, the Notes which the Holder
making the exchange is entitled to receive.

All Notes issued upon any registration of transfer or exchange
of Notes shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Notes
surrendered upon such registration of transfer or exchange.

Every Note presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Trustee) be
duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Registrar duly executed, by the Holder
thereof or his attorney duly authorized in writing.

No service charge shall be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be
imposed in connection with any registration of transfer or exchange of Notes,
other than exchanges pursuant to Section 3.5, 3.6, 3.7, 10.13, 10.18 or 13.7 not
involving any transfer.

The Company shall not be required (i) to issue, register the
transfer of or exchange Notes during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Section 13.3 and ending at the close of
business on the day of such mailing, (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part, or (iii) to register the
transfer of any Note in respect of which a Purchase Notice has been given until
the earlier to occur of the withdrawal of such notice pursuant to Section 10.13
or 10.18 or the Purchase Date.

Section 3.7 Mutilated, Destroyed, Lost and Stolen Notes.

If any mutilated Note is surrendered to the Trustee, the
Obligors shall execute and the Trustee shall authenticate and deliver in
exchange therefor a new Note of like tenor and principal amount and bearing a
number not contemporaneously outstanding.

If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Note and
(ii) such security or indemnity as may be required by them to save each of them
and any agent of either of them harmless, then, in the absence of notice to any
Obligor or the Trustee that such Note has been acquired by a bona fide
purchaser, the Obligors shall execute and the Trustee shall authenticate and
deliver, in lieu of any

<PAGE> 46

such destroyed, lost or stolen Note, a new Note of like tenor and principal
amount and bearing a number not contemporaneously outstanding.

In case any such mutilated, destroyed, lost or stolen Note has
become or is about to become due and payable, the Obligors in their discretion
may, instead of issuing a new Note, pay such Note.

Upon the issuance of any new Note under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.

Every new Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Obligors, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.

The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Notes.

Section 3.8 Payment of Interest; Interest Rights Preserved.

Interest on any Note which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid in immediately
available funds to the Person in whose name that Note (or one or more
Predecessor Notes) is registered at the close of business on the Regular Record
Date for such interest.

Any interest on any Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "DEFAULTED INTEREST") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in clause (1) or (2) below:

(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Notes (or their respective
Predecessor Notes) are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on each
Note and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for
such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons
entitled to such Defaulted Interest as in this clause provided.
Thereupon the Trustee shall fix a Special Record Date

39
<PAGE> 47

for the payment of such Defaulted Interest which shall be not
more than 15 days and not less than 10 days prior to the date of the
proposed payment and not less than 10 days after the receipt by the
Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date and, in the
name and at the expense of the Company, shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder of
Notes at his address as it appears in the Note Register, not less than
10 days prior to such Special Record Date. Notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
having been so mailed, such Defaulted Interest shall be paid to the
Persons in whose names the Notes (or their respective Predecessor
Notes) are registered at the close of business on such Special Record
Date and shall no longer be payable pursuant to the following clause
(2).

(2) The Company may make payment of any Defaulted Interest on
the Notes in any other lawful manner not inconsistent with the
requirements of any securities exchange on which such Notes may be
listed, and upon such notice as may be required by such exchange, if,
after notice given by the Company to the Trustee of the proposed
payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.

Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.

Section 3.9 Persons Deemed Owners.

Prior to due presentment of a Note for registration of
transfer, the Obligors, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Note is registered as the owner of such
Note for the purpose of receiving payment of principal of and any premium and
(subject to Section 3.8) any interest on such Note and for all other purposes
whatsoever, whether or not such Note be overdue, and neither the Obligors, the
Trustee nor any agent of the Company or the Trustee shall be affected by notice
to the contrary.

So long as the Global Note Holder is the registered owner of
any Notes, the Global Note Holder will be considered the sole Holder under this
Indenture of any Notes evidenced by the Global Note for the purposes of
receiving payment on the Notes, receiving notices, and for all other purposes
under this Indenture and the Notes. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under this
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Obligors nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.

<PAGE> 48

Section 3.10 Cancellation.

All Notes surrendered for payment, redemption, registration of
transfer or exchange or for credit against any sinking fund payment shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee
and shall be promptly canceled by it. The Company may at any time deliver to the
Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and may
deliver to the Trustee (or to any other Person for delivery to the Trustee) for
cancellation any Notes previously authenticated hereunder which the Company has
not issued and sold, and all Notes so delivered shall be promptly canceled by
the Trustee. No Notes shall be authenticated in lieu of or in exchange for any
Notes canceled as provided in this Section, except as expressly permitted by
this Indenture. All canceled Notes held by the Trustee shall be disposed of as
directed by a Company Order.

Section 3.11 Computation of Interest.

Interest on the Notes shall be computed on the basis of a
360-day year of twelve 30-day months.

ARTICLE FOUR

BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES

Section 4.1 Applicability of Article

Each Global Note shall be subject to this Article.

Section 4.2. Book-Entry Provisions For Global Note

(a) Members of, or participants in, the Depositary ("AGENT
MEMBERS") shall have no rights under this Indenture with respect to any Global
Note held on their behalf by the Depositary or under the Global Note, and the
Depositary may be treated by the Company, the Trustee and any agent of the
Company or the Trustee as the absolute owner of the Global Note for all purposes
whatsoever. Any Holder of the Global Note shall, by acceptance of such Global
Note, agree that the transfers of beneficial interests in such Global Note may
be effected only through a book-entry system maintained by the Holder of such
Global Note (or its agent), and that ownership of a beneficial interest in the
Global Note shall be required to be reflected in a book-entry system.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or an agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Agent Members, the operation of
customary practices governing the exercise of the rights of a Holder of any
Note.

(b) The Depositary must, at the time of its designation and at
all times while it serves as Depositary, be a clearing agency registered under
the Exchange Act and any other applicable statute or regulation.

<PAGE> 49

(c) Notwithstanding any other provision of this Section,
unless and until it is exchanged in whole or in part for individual Notes
represented thereby, a Global Note representing all or a portion of the Notes
may not be transferred except as a whole by the Depositary to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary. Interests of
beneficial owners in the Global Notes (each an "INTEREST") may be transferred to
one beneficial owner or to another Agent Member or exchanged for definitive
Notes in accordance with the rules and procedures of the Depositary and the
provisions of this Indenture. In addition, definitive Notes shall be transferred
to all beneficial owners in exchange for their beneficial interests in Global
Notes if (i) the Depositary for the Notes notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the Global Notes
or is no longer eligible to serve as Depositary pursuant to the terms of this
Indenture and a successor Depositary is not appointed by the Company within 90
days after delivery of such notice; (ii) the Company, at its sole discretion,
notifies the Trustee in writing that it elects to cause the issuance of
definitive Notes under this Indenture, then the Company shall execute; or (iii)
there shall have occurred and be continuing a Default with respect to any Notes
represented by the Global Notes; and the Trustee shall, upon receipt of a
Company Order in accordance with Section 3.4, authenticate and deliver,
definitive Notes in an aggregate principal amount equal to the principal amount
of the Global Notes in exchange for such Global Notes. If specified by the
Company pursuant to Section 3.4, the Depositary may surrender a Global Note in
exchange in whole or in part for Notes of like tenor and terms and in definitive
form on such terms as are acceptable to the Company, the Trustee and the
Depositary.

(d) In connection with the transfer of any Interest from one
beneficial owner to another Agent Member not taking a definitive Note, but an
Interest, pursuant to paragraph (c), the Depositary shall reflect on its books
and records the date, the name of the transferor and transferee, and the amount
of the Interest transferred.

(e) In connection with the transfer of Global Notes to
beneficial owners pursuant to the third sentence of paragraph (c) or (h) of this
Section, the Global Notes shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute and the Trustee upon receipt of a
Company Order for the authentication and delivery of definitive Notes shall
authenticate and deliver, without service charge:

(i) to the Depositary or to each Person specified by
such Depositary a new Note or Notes of like tenor and terms and of
any authorized denomination as requested by such Person in aggregate
principal amount equal to and in exchange for such Person's beneficial
interest in the Global Note; and

(ii) to such Depositary a new Global Note of like
tenor and terms and in an authorized denomination equal to the
difference, if any, between the principal amount of the surrendered
Global Note and the aggregate principal amount of Notes delivered to
Holders thereof.

42
<PAGE> 50

Notwithstanding any other provision of this Indenture, any
Note authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, any Global Note shall also be a Global Note and
shall bear the legend specified in Section 2.4 except for any Note authenticated
and delivered in exchange for, or upon registration of transfer of, a Global
Note pursuant to the preceding sentence.

(f) The Holder of any Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.

(g) Upon the exchange of a Global Note in its entirety for
Notes in definitive form, such Global Note shall be canceled by the Trustee.

(h) Notwithstanding anything herein to the contrary, if at any
time the Depositary for the Notes notifies the Company that it is unwilling or
unable to continue as a Depositary for the Notes or if at any time the
Depositary for the Notes shall no longer be registered or in good standing under
the Exchange Act, or other applicable statute or regulation, the Company shall
appoint a successor Depositary with respect to the Notes. If a successor
Depositary for the Notes is not appointed by the Company within 90 days after
the Company receives such notice or becomes aware of such condition, the Company
will execute, and the Trustee, upon Company Request, will authenticate and
deliver Notes in definitive form in an aggregate principal amount equal to the
principal amount of the Global Note or Global Notes representing Notes in
exchange for such Global Note or Global Notes.

ARTICLE FIVE

REMEDIES

Section 5.1 Events of Default.

An "EVENT OF DEFAULT" as used herein is any one of the
following:

(a) a default in the payment of interest on the Notes
when due, continued for 30 days;

(b) a default in the payment of principal of and premium, if
any, on any Note when due at its Stated Maturity, upon optional
redemption, upon required repurchase, upon declaration of acceleration
or otherwise;

(c) the failure by the Company or any Subsidiary Guarantor to
comply with any of its obligations in Section 10.13, 10.18 or 10.20 or
Article Eight or Eleven;

(d) the failure by the Company or any Subsidiary Guarantor to
comply with any of its obligations in Section 7.4, 10.9, 10.10, 10.11,
10.12, 10.14, 10.15 or 10.16 and 30 days or more shall have expired
after a Senior Officer of the Company first becomes aware of such
failure;

43
<PAGE> 51

(e) the failure by the Company or any Subsidiary Guarantor to
comply, for 30 days after the notice specified below, in any material
respect in the performance of or to breach any covenant, representation
or warranty contained in this Indenture;

(f) Indebtedness of the Company or any Subsidiary is not paid
within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $2,000,000;

(g) a decree, judgment or order by a court of competent
jurisdiction shall have been entered adjudging the Company or any of
its Subsidiaries as bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization of the Company or such
Subsidiary under any bankruptcy or similar law, and such decree or
order shall have continued undischarged and unstayed for a period of 60
days; or a decree or order of a court of competent jurisdiction over
the appointment of a receiver, liquidator, trustee or assignee in
bankruptcy or insolvency of the Company or such Subsidiary, or of the
property of any such person, or for the winding up for liquidation of
the affairs of any such person, shall have been entered, and such
decree, judgment or order shall have remained in force undischarged and
unstayed for a period of 60 days; or the Company or any of its
Subsidiaries shall institute proceedings to be adjudicated a voluntary
bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall file a petition or answer or consent seeking
reorganization under any bankruptcy or similar law or similar statute,
or shall consent to the filing of any such petition, or shall consent
to the appointment of a custodian, receiver, liquidator, trustee or
assignee in bankruptcy or insolvency of it or any of its assets or
property, or shall make a general assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts
generally as they become due, or shall become insolvent or fail
generally to pay its debts as they become due; or

(h) any judgment or decree for the payment of money in excess
of $1,000,000 is rendered against the Company or a Subsidiary, remains
outstanding for a period of 60 days following such judgment and is not
discharged, waived or stayed; or

(i) any Subsidiary Guarantee ceases to be effective (except if
permitted by Section 10.20), is held to be invalid in a judicial
proceeding or its validity is contested by the Company or any
Restricted Subsidiary.

A Default under subsection (e) is not an Event of Default
until the Trustee or the Holders of at least 25% in principal amount of the
Outstanding Notes notify the Company of the Default and the Company does not
cure the Default within 30 days after receipt of the notice. The notice must
specify the Default, demand that it be remedied and state that the notice is a
"NOTICE OF DEFAULT."

<PAGE> 52

Section 5.2 Acceleration of Maturity;
Rescission and Annulment.

If an Event of Default (other than an Event of Default
specified in clause (g) of Section 5.1) with respect to Notes at the time
Outstanding occurs and is continuing, then in every such case the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Notes may
declare the principal amount of all of the Notes to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by Holders), and upon any such declaration such principal amount (or specified
amount) shall become immediately due and payable. If any Event of Default
specified in clause (g) of Section 5.1 occurs, such principal amount shall
automatically become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any Holder.

At any time after such a declaration of acceleration with
respect to Notes has been made and before a judgment or decree for payment of
the money due has been obtained by the Trustee as hereinafter in this Article
provided, the Holders of a majority in principal amount of the Outstanding
Notes, by written notice to the Company and the Trustee, may rescind and annul
such declaration and its consequences if

(1) the Company has paid or deposited with the Trustee a
sum sufficient to pay

(A) all overdue interest on all Notes,

(B) the principal of (and premium, if any, on) any
Notes which have become due otherwise than by such declaration
of acceleration and any interest thereon at the rate or rates
prescribed therefor in such Notes,

(C) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate or rates
prescribed therefor in such Notes, and

(D) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel; and

(2) all Events of Default with respect to Notes, other than
the non-payment of the principal of Notes which have become due solely
by such declaration of acceleration, have been cured or waived as
provided in Section 5.13.

No such rescission shall affect any subsequent default or impair any right
consequent thereon.

Section 5.3 Collection of Indebtedness and Suits
for Enforcement by Trustee.

The Company covenants that if

<PAGE> 53

(1) default is made in the payment of any interest on any Note
when such interest becomes due and payable and such default continues
for a period of 30 days, or

(2) default is made in the payment of the principal of (or
premium, if any, on) any Note at the Maturity thereof,

the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Notes, the whole amount then due and payable on such Notes for
principal and any premium and interest and, to the extent that payment of such
interest shall be legally enforceable, interest on any overdue principal and
premium and on any overdue interest, at the rate or rates prescribed therefor in
such Notes, and, in addition thereto, such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.

If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may
(or, at the direction of Holders of not less than 25% of the Outstanding Notes
shall), in addition to any other remedies available to it, institute a judicial
proceeding for the collection of the sums so due and unpaid and may prosecute
such proceeding to judgment or final decree, and may enforce the same against
the Company, any Subsidiary Guarantor or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company, any Subsidiary Guarantor or any other
obligor upon the Notes, wherever situated. If an Event of Default with respect
to Notes occurs and is continuing, the Trustee may in its discretion proceed to
protect and enforce its rights and the rights of the Holders of Notes by such
appropriate judicial proceedings as the Trustee shall deem most effectual to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.

Section 5.4 Trustee May File Proofs of Claim.

In case of any judicial proceeding relative to the Company (or
any other Obligor upon the Notes), its property or its creditors, the Trustee
shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture Act
in order to have claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 6.7.

No provision of this Indenture shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization,

<PAGE> 54

arrangement, adjustment or composition affecting the Notes or the rights of any
Holder thereof or to authorize the Trustee to vote in respect of the claim of
any Holder in any such proceeding; provided, however, the Trustee may vote on
behalf of the Holders for the election of a trustee in bankruptcy or similar
official and may be a member of a creditors' or other similar committee.

Section 5.5 Trustee May Enforce Claims Without
Possession of Notes.

All rights of action and claims under this Indenture or the
Notes may be prosecuted and enforced by the Trustee without the possession of
any of the Notes or the production thereof in any proceeding relating thereto,
and any such proceeding instituted by the Trustee shall be brought in its own
name as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Notes in respect of which such judgment
has been recovered.

Section 5.6 Application of Money Collected.

Any money collected by the Trustee pursuant to this Article or
the Subsidiary Guaranty shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such money on
account of principal or any premium or interest, upon presentation of the Notes
and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee under
Section 6.7; and

SECOND: To the payment of the amounts then due and unpaid for
principal of and any premium and interest on the Notes in respect of
which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Notes for principal and any premium and
interest, respectively.

Section 5.7 Limitation on Suits.

No Holder of any Note shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless

(1) such Holder has previously given written notice to
the Trustee of a continuing Event of Default with respect to the Notes;

(2) the Holders of not less than 25% in principal amount of
the Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own
name as Trustee hereunder;

47
<PAGE> 55

(3) such Holder or Holders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and
liabilities to be incurred in compliance with such request;

(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and

(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Notes;

it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all of such
Holders.

Section 5.8 Unconditional Right of Holders to
Receive Principal, Premium and Interest.

Notwithstanding any other provision in this Indenture, the
Holder of any Note shall have the right, which is absolute and unconditional, to
receive payment of the principal of and any premium and (subject to Section 3.8)
any interest on such Note on the Stated Maturity or maturities expressed in such
Note (or, in the case of redemption or repurchase, on the Redemption Date or
Repurchase Date), and to institute suit for the enforcement of any such payment,
and such rights shall not be impaired without the consent of such Holder.

Section 5.9 Restoration of Rights and Remedies.

If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.

Section 5.10 Rights and Remedies Cumulative.

Except as otherwise provided with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph
of Section 3.7, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.

<PAGE> 56

Section 5.11 Delay or Omission Not Waiver.

No delay or omission of the Trustee or of any Holder of any
Notes to exercise any right or remedy accruing upon any Default shall impair any
such right or remedy or constitute a waiver of any such Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.

Section 5.12 Control by Holders.

The Holders of a majority in principal amount of the
Outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the Notes, provided
that

(1) such direction shall not be in conflict with any rule of
law or with this Indenture,

(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and

(3) subject to the provisions of Section 6.1, the Trustee
shall have the right to decline to follow any such direction if the
Trustee in good faith shall, by a Responsible Officer or Officers of
the Trustee, determine that the proceeding so directed would be unduly
prejudicial to the rights of any other Holder or would involve the
Trustee in personal liability.

Section 5.13 Waiver of Past Defaults.

The Holders of not less than a majority in principal amount of
the Outstanding Notes may on behalf of the Holders of all the Notes waive any
past default hereunder and its consequences, except a default

(1) in the payment of the principal of or any premium or
interest on any Note, or

(2) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Note affected.

Upon any such waiver, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.

49
<PAGE> 57

Section 5.14 Undertaking for Costs.

All parties to this Indenture agree, and each Holder of any
Notes by his acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in principal
amount of the Outstanding Notes, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or interest
on any Notes on or after the Stated Maturity or maturities expressed in such
Notes (or, in the case of redemption or repurchase, on or after the Redemption
Date or Repurchase Date).

Section 5.15 Waiver of Usury, Stay or Extension Laws.

The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any usury, stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law and covenants that it will not hinder, delay or impede
the execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law had been enacted.

ARTICLE SIX

THE TRUSTEE

Section 6.1 Certain Duties and Responsibilities.

The duties and responsibilities of the Trustee shall be as
provided by the Trust Indenture Act. Whether or not therein expressly so
provided, every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Section. If an Event of Default occurs (and is not cured),
the Trustee, in the exercise of its power, must use the degree of care of a
prudent man in the conduct of his own affairs. Subject to the requirement in the
foregoing sentence, the Trustee is under no obligation to exercise any of its
rights or powers under this Indenture at the request of any Holder, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense and then only to the extent required
by the terms of this Indenture.

<PAGE> 58

Section 6.2 Notice of Defaults.

If a Default occurs and is continuing and is known to the
Trustee, the Trustee shall mail to each Holder notice of the Default within 60
days after it occurs. Except in the case of a Default in the payment of
principal of, premium, if any, or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers determines that
withholding notice is not opposed to the interest of the Holders.

Section 6.3 Certain Rights of Trustee.

Subject to the provisions of Section 6.1:

(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have been signed
or presented by the proper party or parties;

(b) any request or direction of any Obligor mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors of any Obligor may be
sufficiently evidenced by a Board Resolution;

(c) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate;

(d) the Trustee may consult with counsel and the advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered
or omitted by it hereunder in good faith and in reliance thereon;

(e) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;

(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or
attorney; and

(g) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee

<PAGE> 59

shall not be responsible for any misconduct or negligence on
the part of any agent or attorney appointed with due care by it
hereunder.

Section 6.4 Not Responsible for Recitals or Issuance of Notes.

The recitals contained herein and in the Notes, except the
Trustee's certificate of authentication, shall be taken as the statements of the
Company, and the Trustee or any Authenticating Agent assumes no responsibility
for their correctness. The Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Notes. The Trustee or any
Authenticating Agent shall not be accountable for the use or application by the
Company of Notes or the proceeds thereof.

Section 6.5 May Hold Notes.

The Trustee, any Authenticating Agent, any Paying Agent, any
Note Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Notes and, subject to Sections 6.8
and 6.13, may otherwise deal with the Company with the same rights it would have
if it were not Trustee, Authenticating Agent, Paying Agent, Note Registrar or
such other agent.

Section 6.6 Money Held in Trust.

Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed with the Company.

Section 6.7 Compensation and Reimbursement.

The Company agrees:

(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);

(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence or bad faith;

(3) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or
bad faith on its part, arising out of or in connection with the
acceptance or administration of the trust or trusts hereunder,
including the reasonable costs and expenses of defending itself against
any claim or liability in connection with the exercise or performance
of any of its powers or duties hereunder; and

<PAGE> 60

(4) when the Trustee incurs any expenses or renders any
services after the occurrence of an Event of Default specified in
Section 5.1(g), such expenses and the compensation for such services
are intended to constitute expenses of administration under the
Bankruptcy Code or any similar federal or state law for the relief of
debtors.

As security for the performance of the obligations of the
Company under this Section, the Trustee shall have a lien prior to the Notes
upon all property and funds held or collected by the Trustee as such, except
funds (i) held in trust for the payment of principal of and interest on Notes or
(ii) held in the Trustee's capacity as Paying Agent.

The obligations of the Company under this Section to
compensate and indemnify the Trustee and each predecessor Trustee and to pay or
reimburse the Trustee and each predecessor Trustee for expenses, disbursements
and advances shall constitute an additional obligation hereunder and shall
survive the satisfaction and discharge of this Indenture and the resignation or
removal of the Trustee and each predecessor Trustee.

Section 6.8 Disqualification; Conflicting Interests.

If the Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided by,
and subject to the provisions of, the Trust Indenture Act and this Indenture.

Section 6.9 Corporate Trustee Required; Eligibility.

There shall at all times be a Trustee hereunder which shall be
a Person that is eligible pursuant to the Trust Indenture Act to act as such and
has a combined capital and surplus of at least $10,000,000. If such Person
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such Person shall be deemed
to be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.

Section 6.10 Resignation and Removal;
Appointment of Successor.

(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 6.11.

(b) The Trustee may resign at any time with respect to the
Notes by giving written notice thereof to the Company. If the instrument of
acceptance by a successor Trustee required by Section 6.11 shall not have been
delivered to the Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee with respect to the
Notes.

<PAGE> 61

(c) The Trustee may be removed at any time with respect to the
Notes by Act of the Holders of a majority in principal amount of the Outstanding
Notes, delivered to the Trustee and to the Company.

(d) If at any time:

(1) the Trustee shall fail to comply with Section 6.8
after written request therefor by the Company or by any Holder who has
been a bona fide Holder of a Note for at least six months, or

(2) the Trustee shall cease to be eligible under
Section 6.9 and shall fail to resign after written request therefor by
the Company or by any such Holder, or

(3) the Trustee shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or a receiver of the Trustee
or of its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation,

then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to all securities, or (ii) subject to Section 5.14, any
Holder who has been a bona fide Holder of a Note for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee with respect to all Notes
and the appointment of a successor Trustee or Trustees.

(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, with respect to the Notes, the Company, by a Board Resolution, shall
promptly appoint a successor Trustee or Trustees with respect to the Notes and
shall comply with the applicable requirements of Section 6.11. If, within one
year after such resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee with respect to the Notes shall be appointed by Act
of the Holders of a majority in principal amount of the Outstanding Notes
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in accordance
with the applicable requirements of Section 6.11, become the successor Trustee
with respect to the Notes and to that extent supersede the successor Trustee
appointed by the Company. If no successor Trustee with respect to the Notes
shall have been so appointed by the Company or the Holders and accepted
appointment in the manner required by Section 6.11, any Holder who has been a
bona fide Holder of a Note for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee with respect to the Notes.

(f) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Notes and each appointment of a
successor Trustee with respect to the Notes to all Holders of Notes in the
manner provided in Section 1.6. Each notice shall include the name of the
successor Trustee with respect to the Notes and the address of its Corporate
Trust Office.

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Section 6.11 Acceptance of Appointment by Successor.

(a) In case of the appointment hereunder of a successor
Trustee with respect to the Notes, every such successor Trustee so appointed
shall execute, acknowledge and deliver to the Company and to the retiring
Trustee an instrument accepting such appointment, and thereupon the resignation
or removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee; but, on the
request of the Company or the successor Trustee, such retiring Trustee shall,
upon payment of its charges, execute and deliver an instrument transferring to
such successor Trustee all the rights, powers and trusts of the retiring Trustee
and shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder.

(b) Upon request of any such successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in paragraph (a) of this Section.

(c) No successor Trustee shall accept its appointment unless
at the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.

Section 6.12 Merger, Conversion, Consolidation
or Succession to Business.

Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation succeeding to all or substantially all the corporate
trust business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes.

Section 6.13 Preferential Collection of Claims
Against Company.

If and when the Trustee shall be or become a creditor of the
Company (or any other obligor upon the Notes), the Trustee shall be subject to
the provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).

Section 6.14 Appointment of Authenticating Agent.

The Trustee may appoint an Authenticating Agent or Agents
(which may be an affiliate of the Company) with respect to the Notes which shall
be authorized to act on behalf of the Trustee to authenticate Notes issued upon
original issue and upon exchange, registration of transfer or partial redemption
thereof or pursuant to Section 3.7, and Notes so authenticated shall

<PAGE> 63

be entitled to the benefits of this Indenture and shall be valid and obligatory
for all purposes as if authenticated by the Trustee hereunder. Wherever
reference is made in this Indenture to the authentication and delivery of Notes
by the Trustee or the Trustee's certificate of authentication, such reference
shall be deemed to include authentication and delivery on behalf of the Trustee
by an Authenticating Agent and a certificate of authentication executed on
behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent
shall be acceptable to the Company and shall at all times be a corporation
organized and doing business under the laws of the United States of America, any
state thereof or the District of Columbia, authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of not less than
$500,000,000 and subject to supervision or examination by federal or state
authority. If such Authenticating Agent publishes reports of condition at least
annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such Authenticating Agent shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.

Any corporation into which an Authenticating Agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which such
Authenticating Agent shall be a party, or any corporation succeeding to the
corporate agency or corporate trust business of an Authenticating Agent, shall
continue to be an Authenticating Agent, provided such corporation shall be
otherwise eligible under this Section, without the execution or filing of any
paper or any further act on the part of the Trustee or the Authenticating Agent.

An Authenticating Agent may resign at any time by giving
written notice thereof to the Trustee and to the Company. The Trustee may at any
time terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail written notice of
such appointment by first-class mail, postage prepaid, to all Holders of Notes
with respect to which such Authenticating Agent will serve, as their names and
addresses appear in the Note Register. Any successor Authenticating Agent upon
acceptance of its appointment hereunder shall become vested with all the rights,
powers and duties of its predecessor hereunder, with like effect as if
originally named as an Authenticating Agent. No successor Authenticating Agent
shall be appointed unless eligible under the provisions of this Section.

Unless the Authenticating Agent has been appointed by the
Trustee at the request of the Company, the Trustee agrees to pay to each
Authenticating Agent from time to time reasonable compensation for its services
under this Section, and the Trustee shall be entitled to be reimbursed for such
payments, subject to the provisions of Section 6.7.

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<PAGE> 64

If an appointment is made pursuant to this Section, the Notes
may have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:

This is one of the Notes designated and referred to
in the within-mentioned Indenture.

AMERICAN STOCK TRANSFER & TRUST
COMPANY
as Trustee

By
-----------------------------------------
As Authenticating Agent

By
-----------------------------------------
Authorized Officer

ARTICLE SEVEN

HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY

Section 7.1 Company to Furnish Trustee Names
and Addresses of Holders,

(a) The Company will furnish or cause to be furnished to the
Trustee:

(i) semi-annually, not later than five Business Days
after each Regular Record Date, a list, in such form as the Trustee may
reasonably require, of the names and addresses of the
Holders of Notes as of such Regular Record Date, and

(ii) at such other times as the Trustee may request
in writing, within 30 days after the receipt by the Company of any such
request, a list of similar form and content as of a date not more than
15 days prior to the time such list is furnished;

excluding from any such list names and addresses received by the Trustee in its
capacity as Note Registrar.

(b) If and whenever the Company or any Affiliate acquires any
Notes, the Company shall within 10 Business Days after such acquisition by the
Company and within 10 Business Days after the date on which it obtains knowledge
of any such acquisition by an Affiliate, provide the Trustee with written notice
of such acquisition, the aggregate principal

<PAGE> 65

amount acquired (to the extent known by the Company), the Holder from whom such
Notes were acquired and the date of such acquisition.

Section 7.2 Preservation of Information;
Communications to Holders.

(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the most
recent list furnished to the Trustee as provided in Section 7.1 and the names
and addresses of Holders received by the Trustee in its capacity as Note
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.1 upon receipt of a new list so furnished.

(b) The rights of the Holders to communicate with other
Holders with respect to their rights under this Indenture or under the Notes,
and the corresponding rights and privileges of the Trustee, shall be as provided
by the Trust Indenture Act.

(c) Every Holder of Notes, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
nor any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act.

Section 7.3 Reports by Trustee.

(a) The Trustee shall transmit to Holders such reports
concerning the Trustee and its actions under this Indenture as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant thereto. To the extent that any such report is required by the Trust
Indenture Act with respect to any 12-month period, such report shall cover the
12-month period ending _____________ and shall be transmitted by the next
succeeding _____________.

(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange upon
which any Notes are listed, with the SEC and with the Company. The Company will
notify the Trustee when any Notes are listed on any stock exchange.

Section 7.4 Reports by Company.

The Company shall file with the SEC and shall furnish to the
Trustee and the Holders, within 15 days after it files them with the SEC, copies
of its annual report and the information, documents and other reports which the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall continue to file with the SEC and to provide to the
Trustee and the Holders the annual reports and the information, documents and
other reports which are specified in Section 13 or 15(d) of the Exchange Act and
applicable to a US corporation subject to such sections, such information,
documents and other reports to be filed and provided at the

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times specified for the filing of such information, documents and reports under
such section. The Company also shall comply with the other provisions of TIA ss.
314(a).

ARTICLE EIGHT

SUBSIDIARY GUARANTEES

Section 8.1 Subsidiary Guarantee.

Each Subsidiary Guarantor unconditionally and jointly and
severally with all other Subsidiary Guarantors guaranties and promises to pay to
the Holders and the Trustee (each a "BENEFICIARY"), on demand made at any time
while an Event of Default exists, in lawful money of the United States of
America, any and all Obligations of the Company from time to time owed to the
Beneficiaries. Each Subsidiary Guarantor further agrees to pay on demand any and
all costs and expenses (including reasonable attorneys' fees) incurred by any
Beneficiary in enforcing any rights under the Subsidiary Guarantees. The term
"OBLIGATIONS" means any and all present and future obligations and liabilities
of the Company of every type and description to the Beneficiaries under this
Indenture, the Notes and the Subsidiary Guarantees, whether for principal,
premium (if any), interest, expenses, indemnities or other amounts, in each case
whether due or not due, absolute or contingent, voluntary or involuntary,
liquidated or unliquidated, determined or undetermined, now or hereafter
existing, renewed or restructured, whether or not from time to time decreased or
extinguished and later increased, created or incurred, whether or not arising
after the commencement of a proceeding under the Bankruptcy Code (including
post-petition interest) and whether or not allowed or allowable as a claim in
any such proceeding, and whether or not recovery of any such obligation or
liability may be barred by a statute of limitations or such obligation or
liability may otherwise be unenforceable. All Obligations shall be conclusively
presumed to have been created in reliance on each Subsidiary Guarantee. Each
Subsidiary Guarantee shall be a continuing guaranty of the Obligations and,
except as otherwise provided in Section 10.20, may not be revoked and shall not
otherwise terminate unless and until any and all Obligations have been
indefeasibly paid and performed in full. Each Subsidiary that executes and
delivers to the Trustee from time to time aJoinder of Subsidiary Guarantor shall
be a Subsidiary Guarantor as if such Subsidiary had been a signatory to this
Indenture, and no such Joinder of Subsidiary Guarantor must be executed and
delivered by any other Obligors. Each Obligor hereby consents to any such
Joinder, whether or not it receives notice thereof.

Section 8.2 Nature of Subsidiary Guarantee.

The liability of each Subsidiary Guarantor under its
Subsidiary Guarantee shall be independent of and not in consideration of or
contingent upon the liability of the Company or any other Obligor and a separate
action or actions may be brought and prosecuted against any Subsidiary
Guarantor, whether or not any action is brought or prosecuted against the
Company or any other Obligor or whether the Company or any other Obligor is
joined in any such action or actions. The Subsidiary Guarantee given by each
Subsidiary Guarantor shall be construed as a continuing, absolute and
unconditional guaranty of payment (and not merely of collection) without regard
to:

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(a) the legality, validity or enforceability of the Notes,
this Indenture, any of the Obligations, any Lien or collateral securing
the Obligations ("COLLATERAL") or the Subsidiary Guarantee given by any
other Subsidiary Guarantor;

(b) any defense (other than payment), set-off or counterclaim
that may at any time be available to the Company or any other Obligor
against, and any right of setoff at any time held by, any Beneficiary;
or

(c) any other circumstance whatsoever (with or without notice
to or knowledge of any Subsidiary Guarantor or any other Obligor),
whether or not similar to any of the foregoing, that constitutes, or
might be construed to constitute, an equitable or legal discharge of
the Company or any other Obligor, in bankruptcy or in any other
instance.

Any payment by any Obligor or other circumstance that operates
to toll any statute of limitations applicable to such Obligor shall also operate
to toll the statute of limitations applicable to each Subsidiary Guarantor.

Section 8.3 Authorization.

Each Subsidiary Guarantor authorizes each Beneficiary, without
notice to or further assent by such Subsidiary Guarantor, and without affecting
any Subsidiary Guarantor's liability hereunder (regardless of whether any
subrogation or similar right that such Subsidiary Guarantor may have or any
other right or remedy of such Subsidiary Guarantor is extinguished or impaired),
from time to time to do any or all of the following:

(a) permit the Company to increase or create Obligations, or
terminate, release, compromise, subordinate, extend, accelerate or
otherwise change the amount or time, manner or place of payment of, or
rescind any demand for payment or acceleration of, the Obligations or
any part thereof, consent or enter into supplemental indentures or
otherwise amend the terms and conditions of this Indenture, the Notes
or any provision hereof or thereof;

(b) take and hold Collateral from any Obligor, perfect or
refrain from perfecting a Lien on such Collateral, and exchange,
enforce, subordinate, release (whether intentionally or
unintentionally), or take or fail to take any other action in respect
of, any such Collateral or Lien or any part thereof;

(c) exercise in such manner and order as it elects in its sole
discretion, fail to exercise, waive, suspend, terminate or suffer
expiration of, any of the remedies or rights of such Beneficiary
against the Company or any other Obligor in respect of any Obligations
or any Collateral;

(d) release, add or settle with any Obligor in respect of the
Subsidiary Guarantee or the Obligations;

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(e) accept partial payments on the Obligations and apply any
and all payments or recoveries from such Obligor or Collateral to such
of the Obligations as any Beneficiary may elect in its sole discretion,
whether or not such Obligations are secured or Guaranteed;

(f) refund at any time, at such Beneficiary's sole discretion,
any payments or recoveries received by such Beneficiary in respect of
any Obligations or Collateral; and

(g) otherwise deal with the Company or any other Obligor as
such Beneficiary may elect in its sole discretion.

Section 8.4 Certain Waivers.

Each Subsidiary Guarantor waives:

(a) the right to require the Beneficiaries to proceed against
the Company or any other Obligor or to pursue any other remedy in any
Beneficiary's power whatsoever and the right to have the property of
the Company or any other Obligor first applied to the discharge of the
Obligations;

(b) all rights and benefits under Applicable Law purporting to
reduce a guarantor's obligations in proportion to the obligation of the
principal or providing that the obligation of a surety or guarantor
must neither be larger nor in other respects more burdensome than that
of the principal;

(c) the benefit of any statute of limitations affecting the
Obligations or any Subsidiary Guarantor's liability hereunder;

(d) any requirement of marshaling or any other principle of
election of remedies;

(e) any right to assert against any Beneficiary any defense
(legal or equitable) other than the defense of payment, set-off,
counterclaim and other right that any Subsidiary Guarantor may now or
any time hereafter have against the Company or any other Obligor;

(f) presentment, demand for payment or performance (including
diligence in making demands hereunder), notice of dishonor or
nonperformance, protest, acceptance and notice of acceptance of this
Subsidiary Guarantee, and, except to the extent expressly required by
this Indenture, all other notices of any kind, including (i) notice of
any action taken or omitted by the Beneficiaries in reliance hereon,
(ii) notice of any default by the Company or any other Obligor, (iii)
notice that any portion of the Obligations is due, (iv) notice of any
action against the Company or any other Obligor or any Collateral or
the assertion of any right of any Beneficiary hereunder; and

(g) all defenses that at any time may be available to any
Subsidiary Guarantor by virtue of any valuation, stay, moratorium or
other law now or hereafter in effect.

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Section 8.5 No Subrogation; Certain Agreements.

(a) EACH SUBSIDIARY GUARANTOR WAIVES ANY AND ALL RIGHTS OF
SUBROGATION, INDEMNITY OR REIMBURSEMENT, AND ANY AND ALL BENEFITS OF
AND RIGHTS TO ENFORCE ANY POWER, RIGHT OR REMEDY THAT ANY BENEFICIARY
MAY NOW OR HEREAFTER HAVE IN RESPECT OF THE OBLIGATIONS AGAINST THE
COMPANY OR ANY OTHER OBLIGOR (OTHER THAN RIGHTS OF CONTRIBUTION FROM
OTHER SUBSIDIARY GUARANTORS), AND ANY AND ALL OTHER RIGHTS AND CLAIMS
(AS DEFINED IN THE BANKRUPTCY CODE) ANY SUBSIDIARY GUARANTOR MAY HAVE
AGAINST THE COMPANY, UNDER APPLICABLE LAW OR OTHERWISE, AT LAW OR IN
EQUITY, BY REASON OF ANY PAYMENT UNDER THE SUBSIDIARY GUARANTEE, UNLESS
AND UNTIL THE OBLIGATIONS SHALL HAVE BEEN PAID IN FULL.

(b) Each Subsidiary Guarantor assumes the responsibility for
being and keeping itself informed of the financial condition of each
other Obligor and of all other circumstances bearing upon the risk of
nonpayment of the Obligations or the Subsidiary Guarantee of any other
Subsidiary Guarantor that diligent inquiry would reveal, and agrees
that the Beneficiaries shall have no duty to advise any Subsidiary
Guarantor of information regarding such condition or any such
circumstances.

Section 8.6 Bankruptcy No Discharge.

(a) Without limiting Section 8.2, the Subsidiary Guarantee
shall not be discharged or otherwise affected by any bankruptcy,
reorganization or similar proceeding commenced by or against the
Company or any other Obligor, including (i) any discharge of, or bar or
stay against collecting, all or any part of the Obligations in or as a
result of any such proceeding, whether or not assented to by any
Beneficiary, (ii) any disallowance of all or any portion of any
Beneficiary's claim for repayment of the Obligations, (iii) any use of
cash or other collateral in any such proceeding, (iv) any agreement or
stipulation as to adequate protection in any such proceeding, (v) any
failure by any Beneficiary to file or enforce a claim against the
Company or any other Obligor or its estate in any bankruptcy or
reorganization case, (vi) any amendment, modification, stay or cure of
any Beneficiary's rights that may occur in any such proceeding, (vii)
any election by any Beneficiary under Section 1112(b)(2) of the
Bankruptcy Code, or (viii) any borrowing or grant of a Lien under
Section 364 of the Bankruptcy Code. Each Subsidiary Guarantor
understands and acknowledges that by virtue of its Subsidiary
Guarantee, it has specifically assumed any and all risks of any such
proceeding with respect to the Company and each other Obligor.

(b) Notwithstanding anything in this Article to the contrary,
any Event of Default under Section 5.1(g) of this Indenture shall
render all Obligations, and all obligations of each Subsidiary
Guarantor under its Subsidiary Guaranty, automatically due and payable
for purposes of the Subsidiary Guarantee, without demand on the part of
the Trustee or any Holder.

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(c) Notwithstanding anything to the contrary herein contained,
the Subsidiary Guarantees shall continue to be effective or be
reinstated, as the case may be, if at any time any payment, or any part
thereof, of any or all of the Obligations is rescinded, invalidated,
declared to be fraudulent or preferential or otherwise required to be
restored or returned by any Beneficiary in connection with any
bankruptcy, reorganization or similar proceeding involving the Company,
any other Obligor or otherwise or if any Beneficiary elects to return
any such payment or any part thereof in its sole discretion, all as
though such payment had not been made.

Section 8.7 Severability of Void Obligations under
Subsidiary Guarantee.

The obligations of each Subsidiary Guarantor hereunder shall
be limited to the maximum amount that would not render its obligations hereunder
subject to avoidance under Section 548 of the Bankruptcy Code or any applicable
provisions of comparable state law.

Section 8.8 Right of Contribution.

In order to provide for just and equitable contribution among
the Subsidiary Guarantors in connection with the Subsidiary Guarantees, the
Subsidiary Guarantors have agreed among themselves that if any Subsidiary
Guarantor satisfies some or all of the Obligations (a "FUNDING SUBSIDIARY
GUARANTOR"), the Funding Subsidiary Guarantor shall be entitled to contribution
from the other Subsidiary Guarantors that have positive Maximum Net Worth (as
defined below) for all payments made by the Funding Subsidiary Guarantor in
satisfying the Obligations, so that each Subsidiary Guarantor that remains
obligated under the Subsidiary Guarantee at the time that a Funding Subsidiary
Guarantor makes such payment (A "REMAINING SUBSIDIARY GUARANTOR") and has a
positive Maximum Net Worth shall bear a portion of such payment equal to the
percentage that such Remaining Subsidiary Guarantor's Maximum Net Worth bears to
the aggregate Maximum Net Worth of all Remaining Subsidiary Guarantors that have
positive Maximum Net Worth.

As used herein, "NET WORTH" means, with respect to any
Subsidiary Guarantor, the amount, as of any date of calculation, by which the
sum of a Person's assets (including subrogation, indemnity, contribution,
reimbursement and similar rights that such Subsidiary Guarantor may have),
determined on the basis of a "fair valuation" or their "fair salable value"
(whichever is the applicable test under Section 548 and other relevant
provisions of the Bankruptcy Code and the relevant state fraudulent conveyance
or transfer laws) is greater than the amount that will be required to pay all of
such Person's debts, in each case matured or unmatured, contingent or otherwise,
as of the date of calculation, but excluding liabilities arising under the
Subsidiary Guarantee and excluding, to the maximum extent permitted by
Applicable Law with the objective of avoiding rendering such Person insolvent,
liabilities subordinated to the Obligations arising out of loans or advances
made to such Person by any other Person. "MAXIMUM NET WORTH" means, with respect
to any Subsidiary Guarantor, the greatest of the Net Worths calculated as of the
following dates: (A) the date on which the Subsidiary Guarantor becomes a
Subsidiary Guarantor hereunder, (B) the date on which such Subsidiary Guarantor
expressly reaffirms the Subsidiary Guarantee, (C) the date on which demand for
payment is made

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on such Subsidiary Guarantor hereunder, (D) the date on which payment is made by
such Subsidiary Guarantor hereunder or (E) the date on which any judgment, order
or decree is entered requiring such Subsidiary Guarantor to make payment
hereunder or in respect hereof. The meaning of the terms "FAIR VALUATION" and
"FAIR SALABLE VALUE" and the calculation of assets and liabilities shall be
determined and made in accordance with the relevant provisions of the Bankruptcy
Code and applicable state fraudulent conveyance or transfer laws.

ARTICLE NINE

AMENDMENTS, SUPPLEMENTS AND WAIVERS

Section 9.1 Supplemental Indentures Without Consent of
Holders.

Without the consent of any Holders, the Obligors, when
authorized by a Board Resolution, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto (which term
shall include any Joinder of Subsidiary Guarantor), in form satisfactory to the
Trustee, for any of the following purposes:

(a) to evidence the succession of another Person to any
Obligor, and the assumption by any such successor of the covenants of
such Obligor herein and in the Notes;

(b) to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided, that such uncertificated Notes
are issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Notes are described
in Section 163(f)(2)(B) of the Code);

(c) to add to the covenants of the Obligors for the benefit of
the Holders, to surrender any right or power herein conferred upon any
Obligor, or to add Subsidiary Guaranties with respect to the Notes;

(d) to cure any ambiguity, to correct or supplement any
provision herein that may be defective or inconsistent with any other
provision herein, or to make any other provisions with respect to
matters or questions arising under this Indenture that shall not be
inconsistent with the provisions of this Indenture; provided that, in
each case, such provisions shall not adversely affect the interests of
the Holders;

(e) to evidence, and provide for the acceptance of, the
appointment of a successor Trustee hereunder;

(f) to comply with Section 10.20; or

(g) to comply with any requirement of the SEC or state
securities regulators in connection with the qualification of this
Indenture under the Trust Indenture Act or any registration or
qualification of the Notes under the Securities Act or state securities
laws.

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Section 9.2 Supplemental Indentures with Consent of Holders.

(a) Except as otherwise provided in Section 9.2(b), with the
written consent of the Holders of a majority in principal amount of the
Outstanding Notes, by Act of such Holders delivered to the Company and
the Trustee, the Obligors, when authorized by a Board Resolution, and
the Trustee may enter into an indenture or indentures supplemental
hereto for the purpose of adding any provisions to or changing in any
manner or eliminating or waiving any of the provisions of this
Indenture or of modifying in any manner the rights of the Holders under
this Indenture; provided, however, that no such supplemental indenture
shall, without the consent of the Holder of each Outstanding Note
affected thereby,

(A) extend the Stated Maturity of the principal of,
or the stated maturity of any installment of interest on, any
Note, or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption or
repurchase thereof, or change the coin or currency in which
the principal of any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for
the enforcement of any such payment after the Stated Maturity
or due date thereof (or, in the case of redemption, after the
Redemption Date or, in the case of repurchase, after the
Purchase Date), or affect the ranking (in terms of right or
time of payment) of the Notes or the Subsidiary Guarantee,

(B) release any Subsidiary Guarantor from any
Subsidiary Guarantee (except as contemplated by Section 10.20
or Section 11.2) or amend Article Eight, except as
contemplated by Article Eleven,

(C) reduce the percentage in principal amount of the
Outstanding Notes the consent of whose Holders is required for
any such supplemental indenture, or the consent of whose
Holders is required for any waiver (of compliance with the
provisions of this Indenture or Defaults hereunder and their
consequences) provided for in this Indenture,

(D) modify any provision of Article Twelve with
respect to the subordination of the Notes;

(E) modify any provision of Section 13.2 or the
definitions used therein if the effect of such modification or
waiver is to decrease the amount of any payment required to be
made by the Company thereunder or extend the maturity date of
such payment, or

(F) modify any of the provisions of this Section or
Section 5.13, except to increase any such percentage or to
provide that certain other provisions of this Indenture cannot
be modified or waived without the consent of the Holder of
each Note affected thereby.

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(b) It shall not be necessary for any Act of Holders under
this Section to approve the particular form of any proposed
supplemental indenture, but it shall be sufficient if such Act and such
notice shall approve the substance thereof.

Section 9.3 Execution of Supplemental Indentures.

In executing, or accepting the additional trusts created by,
any supplemental indenture permitted by this Article or the modifications
thereby of the trusts created by this Indenture, the Trustee shall receive, and
(subject to Section 6.1) shall be fully protected in relying upon, an Opinion of
Counsel stating that this Indenture, as amended by such supplemental indenture,
constitutes the legal, valid and binding obligation of all Obligors, enforceable
against each of them in accordance with its terms.

Section 9.4 Effect of Supplemental Indentures.

Upon the execution of any supplemental indenture under this
Article, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes; and
every Holder of Notes theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby and entitled to the benefits thereof (including
the benefit of any Joinder of Subsidiary Guarantor).

Section 9.5 Conformity with Trust Indenture Act.

Every supplemental indenture executed pursuant to this Article
shall conform to the requirements of the Trust Indenture Act as then in effect.

Section 9.6 Reference in Notes to Supplemental
Indentures.

Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form acceptable to the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the Board
of Directors, to any such supplemental indenture may be prepared and executed by
the Obligors and authenticated and delivered by the Trustee in exchange for
Outstanding Notes. Without limitation of Section 9.4, (a) in the case of any
Joinder of Subsidiary Guarantor, whether or not any or all new Notes are so
executed, authenticated and exchanged for previously Outstanding Notes, the
Subsidiary Guarantor added by such Joinder shall be obligated with respect to
its Subsidiary Guarantee as if all Outstanding Notes had been exchanged for
Notes executed by all Obligors, including such Subsidiary Guarantor, or (b) in
the case of the release of a Subsidiary Guarantor pursuant to the terms hereof,
whether or not any or all new Notes are so executed, authenticated and exchanged
for previously Outstanding Notes, such Subsidiary Guarantor shall be released
from the Subsidiary Guarantee as if all Outstanding Notes had been exchanged for
Notes not executed by such Subsidiary Guarantor.

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Section 9.7 Notice of Supplemental Indenture.

After an supplemental indenture hereunder becomes effective,
the Company shall mail to Holders a notice briefly describing such supplemental
indenture; provided, that the failure to give such notice to all Holders, or any
defect therein, will not impair or affect the validity of the supplemental
indenture.

ARTICLE TEN

COVENANTS

Section 10.1 Payment of Principal, Premium and Interest.

The Company covenants and agrees for the benefit of the Notes
that it will duly and punctually pay the principal of (and premium, if any, on)
and interest on the Notes in accordance with the terms of the Notes and this
Indenture.

All payments of principal, premium, if any, and interest will
be made by the Company in immediately available funds. The Notes shall be
included in the Same-Day Funds Settlement System of The Depository Trust Company
until maturity.

Section 10.2 Maintenance of Office or Agency.

The Company will maintain in the Borough of Manhattan, City of
New York, State of New York, an office or agency where Notes may be presented or
surrendered for payment (a "PLACE OF PAYMENT"), where Notes may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Obligors in respect of the Notes and this Indenture may be served.
Initially, the Company hereby designates the Corporate Trust Office of the
Trustee for all such purposes. The Company will give prompt written notice to
the Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.

The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in each
Place of Payment for Notes for such purposes. The Company will give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.

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Section 10.3 Money for Notes Payments to Be Held in
Trust.

If the Company shall at any time act as its own Paying Agent
with respect to the Notes, it will, on or before each due date of the principal
of or any premium or interest on any of the Notes, segregate and hold in trust
for the benefit of the Persons entitled thereto a sum sufficient to pay the
principal and any premium and interest so becoming due until such sums shall be
paid to such Persons or otherwise disposed of as herein provided and will
promptly notify the Trustee of its action or failure to act.

Whenever the Company shall have one or more Paying Agents for
the Notes, it will, prior to each due date of the principal of or any premium or
interest on any Notes, deposit with a Paying Agent, in immediately available
funds, a sum sufficient to pay such amount, such sum to be held as provided by
the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the
Company will promptly notify the Trustee of its action or failure to act.

The Company will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such Paying
Agent shall agree with the Trustee, subject to the provisions of this Section
that such Paying Agent will:

(1) hold all sums held by it for the payment of principal of
(and premium, if any) or interest on Notes in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such
Persons or otherwise disposed of as herein provided;

(2) give the Trustee notice of any default by the Company (or
any other obligor upon the Notes) in the making of any such payment of
principal (and premium, if any) or interest; and

(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.

The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.

Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of or any
premium or interest on any Note and remaining unclaimed for two years after such
principal, premium or interest has become due and payable shall be paid to the
Company on Company Request, or (if then held by the Company) shall be discharged
from such trust; and the Holder of such Note shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before

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being required to make any such repayment, may at the expense of the Company
cause to be published once, in a newspaper published in the English language,
customarily published on each Business Day and of general circulation in the
Borough of Manhattan, the City of New York, notice that such money remains
unclaimed and that, after a date specified therein, which shall not be less than
30 days from the date of such publication, any unclaimed balance of such money
then remaining will be repaid to the Company.

Section 10.4 Statement by Officers as to Default.

(a) The Company will deliver to the Trustee, within 120 days
after the end of each fiscal year of the Company ending after the date hereof,
an Officers' Certificate (one of the signers of which shall be the principal
executive officer, principal financial officer or principal accounting officer
of the Company), stating whether or not to the best knowledge of the signers
thereof the Company is, or was during the preceding year, in default in the
performance and observance of any of the terms, provisions and conditions of
this Indenture (without regard to any period of grace or requirement of notice
provided hereunder) and, if the Company shall be or shall have been in default,
specifying all such defaults and the nature and status thereof of which they may
have knowledge.

(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of the Company or any Subsidiary gives notice or takes any other
action with respect to a claimed default, the Company shall deliver to the
Trustee by registered or certified mail, or by facsimile transmission, its
status, and what action the Company or such Subsidiary is taking or proposes to
take in respect thereof within 30 days after a Senior Officer of the Company or
any Subsidiary becomes aware of the occurrence thereof, an Officers' Certificate
specifying such event, notice or other action.

Section 10.5 Payment of Taxes and Other Claims.

The Company will pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (1) all taxes, assessments
and governmental charges levied or imposed upon the Company or any Restricted
Subsidiary or upon the income, profits or property of the Company or any
Restricted Subsidiary, and (2) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any Restricted Subsidiary; provided, however, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings and for which adequate
reserves (in the good faith judgment of the Board of Directors) have been made.

Section 10.6 Maintenance of Properties.

The Company will cause all properties owned by the Company or
any Restricted Subsidiary or used or held for use in the conduct of its business
or the business of any Restricted Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals,

<PAGE> 77

replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent the Company or any
Restricted Subsidiary from discontinuing the operation or maintenance of any of
such properties if such discontinuance is, in the judgment of the Board of
Directors (or, in the case of real estate owned properties, in the judgment of a
Senior Officer), desirable in the conduct of its business or the business of the
Company or such Restricted Subsidiary and not disadvantageous in any material
respect to the Holders.

Section 10.7 Corporate Existence; Keeping of Books.

Subject to Article Eleven, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect the
existence, rights (charter and statutory) and franchises of the Company and its
Restricted Subsidiaries; provided, however, that the existence of any Restricted
Subsidiary and any such right or franchise of the Company or any Restricted
Subsidiary may be terminated if the Board of Directors shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and its Restricted Subsidiaries and that the loss thereof is not and
is not reasonably likely to be disadvantageous in any material respect to the
Holders.

The Company shall keep, and cause each Restricted Subsidiary
to keep, proper books and records, in which full and correct entries shall be
made of all financial transactions and the assets, liabilities and business of
the Company and its Subsidiaries, in each case in accordance with GAAP.

Section 10.8 Insurance.

The Company will at all times maintain and will cause each of
its Restricted Subsidiaries to maintain (either in the name of the Company or in
such Subsidiary's own name) with financially sound and reputable insurers,
insurance on all its properties in such amounts as management of the Company
reasonably determines is appropriate under the circumstances.

Section 10.9 Limitations on Indebtedness.

(a) The Company will not Incur, and the Company will not
permit any Restricted Subsidiary to Incur, directly or indirectly, any
Indebtedness or Disqualified Stock if, on the date of such Incurrence and after
giving effect thereto, the Consolidated Leverage Ratio exceeds 2.0 to 1.0.

(b) Notwithstanding the foregoing paragraph (a), the Company
and its Restricted Subsidiaries may Incur the following Indebtedness:

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Warehouse Indebtedness (other than Permitted
Warehouse Indebtedness) of the Company and its Restricted
Subsidiaries permitted under clause (a) above, shall not
exceed 300% of Consolidated Net Worth at such time, and (ii)
that to the extent any such Indebtedness ceases to constitute
Permitted Warehouse Indebtedness of the Company or a
Restricted Subsidiary, such event shall be deemed to
constitute the Incurrence of such Indebtedness (and any such
Guarantees, but without duplication) by the Company or such
Subsidiary, as the case may be;

(2) the Notes and the Subsidiary Guarantees;

(3) Hedging Obligations directly related to: (i)
Indebtedness permitted to be Incurred by the Company or the
Restricted Subsidiaries pursuant to this Section; (ii)
Receivables held by the Company or its Restricted Subsidiaries
pending sale or that have been sold pursuant to a Warehouse
Facility; or (iii) Receivables with respect to which the
Company or any Restricted Subsidiary has an outstanding
purchase or offer commitment, financing commitment or security
interest;

(4) Indebtedness outstanding on the Issue Date (other
than Permitted Warehouse Indebtedness and Guarantees thereof,
which shall be permissible under this paragraph (b) only
pursuant to clause (1) above);

(5) Indebtedness or Disqualified Stock issued to and
held by the Company or a Wholly Owned Restricted Subsidiary;
provided, however, that any subsequent issuance or transfer of
any Capital Stock that results in any such Wholly Owned
Restricted Subsidiary ceasing to be a Wholly Owned Restricted
Subsidiary or any subsequent transfer of such Indebtedness or
Disqualified Stock (other than to the Company or a Wholly
Owned Restricted Subsidiary) will be deemed, in each case, to
constitute the Incurrence of such Indebtedness or issuance of
such Disqualified Stock by the issuer thereof;

(6) Indebtedness or Disqualified Stock of a
Restricted Subsidiary Incurred on or prior to the date on
which such Subsidiary was acquired by the Company, other than
Indebtedness or Disqualified Stock Incurred in connection
with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of
related transactions pursuant to which such Subsidiary became
a Subsidiary or was acquired by the Company; provided,
however, that on the date of such acquisition and after giving
effect thereto, the Company would have been able to Incur at
least $1.00 of Indebtedness pursuant to paragraph (a) above;
and

(7) while no Default or Event of Default exists,
Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or clause (4) or (6) of this
paragraph (b).

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(c) Notwithstanding the foregoing, (i) the Company and its
Restricted Subsidiaries may not Incur any Indebtedness (other than the
Notes and the Subsidiary Guarantees) if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is a Junior Subordinated
Obligation, (ii) the Company and its Restricted Subsidiaries shall not
Incur any Indebtedness if the proceeds thereof are used, directly or
indirectly, to Refinance any Junior Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes or the Subsidiary
Guarantees, as applicable, to at least the same extent as such Junior
Subordinated Obligations, and (iii) no Restricted Subsidiary that is
not a Subsidiary Guarantor shall incur, directly or indirectly, any
Indebtedness. Unsecured Indebtedness is not deemed to be subordinate or
junior to secured Indebtedness merely because it is unsecured.

(d) For purposes of determining compliance with the foregoing:
(i) in the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described above, the
Company, in good faith, will classify such item of Indebtedness and be
required to include the amount and type of such Indebtedness in one of
the above clauses; and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described
above.

Section 10.10 Limitation on Preferred Stock of
Restricted Subsidiaries.

The Company will not permit any Restricted Subsidiary to
Incur, directly or indirectly, any Preferred Stock except:

(a) Preferred Stock issued to and held by the Company or a
Wholly Owned Restricted Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock that results in
any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly
Owned Restricted Subsidiary or any subsequent transfer of such
Preferred Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) will be deemed, in each case, to constitute the Incurrence
of such Preferred Stock by the issuer thereof; and

(b) Preferred Stock of a Restricted Subsidiary Incurred or
issued and outstanding on or prior to the date on which such Restricted
Subsidiary was acquired by the Company, other than Preferred Stock
Incurred or issued in connection with, or to provide all or any portion
of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Subsidiary
became a Restricted Subsidiary or was acquired by the Company;
provided, however, that on the date of such acquisition and after
giving effect thereto, the Company would have been able to Incur at
least $1.00 of Indebtedness pursuant to paragraph (a) of Section 10.9.

Section 10.11 Limitation on Restricted Payments.

(a) The Company will not make, and will not permit any
Restricted Subsidiary to make, directly or indirectly, a Restricted Payment if
at the time the Company or such Restricted Subsidiary makes such Restricted
Payment: (i) a Default shall have occurred and be continuing

<PAGE> 80

(or would result therefrom); (ii) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of Section 10.9; or (iii) the
aggregate amount of such Restricted Payment and all other Restricted Payments
since the Issue Date would exceed the sum of: (A) 33% of the Consolidated
Adjusted Net Income accrued during the period (treated as one accounting period)
from the beginning of the fiscal quarter during which the Issue Date occurs to
the end of the most recent fiscal quarter prior to the date of such Restricted
Payment for which financial statements are available (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit); and (B)
the aggregate Net Cash Proceeds received by the Company from the issuance or
sale after the Issue Date of (1) Capital Stock of the Company (other than
Disqualified Stock) or (2) debt securities of the Company, but only if, when and
to the extent such debt securities have been converted into any such Capital
Stock (other than, in each case, an issuance or sale to a Subsidiary of the
Company and other than an issuance or sale to an employee stock ownership plan
or to a trust established by the Company or any of its Subsidiaries for the
benefit of their employees).

(b) While no Default or Event of Default exists, the
provisions of the foregoing paragraph (a) shall not prohibit: (i) any purchase
or redemption of Capital Stock or Junior Subordinated Obligations of the Company
to the extent made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to (A) a Subsidiary of the Company
or (B) an employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees, except to the
extent that the funds used by such plan or trust are attributable to employee
contributions); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from the calculation of amounts
under clause (iii)(B) of paragraph (a) above; (ii) any payment, purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
of Junior Subordinated Obligations made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Indebtedness of the Company that is
permitted to be Incurred pursuant to Section 10.9; provided, however, that, such
purchase, repurchase, redemption, defeasance or other acquisition or retirement
for value shall be excluded in the calculation of the amount of Restricted
Payments; and (iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied with
this Section; provided, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments.

No later than the date on which any Restricted Payment is
made, the Company shall deliver to the Trustee an Officers' Certificate stating
that such Restricted Payment is permitted and setting forth the basis upon which
the calculations required by the foregoing covenant were computed. The amount of
all Restricted Payments made other than in cash shall be the fair market value
thereof on the date of the Restricted Payment, as evidenced by a Board
Resolution.

<PAGE> 81

Section 10.12 Limitations on Dividends and Other Payment
Restrictions Affecting Subsidiaries.

The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company or any Restricted Subsidiary, (b) to
make any loans or advances to the Company or any Restricted Subsidiary or (c) to
transfer any of its property or assets to the Company or any Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an agreement
in effect at the Issue Date and listed on Schedule 10.12 attached hereto; (ii)
any encumbrance or restriction with respect to a Restricted Subsidiary pursuant
to an agreement applicable to such Subsidiary prior to the date on which such
Subsidiary was acquired by the Company (other than an agreement entered into in
connection with, or in anticipation of, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company) and outstanding on such date; (iii) any encumbrance or
restriction with respect to a Restricted Subsidiary pursuant to any other
agreement contained in any amendment to an agreement referred to in clause (i)
or (ii) of this Section or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such amendment are no less favorable to the Holders than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in the agreements referred to in clause (i) or (ii) of this Section,
as the case may be; (iv) any such encumbrance or restriction consisting of
customary non-assignment provisions in leases governing leasehold interests to
the extent such provisions restrict the transfer of the lease or the property
leased thereunder; (v) in the case of clause (c) above, restrictions contained
in security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary otherwise permissible under this Indenture to the extent such
restrictions restrict the transfer of the property subject to such security
agreements or mortgages; (vi) with respect to the ability of a Restricted
Subsidiary to pay dividends or make any other distributions on its Capital Stock
to the Company, any Permitted Warehouse Indebtedness Limitation; and (vii) any
restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition.

Section 10.13 Limitation on Sales of Assets and Subsidiary
Stock.

(a) The Company will not consummate, and will not permit any
Restricted Subsidiary to consummate, directly or indirectly, any Asset
Disposition unless: (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value (including as to the value of any non-cash consideration), as
determined in good faith by the Board of Directors, of the shares and assets
subject to such Asset Disposition and at least 85% of the consideration thereof
received by the Company or such Restricted Subsidiary is in the form of cash or
Temporary Cash Investments; (ii) an amount equal to 100% of the Net Available
Cash from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be):

<PAGE> 82

(A) first, to the extent the Company or such
Restricted Subsidiary elects either (x) to acquire Additional
Assets or (y) to prepay, repay, redeem or purchase Senior
Indebtedness of the Company or such Restricted Subsidiary, as
the case may be (other than in either case Indebtedness owed
to the Company or an Affiliate of the Company), in each case
within 180 days from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash;

(B) second, to the extent of the balance of such Net
Available Cash after application in accordance with clause
(A), for the Company to make an offer to the Holders of the
Notes to purchase Notes pursuant to and subject to this
Section (an "ASSET DISPOSITION PURCHASE OFFER"); and

(C) third, to the extent of the balance of such Net
Available Cash after application in accordance with clauses
(A) and (B), to any application not prohibited by this
Indenture;

and (iii) at the time of such Asset Disposition no Default shall have occurred
and be continuing (or would result therefrom). Pending application of Net
Available Cash pursuant to this Section, such Net Available Cash shall be
invested in Temporary Cash Investments.

For the purposes of this Section, the following are deemed to
be cash: (x) the assumption of Indebtedness (other than Junior Subordinated
Obligations) of the Company or any Restricted Subsidiary, and the release of the
Company or such Subsidiary from all liability on such Indebtedness, in
connection with such Asset Disposition and (y) securities received by the
Company or any Restricted Subsidiary from the transferee that are promptly
converted by the Company or such Subsidiary into cash or Temporary Cash
Investments.

(b) In the event of an Asset Disposition that requires an
Asset Disposition Purchase Offer, the Company shall be required to purchase
Notes tendered pursuant to such offer by the Company for the Notes at a purchase
price of 100% of their principal amount (the "ASSET DISPOSITION PURCHASE PRICE")
plus accrued but unpaid interest in accordance with the procedures set forth in
this Section. If the aggregate purchase price of Notes tendered pursuant to such
offer is less than the Net Available Cash allotted to the purchase thereof (the
"ASSET DISPOSITION OFFER AMOUNT"), the Company will be permitted to apply the
remaining Net Available Cash in accordance with clause (ii)(C) of paragraph (a)
above. The Company shall not be required to make such an Asset Disposition
Purchase Offer if the Asset Disposition Offer Amount is less than $1,000,000
(which lesser amount shall be carried forward for purposes of determining
whether such an offer is required with respect to any subsequent Asset
Disposition).

(c) Within 10 days after the expiration of the 180 day period
referred to in clause (ii)(B) of paragraph (a) above, if the Company is required
to make an Asset Disposition Purchase Offer, the Company shall send, by first
class mail, a notice to each of the Holders, with a copy to the Trustee (an
"ASSET DISPOSITION PURCHASE NOTICE"), containing all instructions and materials
necessary to enable such Holders to tender Notes pursuant to the Asset
Disposition Purchase Offer. Each Asset Disposition Purchase Notice, which shall
govern the terms of the Asset Disposition Purchase Offer, shall state:

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(i) that the Asset Disposition Purchase Offer is
being made pursuant to this Section and the length of time the Asset
Disposition Purchase Offer shall remain open, as provided below;

(ii) the Asset Disposition Offer Amount, the Asset
Disposition Purchase Price and the Asset Disposition Purchase
Date (as defined below);

(iii) that any Note not tendered or accepted for
payment shall continue to accrue interest;

(iv) that, unless the Company defaults in making such
payment, any Note accepted for payment pursuant to the Asset
Disposition Purchase Offer shall cease to accrue interest after the
Asset Disposition Purchase Date;

(v) that Holders electing to have a Note purchased
pursuant to any Asset Disposition Purchase Offer shall be required to
surrender the Note, with the form entitled "OPTION OF HOLDER TO ELECT
PURCHASE" on the reverse of the Note completed, or transfer by
book-entry transfer, to the Company, a Depositary, if appointed by the
Company, or a Paying Agent at the address specified in the notice no
later than three days before the expiration of the Asset Disposition
Offer Period;

(vi) that Holders shall be entitled to withdraw their
election if the Company, the Depositary or the Paying Agent, as the
case may be, receives, not later than the last Business Day of the
Asset Disposition Offer Period, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to have such
Note purchased;

(vii) that, if the aggregate principal amount of
Notes surrendered by Holders exceeds the Asset Disposition Offer
Amount, the Company shall select the Notes to be purchased on a pro
rata basis (with such adjustments as may be deemed appropriate by the
Company or the Trustee so that only Notes in denominations of $1,000,
or integral multiples thereof, shall be purchased); and

(viii) that Holders whose Notes were purchased only
in part shall be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered (or transferred
by book-entry transfer).

(d) The Asset Disposition Purchase Offer will remain open for
a period of 20 Business Days following its commencement and no longer, except to
the extent that a longer period is required by Applicable Law (the "ASSET
DISPOSITION PURCHASE OFFER PERIOD"). No later than five Business Days after the
termination of the Asset Disposition Purchase Offer Period (the "ASSET
DISPOSITION PURCHASE DATE"), the Company will purchase a principal amount of
Notes at least equal to the Asset Disposition Offer Amount or, if less than the
Asset Disposition Offer Amount has been tendered, all Notes tendered in response
to the Asset Disposition Purchase Offer. Payment of the Asset Disposition
Purchase Price and interest accrued thereon for any

<PAGE> 84

Notes so purchased will be made in the same manner as interest payments are
made. Upon completion of an Asset Disposition Purchase Offer, the Asset
Disposition Offer Amount shall be reset at zero.

(e) If the Asset Disposition Purchase Date is on or after a
Regular Record Date and on or before the related Interest Payment Date, any
accrued and unpaid interest will be paid to the Person in whose name a Note is
registered at the close of business on such Regular Record Date, and no
additional interest will be payable to Holders who tender Notes pursuant to the
Asset Disposition Purchase Offer.

(f) On or before the Asset Disposition Purchase Date, the
Company will deliver to the Trustee an Officers' Certificate stating that the
Notes purchased in the Asset Disposition Purchase Offer or portions thereof are
accepted for payment by the Company in accordance with the terms of this
Section. The Company, the Depositary or the Paying Agent, as the case may be,
will promptly (but in any case not later than five days after the Asset
Disposition Purchase Date) mail or deliver to each tendering Holder an amount
equal to the Asset Disposition Purchase Price of the Notes tendered by such
Holder and accepted by the Company for purchase plus (subject to paragraph (e))
interest accrued but unpaid thereon, and the Company will promptly issue a new
Note, and the Trustee, upon delivery of a Company Order from the Company, will
authenticate and mail or deliver such new Note to such Holder, in a principal
amount equal to any unpurchased portion of any Note surrendered. Any Note not so
accepted will be promptly mailed or delivered by the Company to the Holder
thereof. The Company will publicly announce the results of the Asset Disposition
Purchase Offer on the Asset Disposition Purchase Date.

(g) The Company will comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Notes pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under this Section by virtue thereof.

Section 10.14 Limitation on Transactions with Affiliates.

The Company will not, and will not permit any Restricted
Subsidiary to, enter into or permit to exist any transaction with or for the
benefit of any Affiliate of the Company (including without limitation the making
of any loan, advance, Guarantee or capital contribution to or for the benefit
of, the purchase, sale, lease or exchange of any property with, the entering
into or amending of employee compensation arrangements with, or the rendering of
any service with or for the benefit of, any Affiliate of the Company) (an
"AFFILIATE TRANSACTION") unless the terms thereof: (i) are in the ordinary
course of business and consistent with past practice; (ii) are fair to the
Company or such Restricted Subsidiary and are no less favorable to the Company
or such Restricted Subsidiary than those that could be obtained at the time of
such transaction in arm's-length dealings with a Person who is not an Affiliate;
(iii) if such Affiliate Transaction involves an amount in excess of $500,000,
(A) are set forth in writing and (B) have been approved by a majority of the
members of the Board of Directors having no personal stake in such

<PAGE> 85

Affiliate Transaction; and (iv) if such Affiliate Transaction involves an amount
in excess of $3,000,000, have been determined by a nationally recognized
investment banking firm to be fair, from a financial standpoint, to the Company
and its Restricted Subsidiaries.

The provisions of the foregoing paragraph shall not apply to
(a) transactions exclusively between or among the Company and any Wholly Owned
Restricted Subsidiary or between or among Wholly Owned Restricted Subsidiaries,
(b) any Restricted Payment permitted to be made under Section 10.11, (c) any
employment or related arrangement entered into by the Company or any Restricted
Subsidiary in the ordinary course of business on terms customary in the consumer
finance business, provided any such arrangement is approved by the disinterested
members of the Board of Directors, (d) customary directors fees and
indemnities, and (e) payments required by the Tax Sharing Agreement or any
renewal thereof on substantially similar terms, provided, however, in the case
of each of the foregoing clauses (a) through (d), that such transactions are not
otherwise prohibited by this Indenture, and provided further, that the
provisions of clause (iv) of the foregoing paragraph shall not apply to
transactions between the Company, Mego Financial and PEC pursuant to the Tax
Sharing Agreement and the PEC Agreements and renewals thereof on substantially
similar terms.

Section 10.15 Limitations on Liens.

The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, Incur or permit to exist any Lien of any
nature whatsoever on any of its properties (including Capital Stock of a
Subsidiary), whether owned at the Issue Date or thereafter acquired, other than
Permitted Liens, without effectively providing that the Notes shall be secured
equally and ratably with (or prior to) the obligations so secured for so long as
such obligations are so secured.

Section 10.16 Limitation on Investment Company Status.

The Company shall not take, and shall not permit any
Restricted Subsidiary to take, any action, or otherwise permit to exist any
circumstance, that would require the Company or such Restricted Subsidiary to
register as an "investment company" under the Investment Company Act of 1940, as
amended.

Section 10.17 Line of Business.

The Company will not engage, and will not permit any
Subsidiary to engage, in any line of business that is not a Related Business.

Section 10.18 Offer to Purchase upon a Change of Control.

(a) Upon the occurrence of a Change of Control, the Company
will offer to repurchase (the "CHANGE OF CONTROL PURCHASE OFFER") all Notes from
the Holders, and each Holder will have the right to require that the Company
repurchase such Holder's Notes, at a purchase price in cash equal to 101% of the
principal amount thereof (the "CHANGE OF CONTROL PURCHASE PRICE") plus accrued
and unpaid interest, if any, to the Change of Control Purchase

<PAGE> 86

Date (subject to the right of Holders on the relevant Regular Record Date to
receive interest due on the relevant Interest Payment Date), in accordance with
the provisions of this Section.

(b) Within 30 days following any Change of Control, the
Company shall mail a notice to each Holder with a copy to the Trustee (a "CHANGE
OF CONTROL PURCHASE NOTICE") stating:

(i) that a Change of Control has occurred and that
such Holder has the right to require the Company to purchase such
Holder's Notes at a Change of Control Purchase Price in cash equal to
101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the Change of Control Purchase Date (subject to the right of
Holders on the relevant Regular Record Date to receive interest on the
relevant Interest Payment Date);

(ii) the circumstances and relevant facts regarding
such Change of Control (including, in the case of any merger,
consolidation or sale of all or substantially all assets, information
with respect to pro forma results of operations, cash flow and
capitalization after giving effect to such Change of Control);

(iii) the date on which the Company will purchase any
Notes which Holders require the Company to purchase in accordance with
this Section, which date shall be no earlier than 30 days nor later
than 60 days from the date such Change of Control Purchase Notice is
mailed (the "CHANGE OF CONTROL PURCHASE DATE");

(iv) that, unless the Company defaults in making such
payment, any Note accepted for payment pursuant to the Change of
Control Purchase Offer shall cease to accrete or accrue interest after
the Change of Control Purchase Date;

(v) that Holders electing to have a Note purchased
pursuant to any Change of Control Purchase Offer shall be required to
surrender the Note, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Note completed, or
transfer by book-entry transfer, to the Company, a Depositary, if
appointed by the Company, or a Paying Agent at the address specified in
the notice, at least three Business Days before the Change of Control
Purchase Date; and

(vi) that Holders shall be entitled to withdraw their
election if the Company, the Depositary or the Paying Agent, as the
case may be, receives, not later than the last Business Day prior to
the Change of Control Purchase Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to have such
Note purchased.

(c) Holders electing to have a Note purchased will be required
to surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" duly completed, to the Company at the address specified in the notice
at least three Business Days prior to the Change of Control Purchase Date.
Holders will be entitled to withdraw their election if the Trustee or the

<PAGE> 87

Company receives not later than one Business Day prior to the Change of Control
Purchase Date, a telegram, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of the Note which was delivered by the
Holder for purchase by the Company and a statement that such Holder is
withdrawing his election to have such Note purchased.

(d) On the Change of Control Purchase Date, all Notes
purchased by the Company in a Change of Control Purchase Offer shall be
delivered by the Trustee for cancellation, and the Company shall pay the Change
of Control Purchase Price plus accrued and unpaid interest, if any, to the
Holders entitled thereto.

(e) On or before the Change of Control Purchase Date, the
Company will deliver to the Trustee an Officers' Certificate stating that the
Notes purchased in the Change of Control Purchase Offer are accepted for payment
by the Company in accordance with the terms of this Section. The Company, the
Depositary or the Paying Agent, as the case may be, will promptly (but in any
case not later than five days after the Change of Control Purchase Date) mail or
deliver to each tendering Holder an amount equal to the Change of Control
Purchase Price of the Notes tendered by such Holder plus interest accrued but
unpaid thereon (subject to the right of Holders on the relevant Regular Record
Date to receive interest due on the relevant Interest Payment Date). The Company
will publicly announce the results of the Change of Control Purchase Offer on
the Change of Control Purchase Date.

(f) The Company will comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other applicable
securities laws or regulations in connection with the repurchase of Notes
pursuant to this Section. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this Section, the Company
will comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this Section by virtue thereof.

Section 10.19 Payments for Consent.

The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of this Indenture or the Notes unless such consideration is offered to be paid
or agreed to be paid to all Holders that provide such consent or so waive or
agree to amend in the time frams set forth in the solicitation documents
relating to such consent, waiver or agreement.

Section 10.20 Subsidiary Guaranties, Designation of
Subsidiaries as Restricted or Unrestricted.

(a) The Company shall cause each future Subsidiary (other than
Special Purpose Subsidiaries) to execute and deliver to the Trustee a Joinder of
Subsidiary Guarantor promptly upon acquisition or formation thereof, unless such
Subsidiary is designated an "Unrestricted Subsidiary" in accordance with the
terms of this Section. The Company shall cause each Unrestricted Subsidiary from
time to time redesignated a Restricted Subsidiary (other than a Special Purpose
Subsidiary) to execute and deliver to the Trustee aJoinder of Subsidiary

<PAGE> 88

Guarantor concurrently with the delivery of the documents required to be
delivered by Section 10.20(e).

(b) Subject to the provisions of this Section, (i) promptly
upon acquisition or formation of any Subsidiary by the Company or any Restricted
Subsidiary after the date hereof, the Board of Directors shall designate or
cause to be designated such Subsidiary as either a Restricted Subsidiary or an
Unrestricted Subsidiary, and (ii) the Board of Directors may redesignate a
Restricted Subsidiary to be an Unrestricted Subsidiary or an Unrestricted
Subsidiary to be a Restricted Subsidiary. All Subsidiaries of Unrestricted
Subsidiaries automatically shall be designated as Unrestricted Subsidiaries.

(c) Any Subsidiary may be designated an Unrestricted
Subsidiary unless (i) such Subsidiary or any of its Subsidiaries owns any
Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated or (ii) any such Subsidiary has outstanding any
Indebtedness other than Non-Recourse Debt; provided, however, that such
designation would be a permitted Restricted Investment under Section 10.11. Any
Subsidiary that ceases to satisfy the conditions set forth in clauses (i) and
(ii) of this Section 10.20(c) shall promptly be designated a "Restricted
Subsidiary" and any Indebtedness of such Subsidiary shall be deemed to be
Incurred by such Subsidiary as of such date.

(d) Any Subsidiary may be designated a Restricted Subsidiary;
provided, however, that immediately after giving effect to such designation (x)
the Company could Incur $1.00 of additional Indebtedness under Section 10.9(a)
and (y) no Default or Event of Default shall have occurred and be continuing or
would result therefrom (deeming all Indebtedness of such Subsidiary outstanding
at the time of such designation to be Incurred at such time).

(e) Any designation of a Subsidiary as a Restricted Subsidiary
or Unrestricted Subsidiary by the Board of Directors shall be evidenced by the
Company promptly filing with the Trustee a Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions and containing the statements required by
Section 1.2. In the case of the designation of a Subsidiary as a Restricted
Subsidiary, the Company shall further provide the Trustee with an Opinion of
Counsel to the effect that:

(i) Such Subsidiary has been duly incorporated or
organized and is validly existing as a corporation, partnership or
other entity in good standing under the laws of the jurisdiction in
which it is chartered or organized. Such Subsidiary is duly qualified
and in good standing as a foreign corporation, partnership or other
entity in each jurisdiction in which the character or location of its
assets or properties (owned, leased or licensed) or the nature of its
business makes such qualification necessary, except for such
jurisdictions where the failure to so qualify would not have a material
adverse effect on the assets or properties, business, results of
operations or financial condition of the Company and its Subsidiaries
taken as a whole. Such Subsidiary has all requisite corporate,
partnership or other power and authority, and all necessary
authorizations, approvals, consents, orders, licenses, certificates and
permits (collectively, "PERMITS") of and from all

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governmental or regulatory bodies or any other person or
entity, including any and all licenses, permits and approvals required
under any Applicable Law, to (i) own, lease and license its assets and
properties and conduct its businesses as now being conducted and as
proposed to be conducted, (ii) to enter into, deliver and perform its
obligations under the applicable Joinder of Subsidiary Guarantor and
the Indenture. Such Subsidiary has fulfilled and performed in all
material respects all of its obligations with respect to such Permits,
and such Subsidiary is not in material violation of any term or
provision of any such Permits, nor has any event occurred which allows,
or after notice or lapse of time would allow, revocation or termination
thereof or which could result in any material impairment of the rights
of such Subsidiary. No such Permit contains a materially burdensome
restriction which has or would have a material adverse effect on the
assets or properties, business, results of operations or financial
condition of such Subsidiary.

(ii) Neither the execution, delivery and performance
of its obligations under the applicable Joinder of Subsidiary
Guarantor, or this Indenture by such Subsidiary nor the consummation of
any of the transactions contemplated hereby or thereby will give rise
to a right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice or
lapse of time or both would constitute a default) under, or require any
consent or waiver under, or result in the execution or imposition of
any lien, charge or encumbrance upon any properties or assets of the
Company or any Subsidiary pursuant to the terms of, any indenture,
mortgage, deed of trust or other material agreement or instrument
(identified as such by a Senior Officer) to which the Company or any
Subsidiary is a party or by which it or any of its properties or
businesses is bound, or any franchise, license, Permit, judgment,
decree, order, statute, rule or regulation applicable to such
Subsidiary or violate any provision of the charter, by-laws,
partnership agreement or other organizational document of such
Subsidiary, except for such consents or waivers which have already been
obtained and are in full force and effect, or require any
authorization, consent, order, license, certificate or Permit of or
from any governmental or regulatory body under any Federal, state or
local law except for those which have been obtained.

(iii) All necessary corporate, partnership or other
action has been duly and validly taken by such Subsidiary to authorize
the execution, delivery and performance of the applicable Joinder of
Subsidiary Guarantor and this Indenture.

(iv) The applicable Joinder of Subsidiary Guarantor
constitutes the legal, valid and binding obligation of such Subsidiary,
enforceable against such Subsidiary in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and by general equitable
principles. The Indenture constitutes the legal, valid and binding
obligation of such Subsidiary to the extent it is, becomes or is deemed
a party thereto, enforceable against such Subsidiary in accordance with
its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles.

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ARTICLE ELEVEN

MERGER, CONSOLIDATION AND TRANSFER OF ASSETS

Section 11.1 Merger, Consolidation or Transfer of Assets of
the Company.

(a) The Company shall not consolidate with or merge with or
into, or convey, transfer or lease, in one transaction or a series of related
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "SUCCESSOR COMPANY") shall be
a Person organized and existing under the laws of the United States of America
or any state thereof and the Successor Company (if not the Company) shall
expressly assume, by an indenture supplemental hereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all of the Company's
obligations under the Notes and this Indenture; (ii) immediately after giving
effect to such transaction (and treating any Indebtedness that becomes an
obligation of the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been Incurred by such Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Successor Company would be able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of Section 10.9; (iv) immediately after
giving effect to such transaction, the Successor Company shall have Consolidated
Net Worth in an amount that is not less than the Consolidated Net Worth of the
Company prior to such transaction; and (v) the Company shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with this Indenture.

(b) The Successor Company shall be the successor to the
Company and shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under this Indenture, but the predecessor
Company, in the case of a lease, shall not be released from the obligation to
pay the principal of, premium, if any, and interest on the Notes.

Section 11.2 Merger, Consolidation or Transfer of Assets of
Restricted Subsidiaries.

(a) No Restricted Subsidiary may consolidate with or merge
with or into (whether or not such Restricted Subsidiary is the surviving Person)
another Person, whether or not affiliated with such Restricted Subsidiary,
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Restricted Subsidiary) assumes all the obligations of such Restricted
Subsidiary, pursuant to a supplemental indenture, in form and substance
satisfactory to the Trustee, under this Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii) such
Restricted Subsidiary, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction) equal to or greater than the Consolidated Net
Worth of such Restricted Subsidiary immediately preceding the transaction; and
(iv) the Restricted Subsidiary would be permitted, immediately after giving
effect to such transaction, to Incur at least $1.00 of additional Indebtedness
pursuant

<PAGE> 91

to paragraph (a) of Section 10.9; provided that the foregoing provisions will
not restrict the ability of a Subsidiary to consolidate or merge with the
Company or a Wholly Owned Restricted Subsidiary.

(b) In the event of a sale or other disposition of all of the
assets of any Subsidiary (other than to or with the Company or a Wholly Owned
Restricted Subsidiary), by way of merger, consolidation or otherwise, or a sale
or other disposition of all of the Capital Stock of any Subsidiary (other than
to the Company or a Wholly Owned Restricted Subsidiary), such Restricted
Subsidiary (in the event of a sale or other disposition, by way of such a
merger, consolidation or otherwise, of all of the Capital Stock of such
Subsidiary) or the corporation acquiring the property (in the event of a sale or
other disposition of all of the assets of such Restricted Subsidiary) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Cash Proceeds of such sale or other disposition are
applied in accordance with Section 10.13.

Section 11.3 Change of Control.

The provisions of this Article shall not impair the Holders'
rights under Section 10.18 following a Change of Control.

ARTICLE TWELVE

SUBORDINATION

Section 12.1 Notes and Subsidiary Guarantees Subordinate
to Senior Indebtedness.

(a) The Company and each Subsidiary Guarantor covenants and
agrees, and each Holder of a Note and each Beneficiary of any Subsidiary
Guarantee, by his acceptance thereof, likewise covenants and agrees, that, to
the extent and in the manner hereinafter set forth in this Article, the
Indebtedness represented by the Notes and the Subsidiary Guarantees and the
payment of the principal of and premium (if any) and interest on each and all of
the Notes, together with any payment pursuant to any Subsidiary Guarantees, are
hereby expressly made subordinate and subject in right of payment to the prior
payment in full of existing and future Senior Indebtedness of the Company and
the Subsidiary Guarantors, respectively, including without limitation all
obligations of the Company or any Subsidiary Guarantor under any Warehouse
Facility, and will be senior in right of payment to Junior Subordinated
Obligations. If any Senior Indebtedness is disallowed, avoided or subordinated
pursuant to the provisions of Section 548 of the Bankruptcy Code or any
applicable state fraudulent conveyance law, such Indebtedness nevertheless will
constitute Senior Indebtedness for purposes of this Indenture. For purposes of
this Article, (i) a "PAYMENT" includes any payment with respect to principal of,
premium, if any, or interest on, the Notes, including any payment under any
Subsidiary Guarantee, any deposit pursuant to Article Fourteen, and any
repurchase, redemption, defeasance or other retirement of any Notes, and (ii)
"PRINCIPAL", if used with respect to the Notes, shall include, without
limitation, the principal portion of the Redemption Price and Purchase Price of
Notes.

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(b) Notwithstanding anything in this Article to the contrary,
nothing herein shall apply to any payments made out of the assets of any trust
referred to in paragraph (a) of Section 14.4.

Section 12.2 Payment Over of Proceeds upon Dissolution, Etc.

(a) Upon any payment or distribution of the assets of the
Company to creditors upon a total or partial liquidation or total or partial
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property
(whether voluntary or involuntary), (i) the holders of Senior Indebtedness of
the Company shall be entitled to receive payment in full before the holders of
the Notes are entitled to receive any payment, and (ii) until the Senior
Indebtedness of the Company is paid in full, any payment to which the Holders of
the Notes would be entitled but for this Section will be made to holders of
Senior Indebtedness as their interests may appear, except that Holders may
receive shares of stock or Indebtedness of the Company that is subordinated to
Senior Indebtedness of the Company to at least the same extent as the Notes.

(b) Upon any payment or distribution of the assets of any
Subsidiary Guarantor to creditors upon a total or partial liquidation or total
or partial dissolution of the Subsidiary Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Subsidiary Guarantor or its property (whether voluntary or involuntary), (i) the
holders of Senior Indebtedness of such Subsidiary Guarantor shall be entitled to
receive payment in full before the holders of the Notes are entitled to receive
any payment, and (ii) until the Senior Indebtedness of such Subsidiary Guarantor
is paid in full, any payment to which the Holders of the Notes would be entitled
but for this provision will be made to holders of Senior Indebtedness of such
Subsidiary Guarantor as their interests may appear, except that Holders may
receive shares of stock or Indebtedness that is subordinated to Senior
Indebtedness of the Subsidiary Guarantor to at least the same extent as the
Subsidiary Guarantees.

(c) In the event that, notwithstanding the foregoing
provisions of this Section, the Trustee or the Holder of any Note or the
Beneficiary of any Subsidiary Guarantee shall have received any payment or
distribution of any kind or character, whether in cash, securities or other
property, before all Senior Indebtedness is paid in full, then and in such event
such payment or distribution shall be paid over or delivered forthwith to the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent
or other official for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior Indebtedness in
full, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.

Section 12.3 No Payment When Senior Indebtedness In Default.

(a) Note Payments. The Company may not make any payment with
respect to the Notes if (i) any Senior Indebtedness of the Company is not paid
when due or (ii) any other default on any such Senior Indebtedness occurs and
the maturity thereof has been accelerated in accordance with its terms, unless,
in either case, (x) the default has been cured or waived and any such
acceleration has been rescinded or (y) such Senior Indebtedness has been paid in
full.

<PAGE> 93

During the continuance of any default (other than a default described in clause
(i) or (ii) of the preceding sentence) with respect to any Designated Senior
Indebtedness of the Company pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not make a payment with respect to the Notes for a
period (a "PAYMENT BLOCKAGE PERIOD") commencing upon the receipt by the Company
and the Trustee of written notice of such default from the Representative of any
Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period (a "BLOCKAGE NOTICE") and ending 179 days thereafter (or earlier
if such Payment Blockage Period is terminated (i) by written notice to the
Trustee and the Company from the Person or Persons who gave such Blockage
Notice, (ii) by repayment in full of such Designated Senior Indebtedness or
(iii) because the default giving rise to such Blockage Notice is no longer
continuing). Notwithstanding the provisions described in the immediately
preceding sentence (but subject to the provisions of the first sentence of this
subsection), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders shall have accelerated the maturity of such
Designated Senior Indebtedness, the Company may resume payments on the Notes
after such Payment Blockage Period.

Not more than one Blockage Notice may be given in any
consecutive 360-day period, irrespective of the number of defaults with respect
to Designated Senior Indebtedness during such period.

(b) Subsidiary Guarantee Payments. No Subsidiary Guarantor
may make any payment under its Subsidiary Guarantee if (i) any Senior
Indebtedness of any Subsidiary Guarantor is not paid when due or (ii) any other
default on any such Senior Indebtedness occurs and the maturity thereof has been
accelerated in accordance with its terms, unless, in either case, (x) the
default has been cured or waived and any such acceleration has been rescinded or
(y) such Senior Indebtedness has been paid in full. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
preceding sentence) with respect to any Designated Senior Indebtedness of any
Subsidiary Guarantor pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods,
such Subsidiary Guarantor may not make any payment with respect to the Notes for
a period (a "SUBSIDIARY GUARANTOR PAYMENT BLOCKAGE PERIOD") commencing upon the
receipt by the Subsidiary Guarantor and the Trustee of written notice of such
default from the Representative of any Designated Senior Indebtedness of such
Subsidiary Guarantor specifying an election to effect a Subsidiary Guarantor
Payment Blockage Period (a "SUBSIDIARY GUARANTOR PAYMENT BLOCKAGE NOTICE") and
ending 179 days thereafter (or earlier if such Subsidiary Guarantor Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Subsidiary Guarantors from the Person or Persons who gave such Subsidiary
Guarantor Payment Blockage Notice, (ii) by repayment in full of such Designated
Senior Indebtedness of such Subsidiary Guarantor or (iii) because the default
giving rise to such Subsidiary Guarantor Payment Blockage Notice is no longer
continuing). Notwithstanding the provisions described in the immediately
preceding sentence (but subject to the provisions contained in the first
sentence of this subsection), unless the holders of such Senior Indebtedness of
such Subsidiary Guarantor or the Representative of such holders shall have
accelerated the maturity of such Designated Senior Indebtedness of such
Subsidiary Guarantor,

<PAGE> 94

such Subsidiary Guarantor may resume payments under its Subsidiary Guarantee
after such Subsidiary Guarantor Payment Blockage Period.

Not more than one Subsidiary Guarantor Payment Blockage Notice
may be given with respect to the Subsidiary Guarantors in any consecutive
360-day period, irrespective of the number of defaults with respect to
Designated Senior Indebtedness of the Subsidiary Guarantors during such period.

(c) Application. The provisions of this Section shall not
apply to any payment with respect to which Section 12.2 would be applicable.

Section 12.4 Payment Permitted if No Default.

Nothing contained in this Article or elsewhere in this
Indenture or in any of the Notes or Subsidiary Guarantees shall prevent (a) the
Company or any Subsidiary Guarantor, at any time except during the pending of
any liquidation, dissolution or proceeding referred to in Section 12.2 or under
the conditions described in Section 12.3, from making payments at any time of
principal of (or premium, if any) or interest on the Notes or payments pursuant
to any Subsidiary Guarantees, or (b) the application by the Trustee of any money
deposited with it hereunder to the payment of or on account of the principal
(and premium, if any) or interest on the Notes or payment pursuant to any
Subsidiary Guarantee or the retention of such payment by the Holders, if, at the
time of such application by the Trustee, it did not have knowledge that such
payment would have been prohibited by the provisions of this Article.

Section 12.5 Subrogation to Rights of Holders
and Beneficiaries of Senior Indebtedness.

Subject to the payment in full of all Senior Indebtedness, the
Holders of the Notes and the Beneficiaries of any Subsidiary Guarantee shall be
subrogated to the extent of the payments or distributions made to the holders of
such Senior Indebtedness pursuant to the provisions of this Article to the
rights of the holders of such Senior Indebtedness to receive payments and
distributions of cash, property and securities applicable to the Senior
Indebtedness until the principal of (and premium, if any) and interest on the
Notes and any other Obligations shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders of the
Notes, the Trustee or any Beneficiaries would be entitled except for the
provisions of this Article shall, as among the Company (together with any
Subsidiary Guarantors), its creditors other than the holders of Senior
Indebtedness, the Holders of the Notes and the Beneficiaries of any Subsidiary
Guarantees, be deemed to be payment or distribution by the Company to or on
account of the Senior Indebtedness.

Section 12.6 Provisions Solely to Define Relative Rights.

The provisions of this Article are and are intended solely for
the purpose of defining the relative rights of the Holders of the Notes, the
Beneficiaries of any Subsidiary Guarantees and the holders of the Senior
Indebtedness. Nothing contained in this Article or

<PAGE> 95

elsewhere in this Indenture or in the Notes is intended to or shall (a) impair,
as among the Company, its creditors other than holders of Senior Indebtedness,
the Holders of the Notes and the Beneficiaries of any Subsidiary Guarantees, the
obligations of the Company or any other Obligor, which are absolute and
unconditional, to pay to the Holders of the Notes the principal of (and premium,
if any) and interest on the Notes as and when the same shall become due and
payable in accordance with their terms or to make any payments pursuant to any
Subsidiary Guarantees; or (b) affect the relative rights against the Company or
any other Obligor of the Holders of the Notes, Beneficiaries of any Subsidiary
Guarantee, and creditors of the Company other than the holders of Senior
Indebtedness; or (c) prevent the Trustee, the Holder of any Note or any
Beneficiary of any Subsidiary Guarantee from exercising all remedies otherwise
permitted by applicable law upon an Event of Default, subject to the rights, if
any, under this Article of the holders of the Senior Indebtedness to receive
cash, property and securities otherwise payable or deliverable to the Trustee,
such Holder or such Beneficiary.

Section 12.7 Trustee to Effectuate Subordination.

Each Holder of a Note and each Beneficiary by his acceptance
thereof authorizes and directs the Trustee on his behalf to take such action as
may be necessary or appropriate to effectuate the subordination provided in this
Article and appoints the Trustee his attorney-in-fact for any and all such
purposes.

Section 12.8 No Waiver of Subordination Provisions.

No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or other Obligor or by any act or failure to act, in good faith, by
any such holder, or by any non-compliance by the Company or other Obligor with
the terms, provisions and covenants of this Indenture, regardless of any
knowledge thereof any such holder may have or be otherwise charged with.

Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Trustee, the Holders of the Notes
or any Beneficiary of any Subsidiary Guarantee, without incurring responsibility
to the Holders of the Notes and any Beneficiaries and without impairing or
releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Notes and any Beneficiaries to the holders of
Senior Indebtedness, do any one or more of the following: (i) change the manner,
place, amount or terms of payment or extend the time of payment of, or renew or
alter, Senior Indebtedness, or otherwise amend or supplement in any manner
Senior Indebtedness or any instrument evidencing the same or any agreement under
which Senior Indebtedness is outstanding; (ii) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (iii) release any Person liable in any manner for the collection
of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights
against the Company and any other Person.

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Section 12.9 Notice to Trustee.

The Company shall give prompt written notice to the Trustee of
any fact known to the Company which would prohibit the making of any payment to
or by the Trustee in respect of the Notes or any Subsidiary Guarantees pursuant
to this Article. Notwithstanding the provisions of this Article or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment to or
by the Trustee in respect of the Notes or any Subsidiary Guarantees, unless and
until the Trustee shall have received written notice thereof from the Company or
a holder of Senior Indebtedness or from any Representative thereof; and, prior
to the receipt of any such written notice, the Trustee, subject to the
provisions of Article Six, shall be entitled in all respects to assume that no
such facts exist; provided, however, that if the Trustee shall not have received
the notice provided for in this Section at least three Business Days prior to
the date upon which by the terms hereof any money may become payable for any
purpose (including, without limitation, the payment of the principal (and
premium, if any) or interest on any Note), then, anything herein contained to
the contrary notwithstanding, the Trustee shall have full power and authority to
receive such money and to apply the same to the purpose for which such money was
received and shall not be affected by any notice to the contrary which may be
received by it within three Business Days prior to such date.

Subject to the provisions of Article Six, the Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a Representative of Senior Indebtedness to establish
that such notice has been given by a holder of Senior Indebtedness (or a trustee
therefor or other representative thereof). In the event that the Trustee
determines in good faith that further evidence is required with respect to the
right of any Person as a holder of Senior Indebtedness to participate in any
payment or distribution pursuant to this Article, the Trustee may request such
Person to furnish evidence to the reasonable satisfaction of the Trustee as to
the amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such payment or distribution and any other
facts pertinent to the rights of such Person under this Article, and if such
evidence is not furnished, the Trustee may defer any payment to such Person
pending judicial determination as to the right of such Person to receive such
payment or distribution.

Section 12.10 Reliance on Judicial Order or Certificate of
Liquidating Agent.

Upon any payment or distribution of assets of the Company
referred to in this Article, the Trustee, subject to the provisions of Article
Six, and the Holders of the Notes shall be entitled to rely upon any order or
decree entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver or other Person making such payment or distribution,
delivered to the Trustee or to the Holders of Notes, for the purpose of
ascertaining the Person entitled to participate in such payment or distribution,
the holders of the Senior Indebtedness and other indebtedness of the Company,
the amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Article.

<PAGE> 97

Section 12.11 Trustee Not Fiduciary for Holders of
Senior Indebtedness.

The Trustee shall not be deemed to owe any fiduciary duty to
the holders of Senior Indebtedness and shall not be liable to any such holders
if it shall in good faith mistakenly pay over or distribute to Holders of Notes
or to the Company or to any other Person cash, property or securities to which
any holders of Senior Indebtedness shall be entitled by virtue of this Article
or otherwise.

Section 12.12 Rights of Trustee as Holder of Senior
Indebtedness.

The Trustee in its individual capacity shall be entitled to
all the rights set forth in this Article with respect to any Senior Indebtedness
which may at any time be held by it, to the same extent as any other holder of
Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of
any of its rights as such holder.

Nothing in this Article shall apply to claims of, or payments
to, the Trustee pursuant to Section 6.7.

Section 12.13 Article Applicable to Paying Agents.

In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"TRUSTEE" as used in this Article shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying Agent
within its meaning as fully for all intents and purposes as if such Paying Agent
were named in this Article in addition to or in place of Trustee; provided,
however, that Section 12.12 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.

ARTICLE THIRTEEN

REDEMPTION OF NOTES

Section 13.1 Applicability of Article.

Any redemption of Notes before their Stated Maturity shall be
in accordance with their terms and in accordance with this Article.

Section 13.2 Optional Redemption.

The Notes will not be redeemable prior to ____________, _____,
except as provided on the reverse of the Form of Note set forth in Section 2.3.

<PAGE> 98

Section 13.3 Election to Redeem; Selection by Trustee of
Notes to Be Redeemed.

Any election to redeem Notes shall be evidenced by a Board
Resolution.

If less than all the Notes are to be redeemed, the particular
Notes to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Notes not previously called
for redemption, on a pro rata basis, by lot or by such method as the Trustee in
its sole discretion shall deem fair and appropriate and which may provide for
the selection for redemption of portions (equal to the minimum authorized
denomination for Notes or any integral multiple thereof) of the principal amount
of Notes of a denomination larger than the minimum authorized denomination for
Notes.

The Trustee shall promptly notify the Company in writing of
the Notes selected for redemption and, in the case of any Notes selected for
partial redemption, the principal amount thereof to be redeemed.

For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to the redemption of Notes shall
relate, in the case of any Notes redeemed or to be redeemed only in part, to the
portion of the principal amount of such Notes which has been or is to be
redeemed.

Section 13.4 Notice of Redemption.

Notice of redemption shall be given by first-class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date, to each Holder of Notes to be redeemed, at his address
appearing in the Note Register.

All notices of redemption shall state:

(1) the Redemption Date,

(2) the Redemption Price and accrued interest, if any,

(3) if less than all the Outstanding Notes are to be redeemed,
the identification (and, in the case of partial redemption of any
Notes, the principal amounts) of the particular Notes to be redeemed,

(4) that on the Redemption Date the Redemption Price and
accrued but unpaid interest, if any, will become due and payable upon
each such Note to be redeemed and, if applicable, that interest thereon
will cease to accrue on and after said date,

(5) the place or places where such Notes are to be surrendered
for payment of the Redemption Price and accrued interest, if any, and

(6) the CUSIP numbers, if any, of the Notes to be
redeemed.

91
<PAGE> 99

Notice of redemption of Notes to be redeemed at the election
of the Company shall be given by the Company or, at the Company's request, by
the Trustee in the name and at the expense of the Company and shall be
irrevocable.

Section 13.5 Deposit of Redemption Price.

Prior to any Redemption Date, the Company shall deposit with
the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 10.3) an amount
of money in immediately available funds sufficient to pay the Redemption Price
of, and (except if the Redemption Date shall be an Interest Payment Date)
accrued but unpaid interest on, all the Notes which are to be redeemed on that
date.

Section 13.6 Notes Payable on Redemption Date.

Notice of redemption having been given as aforesaid, the Notes
so to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Notes shall cease to bear interest. Upon surrender of any such
Note for redemption in accordance with said notice, such Note shall be paid by
the Company at the Redemption Price, together with accrued but unpaid interest
to the Redemption Date; provided, however, that, installments of interest whose
stated maturity is on or prior to the Redemption Date shall be payable to the
Holders of such Notes, or one or more Predecessor Notes, registered as such at
the close of business on the relevant Record Dates according to their terms and
the provisions of Section 3.8.

If any Note called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and any premium shall, until
paid, bear interest from the Redemption Date at the rate prescribed therefor in
the Note.

Section 13.7 Notes Redeemed in Part.

Any Note which is to be redeemed only in part shall be
surrendered at a Place of Payment therefor (with, if the Company or the Trustee
so requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder thereof
or his attorney duly authorized in writing), and the Company shall execute, and
the Trustee shall authenticate and deliver to the Holder of such Note without
service charge, a new Note or Notes of like tenor, of any authorized
denomination as requested by such Holder, in aggregate principal amount equal to
and in exchange for the unredeemed portion of the principal of the Note so
surrendered.

92
<PAGE> 100

ARTICLE FOURTEEN

DEFEASANCE AND COVENANT DEFEASANCE

Section 14.1 Option to Effect Legal Defeasance or Covenant
Defeasance.

The Company may, at the option of its Board of Directors
evidenced by a Board Resolution, at any time, elect to have either Section 14.2
or 14.3 be applied to all Outstanding Notes upon compliance with the conditions
set forth below in this Article.

Section 14.2 Legal Defeasance and Discharge.

Upon the Company's exercise under Section 14.1 of the option
applicable to this Section, the Company shall, subject to the satisfaction of
the conditions set forth in Section 14.4, be deemed to have been discharged from
its obligations with respect to all Outstanding Notes on the date the conditions
set forth below are satisfied (hereinafter, LEGAL DEFEASANCE). For this purpose,
Legal Defeasance means that the Company and the Subsidiary Guarantors shall be
deemed to have paid and discharged the entire Indebtedness represented by the
Outstanding Notes and the Subsidiary Guarantees, which shall thereafter be
deemed to be OUTSTANDING only for the purposes of Section 14.5 and the other
Sections of this Indenture referred to in (a) and (b) below, and the Company and
the Subsidiary Guarantors shall be deemed to have satisfied all their other
obligations under the Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following provisions which shall survive
until otherwise terminated or discharged hereunder: (a) the rights of Holders of
Outstanding Notes to receive solely from the trust fund described in Section
14.4, and as more fully set forth in such Section, payments in respect of the
principal of, premium, if any, and interest on such Notes as and when such
payments are due, (b) the Company's and Subsidiary Guarantors' obligations with
respect to such Notes under Articles One, Two, Three and Four and Section 10.3,
(c) the rights, powers, trusts, duties and immunities of the Trustee hereunder
and the Company's obligations in connection therewith and (d) this Article.
Subject to compliance with this Article, the Company may exercise its option
under this Section notwithstanding the prior exercise of its option under
Section 14.3.

Section 14.3 Covenant Defeasance.

Upon the Company's exercise under Section 14.1 of the option
applicable to this Section, the Company and the Subsidiary Guarantors shall,
subject to the satisfaction of the conditions set forth in Section 14.4, be
released from its obligations under the covenants contained in Article Ten
(except Sections 10.1, 10.2, 10.5 and 10.7) [and under the provisions of
Sections 11.1(a) and 11.2(a)] with respect to the Outstanding Notes on and after
the date the conditions set forth below are satisfied (hereinafter, COVENANT
DEFEASANCE), and the Notes shall thereafter be deemed not Outstanding for the
purposes of any direction, waiver, consent or declaration or act of Holders (and
the consequences of any thereof) in connection with such covenants, but shall
continue to be deemed Outstanding for all other purposes hereunder (it being
understood that such Notes shall not be deemed outstanding for accounting
purposes). For this

<PAGE> 101

purpose, Covenant Defeasance means that, with respect to the Outstanding Notes
and the Subsidiary Guarantees, the Company and the Subsidiary Guarantors may
omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document and such omission to comply shall not constitute a Default
or an Event of Default under Section 5.1, but, except as specified above, the
remainder of this Indenture and such Notes shall be unaffected thereby. In
addition, upon any such Covenant Defeasance, the events specified in paragraphs
(f), (g) (with respect to Subsidiaries only) (h) and (i) shall not constitute
Defaults.

Section 14.4 Conditions to Legal or Covenant Defeasance.

The following shall be the conditions precedent to the
effectiveness of any Legal Defeasance or Covenant Defeasance:

(a) the Company shall (i) irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders, unencumbered cash in
United States dollars, unencumbered U.S. Government Obligations, or a
combination thereof, in such amounts as will be sufficient, in a
written opinion of a nationally recognized firm of independent public
accountants delivered to the Trustee, to pay the principal of, premium,
if any, and interest on the outstanding Notes on the stated date for
payment thereof or on the applicable Redemption Date, as the case may
be, and the Company must specify whether the Notes are being defeased
to maturity or to a particular Redemption Date, and (ii) irrevocably
instruct the Trustee to apply such cash and U.S. Government Obligations
to such payments with respect to the Notes;

(b) in the case of an election under Section 14.2, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of this Indenture, there
has been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such Opinion of Counsel
shall confirm that, the Holders of the Outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;

(c) in the case of an election under Section 14.3 hereof, the
Company shall have delivered to the Trustee an Opinion of
Counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the Outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance has not occurred;

94
<PAGE> 102

(d) no Default or Event of Default shall have occurred and be
continuing on (i) the date of such deposit (other than a Default or
Event of Default resulting from the Incurrence of Indebtedness all or a
portion of the proceeds of which will be used to defease the Notes
pursuant to this Article concurrently with such Incurrence) and (ii)
insofar as Section 5.1(g) hereof is concerned, at any time during the
period ending on the 91st day after the date of deposit (such condition
not being satisfied until such 91st day) ;

(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than this Indenture) to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;

(f) the Obligors shall have delivered to the Trustee an
Opinion of Counsel to the effect that on the 91st day following the
deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally;

(g) the Obligors shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over any other
creditors of the Obligors or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Obligors; and

(h) the Obligors shall have delivered to the Trustee Officers'
Certificates and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with.

Section 14.5 Deposited Money and U.S. Government Obligations
To Be Held in Trust; Other Miscellaneous
Provisions.

Subject to Section 14.6, all money and U.S. Government
Obligations (including the proceeds thereof) deposited with the Trustee (or
other qualifying trustee, collectively for purposes of this Section, the
TRUSTEE) pursuant to Section 14.4 in respect of the Outstanding Notes shall be
held in trust and applied by the Trustee, in accordance with the provisions of
the Notes and this Indenture, to the payment, either directly or through any
Paying Agent (excluding any Obligor acting as Paying Agent) as the Trustee may
determine, to the Holders of such Notes of all sums due and to become due
thereon in respect of principal, premium, if any, and interest, but such money
need not be segregated from other funds except to the extent required by law.

The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the cash or U.S.
Government Obligations deposited pursuant to Section 14.4 or the principal and
interest received in respect thereof.

Anything in this Article to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the request
of the Company any money or U.S. Government Obligations held by it as provided
in Section 14.4 which, in the opinion of a

<PAGE> 103

nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 14.4), are in excess of the amount thereof that would
then be required to be deposited to effect an equivalent Legal Defeasance or
Covenant Defeasance.

Section 14.6 Repayment to Company.

Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium,
if any, or interest on any Note and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall be
paid to the Company on its request or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Note shall thereafter, as a
creditor, look only to the Company for payment thereof, and all liability of the
Trustee or such Paying Agent with respect to such trust money, and all liability
of the Company as trustee thereof, shall thereupon cease; provided, however,
that the Trustee or such Paying Agent, before being required to make any such
repayment, may at the expense of the Company cause to be published once, in The
New York Times and The Wall Street Journal (national edition), notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining will be repaid to the Company.

Section 14.7 Reinstatement.

If the Trustee or Paying Agent is unable to apply any United
States Dollars or U.S. Government Obligations in accordance with Section 14.2 or
14.3, as the case may be, by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Obligors' obligations under this Indenture, the Notes and
the Subsidiary Guarantees shall be revived and reinstated as though no deposit
had occurred pursuant to Section 14.2 or 14.3 until such time as the Trustee or
Paying Agent is permitted to apply all such money in accordance with Section
14.2 or 14.3, as the case may be; provided, however, that, if the Company makes
any payment of principal of, premium, if any, or interest on any Note following
the reinstatement of its obligations, the Company shall be subrogated to the
rights of the Holders of such Notes to receive such payment from the money held
by the Trustee or Paying Agent.

ARTICLE FIFTEEN

MISCELLANEOUS

Section 15.1. No Recourse Against Others.

A director, officer, employee, stockholder or incorporator, as
such, of any Obligor shall not have any liability for any obligations of such
Obligor under the Notes, the Subsidiary Guarantees or this Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability.

96
<PAGE> 104

Section 15.2. Execution in Counterparts.

This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.

Section 15.3. Waiver of Trial by Jury.

EACH OF THE PARTIES TO THIS INDENTURE WAIVES THE RIGHT TO A
TRIAL BY JURY IN ANY ACTION UNDER THIS INDENTURE, THE NOTES OR ANY SUBSIDIARY
GUARANTEE OR ANY ACTION ARISING OUT OF THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, REGARDLESS OF WHICH PARTY INITIATES SUCH ACTION OR ACTIONS.

.* * * * *

IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.

MEGO MORTGAGE CORPORATION

By:
------------------------------------
Name:

Title:

Attest:

By:
----------------------------------
Title:

<PAGE> 105

AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Trustee

By:
-------------------------------------
Name:
Title:

Attest:

By:
-----------------------------------
Title:

<PAGE> 106

STATE OF [____________] )
) ss.:
COUNTY OF [________] )

On the _____ day of _______________, 1996 before me personally
came ___________________________, to me known, who, being by me duly sworn, did
depose and say that he is __________________________ of Mego Mortgage
Corporation, one of the corporations described in and which executed the
foregoing instrument; that he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation, and that he signed his
name thereto by like authority.

--------------------------------------
Notary Public

99
<PAGE> 107

STATE OF [____________] )
) ss.:
COUNTY OF [________] )

On the ____ day of ____________ 1996 before me personally came
__________________ to me known, who, being by me duly sworn, did depose and say
that he is an [______________________________] of American Stock Transfer &
Trust Company, one of the corporations described in and which executed the
foregoing instrument, that he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation, and that he signed his
name thereto by like authority.

--------------------------------
Notary Public

100

<PAGE> 108

SCHEDULE 10.12

LIENS EXISTING ON ISSUE DATE

[?]

<PAGE> 109

EXHIBIT A

FORM OF SUBSIDIARY GUARANTEE

The Subsidiary Guarantors listed below (hereinafter referred
to as "SUBSIDIARY GUARANTORS," which term includes any successor or assign under
the Indenture dated as of ___________________, 1996 by and among Mego Mortgage
Corporation (the COMPANY), any Person that may from time to time become a party
thereto as a Subsidiary Guarantor by executing and delivering to the Trustee an
Joinder of Subsidiary Guarantor (as defined therein), and American Stock
Transfer & Trust Company, a _____________________, as Trustee (the INDENTURE)),
have irrevocably, unconditionally and jointly and severally guaranteed (i) the
due and punctual payment of the principal of, premium, if any, and interest on
the Company's ___% Senior Subordinated Notes due 2001 in an aggregate principal
amount of $40,000,000 (the NOTES), the due and punctual payment of interest on
the overdue principal and interest, if any, of the Notes and the due and
punctual performance of all other Obligations of the Company to the Holders of
Notes or the Trustee, all subject to the terms and limitations set forth in
ARTICLE EIGHT of the Indenture, (ii) in case of any extension of time of payment
or renewal of any Notes or any such other Obligations, that the same will be
promptly paid in full when due or performed in accordance with the terms of the
extension or renewal, whether at stated maturity, by acceleration or otherwise,
and (iii) the payment of any and all costs and expenses (including reasonable
attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights
under this Subsidiary Guarantee.

The obligations of each Subsidiary Guarantor to the Holders
and to the Trustee pursuant to this Subsidiary Guarantee and the Indenture are
expressly set forth in ARTICLE EIGHT of the Indenture and reference is hereby
made to such Indenture for the precise terms of this Subsidiary Guarantee.

No director, officer, employee, stockholder or incorporator,
as such, past, present or future, of any Subsidiary Guarantor shall have any
liability under this Subsidiary Guarantee by reason of his, her or its status as
such director, officer, employee, stockholder or incorporator.

This is a continuing guarantee and, except as otherwise
provided in Section 10.20 of the Indenture, shall remain in full force and
effect and shall be binding upon each Subsidiary Guarantor and its successors
and assigns until full and final payment of all of the Company's Obligations and
shall inure to the benefit of the successors and assigns of the Trustee and the
Holders and, in the event of any transfer or assignment of rights by any Holder
or the Trustee, the rights and privileges herein conferred upon that party shall
automatically extend to and be vested in such transferee or assignee, all
subject to the terms and conditions hereof. This is a guarantee of payment and
not of collectability.

This Subsidiary Guarantee shall not be valid or obligatory for
any purpose until the certificate of authentication on the Note upon which this
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of an authorized officer.

EXHIBIT A
to Subsidiary Guarantee
1
<PAGE> 110

THE TERMS OF ARTICLE EIGHT OF THE INDENTURE ARE INCORPORATED
HEREIN BY REFERENCE.

Capitalized terms used herein have the same meanings given in
the Indenture unless otherwise indicated.

Subsidiary Guarantors:

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

By:
------------------------------
Name:

Title:

EXHIBIT A
to Subsidiary Guarantee
2

<PAGE> 111

EXHIBIT B

FORM OF JOINDER OF SUBSIDIARY GUARANTOR

Pursuant to Section 8.1 of the Indenture dated as of
____________ ___, 1996 between Mego Mortgage Corporation (the COMPANY), any
Person that may from time to time become a party thereto as a Subsidiary
Guarantor by executing and delivering to the Trustee aJoinder of Subsidiary
Guarantor (as defined therein), and American Stock Transfer & Trust Company, a
[national banking association], as Trustee (the INDENTURE), the undersigned
hereby agrees, represents and acknowledges that it is a Subsidiary Guarantor
under the Indenture for all purposes, and jointly and severally with all other
Subsidiary Guarantors under the Indenture as may exist from time to time, as if
it had been a signatory to the Indenture.

The undersigned hereby irrevocably and unconditionally
guarantees (i) the due and punctual payment of the principal of, premium, if
any, and interest, on the Company's ......% Senior Subordinated Notes due 2001
in an aggregate principal amount of $40,000,000 (the "NOTES"), whether at stated
maturity, by acceleration or otherwise, the due and punctual payment of interest
on the overdue principal and interest, if any, of the Notes and the due and
punctual performance of all other Obligations of the Company to the Holders of
Notes or the Trustee, all subject to the terms and limitations set forth in
ARTICLE EIGHT of the Indenture, (ii) in case of any extension of time of payment
or renewal of any Notes or any such other Obligations, that the same will be
promptly paid in full when due or performed in accordance with the terms of the
extension or renewal, whether at stated maturity, by acceleration or otherwise,
and (iii) the payment of any and all costs and expenses (including reasonable
attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights
under this Joinder of Subsidiary Guarantor.

The obligations of the undersigned Subsidiary Guarantor to the
Holders and to the Trustee pursuant to this Joinder of Subsidiary Guarantor and
the Indenture are expressly set forth in ARTICLE EIGHT of the Indenture and
reference is hereby made to such Indenture for the precise terms of this Joinder
of ubsidiary Guarantor.

No director, officer, employee, stockholder or incorporator,
as such, past, present or future, of the undersigned Subsidiary Guarantor shall
have any liability under this Joinder of Subsidiary Guarantor by reason of his
or its status as such director, officer, employee, stockholder or incorporator.

This is a continuing guarantee and, except as otherwise
provided in Section 10.20 of the Indenture, shall remain in full force and
effect and shall be binding upon the undersigned Subsidiary Guarantor and its
successors and assigns until full and final payment of all of the Company's
Obligations and shall inure to the benefit of the successors and assigns of the
Trustee and the Holders and, in the event of any transfer or assignment of
rights by any Holder or the Trustee, the rights and privileges herein conferred
upon that party shall automatically extend to and be vested in such transferee
or assignee, all subject to the terms and conditions hereof. This is a guarantee
of payment and not of collectibility.

EXHIBIT B
to Subsidiary Guarantor
1

<PAGE> 112

THE TERMS OF ARTICLE EIGHT OF THE INDENTURE ARE INCORPORATED
HEREIN BY REFERENCE.

The undersigned Subsidiary Guarantor hereby represents and
warrants as follows:

(i) The undersigned has been duly incorporated or
organized and is validly existing as a corporation, partnership or
other entity in good standing under the laws of the jurisdiction in
which it is chartered or organized. The undersigned is duly qualified
and in good standing as a foreign corporation, partnership or other
entity in each jurisdiction in which the character or location of its
assets or properties (owned, leased or licensed) or the nature of its
business makes such qualification necessary, except for such
jurisdictions where the failure to so qualify would not have a material
adverse effect on the assets or properties, business, results of
operations or financial condition of the Company and its Subsidiaries
taken as a whole. The undersigned has all requisite corporate,
partnership or other power and authority, and all necessary
authorizations, approvals, consents, orders, licenses, certificates and
permits (collectively, PERMITS) of and from all governmental or
regulatory bodies or any other person or entity, to (i) own, lease and
license its assets and properties and conduct its businesses as now
being conducted and as proposed to be conducted, (ii) to enter into,
deliver and perform its obligations under this Joinder of Subsidiary
Guarantor and the Indenture to the extent it is, becomes or is deemed a
party thereto. The undersigned has fulfilled and performed in all
material respects all of its obligations with respect to such Permits,
and the undersigned is not in material violation of any term or
provision of any such Permits, nor has any event occurred which allows,
or after notice or lapse of time would allow, revocation or termination
thereof or which could result in any material impairment of the rights
of the undersigned. No such Permit contains a materially burdensome
restriction.

(ii) Neither the execution, delivery and performance
of its obligations under this Joinder of Subsidiary Guarantor, or the
Indenture to the extent the undersigned is, becomes or is deemed to be
a party thereto, by the undersigned nor the consummation of any of the
transactions contemplated hereby or thereby will give rise to a right
to terminate or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision of, or
constitute a default (or an event which with notice or lapse of time or
both would constitute a default) under, or require any consent or
waiver under, or result in the execution or imposition of any lien,
charge or encumbrance upon any properties or assets of the Company or
any Subsidiary pursuant to the terms of, any indenture, mortgage, deed
of trust or other material agreement or instrument to which the Company
or any Subsidiary is a party or by which it or any of its properties or
businesses is bound, or any franchise, license, Permit, judgment,
decree, order, statute, rule or regulation applicable to the
undersigned or violate any provision of the charter, by-laws,
partnership agreement or other organizational document of the
undersigned, except for such consents or waivers which have already
been obtained and are in full force and effect, or require any
authorization, consent, order, license, certificate or Permit of or
from any governmental or regulatory body under any Federal, state or
local law except for those which have been obtained.

EXHIBIT B
to Subsidiary Guarantor
2
<PAGE> 113

(iii) All necessary corporate, partnership or other
action has been duly and validly taken by the undersigned to
authorize the execution, delivery and performance of this Joinder of
Subsidiary Guarantor, the Indenture and each other relevant document to
which it is, will become or is or will be deemed a party in connection
with the Indenture.

(iv) This Joinder of Subsidiary Guarantor constitutes
the legal, valid and binding obligation of the undersigned, enforceable
against the undersigned in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles. Each of the Indenture does, and each of the other relevant
documents will, constitute the legal, valid and binding obligation of
the undersigned, enforceable against the undersigned in accordance with
their terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles.

Capitalized terms used herein have the same meanings given in
the Indenture unless otherwise indicated.

Subsidiary Guarantor:

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

By:
--------------------------------------
Name:
Title:

EXHIBIT B
Joinder of Subsidiary Guarantor
3

<PAGE> 1
EXHIBIT 5.1

November 13, 1996

Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339

Gentlemen:

On October 4, 1996, Mego Mortgage Corporation, a Delaware corporation
(the "Company"), filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (Registration No. 333-13421) (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). The Registration Statement relates to the sale by the Company of
$40,000,000 principal amount of Senior Subordinated Notes of the Company due
2001 (the "Notes"). We have acted as counsel to the Company in connection with
the preparation and filing of the Registration Statement.

In connection with the Registration Statement, we have examined,
considered and relied upon copies of the following documents (collectively, the
"Documents"): (i) the Company's Amended and Restated Certificate of
Incorporation and Bylaws; (ii) resolutions of the Company's Board of Directors
authorizing the offering and the issuance of the Notes to be sold by the Company
and related matters; (iii) the Registration Statement and all amendments and
exhibits thereto; and (iv) such other documents and instruments that we have
deemed necessary for the expression of the opinions herein contained. In making
the foregoing examinations, we have assumed without investigation the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to authentic original documents of all documents
submitted to us as copies, and the veracity of the Documents. As to various
questions of fact material to the opinion expressed below, we have relied, to
the extent we deemed reasonably appropriate, upon the representations or
certificates of officers and/or directors of the Company and upon documents,
records and instruments furnished to us by the Company, without independently
verifying the accuracy of such certificates, documents, records or instruments.

Based upon the foregoing examination, and subject to the qualifications
set forth below, we are of the opinion that the Notes have been duly and validly
authorized, and when issued and delivered in accordance with the terms of the
Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement, will

<PAGE> 2

Mego Mortgage Corporation
November 13, 1996

Page 2

be validly issued, fully paid and non-assessable, and binding obligations of
the Company.

Although we have acted as counsel to the Company in connection with the
preparation and filing of the Registration Statement, our engagement has been
limited to certain matters about which we have been consulted. Consequently,
there exist matters of a legal nature involving the Company in which we have not
been consulted and have not represented the Company. This opinion letter is
limited to the matters stated herein and no opinions may be implied or inferred
beyond the matters expressly stated herein. The opinions expressed herein are
given as of this date, and we assume no obligation to update or supplement our
opinions to reflect any facts or circumstances that may come to our attention or
any change in law that may occur or become effective at a later date.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption "Legal
Matters" in the prospectus comprising a part of the Registration Statement. In
giving such consent, we do not thereby admit that we are included within the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations promulgated thereunder.

Sincerely,

GREENBERG, TRAURIG, HOFFMAN,
LIPOFF, ROSEN & QUENTEL, P.A.

<PAGE> 1

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 2 to Registration Statement No.
333-13421 of Mego Mortgage Corporation on Form S-1 of our report dated October
28, 1996, appearing in the Prospectus, which is part of this Registration
Statement, and to the references to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.

DELOITTE & TOUCHE LLP

Las Vegas, Nevada
November 13, 1996

<PAGE> 1
EXHIBIT 25.1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM T-1

STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE

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

AMERICAN STOCK TRANSFER & TRUST COMPANY
(Exact name of trustee as specified in its charter)

New York 13-3439945
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)

40 Wall Street 10005
New York, New York (Zip Code)
(Address of trustee's
principal executive offices)

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

MEGO MORTGAGE CORPORATION

(Exact name of obligor 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 (Zip Code)
offices)

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

% Senior Subordinated Notes Due 2001

(Title of the Indenture Securities)

<PAGE> 2

-2-

GENERAL

1. General Information.

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervising
authority to which it is subject.

New York State Banking Department, Albany, New York

(b) Whether it is authorized to exercise corporate trust powers.

The Trustee is authorized to exercise corporate trust powers.

2. Affiliations with Obligor and Underwriters.

If the obligor or any underwriter for the obligor is an affiliate of
the trustee, describe each such affiliation.

None.

3. Voting Securities of the Trustee.

Furnish the following information as to each class of voting securities
of the trustee:

As of November 1, 1996

- --------------------------------------------------------------------------------
COL. A COL. B
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Common Shares - par value $600 per share. 1,000 shares

4. Trusteeships under Other Indentures.

None.

5. Interlocking Directorates and Similar Relationships with the
Obligor or Underwriters.

None.

<PAGE> 3

-3-

6. Voting Securities of the Trustee Owned by the Obligor or its
Officials.

None.

7. Voting Securities of the Trustee Owned by Underwriters or
their Officials.

None.

8. Securities of the Obligor Owned or Held by the Trustee.

None.

9. Securities of Underwriters Owned or Held by the Trustee.

None.

10. Ownership or Holdings by the Trustee of Voting Securities of
Certain Affiliates or Security Holders of the Obligor.

None.

11. Ownership or Holdings by the Trustee of any Securities of
a Person Owning 50 Percent or More of the Voting Securities
of the Obligor.

None.

12. Indebtedness of the Obligor to the Trustee.

None.

13. Defaults by the Obligor.

None.

14. Affiliations with the Underwriters.

None.

15. Foreign Trustee.

Not applicable.

<PAGE> 4

-4-

16. List of Exhibits.

T-1.1 - A copy of the Organization Certificate of American
Stock Transfer & Trust Company, as amended to date
including authority to commence business and
exercise trust powers was filed in connection with
the Registration Statement of Live Entertainment,
Inc., File No. 33-54654, and is incorporated herein
by reference.

T-1.4 - A copy of the By-Laws of American Stock Transfer
& Trust Company, as amended to date was filed in
connection with the Registration Statement of Live
Entertainment, Inc., File No. 33-54654, and is
incorporated herein by reference.

T-1.6 - The consent of the Trustee required by Section
312(b) of the Trust Indenture Act of 1939. -
Exhibit A.

T-1.7 - A copy of the latest report of condition of the
Trustee published pursuant to law or the
requirements of its supervising or examining
authority. - Exhibit B.

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

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
American Stock Transfer and Trust Company, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New York,
on the 4th day of November 1996 .

AMERICAN STOCK TRANSFER
AND TRUST COMPANY
Trustee

By: /s/
----------------------
Vice President

<PAGE> 5

EXHIBIT A

Securities and Exchange Commission
Washington, DC 20549

Gentlemen:

Pursuant to the provisions of Section 321 (b) of the Trust Indenture Act of
1939, and subject to the limitations therein contained, American Stock Transfer
& Trust Company hereby consents that reports of examinations of said corporation
by Federal, State, Territorial or District authorities may be furnished by such
authorities to you upon request therefor.

Very truly yours,

AMERICAN STOCK TRANSFER
& TRUST COMPANY

By /s/
------------------------
Vice President