MEGO MORTGAGE CORP, S-1/A, 1996-10-30

MEGO MORTGAGE CORP
S-1/A, 1996-10-30
MISCELLANEOUS BUSINESS CREDIT INSTITUTION

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996

REGISTRATION NO. 333-12443

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

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

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

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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. [ ]

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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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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 OCTOBER 30, 1996

2,000,000 SHARES
MEGO MORTGAGE CORPORATION [LOGO]

COMMON STOCK
------------------------
All of the 2,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Mego Mortgage Corporation (the "Company"). Mego Financial
Corp. ("Mego Financial") currently owns 100% of the outstanding Common Stock.
Upon completion of the Offering, Mego Financial will own approximately 83.3% of
the Company's outstanding Common Stock (approximately 81.3% if the Underwriters
exercise their over-allotment option in full). The sale of the Common Stock
offered hereby is contingent upon the completion of a concurrent offering by the
Company (the "Note Offering") of an aggregate of $40,000,000 of % Senior
Subordinated Notes due 2001.

Prior to the Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that any active trading market will
develop. It is currently anticipated that the initial public offering price will
be between $11.00 and $13.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.

Application has been made to list the Common Stock for quotation on The
Nasdaq National Market ("Nasdaq") under the symbol "MMGC."

SEE "RISK FACTORS" ON PAGES 8 THROUGH 18 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
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>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share........................... $ $ $
Total(3)............................ $ $ $
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</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.

(2) Before deducting expenses of the Offering estimated at $675,000 payable by
the Company.

(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 300,000 additional shares of
Common Stock for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the shares of Common Stock
will be made against payment on or about , 1996, at the office of
Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York,
New York 10281.
------------------------
OPPENHEIMER & CO., INC. FRIEDMAN, BILLINGS, RAMSEY & 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 COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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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 (i) assumes no exercise of the Underwriters'
over-allotment option to purchase from the Company up to an additional 300,000
shares of Common Stock and (ii) 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.

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terms. At August 31, 1996, the Company had developed a 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 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.

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
Offering, Mego Financial will own approximately 83.3% of the outstanding Common
Stock (approximately 81.3% if the Underwriters exercise their over-allotment
option in full). As a result of its ownership interest, upon completion of the
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 Note
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 and its direct and indirect subsidiaries
for tax sharing. See "Use of Proceeds" and "Certain Transactions."

THE OFFERING

Common Stock offered by the
Company............................. 2,000,000 shares

Common Stock to be outstanding after
the Offering........................ 12,000,000 shares(1)

Use of proceeds..................... The Company intends to use the
aggregate net proceeds of the Offering
and the Note 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."

Proposed Nasdaq symbol.............. MMGC
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(1) Does not include 925,000 shares of Common Stock reserved for issuance upon
exercise of stock options to be granted under the Company's 1996 Employee
Stock Option Plan (the "Stock Option Plan"). See "Management -- Company
Stock Option Plan."

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RISK FACTORS

Investment in the Common Stock 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 control by Mego Financial; risks relating to changes in interest rates; risks
relating 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 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 continued access to adequate
credit facilities; risks relating to the Note Offering; risks relating to the
Company's concentration of operations in California and Florida; legislative and
regulatory risks; risks relating to the Company's dependence on executive
officers, Mego Financial and PEC; risks associated with competition; the fact
that purchasers of the Common Stock in the Offering will experience substantial
dilution; restrictions on dividends; the absence of a public market for the
Common Stock; and factors inhibiting a takeover of the Company.

CONCURRENT OFFERING OF SUBORDINATED NOTES

Concurrent with the Offering, the Company is offering $40.0 million
aggregate principal amount of % Senior Subordinated Notes due 2001 (the
"Notes") by a separate prospectus. The consummation of the Offering and the Note
Offering are conditioned upon each other. Upon the consummation of the Note
Offering, the Company will be significantly leveraged. As of August 31, 1996,
after giving effect to the Note Offering and application of the net proceeds
therefrom as described in "Use of Proceeds," the Company would have had
outstanding indebtedness of approximately $40.9 million. The Company will be
required to make scheduled payments of principal and interest regardless of the
Company's cash flow from operations. The Company's ability to make payments of
principal and interest on the Notes depends on its future operating performance
and its ability to obtain financing in the future. See "Description of Note
Offering."

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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
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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 1.84x(12)
</TABLE>

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(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 shares of Common Stock
offered hereby (at an assumed initial public offering price of $12.00 per
share and after deducting underwriting discounts and estimated expenses of
the Offering), (ii) the sale of the Notes pursuant to the Note Offering
(after deducting underwriting discounts and estimated expenses of the Note
Offering) and (iii) the application of the estimated net proceeds from the
Offering and the Note 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 $40,000,000
of Notes at an assumed interest rate of 13%.

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RISK FACTORS

Investment in the Common Stock 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.

CONTROL BY MAJORITY STOCKHOLDER

Upon completion of the 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' over-allotment
option is exercised 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 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" and "Description of Capital Stock."

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 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

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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 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.

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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."

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 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

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<PAGE> 12

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."

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 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.

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

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<PAGE> 13

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, 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

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HUD aggregating $1.3 million. As of August 31, 1996, none of the Company's
Conventional Loans were 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.

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

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assurance that the Company will be able to continue to grow successfully. See
"Business -- Business Strategy."

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. The Company
also received a commitment from the same financial institution for the purchase
of $2.0 billion of loans over a five-year period, as well as a commitment 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 Note 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 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.

RISKS RELATED TO THE NOTE OFFERING

The ability of the Company to make payments of interest and principal on
the Notes will depend on the cash reserves and other liquid assets held by the
Company and any proceeds from any future financings. If the Company were unable
to make such payments, it would result in a default under the Indenture
governing the Notes (the "Indenture"), as well as a default under certain of the
Company's other agreements, which would have a material adverse effect on the
Company's financial condition. The Indenture also includes certain covenants
that, among other things, restrict: (i) the incurrence of indebtedness; (ii) the
creation of liens, other than certain permitted liens; (iii) consolidations,
mergers and the sale of assets; (iv) certain transactions with affiliates; (v)
the incurrence of indebtedness and issuance of preferred stock by subsidiaries;
(vi) the making of restricted payments (including restrictions on the payment of
dividends on the Common Stock); (vii) the

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imposition of certain distribution restrictions on subsidiaries; and (viii) the
making of guarantees by subsidiaries. If the Company does not comply with these
covenants, the holders of the Notes will be entitled, under certain
circumstances, to declare the Notes immediately due and payable, which would
have a material adverse effect on the Company's financial condition. In
addition, the Indenture provides that, upon certain events constituting a change
of control of the Company, the holders of the Notes would be entitled to require
the Company to repurchase up to all of the outstanding Notes, plus accrued and
unpaid interest, if any, to the date of repurchase. The Company's failure to
repurchase the Notes would result in a default under the Indenture, which would
have a material adverse effect on the Company's financial condition.

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

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<PAGE> 17

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 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.

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 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

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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 are
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 Note Offering to repay Intercompany Debt owed to Mego
Financial. See "Use of Proceeds."

DILUTION

Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net book value per share of Common Stock from the public
offering price per share of Common Stock. See "Dilution."

NO DIVIDENDS

The Company has not paid any cash dividends to date and does not intend to
pay cash dividends in the foreseeable future. In addition, certain agreements to
which the Company is a party, including the Indenture, restrict the Company's
ability to pay dividends on the Common Stock. The Company intends to retain
earnings to finance the development and expansion of its business. See "Dividend
Policy."

ABSENCE OF PUBLIC MARKET; POSSIBLE FLUCTUATIONS OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market for the Common
Stock will develop or that, if developed, it will be sustained after the
Offering or that it will be possible to resell the shares of Common Stock at or
above the initial public offering price. The market price of the Common Stock
could be subject to significant fluctuations in response to the Company's
operating results and other factors. In addition, the stock 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 Common Stock. See "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Underwriting."

17
<PAGE> 19

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have 12,000,000 shares
of Common Stock outstanding (12,300,000 shares if the over-allotment option
granted to the Underwriters is exercised in full). Of these shares, 2,000,000
shares (2,300,000 shares if the over-allotment option granted to the
Underwriters is exercised in full) will be freely tradeable without restriction
or registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless held by affiliates of the Company. All of the remaining 10,000,000
shares of Common Stock held by Mego Financial will be "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act. All of
such shares will become eligible for sale under Rule 144 commencing 90 days
after the consummation of the Offering. Mego Financial has agreed not to sell
any such shares of Common Stock for 180 days from the date of this Prospectus
without the prior written consent of Oppenheimer & Co., Inc. and Friedman,
Billings, Ramsey & Co., Inc. on behalf of the Underwriters. See "Underwriting."
Additionally, upon consummation of the Offering, 925,000 shares of Common Stock
will be reserved for issuance under the Company's Stock Option Plan. The Company
intends to register under the Securities Act all shares reserved for issuance
under its Stock Option Plan. Shares covered by such registration will be
eligible for resale in the public market, subject to Rule 144 limitations
applicable to affiliates. See "Management -- Company Stock Option Plan." Future
sales of substantial amounts of Common Stock in the public market, or the
availability of such shares for future sale, could impair the Company's ability
to raise capital through an offering of securities and may adversely affect the
then-prevailing market prices. See "Shares Eligible for Future Sale."

FACTORS INHIBITING TAKEOVER

As Mego Financial will continue to own in excess of 80% of the Common Stock
after the 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 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.

18
<PAGE> 20

USE OF PROCEEDS

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

The Company currently intends to use approximately $12.8 million of the
aggregate net proceeds received by the Company from the Offering and the Note
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.

DIVIDEND POLICY

The Company has not paid any cash dividends to date. The Company intends to
retain any future earnings for the operation and expansion of its business and
does not currently anticipate paying cash dividends on the Common Stock in the
foreseeable future. Any future determination as to the payment of such cash
dividends would depend upon a number of factors, including future earnings,
results of operations, capital requirements, the Company's financial condition
and any restrictions under credit agreements, including the Indenture, existing
from time to time, as well as such other factors as the Board of Directors might
deem relevant. No assurance can be given that the Company will pay any dividends
in the future.

19
<PAGE> 21

DILUTION

The net book value of the Company's Common Stock as of August 31, 1996 was
$17.7 million or approximately $1.77 per share. Net book value per share
represents the amount of the Company's stockholder's equity divided by
10,000,000 shares of Common Stock outstanding.

Net book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Offering
and the pro forma net book value per share of Common Stock immediately after
completion of the Offering. After giving effect to the sale by the Company of
2,000,000 shares of Common Stock in the Offering at an assumed initial public
offering price of $12.00 per share and the application of the estimated net
proceeds therefrom, the pro forma net book value of the Company as of August 31,
1996 would have been $39.3 million or $3.28 per share. This represents an
immediate increase in net book value of $1.51 per share to the existing
stockholder and an immediate dilution in net book value of $8.72 per share to
purchasers of Common Stock in the Offering, as illustrated in the following
table.

<TABLE>
<S> <C> <C>
Assumed public offering price per share.................................. $ 12.00
Net book value per share as of August 31, 1996......................... $ 1.77
Increase per share attributable to new investors....................... 1.51
Pro forma net book value per share after the Offering.................... 3.28
--------
Net book value dilution per share to new investors....................... $ 8.72
========
</TABLE>

The following table sets forth as of August 31, 1996 the difference between
the existing stockholder and the purchasers of shares in the Offering with
respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder.......... 10,000,000 83.3% $ 8,000,000 25.0% $ 0.80
New investors................. 2,000,000 16.7 24,000,000 75.0 12.00
---------- ----- --------- -----
Total............... 12,000,000 100.0% $32,000,000 100.0%
========== ===== ========= =====
</TABLE>

20
<PAGE> 22

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
2,000,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $12.00 per share (after deducting underwriting discounts and
estimated expenses of the Offering), (ii) the sale of the Notes pursuant to the
Note Offering (after deducting underwriting discounts and estimated expenses of
the Note Offering) and (iii) the application of the net proceeds from the
Offering and the Note 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 Note 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. See "Management -- Company Stock
Option Plan," "Underwriting" and "Description of Capital Stock."

21
<PAGE> 23

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>

22
<PAGE> 24

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>

23
<PAGE> 25

<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 1.84x(12)
</TABLE>

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

(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.

(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."

(12) Ratio computed giving pro forma effect for the total additional interest
expense resulting from the proposed issuance by the Company of $40,000,000
of Notes at an assumed interest rate of 13%.

24
<PAGE> 26

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

25
<PAGE> 27

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 of 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.

26
<PAGE> 28

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.

27
<PAGE> 29

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.

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<PAGE> 30

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.

29
<PAGE> 31

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.

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<PAGE> 32

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.

31
<PAGE> 33

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

32
<PAGE> 34

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. The Company also received a commitment from the same 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
agreement is also expected to provide (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 agreed to provide the Company a separate one-year facility of up to $11.0
million, less any amounts advanced under the

33
<PAGE> 35

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 Note Offering will be sufficient to satisfy its contemplated
cash requirements for at least twelve months following the consummation of the
Offering.

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

34
<PAGE> 36

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 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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<PAGE> 38

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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<PAGE> 39

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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<PAGE> 40

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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<PAGE> 41

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,

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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.

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.

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<PAGE> 44

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

43
<PAGE> 45

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
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

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<PAGE> 46

staff of post-disbursement review auditors which reviews 100% of recently funded
accounts, typically within two weeks of funding. All credit reports are
analyzed, debt-to-income ratios recalculated, contingencies monitored and loan
documents inspected. Exception reports are forwarded to the respective Vice
Presidents of Production as well as senior management. 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

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<PAGE> 47

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.

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> 48

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

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<PAGE> 49

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 balance sheet 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 other

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<PAGE> 50

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 balance sheet 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

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<PAGE> 51

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,

50
<PAGE> 52

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.

51
<PAGE> 53

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 and Chief Executive Officer
of the Company since April 1995. 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

52
<PAGE> 54

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. 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.

53
<PAGE> 55

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, the Commission has made certain inquiries and
indicated that it will conduct 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. 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. Mego
Financial has not yet received formal notice of any formal investigation by the
Commission. If such investigation is initiated, 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
any investigation or 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 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.

54
<PAGE> 56

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 $ -- $ 5,140 25,000 $ --
President and Chief 1995 200,003 -- 13,963 -- --
Operating Officer 1996 200,000 86,385 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 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 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.

55
<PAGE> 57

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.

The following table sets forth information with respect to options to be
granted under the Plan upon consummation of the Offering to (i) each Named
Officer and (ii) each director and nominee for director. All of the options are
nonstatutory, are being granted with an exercise price equal to the offering
price, are subject to the consummation of the 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 Offering, Mego Financial will own
approximately 83.3% of the issued and outstanding Common Stock of the Company
(approximately 81.3% if the Underwriters' over-allotment option is exercised in
full).

56
<PAGE> 58

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 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(2)
-------------------
AMOUNT AND NATURE OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OFFERING OFFERING
- ----------------------------------------------------------- -------------------- -------- --------
<S> <C> <C> <C>
Robert Nederlander(3)...................................... 2,133,697 11.4% 9.5%
Eugene I. Schuster and Growth Realty Inc. ("GRI")(4)....... 1,933,634 10.3 8.6
Jerome J. Cohen(5)......................................... 1,127,823 6.0 5.4
Jeffrey S. Moore(6)........................................ 15,000 * *
James L. Belter(7)......................................... 9,000 * *
Michael G. Ebinger(8)...................................... 3,000 * *
Herbert B. Hirsch(9)....................................... 1,699,623 9.1 7.6
Don A. Mayerson(10)........................................ 824,414 4.4 3.7
Spencer I. Browne(11)...................................... -- -- --
Jeremy Wiesen(12).......................................... -- -- --
All executive officers and directors of the Company as a
group (9 persons)(13).................................... 5,812,557 30.1 25.1
</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) Percentages are calculated assuming the issuance of 343,347 shares of
common stock for which a definitive agreement to redeem previously
outstanding preferred stock has been signed but the stock certificates
relating to which have not yet been issued.

(3) 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.

(4) 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.

(5) 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.

(6) 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.

57
<PAGE> 59

(7) 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.

(8) 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.

(9) 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 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.

(10) 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.

(11) 1660 Holly Street, Denver, Colorado 80220.

(12) 254 East 68th Street, New York, New York 10021.

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

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, Mego Financial and the other members
of the tax reporting group will enter into a tax allocation and indemnity
agreement. Under that agreement, for periods ending after the Offering, the tax
liabilities of each entity in the group will be allocated pursuant to a method
that would impose on the Company liability for an amount that corresponds (with
various modifications) to the liability that the Company would incur if it filed
a separate tax return. In addition, the agreement provides that the Company and
the other members of the group each will indemnify the other under certain
circumstances.

MANAGEMENT AGREEMENT WITH PEC

The Company and PEC are 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 provides 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.

58
<PAGE> 60

The Company anticipates that prior to consummation of the Offering it will
enter into a formal management agreement with PEC pursuant to which PEC will
agree 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.

SERVICING AGREEMENT WITH PEC

The Company has an arrangement with PEC pursuant to which it pays 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 anticipates
that prior to consummation of the Offering it will enter into a servicing
agreement with PEC 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.

DESCRIPTION OF NOTE OFFERING

Concurrently with the Offering, the Company is offering the Notes by a
separate prospectus pursuant to the Note Offering. The following summary of the
principal terms of the Notes does not purport to be complete and is qualified in
its entirety by reference to all of the provisions of the Indenture governing
the Notes and the Notes, copies of which will be filed as exhibits to the
Registration Statement governing the Notes. Capitalized terms not otherwise
defined herein have the meanings specified in the Indenture.

The Notes will be limited in aggregate principal amount to $40.0 million
and will mature on , 2001. The Notes will be general unsecured
obligations of the Company, subordinated in right of payment to all Senior
Indebtedness of the Company. Interest on the Notes will accrue at a rate of
% per year and will be payable in cash semi-annually on and
of each year, commencing , 1997.

Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Notes will have the right to require that the Company repurchase
all or a portion of such holder's Notes at a purchase price in cash equal to %
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase.

The Indenture governing the Notes will contain certain covenants, including
limitations on the incurrence of indebtedness, the incurrence of indebtedness
and issuance of preferred stock by subsidiaries, the making of restricted
payments (including restrictions on the payment of dividends on the Common
Stock), the imposition of certain distribution restrictions on subsidiaries,
transactions with affiliates, the existence of liens, the making of guarantees
by subsidiaries, mergers and sales of assets.

The Offering is conditioned upon the consummation of the Note Offering.

59
<PAGE> 61

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, par value
$.01 per share. No shares of Preferred Stock have been issued to date. The
following brief description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable law and the provisions
of the Company's Certificate of Incorporation and Bylaws, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock.

Upon completion of the Offering, the Company's existing sole stockholder
will beneficially own approximately 83.3% of the outstanding shares of Common
Stock (approximately 81.3% if the Underwriters' over-allotment option is
exercised in full) and will therefore be able to elect the entire Board of
Directors and control all matters submitted to stockholders for a vote.

During the Eighty Percent Period, no additional shares of Common Stock may
be issued that would reduce Mego Financial's ownership interest in the Common
Stock below 80% of the issued and outstanding shares of Common Stock without
Mego Financial's written approval, and no shares of any other class of capital
stock may be issued without Mego Financial's written approval. The shares of
Common Stock offered hereby will be, when issued and paid for, fully paid and
non-assessable.

PREFERRED STOCK

Although the Company has no present plans to issue shares of Preferred
Stock, Preferred Stock may be issued from time to time in one or more classes or
series with such designations, powers, preferences, rights, qualifications,
limitations and restrictions as may be fixed by the Company's Board of
Directors. The Board of Directors, without obtaining stockholder approval other
than written approval from Mego Financial during the Eighty Percent Period,
could issue the Preferred Stock with voting and/or conversion rights and thereby
dilute the voting power and equity of the holders of Common Stock and adversely
effect the market price of such stock. The issuance of Preferred Stock could
also be used as an antitakeover measure by the Company without any further
action by the stockholders.

PAYMENT OF DIVIDENDS

The Company has never paid any cash dividends on its capital stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. In
addition, certain agreements to which the Company is a party, including the
Indenture, restrict the Company's ability to pay dividends on the Common Stock.

CERTAIN PROVISIONS OF DELAWARE LAW

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination"

60
<PAGE> 62

(as defined in Section 203) with the Company for three years following the date
that person became an interested stockholder unless: (i) before that person
became an interested stockholder, the Board approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination; (ii) upon completion of the transaction that resulted in
the interested stockholders becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the Company outstanding at
the time the transaction commenced (excluding stock held by directors who are
also officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) on or
following the date on which that person became an interested stockholder, the
business combination is approved by the Company's Board and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
66 2/3% of the outstanding voting stock of the Company not owned by the
interested stockholder.

Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.

Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing a
change of control of the Company. Other than pursuant to the Offering, the
Company has no plan or arrangement for the issuance of any shares of capital
stock other than in the ordinary course pursuant to the Stock Option Plan.

CERTAIN CHARTER AND BYLAW PROVISIONS

The Company's Certificate of Incorporation contains certain provisions that
could discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. The Company's 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 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 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 Certificate of Incorporation and Bylaws
provide (i) that special meetings of 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.

The Certificate of Incorporation permits the Board of Directors to create
new directorships and the Company's Bylaws permit the Board of Directors to
elect new directors to serve the full term of the class of directors in which
the new directorship was created. The Bylaws also provide that the Board of
Directors (or its remaining members, even though less than a quorum) is
empowered to fill vacancies on the Board of Directors occurring for any reason
for the remainder of the terms of the class of directors in which the vacancy
occurred.

TRANSFER AGENT

The transfer agent and registrar for the Common Stock will be American
Stock Transfer & Trust Company.

61
<PAGE> 63

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have 12,000,000 shares
of Common Stock outstanding (12,300,000 shares if the Underwriters'
over-allotment option is exercised in full). Of those shares, the 2,000,000
shares sold in the Offering (2,300,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely transferable without
restriction or registration under the Act, unless purchased by persons deemed to
be "affiliates" of the Company (as that term is defined under the Act). The
remaining 10,000,000 shares of Common Stock to be outstanding immediately
following the Offering ("restricted shares") may only be sold in the public
market if such shares are registered under the Act or sold in accordance with
Rule 144 promulgated under the Act.

In general, under Rule 144 a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned his shares for
two years, may sell in the open market within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 120,000 shares immediately after
the Offering, 123,000 shares if the over-allotment option is exercised in full)
or (ii) the average weekly trading volume in the Common Stock in the
over-the-counter market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain limitations on the manner of
sale, notice requirements and availability of current public information about
the Company. A person (or persons whose shares are aggregated) who is deemed not
to have been an "affiliate" of the Company at any time during the 90 days
preceding a sale by such person and who has beneficially owned his shares for at
least three years, may sell such shares in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, notice
requirements or availability of current information referred to above.
Restricted shares properly sold in reliance upon Rule 144 are thereafter freely
tradeable without restrictions or registration under the Act, unless thereafter
held by an "affiliate" of the Company.

The Company has reserved an aggregate of 925,000 shares of Common Stock for
issuance pursuant to the Stock Option Plan and the Company intends to register
such shares on Form S-8 following the Offering. Subject to restrictions imposed
pursuant to the Stock Option Plan, shares of Common Stock issued pursuant to the
Stock Option Plan after the effective date of any Registration Statement on Form
S-8 will be available for sale in the public market without restriction to the
extent they are held by persons who are not affiliates of the Company, and by
affiliates pursuant to Rule 144. See "Management -- Stock Option Plan."

Prior to the Offering, there has been no trading market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to Rule 144 or otherwise will have on the market price
prevailing from time to time. Sales of substantial amounts of the Common Stock
in the public market following the Offering could adversely affect the then
prevailing market price. All of the 10,000,000 shares of Common Stock held by
Mego Financial will be eligible for sale under Rule 144 commencing 90 days after
consummation of the Offering. Mego Financial has agreed that it will not sell or
otherwise transfer any shares of Common Stock to the public for 180 days after
the Offering without the prior written consent of Oppenheimer & Co., Inc. and
Friedman, Billings, Ramsey & Co., Inc., on behalf of the Underwriters. See
"Underwriting."

62
<PAGE> 64

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company and the underwriters named below (the "Underwriters"), for
whom Oppenheimer & Co., Inc. ("Oppenheimer") and Friedman, Billings, Ramsey &
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 numbers of shares of
Common Stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Oppenheimer & Co., Inc. ..................................................
Friedman, Billings, Ramsey & Co., Inc. ...................................

---------
Total........................................................... 2,000,000
=========
</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 and pay for all of the above shares of Common Stock if any are
purchased.

The Underwriters have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock 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
$ per share of Common Stock. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share of
Common Stock on sales to certain other dealers. After the initial public
offering, 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
Common Stock. Although the Company has applied for quotation of the Common Stock
on Nasdaq, there can be no assurance that any active trading market will develop
for the Common Stock or, if developed, will be maintained. The initial public
offering price will be determined through negotiations among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price will include the history of and the prospects for the industry in
which the Company competes, the ability of the Company's management, the past
and present operations of the Company, the historical results of operations of
the Company, the prospects for future earnings of the Company, the general
condition of the securities markets at the time of the Offering and the recent
market prices of securities of generally comparable companies.

The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to an aggregate of 300,000 additional shares of Common Stock at the
public offering price less the underwriting discount. If the Underwriters
exercise such over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof as the number of shares of Common Stock offered hereby. The Underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the shares of Common Stock offered hereby.

The Company and Mego Financial have agreed that they will not, without the
prior written consent of the Representatives, directly or indirectly, offer,
sell, grant any option to purchase or otherwise dispose (or announce the offer,
sale, grant of any option to purchase or other disposition) of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for shares of Common Stock for a period of 180 days after the date of this
Prospectus.

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

63
<PAGE> 65

The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments that the Underwriters may be required to make in respect
thereof.

Oppenheimer 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 has received and will receive customary fees
and commissions.

LEGAL MATTERS

The legality of the shares of Common Stock 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.

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 Common Stock 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 Common
Stock 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, 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.

64
<PAGE> 66

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> 67

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> 68

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> 69

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> 70

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............................................ 116 161 504
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) (15,454) (22,199)
-------- -------- --------
Net cash used in operating activities................................... (4,402) (11,812) (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 (42) (309)
CASH -- BEGINNING OF YEAR........................................................ 352 824 752
-------- -------- --------
CASH -- END OF YEAR.............................................................. $ 824 $ 782 $ 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> 71

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> 72

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> 73

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> 74

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> 75

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> 76

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> 77

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> 78

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 $88,565,000
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> 79

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> 80

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> 81

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, $88,565,000 and
$81,458,000, yielding weighted average interest rates of 12.9%, 13.3% 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> 82

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> 83

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> 84

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> 85

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> 86

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> 87

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY ANY OF THE SECURITIES OFFERED HEREBY IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 8
Use of Proceeds........................... 19
Dividend Policy........................... 19
Dilution.................................. 20
Capitalization............................ 21
Pro Forma Selected Financial Data......... 22
Selected Financial Data................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 25
Business.................................. 36
Management................................ 52
Principal Stockholders.................... 56
Certain Transactions...................... 58
Description of Note Offering.............. 59
Description of Capital Stock.............. 60
Shares Eligible for Future Sale........... 62
Underwriting.............................. 63
Legal Matters............................. 64
Experts................................... 64
Additional Information.................... 64
Index to Financial Statements............. F-1
</TABLE>

---------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,000,000 SHARES

MEGO MORTGAGE CORPORATION

COMMON STOCK
MEGO (LOGO)
------------------------
PROSPECTUS
------------------------

OPPENHEIMER & CO., INC.

FRIEDMAN, BILLINGS,

RAMSEY & CO., INC.
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 88

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....................... $ 11,104
NASD filing fee........................................................... 3,720
Nasdaq National Market listing fee........................................ 47,500
Printing expenses......................................................... 100,000
Accounting fees and expenses.............................................. 280,000
Legal fees and expenses................................................... 175,000
Fees and expenses (including legal fees) for qualifications under state
securities laws......................................................... 5,000
Transfer agent's fees and expenses........................................ 15,000
Miscellaneous............................................................. 37,676
--------
Total........................................................... $675,000
========
</TABLE>

All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq listing 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> 89

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> 90

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 -- Amended and Restated Certificate of Incorporation of the Registrant.
3.2 -- By-laws of the Registrant, as amended.
4.1* -- Specimen Common Stock Certificate.
5.1* -- Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A.
10.1* -- 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* -- Tax Sharing Agreement among the Registrant, Mego Financial Corp., Preferred
Equities Corporation and the subsidiaries of Preferred Equities Corporation.
10.10* -- Servicing Agreement between the Registrant and Preferred Equities Corporation.
10.11** -- 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** -- Loan Purchase Agreement between Financial Asset Securities Corp., as Purchaser,
and the Registrant, as Seller, dated as of March 21, 1996.
10.13(3) -- 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> 91

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <C> <S>
10.14** -- 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(3) -- 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(3) -- Credit Agreement dated as of June 28, 1996 between the Registrant and First
National Bank of Boston as Agent.
10.17** -- Loan Purchase Agreement dated as of August 1, 1996 between Financial Asset
Securities Corp., as Purchaser, and the Registrant, as Seller.
10.18** -- Pooling and Servicing Agreement dated as of August 1, 1996 between Financial Asset
Securities Corp., as Purchaser, and the Registrant, as Seller.
10.19(3) -- 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* -- Office Lease by and between MassMutual and the Registrant dated April 1996.
10.21(3) -- Amendment to Master Loan Purchase and Servicing Agreement between Greenwich
Capital Financial Products, Inc. and the Registrant dated February 1, 1996.
10.22(3) -- 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* -- Management Agreement between Mego Financial Corp. and the Registrant dated October
1996.
10.24(3) -- Employment Agreement between the Registrant and Jeffrey S. Moore dated January 1,
1994.
10.25* -- Form of Indenture to be entered into between the Registrant and the Indenture
Trustee.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1** -- Subsidiaries of the Registrant.
23.1* -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (to be
included in its opinion to be filed as Exhibit 5.1*).
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Director Nominees.
24.1** -- Power of Attorney.
27.1 -- Financial Data Schedule
</TABLE>

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

* To be filed by amendment.

** 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
(File No. 333-13421) and incorporated herein by reference.

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,

II-4
<PAGE> 92

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> 93

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 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 October 29, 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. 1 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 October 29, 1996
- --------------------------------------------- Chief Executive Officer
Jerome J. Cohen

/s/ JEFFREY S. MOORE* President, Chief Operating October 29, 1996
- --------------------------------------------- Officer and Director
Jeffrey S. Moore

/s/ JAMES L. BELTER* Executive Vice President October 29, 1996
- --------------------------------------------- and Chief Financial
James L. Belter Officer

/s/ ROBERT NEDERLANDER* Director October 29, 1996
- ---------------------------------------------
Robert Nederlander

/s/ HERBERT B. HIRSCH* Director October 29, 1996
- ---------------------------------------------
Herbert B. Hirsch

/s/ DON A. MAYERSON Director October 29, 1996
- ---------------------------------------------
Don A. Mayerson

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

II-6

<PAGE> 1

EXHIBIT 3.1

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEGO MORTGAGE CORPORATION

Mego Mortgage Corporation, a corporation existing under the laws of
the State of Delaware (the "Corporation"), does hereby certify as follows:

1. The name of the Corporation is Mego Mortgage Corporation.

2. The Corporation's Certificate of Incorporation was filed with
the Secretary of State for the State of Delaware on June 12,
1992.

3. The Corporation's Amended and Restated Certificate of
Incorporation was duly adopted in accordance with the
provisions of Sections 242 and 245 of the General Corporation
Law of the State of Delaware by a resolution of the Board of
Directors of the Corporation and by a written consent of the
sole stockholder of the Corporation, there being only one
class of stock of the Corporation outstanding.

4. The Corporation's Certificate of Incorporation is hereby
amended and restated to read as follows:
<PAGE> 2

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEGO MORTGAGE CORPORATION

ARTICLE I

The name of the corporation is MEGO MORTGAGE CORPORATION (hereinafter
called the "Corporation").

ARTICLE II

The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle and
the name of its registered agent at such address is The Corporation Trust
Company.

ARTICLE III

The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware.

ARTICLE IV

The aggregate number of shares of all classes of capital stock which
this Corporation shall have authority to issue is Fifty-Five Million
(55,000,000), consisting of (i) Fifty Million (50,000,000) shares of common
stock, par value $0.01 per share (the "Common Stock"), and (ii) Five Million
(5,000,000) shares of preferred stock, par value $0.01 per share (the Preferred
Stock").

The designations and the preferences, limitations and relative rights
of the Preferred Stock and the Common Stock of the Corporation are as follows:

A. Provisions Relating to the Preferred Stock.

1. Except as set forth in subsection D of this Article
IV, the Preferred Stock may be issued from time to time in one or more classes
or series, the shares of each class or series to have such designations and
powers, preferences and rights, and qualifications, limitations and
restrictions thereof as are stated and expressed herein and in the resolution
or resolutions providing for the issue of such class or series adopted by the
Board of Directors as hereinafter prescribed.

<PAGE> 3

2. Except as set forth in subsection D of this Article
IV, authority is hereby expressly granted to and vested in the Board of
Directors to authorize the issuance of the Preferred Stock from time to time in
one or more classes or series, to determine and take necessary proceedings
fully to effect the issuance and redemption of any such Preferred Stock and,
with respect to each class or series of the Preferred Stock, to fix and state
by resolution or resolutions from time to time adopted providing for the
issuance thereof the following:

a. whether or not the class or series is to have
voting rights, full or limited, or is to be without voting rights;

b. the number of shares to constitute the class
or series and the designations thereof;

c. the preferences and relative, participating,
optional or other special rights, if any, and the qualifications, limitations
or restrictions thereof, if any, with respect to any class or series;

d. whether or not the shares of any class or
series shall be redeemable and if redeemable the redemption price or prices,
and the time or times at which and the terms and conditions upon which, such
shares shall be redeemable and the manner of redemption;

e. whether or not the shares of a class or
series shall be subject to the operation of retirement or sinking funds to be
applied to the purchase or redemption of such shares for retirement, and if
such retirement or sinking fund or funds be established, the annual amount
thereof and the terms and provisions relative to the operation thereof;

f. the dividend rate, whether dividends are
payable in cash, stock of the Corporation, or other property, the conditions
upon which and the times when such dividends are payable, the preference to or
the relation to the payment of the dividends payable on any other class or
classes or series of stock whether or not such dividend shall be cumulative or
noncumulative, and if cumulative, the date or dates from which such dividends
shall accumulate;

g. the preferences, if any, and the amounts
thereof which the holders of any class or series thereof shall be entitled to
receive upon the voluntary or involuntary dissolution of, or upon any
distribution of the assets of, the Corporation;

h. whether or not the shares of any class or
series shall be convertible into, or exchangeable for, the shares of any other
class or classes or of any other series of the same or any other class or
classes of stock of the Corporation and the conversion price or prices or ratio
or ratios or the rate or rates at which such conversion or exchange may be
made, with such adjustments, if any, as shall be stated and expressed or
provided for in such resolution or resolutions; and

2
<PAGE> 4

i. such other special rights and protective
provisions with respect to any class or series as the Board of Directors may
deem advisable.

The shares of each class or series of the Preferred Stock may vary
from the shares of any other series thereof in any or all of the foregoing
respects. The Board of Directors may increase the number of shares of the
Preferred Stock designated for any existing class or series by a resolution
adding to such class or series authorized and unissued shares of the Preferred
Stock not designated for any other class or series. The Board of Directors may
decrease the number of shares of the Preferred Stock designated for any
existing class or series by a resolution, subtracting from such series unissued
shares of the Preferred Stock designated for such class or series, and the
shares so subtracted shall become authorized, unissued and undesignated shares
of the Preferred Stock.

B. Provisions Relating to the Common Stock.

1. Except as otherwise required by law or as may be
provided by resolutions of the Board of Directors authorizing the issuance of
any class or series of Preferred Stock, as herein above provided, all rights to
vote and all voting power shall be vested exclusively in the holders of the
Common Stock.

2. Subject to the rights of the holders of the Preferred
Stock (if any), the holders of the Common Stock shall be entitled to receive
when, as and if declared by the Board of Directors, out of funds legally
available therefor, dividends payable in cash, stock or otherwise.

3. Upon any liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, and after the holders of the
Preferred Stock shall have been paid-in-full the amounts to which they shall be
entitled (if any) or a sum sufficient for such payment in full shall have been
set aside, the remaining net assets of the Corporation shall be distributed pro
rata to the holders of the Common Stock in accordance with their respective
rights and interests to the exclusion of the holders of the Preferred Stock.

C. General Provisions.

1. Except as may be provided by resolutions of the Board
of Directors authorizing the issuance of any class or series of Preferred Stock
as hereinabove provided, cumulative voting by any stockholder is hereby
expressly denied.

2. No stockholder of the Corporation shall have, by
reason of its holding shares of any class or series of stock of the
Corporation, any preemptive or preferential rights to purchase or subscribe for
any other shares of any class or series of the Corporation now or hereafter to
be authorized, and any other equity securities, or any notes, debentures,
warrants, bonds, or other securities convertible into or carrying options or
warrants to purchase shares of any class, now or hereafter to be authorized,
whether or not the issuance of any such shares, or

3
<PAGE> 5

such notes, debentures, bonds or other securities, would adversely affect the
dividend or voting rights of such stockholder.

D. Prohibitions Against Future Issuances and Investments.

Notwithstanding any other provision of this Certificate of
Incorporation, during the period (the "Eighty Percent Period") that and so long
as Mego Financial Corp., a New York corporation and presently the sole
stockholder of the Corporation, holds shares having at least 80% of the total
combined voting power of all classes of stock entitled to vote for directors of
the Corporation and constituting at least 80% of the total number of shares of
each other class of stock of the Corporation, all as defined in Section 368(c)
of the Code (all such stock in the aggregate constituting "Eighty Percent
Control" and Mego Financial Corp. being hereinafter referred to as the "Eighty
Percent Holder"), and although a vote of stockholders is not and shall not be
required under applicable law or this Certificate of Incorporation for the
issuance of shares of capital stock or equity securities or any debt or other
instrument that is convertible or exchangeable into stock or any other equity
security of the Corporation or any subsidiary, including options or any other
rights to purchase capital stock, pursuant to any employee benefit plan or
stock option plan (collectively, "Plan") or otherwise, that are authorized
under this Certificate of Incorporation, but unissued, or, to acquire an
ownership interest in certain assets, the advance written approval of the
Eighty Percent Holder shall be required (unless waived in writing by the Eighty
Percent Holder) prior to:

(i) the Corporation taking any action, including without
limitation, the issuance of any capital stock or other equity security or any
debt or other instrument that is convertible or exchangeable into stock or any
other equity security of the Corporation, including options, warrants or any
other rights to purchase capital stock, pursuant to any Plan or otherwise, that
would reduce the percentage of ownership of the Eighty Percent Holder in the
capital stock of the Corporation so that the Eighty Percent Holder thereafter
would not own stock constituting Eighty Percent Control (treating options,
warrants or any other rights to purchase capital stock as exercised immediately
upon issuance for purposes of making this determination) or that otherwise
would reduce (or, with the taking of any action contemplated by the instrument
in question, could reduce) the Eighty Percent Holder's ownership of Corporation
stock below "control" of the Corporation within the meaning of Section 368(c)
of the Code;

(ii) the Corporation acquiring or taking any action to cause
any subsidiary to acquire any direct or indirect ownership interest in any
asset that does not constitute part of an active trade or business within the
meaning of Section 355(b) of the Code, provided, however, that the Corporation
or any subsidiary may acquire any asset that is similar in nature to the assets
it holds on October 28, 1996, so long as that acquisition would not cause the
Corporation or any subsidiary not to be engaged in an active trade or business
within the meaning of Section 355(b) of the Code; or

(iii) the Corporation taking any action to cause the issuance
of any capital stock or equity security, any debt or other instrument that is
convertible or exchangeable into stock or

4
<PAGE> 6

any other equity security by or of any subsidiary or any right to purchase the
same in the Corporation or any subsidiary, and the Corporation shall not take
any such action above without the prior written approval of the Eighty Percent
Holder.

Any attempt to take any such actions without the prior written approval of the
Eighty Percent Holder during the Eighty Percent Period shall be null and void
and any purported issuance of any capital stock or equity security or any
convertible or exchangeable debt or other instrument or any right to purchase
the same in the Corporation or any subsidiary or any acquisition in violation
of this provision shall not terminate the Eighty Percent Period.

E. Share Reclassification

On the date of filing of this Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, the 6,250
issued and outstanding shares of the Corporation's previously authorized common
stock, no par value (the "Old Common Stock"), shall thereby and thereupon be
classified and converted into 10,000,000 validly issued, fully paid and
nonassessable shares of Common Stock reflecting a conversion ratio of 1,600
shares of Common Stock for each share of Old Common Stock. Each certificate
that heretofore represented shares of Old Common Stock shall thereafter
represent the number of whole shares of Common Stock into which the shares of
Old Common Stock represented by such certificate were reclassified and
converted; provided, however, that each person holding of record a stock
certificate or certificates that represented shares of Old Common Stock shall
receive, upon surrender of each such certificate or certificates, a new
certificate or certificates evidencing and representing the number of shares of
Common Stock to which such person is entitled.

ARTICLE V

Call of Special Stockholders Meeting. Except as otherwise required by
law, the Corporation shall not be required to hold a special meeting of
stockholders of the Corporation unless (in addition to any other requirements
of law) (i) the holders of not less than 30% of all the votes entitled to be
cast on any issue proposed to be considered at the proposed special meeting
sign, date and deliver to the Corporation's secretary one or more written
demands for the meeting describing the purpose or purposes for which it is to
be held or (ii) the meeting is called by the Board pursuant to a resolution
approved by a majority of the entire Board. Only business within the purpose
or purposes described in the special meeting notice required by Section 222 of
the Delaware General Corporation Law may be conducted at a special meeting of
stockholders.

5
<PAGE> 7

ARTICLE VI

The Board of Directors of the Corporation shall consist of at least
one director, with the exact number to be fixed from time to time by the
affirmative vote of a majority of directors in office, subject to the advance
written approval of the Eighty Percent Holder during the Eighty Percent Period
(unless such requirement is waived in writing by the Eighty Percent Holder and
although a vote of stockholders is not required under applicable law or this
Certificate of Incorporation to fix the number of directors), or the
affirmative vote of holders of a majority of the shares entitled to vote on the
matter. During the Eighty Percent Period, the Corporation shall not take any
action to alter the composition of the board of directors of any subsidiary or
to remove or replace any director then serving on the board of directors of any
subsidiary without the advance written approval of the Eighty Percent Holder
(unless such requirement is waived in writing by the Eighty Percent Holder).

ARTICLE VII

Whenever any vacancy on the Board shall occur due to death,
resignation, retirement, disqualification, removal, increase in the number of
directors, or otherwise, a majority of directors in office, although less than
a quorum of the entire Board, subject to the advance written approval of the
Eighty Percent Holder during the Eighty Percent Period (unless such requirement
is waived in writing by the Eighty Percent Holder and although a vote of
stockholders is not required under applicable law or this Certificate of
Incorporation to fill vacancies in the Board), or holders of a majority of the
shares entitled to vote on the matter may fill the vacancy or vacancies for the
balance of the unexpired term or terms, at which time a successor or successors
shall be duly elected by the stockholders and qualified.

ARTICLE VIII

Unless otherwise provided by law, the Bylaws of the Corporation may be
altered, amended or repealed, in whole or in part, or new Bylaws may be
adopted, by the affirmative vote of a majority of the directors in office,
subject to the advance written approval of the Eighty Percent Holder during the
Eighty Percent Period (unless such requirement is waived in writing by the
Eighty Percent Holder and although a vote of stockholders is not required under
applicable law or this Certificate of Incorporation to alter, amend or repeal,
in whole or in part, the Bylaws, or to adopt new Bylaws), or the affirmative
vote of holders of a majority of the shares entitled to vote on the matter.

ARTICLE IX

This Corporation shall indemnify and hold harmless any director or
officer of the Corporation from and against any and all expenses and
liabilities that may be imposed upon or incurred by him, and shall advance
expenses on behalf of any officer or director, in connection with, or as a
result of, any claim or proceeding in which he may become involved, as a party
or

6
<PAGE> 8

otherwise, by reason of the fact that he is or was such a director or officer
of the Corporation and relating to acts or omissions to act as such, whether or
not he continues to be such at the time the expenses and liabilities shall have
been incurred, to the fullest extent not prohibited by any law in existence
either now or hereafter.

ARTICLE X

No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. It is the intent that this provision be interpreted to provide the
maximum protection against liability afforded to directors under the Delaware
General Corporation Law in existence either now or hereafter. If the Delaware
General Corporation Law is amended hereafter to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended. Any amendment, repeal or modification of this Article X shall not
adversely affect any right or protection of a director of the Corporation
existing hereunder with respect to any act or omission occurring prior to such
amendment, repeal or modification.

ARTICLE XI

Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of Section 279 of Title 8 of
the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.

7
<PAGE> 9

IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be executed by an officer of the
Corporation this 28th day of October, 1996.

MEGO MORTGAGE CORPORATION

By: /s/ Jerome J. Cohen
----------------------------------
Name: Jerome J. Cohen
Title: Chairman of the Board

<PAGE> 1

EXHIBIT 3.2

AMENDED AND RESTATED

BY LAWS

MEGO MORTGAGE CORPORATION

(A DELAWARE CORPORATION)

<PAGE> 2

INDEX

<TABLE>
<S> <C>
ARTICLE ONE - OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Registered Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE TWO - MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Time of Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Call of Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
4. Conduct of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
5. Notice and Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
6. Business and Nominations for Annual and Special Meetings . . . . . . . . . . . . . . . . . . . . . 2
7. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
8. Voting Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
9. Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
10. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
11. Stockholder List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
12. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
13. Fixing Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
14. Inspectors and Judges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
15. Voting for Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE THREE - DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1. Number; Election and Term; Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. Special Meetings and Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
8. Quorum; Required Vote; Presumption of Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10. Conference Telephone or Similar Communications Equipment
Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
12. Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
13. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE FOUR - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1. Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2. Election of Specified Officers by Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3. Election or Appointment of Other Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4. Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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5. Term; Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
8. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10. Other Officers; Employees and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ARTICLE FIVE - CERTIFICATES FOR SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1. Issue of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Legends for Preferences and Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . 10
3. Facsimile Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE SIX - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2. Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ARTICLE SEVEN - AMENDMENT OF BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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MEGO MORTGAGE CORPORATION

AMENDED AND RESTATED BYLAWS

ARTICLE ONE

OFFICES

Section 1. Registered Office. The registered office of MEGO
MORTGAGE CORPORATION, a Delaware corporation (the "Corporation"), shall be
located in the City of Wilmington, State of Delaware, unless otherwise
designated by the Board of Directors.

Section 2. Other Offices. The Corporation may also have offices
at such other places, either within or without the State of Delaware, as the
Board of Directors of the Corporation (the "Board of Directors") may from time
to time determine or as the business of the Corporation may require.

ARTICLE TWO

MEETINGS OF STOCKHOLDERS

Section 1. Place. All annual meetings of stockholders shall be
held at such place, within or without the State of Delaware, as may be
designated by the Board of Directors and stated in the notice of the meeting or
in a duly executed waiver of notice thereof. Special meetings of stockholders
may be held at such place, within or without the State of Delaware, and at such
time as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.

Section 2. Time of Annual Meeting. Annual meetings of
stockholders shall be held on such date and at such time fixed, from time to
time, by the Board of Directors, provided that there shall be an annual meeting
held every year at which the stockholders shall elect a Board of Directors (or
the appropriate class of the Board of Directors if the Board of Directors is
divided into two or more classes) and transact such other business as may
properly be brought before the meeting.

Section 3. Call of Special Meetings. Special meetings of the
stockholders shall be held if called in accordance with the procedures set
forth in the Corporation's Certificate of Incorporation (the "Certificate of
Incorporation") for the call of a special meeting of stockholders.

Section 4. Conduct of Meetings. The Chairman of the Board (or
in his absence, the President or such other designee of the Chairman of the
Board) shall preside at the annual and special meetings of stockholders and
shall be given full discretion in establishing the rules and

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procedures to be followed in conducting the meetings, except as otherwise
provided by law, the Certificate of Incorporation or in these Bylaws.

Section 5. Notice and Waiver of Notice. Except as otherwise
provided by law, written or printed notice stating the place, day and hour of
the meeting and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than ten (10) nor more
than sixty (60) days before the day of the meeting, either personally or by
first-class mail, by or at the direction of the President, the Secretary, or
the officer or person calling the meeting, to each stockholder of record
entitled to vote at such meeting, provided that no such notice need be
delivered to any stockholder to whom the Corporation is not required to deliver
any such notice pursuant to the Delaware General Corporation Law as now or
hereafter in effect. If the notice is mailed at least thirty (30) days before
the date of the meeting, it may be done by a class of United States mail other
than first class. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the stockholder at his address
as it appears on the stock transfer books of the Corporation, with postage
thereon prepaid. If a meeting is adjourned to another time and/or place, and
if an announcement of the adjourned time and/or place is made at the meeting,
it shall not be necessary to give notice of the adjourned meeting unless the
Board of Directors, after adjournment, fixes a new record date for the
adjourned meeting. Whenever any notice is required to be given to any
stockholder, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether signed before, during or after the time of the
meeting stated therein, and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records, shall be equivalent to the giving
of such notice. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the stockholders need be specified in any
written waiver of notice. Attendance of a person at a meeting shall constitute
a waiver of (a) lack of or defective notice of such meeting, unless the person
objects at the beginning to the holding of the meeting or the transacting of
any business at the meeting, or (b) lack of defective notice of a particular
matter at a meeting that is not within the purpose or purposes described in the
meeting notice, unless the person objects to considering such matter when it is
presented.

Section 6. Business and Nominations for Annual and Special
Meetings. Business transacted at any special meeting shall be confined to the
purposes stated in the notice thereof. At any annual meeting of stockholders,
only such business shall be conducted as shall have been properly brought
before the meeting in accordance with the requirements and procedures set forth
in the Certificate of Incorporation and these Bylaws, if any. Only such
persons who are nominated for election as directors of the Corporation in
accordance with the requirements and procedures set forth in the Certificate of
Incorporation and these Bylaws, if any, shall be eligible for election as
directors of the Corporation.

Section 7. Quorum. Shares entitled to vote as a separate voting
group may take action on a matter at a meeting only if a quorum of these shares
exists with respect to that matter. Except as otherwise provided in the
Certificate of Incorporation or by law, a majority of the shares entitled to
vote on the matter by each voting group, represented in person or by proxy,
shall constitute a quorum at any meeting of stockholders, but in no event shall
a quorum consist

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of less than one-third (1/3) of the shares of each voting group entitled to
vote. If less than a majority of outstanding shares entitled to vote are
represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. After a quorum has been
established at any stockholders' meeting, the subsequent withdrawal of
stockholders, so as to reduce the number of shares entitled to vote at the
meeting below the number required for a quorum, shall not affect the validity
of any action taken at the meeting or any adjournment thereof. Once a share is
represented for any purpose at a meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for that adjourned meeting.

Section 8. Voting Per Share. Except as otherwise provided in
the Certificate of Incorporation or by law, each stockholder is entitled to one
(1) vote for each outstanding share held by him on each matter voted at a
stockholders' meeting.

Section 9. Voting of Shares. A stockholder may vote at any
meeting of stockholders of the Corporation, either in person or by proxy.
Shares standing in the name of another corporation, domestic or foreign, may be
voted by the officer, agent or proxy designated by the bylaws of such corporate
stockholder or, in the absence of any applicable bylaw, by such person or
persons as the board of directors of the corporate stockholder may designate.
In the absence of any such designation, or, in case of conflicting designation
by the corporate stockholder, the chairman of the board, the president, any
vice president, the secretary and the treasurer of the corporate stockholder,
in that order, shall be presumed to be fully authorized to vote such shares.
Shares held by an administrator, executor, guardian, personal representative,
or conservator may be voted by him, either in person or by proxy, without a
transfer of such shares into his name. Shares standing in the name of a
trustee may be voted by him, either in person or by proxy, but no trustee shall
be entitled to vote shares held by him without a transfer of such shares into
his name or the name of his nominee. Shares held by or under the control of a
receiver, a trustee in bankruptcy proceedings, or an assignee for the benefit
of creditors may be voted by such person without the transfer thereof into his
name. If shares stand of record in the names of two or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary of the
Corporation is given notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, then acts with respect to voting shall have the following effect:
(a) if only one votes, in person or by proxy, his act binds all; (b) if more
than one vote, in person or by proxy, the act of the majority so voting binds
all; (c) if more than one vote, in person or by proxy, but the vote is evenly
split on any particular matter, each faction is entitled to vote the share or
shares in question proportionally; or (d) if the instrument or order so filed
shows that any such tenancy is held in unequal interest, a majority or a vote
evenly split for purposes hereof shall be a majority or a vote evenly split in
interest. The principles of this paragraph shall apply, insofar as possible,
to execution of proxies, waivers, consents, or objections and for the purpose
of ascertaining the presence of a quorum.

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Section 10. Proxies. Any stockholder of the Corporation, other
person entitled to vote on behalf of a stockholder pursuant to law, or
attorney-in-fact for such persons may vote the stockholder's shares in person
or by proxy. Any stockholder of the Corporation may appoint a proxy to vote or
otherwise act for him by signing an appointment form, either personally or by
his attorney-in-fact. An executed telegram or cablegram appearing to have been
transmitted by such person, or a photographic, photostatic, or equivalent
reproduction of an appointment form, shall be deemed a sufficient appointment
form. An appointment of a proxy is effective when received by the Secretary of
the Corporation or such other officer or agent which is authorized to tabulate
votes, and shall be valid for up to 11 months, unless a longer period is
expressly provided in the appointment form. The death or incapacity of the
stockholder appointing a proxy does not affect the right of the Corporation to
accept the proxy's authority unless notice of the death or incapacity is
received by the secretary or other officer or agent authorized to tabulate
votes before the proxy exercises his authority under the appointment. An
appointment of a proxy is revocable by the stockholder unless the appointment
is coupled with an interest.

Section 11. Stockholder List. After fixing a record date for a
meeting of stockholders, the Corporation shall prepare an alphabetical list of
the names of all its stockholders who are entitled to notice of the meeting,
arranged by voting group with the address of, and the number and class and
series, if any, of shares held by each. The stockholders' list must be
available for inspection by any stockholder for a period of ten (10) days prior
to the meeting or such shorter time as exists between the record date and the
meeting and continuing through the meeting at the Corporation's principal
office, at a place identified in the meeting notice in the city where the
meeting will be held, or at the office of the Corporation's transfer agent or
registrar. Any stockholder of the Corporation or his agent or attorney is
entitled on written demand to inspect the stockholders' list (subject to the
requirements of law), during regular business hours and at his expense, during
the period it is available for inspection. The Corporation shall make the
stockholders' list available at the meeting of stockholders, and any
stockholder or his agent or attorney is entitled to inspect the list at any
time during the meeting or any adjournment.

Section 12. Action Without Meeting. Any action required by law
to be taken at a meeting of stockholders, or any action that may be taken at a
meeting of stockholders, may be taken without a meeting or notice if a consent
in writing, setting forth the action so taken, shall be signed by the holders
of outstanding stock having not less than the minimum number of votes that
would be necessary to authorize to take such action at a meeting at which all
shares entitled to vote thereon were present and voted with respect to the
subject matter thereof, and such consent shall have the same force and effect
as a vote of stockholders taken at such a meeting.

Section 13. Fixing Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of stockholders for any other proper purposes,
the Board of Directors may fix in advance a date as the record date for any
such determination of stockholders, such date in any case to be not more than
seventy (70) days, and, in case of a meeting of stockholders, not less than ten
(10) days, prior to the date on which the particular action requiring such
determination of stockholders is to be taken. If no

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record date is fixed for the determination of stockholders entitled to notice
of or to vote at a meeting of stockholders, or stockholders entitled to receive
payment of a dividend, the date on which the notice of the meeting is mailed or
the date on which the resolutions of the Board of Directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders entitled
to vote at any meeting of stockholders has been made as provided in this
Section 13, such determination shall apply to any adjournment thereof, except
where the Board of Directors fixes a new record date for the adjourned meeting
or as required by law.

Section 14. Inspectors and Judges. The Board of Directors in
advance of any meeting may, but need not, appoint one or more inspectors of
election or judges of the vote, as the case may be, to act at the meeting or
any adjournment(s) thereof. If any inspector or inspectors, or judge or
judges, are not appointed, the person presiding at the meeting may, but need
not, appoint one or more inspectors or judges. In case any person who may be
appointed as an inspector or judge fails to appear or act, the vacancy may be
filled by the Board of Directors in advance of the meeting, or at the meeting
by the person presiding thereat. The inspectors or judges, if any, shall
determine the number of shares of stock outstanding and the voting power of
each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots
and consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate votes, ballots and
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the person
presiding at the meeting, the inspector or inspectors or judge or judges, if
any, shall make a report in writing of any challenge, question or matter
determined by him or them, and execute a certificate of any fact found by him
or them.

Section 15. Voting for Directors. Unless otherwise provided in
the Certificate of Incorporation, directors shall be elected by a plurality of
the votes cast by the shares entitled to vote in the election at a meeting at
which a quorum is present.

ARTICLE THREE

DIRECTORS

Section 1. Number; Election and Term; Removal. The number of
directors of the Corporation shall be fixed from time to time, within the
limits specified by and as provided in the Certificate of Incorporation;
provided, however, that no director's term shall be shortened by reason of a
resolution reducing the number of directors. The directors shall be elected at
the annual meeting of the stockholders, except as provided in Section 2 of this
Article, and each director elected shall hold office for the term for which he
is elected and until his successor is elected and qualified or until his
earlier resignation, removal from office or death. Directors must be natural
persons who are 18 years of age or older but need not be residents of the State
of Delaware, stockholders of the Corporation or citizens of the United States.
Any director may be

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removed at any time, with or without cause, at a special meeting of the
stockholders called for that purpose.

Section 2. Vacancies. A director may resign at any time by
giving written notice to the Corporation, the Board of Directors or the
Chairman of the Board. Such resignation shall take effect when the notice is
delivered unless the notice specifies a later effective date, in which event
the pending vacancy may be filled before the effective date if the successor
does not take office until the effective date. Any vacancy occurring in the
Board of Directors and any directorship to be filled by reason of an increase
in the size of the Board of Directors shall be filled as provided in the
Certificate of Incorporation. A director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office, or until the next
election of one or more directors by stockholders if the vacancy is caused by
an increase in the number of directors.

Section 3. Powers. Except as provided in the Certificate of
Incorporation and by law, all corporate powers shall be exercised by or under
the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, its Board of Directors.

Section 4. Place of Meetings. Meetings of the Board of
Directors, regular or special, may be held either within or without the State
of Delaware.

Section 5. Annual Meeting. The first meeting of each newly
elected Board of Directors shall be held, without call or notice, immediately
following each annual meeting of stockholders.

Section 6. Regular Meetings. Regular meetings of the Board of
Directors may also be held without notice at such time and at such place as
shall from time to time be determined by the Board of Directors.

Section 7. Special Meetings and Notice. Special meetings of the
Board of Directors may be called by the Chairman of the Board or by the
President and shall be called by the Secretary on the written request of any
two directors. Written notice of special meetings of the Board of Directors
shall be given to each director at least twenty-four (24) hours before the
meeting. Except as required by statute, neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the Board of
Directors need be specified in the notice or waiver of notice of such meeting.
Notices to directors shall be in writing and delivered personally or mailed to
the directors at their addresses appearing on the books of the Corporation.
Notice by mail shall be deemed to be given at the time when the same shall be
received. Notice to directors may also be given by telegram, teletype,
telecopier or other form of electronic communication. Notice of a meeting of
the Board of Directors need not be given to any director who signs a written
waiver of notice before, during or after the meeting. Attendance of a director
at a meeting shall constitute a waiver of notice of such meeting and a waiver
of any and all objections to the place of the meeting, the time of the meeting
and the manner in which it has been called or convened, except when a director
states, at the beginning of the meeting or

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promptly upon arrival at the meeting, any objection to the transaction of
business because the meeting is not lawfully called or convened.

Section 8. Quorum; Required Vote; Presumption of Assent. A
majority of the number of directors fixed by, or in the manner provided in,
these bylaws shall constitute a quorum for the transaction of business;
provided, however, that whenever, for any reason, a vacancy occurs in the Board
of Directors, a quorum shall consist of a majority of the remaining directors
until the vacancy has been filled. The act of a majority of the directors
present at a meeting at which a quorum is present when the vote is taken shall
be the act of the Board of Directors. A director of the Corporation who is
present at a meeting of the Board of Directors or a committee of the Board of
Directors when corporate action is taken shall be presumed to have assented to
the action taken, unless he objects at the beginning of the meeting, or
promptly upon his arrival, to holding the meeting or transacting specific
business at the meeting, or he votes against or abstains from the action taken.

Section 9. Action Without Meeting. Any action required or
permitted to be taken at a meeting of the Board of Directors or a committee
thereof may be taken without a meeting if a consent in writing, setting forth
the action taken, is signed by all of the members of the Board of Directors or
the committee, as the case may be, and such consent shall have the same force
and effect as a unanimous vote at a meeting. Action taken under this section
is effective when the last director signs the consent, unless the consent
specifies a different effective date. A consent signed under this Section 9
shall have the effect of a meeting vote and may be described as such in any
document.

Section 10. Conference Telephone or Similar Communications
Equipment Meetings. Members of the Board of Directors may participate in a
meeting of the Board by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time. Participation in such a meeting shall constitute
presence in person at the meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground the meeting is not lawfully called or convened.

Section 11. Committees. The Board of Directors, by resolution
adopted by a majority of the full Board of Directors, may designate from among
its members one or more other committees, each of which, to the extent provided
in such resolution, shall have and may exercise all of the authority of the
Board of Directors in the business and affairs of the Corporation except where
the action of the full Board of Directors is required by statute. Each
committee must have two or more members who serve at the pleasure of the Board
of Directors. The Board of Directors, by resolution adopted in accordance with
this Article Three, may designate one or more directors as alternate members of
any committee, who may act in the place and stead of any absent member or
members at any meeting of such committee. Vacancies in the membership of a
committee shall be filled by the Board of Directors at a regular or special
meeting of the Board of Directors. Each committee shall keep minutes and other
appropriate records of its proceedings and report the same to the Board of
Directors when required. The designation of any such

-7-
<PAGE> 11

committee and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed
upon it or him by law.

Section 12. Compensation of Directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director or any combination thereof. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
Directors may receive such other compensation as may be approved by the Board
of Directors.

Section 13. Chairman of the Board. The Board of Directors may,
in its discretion, choose a Chairman of the Board who shall preside at meetings
of the stockholders and of the directors. The Chairman of the Board shall be a
member of the Board of Directors but no other officers of the Corporation need
be a director. The Chairman of the Board shall serve until his successor is
chosen and qualified, but he may be removed at any time by the affirmative vote
of a majority of the Board of Directors.

ARTICLE FOUR

OFFICERS

Section 1. Positions. The officers of the Corporation shall
consist of a President, one or more Vice Presidents, a Secretary and a
Treasurer, and, if elected by the Board of Directors by resolution, a Chairman
of the Board. Any two or more offices may be held by the same person.

Section 2. Election of Specified Officers by Board. The Board
of Directors at its first meeting after each annual meeting of stockholders
shall elect a President, one or more Vice Presidents, a Secretary and a
Treasurer.

Section 3. Election or Appointment of Other Officers. Such
other officers and assistant officers and agents as may be deemed necessary may
be elected or appointed by the Board of Directors, or, unless otherwise
specified herein, appointed by the Chairman of the Board of the Corporation.
The Board of Directors shall be advised of appointments by the Chairman of the
Board at or before the next scheduled Board of Directors meeting.

Section 4. Salaries. The salaries of all officers of the
Corporation to be elected or appointed by the Board of Directors pursuant to
Article Four, Section 2 hereof shall be fixed from time to time by the Board of
Directors or pursuant to its discretion. The salaries of all other elected or
appointed officers of the Corporation shall be fixed from time to time by the
Chairman of the Board of the Corporation or pursuant to his direction.

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<PAGE> 12

Section 5. Term; Resignation. The officers of the Corporation
shall hold office until their successors are chosen and qualified. Any officer
or agent elected or appointed by the Board of Directors or the Chairman of the
Board of the Corporation may be removed, with or without cause, by the Board of
Directors. Any officers or agents appointed by the Chairman of the Board of
the Corporation pursuant to Section 3 of this Article Four may also be removed
from such officer positions by the Chairman of the Board, with or without
cause. Any vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise shall be filled by the Board of Directors,
or, in the case of an officer appointed by or who could be appointed by the
Chairman of the Board of the Corporation, by the Chairman of the Board or the
Board of Directors. Any officer of the Corporation may resign from his
respective office or position by delivering notice to the Corporation. Such
resignation is effective when delivered unless the notice specifies a later
effective date. If a resignation is made effective at a later date and the
Corporation accepts the future effective date, the Board of Directors may fill
the pending vacancy before the effective date if the Board provides that the
successor does not take office until the effective date.

Section 6. Chairman of the Board. The Chairman of the Board, if
designated by the Board of Directors, shall be the Chief Executive Officer of
the Corporation, shall have general and active management of the business of
the Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect.

Section 7. President. The President shall be the Chief
Operating Officer, or, if the Board of Directors shall have not designated a
Chairman of the Board, the Chief Executive Officer of the Corporation. At the
request of the Chairman of the Board, or in the case of his absence or
inability to act, or if the office of Chairman of the Board shall be vacant,
the President shall perform the duties of the Chairman of the Board, and, when
so acting, shall have all the powers of the Chairman of the Board. In addition
to the powers and duties expressly conferred upon him by these ByLaws, he
shall, except as otherwise specifically provided by the laws of the State of
Delaware, perform such other duties and have such other powers as the Board of
Directors shall prescribe or as the Chairman of the Board may from time to time
delegate. In the absence of the Chairman of the Board or in the event the
Board of Directors shall not have designated a Chairman of the Board, the
President shall preside at meetings of the stockholders and the Board of
Directors.

Section 8. Vice Presidents. The Vice Presidents in the order of
their seniority, unless otherwise determined by the Board of Directors, shall,
in the absence or disability of the President, perform the duties and exercise
the powers of the President. They shall perform such other duties and have
such other powers as the Board of Directors shall prescribe or as the Chairman
of the Board may from time to time delegate.

Section 9. Secretary. The Secretary shall attend all meetings
of the Board of Directors and all meetings of the stockholders and record all
the proceedings of the meetings of the stockholders and of the Board of
Directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be

-9-
<PAGE> 13

given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or Chairman of the Board, under whose supervision he
shall be. He shall keep in safe custody the seal of the Corporation and, when
authorized by the Board of Directors, affix the same to any instrument
requiring it.

Section 10. Treasurer. The Treasurer shall have the custody of
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the Chairman of the Board and the Board of Directors at its
regular meetings or when the Board of Directors so requires an account of all
his transactions as treasurer and of the financial condition of the
Corporation. Unless otherwise specified by the Board of Directors, the
Treasurer shall be the Corporation's Chief Financial Officer.

Section 11. Other Officers; Employees and Agents. Each and every
other officer, employee and agent of the Corporation shall possess, and may
exercise, such power and authority, and shall perform such duties, as may from
time to time be assigned to him by the Board of Directors, the officer so
appointing him and such officer or officers who may from time to time be
designated by the Board of Directors to exercise such supervisory authority.

ARTICLE FIVE

CERTIFICATES FOR SHARES

Section 1. Issue of Certificates. The Corporation shall deliver
certificates representing all shares to which stockholders are entitled; and
such certificates shall be signed by the Chairman of the Board, President or a
Vice President, and by the Secretary or an Assistant Secretary of the
Corporation, and may be sealed with the seal of the Corporation or a facsimile
thereof.

Section 2. Legends for Preferences and Restrictions on Transfer.
The designations, relative rights, preferences and limitations applicable to
each class of shares and the variations in rights, preferences and limitations
determined for each series within a class (and the authority of the Board of
Directors to determine variations for future series) shall be summarized on the
front or back of each certificate. Alternatively, each certificate may state
conspicuously on its front or back that the Corporation will furnish the
stockholder a full statement of this information on request and without charge.
Every certificate representing shares that are restricted as to the sale,
disposition, or transfer of such shares shall also indicate that such shares
are restricted as to transfer and there shall be set forth or fairly summarized
upon the certificate, or the certificate shall indicate that the Corporation
will furnish to any stockholder upon request and without charge, a full
statement of such restrictions. If the Corporation issues any shares that are
not

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<PAGE> 14

registered under the Securities Act of 1933, as amended, or registered or
qualified under applicable state securities laws, the transfer of any such
shares shall be restricted substantially in accordance with the following
legend:

"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION
UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR
(2) AT HOLDER'S EXPENSE, AN OPINION OF COUNSEL TO THE CORPORATION
THAT REGISTRATION IS NOT REQUIRED."

Section 3. Facsimile Signatures. The signatures of the Chairman
of the Board, the President or a Vice President and the Secretary or Assistant
Secretary upon a certificate may be facsimiles, if the certificate is manually
signed by a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. In case any officer who
has signed or whose facsimile signature has been placed upon such certificate
shall have ceased to be such officer before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer at
the date of the issuance.

Section 4. Lost Certificates. The Board of Directors may direct
a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue
of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost or destroyed.

Section 5. Transfer of Shares. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for
shares duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, it shall be the duty of the Corporation to
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.

Section 6. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive rights of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have

-11-
<PAGE> 15

express or other notice thereof, except as otherwise provided by the laws of
the State of Delaware.

ARTICLE SIX

GENERAL PROVISIONS

Section 1. Dividends. The Board of Directors may from time to
time declare, and the Corporation may pay, dividends on its outstanding shares
in cash, property, or its own shares pursuant to law and subject to the
provisions of the Certificate of Incorporation.

Section 2. Reserves. The Board of Directors may by resolution
create a reserve or reserves out of earned surplus for any proper purpose or
purposes, and may abolish any such reserve in the same manner.

Section 3. Checks. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.

Section 4. Fiscal Year. The fiscal year of the Corporation
shall end on August 31st of each year, unless otherwise fixed by resolution of
the Board of Directors.

Section 5. Seal. The corporate seal shall have inscribed
thereon the name and state of incorporation of the Corporation. The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or in
any other manner reproduced.

Section 6. Gender. All words used in these Bylaws in the
masculine gender shall extend to and shall include the feminine and neuter
genders.

ARTICLE SEVEN

AMENDMENT OF BYLAWS

Unless otherwise provided by law, these Bylaws may be altered, amended
or repealed in whole or in part, or new Bylaws may be adopted, as provided in
the Certificate of Incorporation.

-12-

<PAGE> 1

EXHIBIT 12.1

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Income (loss) before provision for income taxes per income
statement.................................................... $(1,511) $5,919 $11,155
Add
Portion of rents representative of the interest
factor(1)................................................. 28 82 112
Interest on indebtedness(2).................................. 129 655 1,283
------- ------ -------
Income as adjusted................................... $(1,354) $6,656 $12,550
======= ====== =======
Fixed charges
Interest on indebtedness(2).................................. $ 129 $ 655 $ 1,283
Pro forma interest on senior subordinated notes.............. -- -- 5,200
Prepaid commitment fees...................................... 50 129 216
Portion of rents representative of the interest
factor(1)................................................. 28 82 112
------- ------ -------
Fixed charges............................................. $ 207 $ 866 $ 6,811
------- ------ -------
Ratio of earnings to fixed charges............................. NM 7.69 184
======= ====== =======
(1) Total rents................................................ $ 85 $ 249 $ 338
Multiplied by 1/3......................................... 0.33 0.33 0.33
------- ------ -------
Portion of rents representative of the interest factor..... $ 28 $ 82 $ 112
======= ====== =======
(2) Based on total interest expense.
</TABLE>

NM = NOT MEANINGFUL

<PAGE> 1

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-12443 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

October 29, 1996

<PAGE> 1
Exhibit 23.3

CONSENT OF SPENCER BROWNE

The undersigned, a nominee for director of Mego Mortgage Corporation, a
Delaware corporation (the "Company"), hereby (i) consents to being nominated
for the position of director of the Company and agrees to serve as such if
appointed or elected, and (ii) consents to being named as a prospective director
and/or director nominee in the Company's Registration Statements on Form S-1
relating to the Company's initial public offering of its Common Stock and
Senior Subordinated Notes due 2001, and in the Prospectuses contained therein
proposed to be circulated in connection with such offering, and all amendments
thereto.

Executed this 29th day of October, 1996.

/s/ Spencer Browne
Spencer Browne

<PAGE> 2
CONSENT OF JEREMY WIESEN

Executed this 25th day of October, 1996.

/s/ Jeremy Wiesen
Jeremy Wiesen

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEGO MORTGAGE CORPORATION FOR THE YEAR ENDED AUGUST 31,
1995 AND FOR THE YEAR ENDED AUGUST 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> AUG-31-1995 AUG-31-1996
<PERIOD-START> SEP-1-1994 SEP-1-1995
<PERIOD-END> AUG-31-1995 AUG-31-1996
<CASH> 752 443
<SECURITIES> 0 22,944
<RECEIVABLES> 3,750 4,705
<ALLOWANCES> 74 95
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 537 1,144
<DEPRECIATION> 108 279
<TOTAL-ASSETS> 24,081 50,606
<CURRENT-LIABILITIES> 0 0
<BONDS> 1,458 14,197
0 0
0 0
<COMMON> 100 100
<OTHER-SE> 10,681 17,601
<TOTAL-LIABILITY-AND-EQUITY> 24,081 50,606
<SALES> 0 0
<TOTAL-REVENUES> 13,579 25,027
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 7,660 13,872
<LOSS-PROVISION> 864 1,510
<INTEREST-EXPENSE> 187 167
<INCOME-PRETAX> 5,919 11,155
<INCOME-TAX> 2,277 4,235
<INCOME-CONTINUING> 3,642 6,920
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,642 6,920
<EPS-PRIMARY> 0.00 0.60
<EPS-DILUTED> 0.00 0.60

</TABLE>