##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- | -------------------------------------------------------

| | SECURITIES EXCHANGE ACT OF 1934
| | -------------------------------



For the quarterly period ended January 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
|- | --------------------------------------------------------

| | SECURITIES EXCHANGE ACT OF 1934
| | -------------------------------



For the transition period from  to



Commission file number 0-8568



---



BESTWAY, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 81-0332743                          
|(State of other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|7800 Stemmons Freeway, Suite 320                               |  |                                     
|Dallas, Texas                                                  |  | 75247                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(214) 630-6655

(Registrants telephone number, including area code)



---



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2).    Yes ̈No  x



APPLICABLE ONLY TO CORPORATE ISSUERS:



The number of shares of Common Stock, $.01 par value, outstanding as of January 31, 2005, was 1,687,572.



---



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION

FOR THE QUARTER ENDED

January 31, 2005



|                               |  |                                                                                                                          |  |          
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------ |  | ---------
|                               |  |                                                                                                                          |  | Page Nos.
|PART I  Financial Information |  |                                                                                                                         
|                               |  |                                                                                                                         
|ITEM 1.                        |  | Financial Statements (Unaudited)                                                                                         |  |          
|                               |  |                                                                                                                         
|                               |  | a)      
Condensed Consolidated Balance Sheets as of January 31, 2005 and July 31, 2004                                  |  | 3        
|                               |  |                                                                                                                         
|                               |  | b)      
Condensed Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2005 and 2004    |  | 4        
|                               |  |                                                                                                                         
|                               |  | c)      
Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2005 and 2004(as restated) |  | 5        
|                               |  |                                                                                                                         
|                               |  | d)      
Condensed Consolidated Statements of Stockholders Equity for the Six Months Ended January 31, 2005             |  | 6        
|                               |  |                                                                                                                         
|                               |  | e)      
Notes to the Condensed Consolidated Financial Statements                                                        |  | 7        
|                               |  |                                                                                                                         
|ITEM 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |  | 12       
|                               |  |                                                                                                                         
|ITEM 4.                        |  | Controls and Procedures                                                                                                  |  | 19       
|                               | 
|PART II  Other Information    |  |                                                                                                                         
|                               |  |                                                                                                                         
|ITEM 1.                        |  | Legal Proceedings                                                                                                        |  | 20       
|                               |  |                                                                                                                         
|ITEM 6.                        |  | Exhibits and Reports on Form 8-K, Signatures                                                                             |  | 20       





---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)



|                                                                                                                               |  |                  |            |   |               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                                               |  | January 31, 2005 |            |   | July 31, 2004 |  
|ASSETS                                                                                                                         |  |                  |            |   |               |   |            |  
|Cash and cash equivalents                                                                                                      |  | $                | 700,789    |   |               | $ | 692,476    |  
|Prepaid expenses                                                                                                               |  |                  | 126,266    |   |               |   | 208,447    |  
|Deferred income taxes                                                                                                          |  |                  | 233,231    |   |               |   | 148,232    |  
|Other assets                                                                                                                   |  |                  | 120,788    |   |               |   | 35,172     |  
|                                                                                                                               |  |                 
|Rental merchandise, at cost                                                                                                    |  |                  | 23,785,244 |   |               |   | 22,926,368 |  
|less accumulated depreciation                                                                                                  |  |                  | 9,404,384  |   |               |   | 8,980,273  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|                                                                                                                               |  |                  | 14,380,860 |   |               |   | 13,946,095 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Property and equipment, at cost                                                                                                |  |                  | 8,495,385  |   |               |   | 8,594,130  |  
|less accumulated depreciation                                                                                                  |  |                  | 6,395,435  |   |               |   | 6,358,145  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|                                                                                                                               |  |                  | 2,099,950  |   |               |   | 2,235,985  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Employee advance                                                                                                               |  |                  | 583,333    |   |               |   | 683,333    |  
|Non-competes, net of amortization                                                                                              |  |                  | 153,661    |   |               |   | 200,587    |  
|Goodwill, net of amortization                                                                                                  |  |                  | 1,225,295  |   |               |   | 1,225,295  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total assets                                                                                                                   |  | $                | 19,624,173 |   |               | $ | 19,375,622 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                           |  |                  |            |   |               |   |            |  
|Accounts payable                                                                                                               |  | $                | 1,430,158  |   |               | $ | 606,009    |  
|Accrued interest-related parties                                                                                               |  |                  | 19,978     |   |               |   | 20,667     |  
|Other accrued liabilities                                                                                                      |  |                  | 1,242,515  |   |               |   | 1,596,505  |  
|Notes payable-related parties                                                                                                  |  |                  | 2,900,000  |   |               |   | 3,000,000  |  
|Notes payable-other                                                                                                            |  |                  | 5,424,609  |   |               |   | 5,433,907  |  
|                                                                                                                               |  |                 
|Commitments and contingencies                                                                                                  |  |                  |            |   |               |   |            |  
|                                                                                                                               |  |                 
|Stockholders equity:                                                                                                          |  |                  |            |   |               |   |            |  
|Preferred stock, $10.00 par value, 1,000,000 authorized, none issued                                                           |  |                  |           |   |               |   |           |  
|Common stock, $.01 par value, 5,000,000 authorized, 1,791,917 issued at January 31, 2005 and 1,787,617 issued at July 31, 2004 |  |                  | 17,919     |   |               |   | 17,876     |  
|Paid-in capital                                                                                                                |  |                  | 16,361,973 |   |               |   | 16,332,551 |  
|Less treasury stock, at cost, 104,345 at January 31, 2005 and July 31, 2004                                                    |  |                  | (563,083   | ) |               |   | (563,083   | )
|Accumulated deficit                                                                                                            |  |                  | (7,209,896 | ) |               |   | (7,068,810 | )
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total stockholders equity                                                                                                     |  |                  | 8,606,913  |   |               |   | 8,718,534  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total liabilities and stockholders equity                                                                                     |  | $                | 19,624,173 |   |               | $ | 19,375,622 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



3



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|-------------------------------------------------- |  | ------------------------------ | ---------- | ---------------------------- | ---- | - | --------- |  | - | ---------- | - |  | - | ----------
|                                                   |  | Three Months Ended January 31, |            | Six Months Ended January 31,
|                                                   |  | 2005                           |            |                              | 2004 |   | 2005      |  |   | 2004      
|Revenues:                                          |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Rental and fee income                              |  | $                              | 9,474,675  |                              |      | $ | 9,107,900 |  | $ | 18,528,630 |   |  | $ | 17,836,089
|Sales of merchandise                               |  |                                | 519,778    |                              |      |   | 456,293   |  |   | 896,363    |   |  |   | 787,132   
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|                                                   |  |                                | 9,994,453  |                              |      |   | 9,564,193 |  |   | 19,424,993 |   |  |   | 18,623,221
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Cost and operating expenses:                       |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Depreciation and amortization:                     |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Rental merchandise                                 |  |                                | 2,174,321  |                              |      |   | 1,862,648 |  |   | 4,218,811  |   |  |   | 3,621,819 
|Other                                              |  |                                | 258,687    |                              |      |   | 308,540   |  |   | 530,673    |   |  |   | 636,981   
|Cost of merchandise sold                           |  |                                | 343,257    |                              |      |   | 333,997   |  |   | 607,430    |   |  |   | 588,874   
|Salaries and wages                                 |  |                                | 2,925,223  |                              |      |   | 2,772,879 |  |   | 5,781,583  |   |  |   | 5,414,204 
|Advertising                                        |  |                                | 497,043    |                              |      |   | 454,715   |  |   | 982,293    |   |  |   | 918,604   
|Occupancy                                          |  |                                | 643,014    |                              |      |   | 632,683   |  |   | 1,311,171  |   |  |   | 1,250,953 
|Other operating expenses                           |  |                                | 3,029,272  |                              |      |   | 2,792,969 |  |   | 5,894,385  |   |  |   | 5,532,408 
|Interest expense                                   |  |                                | 130,405    |                              |      |   | 136,396   |  |   | 257,606    |   |  |   | 289,210   
|Loss on sale of property and equipment             |  |                                | 6,923      |                              |      |   | 14,225    |  |   | 67,126     |   |  |   | 11,653    
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|                                                   |  |                                | 10,008,145 |                              |      |   | 9,309,052 |  |   | 19,651,078 |   |  |   | 18,264,706
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Income (loss) before income taxes                  |  |                                | (13,692    | )                            |      |   | 255,141   |  |   | (226,085   | ) |  |   | 358,515   
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Income tax (benefit) expense                       |  |                                | (5,135     | )                            |      |   | 95,933    |  |   | (84,999    | ) |  |   | 134,802   
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Net income (loss)                                  |  | $                              | (8,557     | )                            |      | $ | 159,208   |  | $ | (141,086   | ) |  | $ | 223,713   
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Basic net income (loss) per share                  |  | $                              | (.01       | )                            |      | $ | .09       |  | $ | (.08       | ) |  | $ | .13       
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Diluted net income (loss) per share                |  | $                              | (.01       | )                            |      | $ | .09       |  | $ | (.08       | ) |  | $ | .12       
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Weighted average common shares outstanding         |  |                                | 1,687,405  |                              |      |   | 1,681,089 |  |   | 1,685,639  |   |  |   | 1,679,880 
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           
|Diluted weighted average common shares outstanding |  |                                | 1,687,405  |                              |      |   | 1,825,787 |  |   | 1,685,639  |   |  |   | 1,831,179 
|                                                   |  |                                |            |                              |      |   |           |  |   |            |   |  |   |           



The accompanying notes
are an integral part of these condensed consolidated financial statements.



4



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



|                                                                                         |  |                  |            |   |                                           |   |            |  
|---------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ----------------------------------------- | - | ---------- | -
|                                                                                         |  | Six Months Ended |           
|                                                                                         |  | January 31,2005  |            |   | January 31,2004 (as restated,see Note 11) |  
|Cash flows from operating activities:                                                    |  |                  |            |   |                                           |   |            |  
|Net income (loss)                                                                        |  | $                | (141,086   | ) |                                           | $ | 223,713    |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                  |            |   |                                           |   |            |  
|Depreciation and amortization                                                            |  |                  | 4,749,484  |   |                                           |   | 4,258,800  |  
|Net book value of rental units retired                                                   |  |                  | 1,474,730  |   |                                           |   | 1,501,804  |  
|Proceeds from sales of merchandise                                                       |  |                  | (896,363   | ) |                                           |   | (787,132   | )
|Loss on sale of property and equipment                                                   |  |                  | 67,126     |   |                                           |   | 11,653     |  
|Deferred income taxes                                                                    |  |                  | (84,999    | ) |                                           |   | 134,802    |  
|Non-cash compensation expense                                                            |  |                  | 100,000    |   |                                           |   | 72,223     |  
|Changes in operating assets and liabilities other than cash:                             |  |                  |            |   |                                           |   |            |  
|Prepaid expenses                                                                         |  |                  | 82,181     |   |                                           |   | 57,126     |  
|Taxes receivable                                                                         |  |                  |           |   |                                           |   | 157,978    |  
|Other assets                                                                             |  |                  | (82,536    | ) |                                           |   | (30,848    | )
|Accounts payable                                                                         |  |                  | 824,149    |   |                                           |   | 156,006    |  
|Other accrued liabilities                                                                |  |                  | (354,679   | ) |                                           |   | (219,242   | )
|                                                                                         |  |                  |            |   |                                           |   |            |  
|Net cash flows provided by operating activities                                          |  |                  | 5,738,007  |   |                                           |   | 5,536,883  |  
|                                                                                         |  |                  |            |   |                                           |   |            |  
|Cash flows from investing activities:                                                    |  |                  |            |   |                                           |   |            |  
|Purchase of rental units and equipment                                                   |  |                  | (6,128,306 | ) |                                           |   | (4,854,562 | )
|Additions to property and equipment                                                      |  |                  | (439,458   | ) |                                           |   | (290,061   | )
|Proceeds from sale of property and equipment                                             |  |                  | 21,540     |   |                                           |   | 23,702     |  
|Proceeds from sales of merchandise                                                       |  |                  | 896,363    |   |                                           |   | 787,132    |  
|                                                                                         |  |                  |            |   |                                           |   |            |  
|Net cash flows used in investing activities                                              |  |                  | (5,649,861 | ) |                                           |   | (4,333,789 | )
|                                                                                         |  |                  |            |   |                                           |   |            |  
|Cash flows from financing activities:                                                    |  |                  |            |   |                                           |   |            |  
|Proceeds from notes payable                                                              |  |                  | 1,300,000  |   |                                           |   | 800,000    |  
|Repayment of notes payable                                                               |  |                  | (1,409,298 | ) |                                           |   | (1,508,502 | )
|Stock options exercised                                                                  |  |                  | 29,465     |   |                                           |   | 22,597     |  
|                                                                                         |  |                  |            |   |                                           |   |            |  
|Net cash flows (used in) provided by financing activities                                |  |                  | (79,833    | ) |                                           |   | (685,905   | )
|                                                                                         |  |                  |            |   |                                           |   |            |  
|Cash and cash equivalents at beginning of period                                         |  |                  | 692,476    |   |                                           |   | 305,869    |  
|                                                                                         |  |                  |            |   |                                           |   |            |  
|Cash and cash equivalents at end of period                                               |  | $                | 700,789    |   |                                           | $ | 823,058    |  
|                                                                                         |  |                  |            |   |                                           |   |            |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



5



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited)



For the six months ended January 31, 2005:



|                                                   |  |              |  |                 |        |                |        |            |                     |          |   |  |   |          |   |  |                            |            |   |  |   |           |  
|-------------------------------------------------- |  | ------------ |  | --------------- | ------ | -------------- | ------ | ---------- | ------------------- | -------- | - |  | - | -------- | - |  | -------------------------- | ---------- | - |  | - | --------- | -
|                                                   |  |              |  |                 |        |                |        |            |                     |          |   |  |   |          |   |  | Total Stockholders Equity |           
|                                                   |  | Common Stock |  | Paid-in Capital |        | Treasury Stock |        |            | Accumulated Deficit |          |  
|                                                   |  | Shares       |  | Amount          |        |                | Shares |            |                     | Amount   |   |  |  
|Balance at July 31, 2004                           |  | 1,787,617    |  | $               | 17,876 |                | $      | 16,332,551 |                     | (104,345 | ) |  | $ | (563,083 | ) |  | $                          | (7,068,810 | ) |  | $ | 8,718,534 |  
|Stock options exercised                            |  | 4,300        |  |                 | 43     |                |        | 29,422     |                     |          |   |  |   |          |   |  |                            |            |   |  |   | 29,465    |  
|Net loss for the six months ended January 31, 2005 |  |              |  |                 |        |                |        |            |                     |          |   |  |   |          |   |  |                            | (141,086   | ) |  |   | (141,086  | )
|                                                   |  |              |  |                 |        |                |        |            |                     |          |   |  |   |          |   |  |                            |            |   |  |   |           |  
|Balance at January 31, 2005                        |  | 1,791,917    |  | $               | 17,919 |                | $      | 16,361,973 |                     | (104,345 | ) |  | $ | (563,083 | ) |  | $                          | (7,209,896 | ) |  | $ | 8,606,913 |  
|                                                   |  |              |  |                 |        |                |        |            |                     |          |   |  |   |          |   |  |                            |            |   |  |   |           |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



6



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|1. | BASIS OF PRESENTATION
|-- | ---------------------



Bestway, Inc. and its consolidated subsidiaries (the Company) is engaged in the rental and sale of home electronics, furniture, appliances and
computers to the general public. At January 31, 2005, the Company operated 70 stores in seven states: Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. The Companys corporate office is located in Dallas,
Texas.



The condensed consolidated financial statements
included herein have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures are adequate to make the information presented not misleading and that all
adjustments deemed necessary for a fair statement of the results for the interim period have been reflected. Such adjustments are of a normal recurring nature. It is suggested that these unaudited condensed consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in the Companys 2004 Form 10-K, including any amendments thereto, particularly with regard to disclosure relating to significant accounting policies. The year-end
condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.



|2. | STOCK-BASED COMPENSATION
|-- | ------------------------



The Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, no compensation expense is recognized for fixed option plans because the exercise prices of employee stock options equal
or exceed the market prices of the underlying stock on the date of grant. The Company sponsors a stock option plan for the benefit of its employees.



7



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



The following table represents the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:



|                                         |  |                               |         |                             |      |   |         |  |   |          |   |  |   |        
|---------------------------------------- |  | ----------------------------- | ------- | --------------------------- | ---- | - | ------- |  | - | -------- | - |  | - | -------
|                                         |  | Three Months EndedJanuary 31, |         | Six Months EndedJanuary 31,
|                                         |  | 2005                          |         |                             | 2004 |   | 2005    |  |   | 2004    
|Net income (loss)                        |  |                               |         |                             |      |   |         |  |   |          |   |  |   |        
|As reported                              |  | $                             | (8,557  | )                           |      | $ | 159,208 |  | $ | (141,086 | ) |  | $ | 223,713
|Pro forma                                |  | $                             | (53,115 | )                           |      | $ | 124,618 |  | $ | (230,479 | ) |  | $ | 159,078
|Basic earnings (loss) per common share   |  |                               |         |                             |      |   |         |  |   |          |   |  |   |        
|As reported                              |  | $                             | (.01    | )                           |      | $ | .09     |  | $ | (.08     | ) |  | $ | .13    
|Pro forma                                |  | $                             | (.03    | )                           |      | $ | .07     |  | $ | (.14     | ) |  | $ | .09    
|Diluted earnings (loss) per common share |  |                               |         |                             |      |   |         |  |   |          |   |  |   |        
|As reported                              |  | $                             | (.01    | )                           |      | $ | .09     |  | $ | (.08     | ) |  | $ | .12    
|Pro forma                                |  | $                             | (.03    | )                           |      | $ | .07     |  | $ | (.14     | ) |  | $ | .09    



|3. | EARNINGS PER COMMON SHARE
|-- | -------------------------



Basic earnings per common share is based on the weighted average common shares outstanding during the period. Diluted earnings per common share includes
common stock equivalents, consisting of stock options, which are dilutive to net income per share. For the three and six months ended January 31, 2005 and 2004, 272,345 and 20,413 and 272,345 and 21,391 shares, respectively, of common stock options
were excluded from the calculation of diluted earnings per common share because their effect would be antidilutive.



|4. | RENTAL MERCHANDISE
|-- | ------------------



Rental merchandise rented to customers, or available for rent, is recorded at cost, net of accumulated depreciation. Merchandise rented to customers is
depreciated on the income-forecast basis over the term of the rental agreement, generally ranging from 12 to 30 months. Under the income-forecast basis, merchandise held for rent is not depreciated.



Rental merchandise which is damaged and inoperable, deemed obsolete, or not
returned by the customer after becoming delinquent on payments, is written-off as such impairment is incurred. For the three and six months ended January 31, 2005 and 2004, $374,959 and $358,551 and $664,731 and $723,041, respectively, of such
impairments were incurred and are included in other operating expenses in the accompanying condensed consolidated statements of operations.



8



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|5. | NOTES PAYABLE
|-- | -------------



On August 13, 2004, the Company amended and restated its Revolving Credit Loan Agreement with its lender. In the amendment, the lender extended the
maturity date from May 31, 2006 to May 31, 2007, and modified certain covenants relating to Interest Coverage Ratio and Profitability, as well as increased the aggregate amount for Capital Expenditures and Acquisitions.



On August 13, 2004, the Company amended its subordinated note payable to a
limited partnership, which is a stockholder of the Company, dated October 26, 2001. The amendment extended the maturity date from May 31, 2006 to May 31, 2007.



|6. | GUARANTEES
|-- | ----------



The Company adopted FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, during 2003, which required the prospective recognition and measurement of certain guarantees and indemnifications. Accordingly, any contractual guarantees or indemnifications the Company has issued or modified subsequent to December 31,
2002 are subject to evaluation. If required, a liability for the fair value of the obligations undertaken will be recognized.



The Company has guarantees under certain operating leases, amounting to $649,213 as of January 31, 2005, for the residual values of vehicles at the end of
the respective operating lease periods. Under these leases, if the fair market value of the leased asset at the end of the lease term is less than an agreed-upon value as set forth in the related operating lease agreement, the Company will be
responsible to the lessor for the amount of such deficiency. Based upon the expectation that none of these leased assets will have a residual value at the end of the lease term that is materially less than the value specified in the related
operating lease agreement, the Company does not believe it is probable that it will be required to fund any amounts under the terms of these arrangements. Accordingly no accruals have been recognized for these guarantees.



|7. | NEW ACCOUNTING STANDARDS
|-- | ------------------------



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment (revised 2004). This Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. FAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. FAS 123(R) focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. FAS 123(R) is effective for the Company beginning in fiscal year 2006. The Company is in the process of assessing the impact of the adoption of FAS 123(R) on the Companys financial
position and results of operations.



9



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|8. | LEGAL CONTINGENCIES
|-- | -------------------



In July 2003, the County Court of the Second Judicial District of Bolivar County, Mississippi entered final judgment against the Company in a lawsuit
brought by a former lessor. The lessor alleged that the Company had breached the terms and conditions of a lease agreement for a store location in Mississippi when the Company vacated the premises and failed to properly notify the lessor of its
intentions not to exercise an option extending the original lease term. The judgment against the Company was for approximately $70,000, including attorney fees. The Company appealed the judgment at the Circuit Court and on November 18, 2004, the
judgment of the County Court was affirmed. The Company has appealed the Circuit Court judgment to the Supreme Court of Mississippi. While the Company continues to believe that it has a meritorious defense to the plaintiffs claim, the Company
had accrued the $70,000 judgment.



The Company is subject to
various other legal proceedings and claims that arise in the ordinary course of business. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or
liquidity of the Company.



|9. | PROPOSED REVERSE/FORWARD STOCK SPLIT
|-- | ------------------------------------



On November 19, 2004, the Company filed its Schedule 13E-3 and preliminary proxy statement in connection with the upcoming annual meeting of the
stockholders of the Company. At such meeting, the stockholders of the Company will vote upon, among other things, an amendment to the Companys Amended and Restated Certificate of Incorporation, which, if approved, would result in a 1-for-100
reverse stock split, such that stockholders owning less than 100 shares of Common Stock will have such shares cancelled and converted into the right to receive payment of cash, at a rate of $13.00 per each pre-split share of Common Stock,
immediately followed by a 100-for-1 forward stock split. The per share price payable to cashed-out stockholders in the reverse/forward stock split represents a 36.8% premium to the closing price for the Common Stock on November 4, 2004 (the most
recent practicable date prior to the announcement of the reverse/forward stock split) and premiums of 15.4%, 0.2%, and 24.0%, respectively, to the 30-day, one year and three year averages prior to such date.



The reverse/forward stock split is subject to approval by the Companys
stockholders. It is anticipated that shares controlled directly or indirectly by the Companys directors, officers and controlling stockholder will be voted in favor of the transaction. These shares collectively account for at least 67.6% of
the total votes entitled to be cast.



The transaction was
unanimously recommended by a Special Committee of independent directors and approved by the Companys Board of Directors. Southwest Securities, Inc. served as financial advisor to the Special Committee and provided a fairness opinion to the
Special Committee.



If stockholders approve the
reverse/forward stock split, the Company expects to have fewer than 300 shareholders of record and would become a non-reporting company. Accordingly, the registration of the common stock under the Securities Exchange Act of 1934 would terminate, and
the Company would cease filing reports with the SEC.



The
announcement of the proposed reverse/forward stock split transaction described above is not a solicitation of a proxy. The Company has filed its definitive proxy statement and other necessary



10



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



filings with the SEC for the upcoming annual meeting of the stockholders to
vote on the proposed transaction. The definitive proxy statement contains important information regarding the transaction, including, among other things, the recommendation of the Companys Board of Directors and the Special Committee regarding
the transaction. The Company is currently awaiting completion of the SEC review of its proxy statement and Schedule 13E-3 before proceeding with the reverse/forward stock split. All stockholders will receive a definitive proxy statement once the SEC
has completed its review process.



|10. | DELISTING BY NASDAQ
|--- | -------------------



The Companys common stock was delisted from the NASDAQ SmallCap Market on December 21, 2004 because of the Companys failure to certify
its compliance with the new audit committee composition, audit and nominating committee charters, executive sessions and code of conduct requirements, as set forth in NASDAQ Marketplace Rules 4350(d)(2)(A), 4350(d)(1), 4350(c)(4)(B), 4350(c)(2) and
4350(n), respectively. The Company had disclosed in November 2004 that it had received a letter from NASDAQ indicating that the Company was not in compliance with the certification requirement and that the Company would request a hearing with the
NASDAQ Hearing Panel on the matter. The Company requested a written hearing, which was held on December 9, 2004. In connection with the hearing, the Company discussed its intent to go private with NASDAQ and described the status of the transaction.
The Company requested that NASDAQ grant an extension to the Company regarding the listing requirements until the Companys going-private transaction was complete. This appeal was denied by NASDAQ. Prior to undertaking the going-private
transaction, the Company was in the process of complying with NASDAQ listing requirements, including the matters set forth in the certification requirements described above. The Companys common stock is quoted in the Pink Sheets under the
symbol BSTW.



|11. | RESTATEMENT OF CASH FLOW ACTIVITY
|--- | ---------------------------------



The Company has restated its consolidated statements of cash flow for the six months ended January 31, 2004 to present the proceeds from sales of
merchandise as an investing activity rather than an operating activity.



The impact of the restatement on cash flows for the six months ended January 31, 2004, was as follows:



|                                            |  |                      |           |             |   |          
|------------------------------------------- |  | -------------------- | --------- | ----------- | - | ---------
|                                            |  | AsPreviouslyReported |           | As Restated
|Cash flows provided by operating activities |  | $                    | 6,324,015 |             | $ | 5,536,883
|Cash flows used in investing activities     |  | $                    | 5,120,921 |             | $ | 4,333,789



11



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



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



FORWARD-LOOKING STATEMENTS



This Report on Form 10-Q and the foregoing Managements Discussion and analysis of Financial Condition and Results of Operations contains various
forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Companys
expectations or beliefs concerning future events. Any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to, (i) the ability of the Company to open or acquire additional rental-purchase stores on favorable terms, (ii) the ability of the Company to improve the performance of such opened or
acquired stores and to integrate such acquired stores into the Companys operations, (iii) the impact of state and federal laws regulating or otherwise affecting rental-purchase transactions, (iv) the impact of general economic conditions in
the United States and (v) the impact of terrorist activity, threats of terrorist activity and responses thereto on the economy in general and the rental-purchase industry in particular. Undue reliance should not be placed on any forward-looking
statements made by or on behalf of the Company as such statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, the occurrence
of future events or otherwise.



General



The Company currently operates 70 rental-purchase stores located in seven
states. Our stores offer quality, name brand, durable products, such as home electronics, household appliances, computers and furniture, under flexible rental-purchase agreements that typically allow the customer to obtain ownership of the
merchandise at the conclusion of an agreed upon rental period (ranging from 12 to 30 months). Customers have the option to return the product at any time without further obligation, and also have the option to purchase the product at any time during
the rental period.



Recent Developments



On November 19, 2004, the Company filed its Schedule 13E-3 and preliminary
proxy statement in connection with the upcoming annual meeting of the stockholders of the Company. At such meeting, the stockholders of the Company will vote upon, among other things, an amendment to the Companys Amended and Restated
Certificate of Incorporation, which, if approved, would result in a 1-for-100 reverse stock split, such that stockholders owning less than 100 shares of Common Stock will have such shares cancelled and converted into the right to receive payment of
cash, at a rate of $13.00 per each pre-split share of Common Stock, immediately followed by a 100-for-1 forward stock split. The per share price payable to cashed-out stockholders in the reverse/forward stock split represents a 36.8% premium to the
closing price for the Common Stock on November 4, 2004 (the most recent practicable date prior to the announcement of the reverse/forward stock split) and premiums of 15.4%, 0.2%, and 24.0%, respectively, to the 30-day, one year and three year
averages prior to such date.



The reverse/forward stock split
is subject to approval by the Companys stockholders. It is anticipated that shares controlled directly or indirectly by the Companys directors, officers and controlling stockholder will be voted in favor of the transaction. These shares
collectively account for at least 67.6% of the total votes entitled to be cast.



12



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)



The transaction was unanimously recommended by a Special
Committee of independent directors and approved by the Companys Board of Directors. Southwest Securities, Inc. served as financial advisor to the Special Committee and provided a fairness opinion to the Special Committee.



If stockholders approve the reverse/forward stock split, the Company expects
to have fewer than 300 shareholders of record and would become a non-reporting company. Accordingly, the registration of the common stock under the Securities Exchange Act of 1934 would terminate, and the Company would cease filing reports with the
SEC.



The announcement of the proposed reverse/forward stock
split transaction described above is not a solicitation of a proxy. The Company has filed its definitive proxy statement and other necessary filings with the SEC for the upcoming annual meeting of the stockholders to vote on the proposed
transaction. The definitive proxy statement contains important information regarding the transaction, including, among other things, the recommendation of the Companys Board of Directors and the Special Committee regarding the transaction. The
Company is currently awaiting completion of the SEC review of its proxy statement and Schedule 13E-3 before proceeding with the reverse/forward stock split. All stockholders will receive a definitive proxy statement once the SEC has completed its
review process. Stockholders of the Company are advised to read the definitive proxy statement they receive by mail, before making any decision regarding the transaction. Copies of the definitive proxy statement and any amendments thereto, are
available by going to www.bestwayrto.com under Investor Relations, SEC Filings or from the Secretary of the Company upon written request by a stockholder.



The Companys common stock was delisted from the NASDAQ SmallCap Market on December 21, 2004 because of the
Companys failure to certify its compliance with the new audit committee composition, audit and nominating committee charters, executive sessions and code of conduct requirements, as set forth in NASDAQ Marketplace Rules 4350(d)(2)(A),
4350(d)(1), 4350(c)(4)(B), 4350(c)(2) and 4350(n), respectively. The Company had disclosed in November 2004 that it had received a letter from NASDAQ indicating that the Company was not in compliance with the certification requirement and that the
Company would request a hearing with the NASDAQ Hearing Panel on the matter. The Company requested a written hearing, which was held on December 9, 2004. In connection with the hearing, the Company discussed its intent to go private with NASDAQ and
described the status of the transaction. The Company requested that NASDAQ grant an extension to the Company regarding the listing requirements until the Companys going-private transaction was complete. This appeal was denied by NASDAQ. Prior
to undertaking the going-private transaction, the Company was in the process of complying with NASDAQ listing requirements, including the matters set forth in the certification requirements described above. The Companys common stock is quoted
in the Pink Sheets under the symbol BSTW.



13



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)



Results of operations



The following table sets forth, for the periods indicated, certain items
from the Companys unaudited Condensed Consolidated Statements of Operations, expressed as a percentage of revenues:



|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  
|--------------------------------------------- |  | ------------------------------ | -- |  | ---------------------------- | - |  | ----- | -- |  | ----- | -
|                                              |  | Three Months Ended January 31, |    |  | Six Months Ended January 31, |  
|                                              |  | 2005                           |    |  | 2004                         |   |  | 2005  |    |  | 2004  |  
|Revenues:                                     |  |                                |    |  |                              |   |  |       |    |  |       |  
|Rental and fee income                         |  | 94.8                           | %  |  | 95.2                         | % |  | 95.4  | %  |  | 95.8  | %
|Sales of merchandise                          |  | 5.2                            |    |  | 4.8                          |   |  | 4.6   |    |  | 4.2   |  
|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  
|Total revenues                                |  | 100.0                          |    |  | 100.0                        |   |  | 100.0 |    |  | 100.0 |  
|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  
|Cost and operating expenses:                  |  |                                |    |  |                              |   |  |       |    |  |       |  
|Depreciation and amortization:                |  |                                |    |  |                              |   |  |       |    |  |       |  
|Rental merchandise                            |  | 21.8                           |    |  | 19.5                         |   |  | 21.7  |    |  | 19.4  |  
|Other                                         |  | 2.6                            |    |  | 3.2                          |   |  | 2.7   |    |  | 3.4   |  
|Cost of merchandise sold                      |  | 3.4                            |    |  | 3.5                          |   |  | 3.1   |    |  | 3.2   |  
|Salaries and wages                            |  | 29.3                           |    |  | 29.0                         |   |  | 29.8  |    |  | 29.1  |  
|Advertising                                   |  | 5.0                            |    |  | 4.8                          |   |  | 5.1   |    |  | 4.9   |  
|Occupancy                                     |  | 6.4                            |    |  | 6.6                          |   |  | 6.8   |    |  | 6.7   |  
|Other operating expenses                      |  | 30.3                           |    |  | 29.2                         |   |  | 30.3  |    |  | 29.7  |  
|Interest expense                              |  | 1.3                            |    |  | 1.4                          |   |  | 1.3   |    |  | 1.6   |  
|Loss (gain) on sale of property and equipment |  |                               |    |  | 0.1                          |   |  | 0.4   |    |  | 0.1   |  
|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  
|Total cost and operating expenses             |  | 100.1                          |    |  | 97.3                         |   |  | 101.2 |    |  | 98.1  |  
|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  
|Income (loss) before income taxes             |  | (0.1                           | )  |  | 2.7                          |   |  | (1.2  | )  |  | 1.9   |  
|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  
|Income tax expense (benefit)                  |  |                               |    |  | 1.0                          |   |  | (0.5  | )  |  | 0.7   |  
|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  
|Net income (loss)                             |  | (0.1                           | )% |  | 1.7                          | % |  | (0.7  | )% |  | 1.2   | %
|                                              |  |                                |    |  |                              |   |  |       |    |  |       |  



14



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)



Comparison of three months ended January 31, 2005 and
2004



Total revenue increased $430,260, or 4.5% to
$9,994,453 for the quarter ended January 31, 2005 from $9,564,193 for the quarter ended January 31, 2004. The increase was primarily attributable to increased revenues in same stores, as well as the inclusion of one new store opening in the quarter
ended January 31, 2005.



Revenue from same stores increased
$383,792, or 4.1%. Same store revenues represent those revenues earned in stores that were opened by the Company for the entire three months ended January 31, 2005 and 2004. The increase in same store revenues was primarily due to the success of our
efforts on increasing our customer base and increasing the number of agreements on rent through transitioning to a more aggressive pricing model offering customers the lowest total cost of ownership, implemented during the fourth quarter of 2004.



Depreciation of rental merchandise increased $311,673, or
16.7% to $2,174,321 for the three months ended January 31, 2005 from $1,862,648 for the three months ended January 31, 2004 and increased 2.3% as a percentage of total revenue to 21.8% from 19.5%, resulting primarily from increased depreciation
expense in connection with transitioning to a more aggressive pricing model offering customers the lowest total cost of ownership implemented during the fourth quarter of 2004. Other depreciation and amortization decreased $49,853, or 16.2% to
$258,687 for the three months ended January 31, 2005 from $308,540 for the three months ended January 31, 2004 and decreased .6% as a percentage of total revenue to 2.6% from 3.2%, relating to reduced vehicle depreciation and the full amortization
of certain non-competes.



Cost of merchandise sold increased
$9,260, or 2.8% to $343,257 for the three months ended January 31, 2005 from $333,997 for the three months ended January 31, 2004 and decreased .1% as a percentage of total revenue to 3.4% from 3.5%.



Salaries and wages increased $152,344, or 5.5% to $2,925,223 for the three
months ended January 31, 2005 from $2,772,879 for the three months ended January 31, 2004 and increased .3% as a percentage of total revenue to 29.3% from 29.0%, relating to increased same store level labor costs due to additional store staffing and
higher pay rates, as well as additional personnel for one new store opening in the quarter.



Advertising expense increased $42,328, or 9.3% to $497,043 for the three months ended January 31, 2005 from $454,715 for the three months ended January 31, 2004 and increased .2% as a percentage of total revenue to
5.0% from 4.8%, relating to an increase in the quantity of same store advertising flyers distributed, as well as advertising expense for one new store opening in the quarter.



Occupancy expense increased $10,331, or 1.6% to $643,014 for the three months ended January 31, 2005 from $632,683 for the
three months ended January 31, 2004 and decreased .2% as a percentage of total revenue to 6.4% from 6.6%, relating to expansions or relocations of certain stores based on targeted market analysis, as well as occupancy expense for one new store
opening in the quarter.



Other operating expenses increased
$236,303, or 8.5% to $3,029,272 for the three months ended January 31, 2005 from $2,792,969 for the three months ended January 31, 2004 and increased 1.1% as a percentage of total revenue to 30.3% from 29.2%. The increase was primarily attributable
to a



15



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)



number of factors, including other operating expenses
relating to one new store opening in the quarter, increased group insurance costs, increased vehicle lease costs, as well as additional costs relating to the Companys efforts to effect a going private transaction by reducing its
registered shareholders to less than 300.



Interest expense
decreased $5,991, or 4.4% to $130,405 for the three months ended January 31, 2005 from $136,396 for the three months ended January 31, 2004 and decreased .1% as a percentage of total revenue to 1.3% from 1.4%, relating to decreased indebtedness,
offset with a higher effective interest rate.



Loss on sale of
property and equipment decreased $7,302, or 51.3% to $6,923 for the three months ended January 31, 2005 compared to $14,225 for the three months ended January 31, 2004, relating to the relocation of one store last year.



Income before income taxes decreased $268,833, or 105.4% to a loss of
$13,692 for the three months ended January 31, 2005 compared to income of $255,141 for the three months ended January 31, 2004 and decreased 2.8% as a percentage of total revenue to a loss of .1% compared to income of 2.7%, relating primarily to the
Company transitioning to a more aggressive pricing model necessary to increase customer traffic, as well as operating losses of $39,022 from one new store opening in the quarter. Management remains diligent in controlling costs and operating
expenses and believes that, combined with revenue increases, the Company will improve its profitability.



Comparison of the Six Months Ended January 31, 2005 and 2004



Total revenue increased $801,772, or 4.3% to $19,424,993 for the six months ended January 31, 2005 from $18,623,221 for the
six months ended January 31, 2004. The increase was primarily attributable to increased revenues in same stores.



Revenue from same stores increased $697,243, or 3.8%. Same store revenues represent those revenues earned in stores that were opened by the Company for
the entire six months ended January 31, 2005 and 2004. The increase in same store revenues was primarily due to the success of our efforts on increasing our customer base and increasing the number of agreements on rent through transitioning to a
more aggressive pricing model offering customers the lowest total cost of ownership, implemented during the fourth quarter of 2004.



Depreciation of rental merchandise increased $596,992, or 16.5% to $4,218,811 for the six months ended January 31, 2005 from $3,621,819 for the six months
ended January 31, 2004 and increased 2.3% as a percentage of total revenue to 21.7% from 19.4%, resulting primarily from increased depreciation expense in connection with transitioning to a more aggressive pricing model offering customers the lowest
total cost of ownership implemented during the fourth quarter of 2004. Other depreciation and amortization decreased $106,308, or 16.7% to $530,673 for the six months ended January 31, 2005 from $636,981 for the six months ended January 31, 2004 and
decreased .7% as a percentage of total revenue to 2.7% from 3.4%, relating to reduced vehicle depreciation and the full amortization of certain non-competes.



16



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)



Cost of merchandise sold increased $18,556, or 3.2% to
$607,430 for the six months ended January 31, 2005 from $588,874 for the six months ended January 31, 2004 and decreased .1% as a percentage of total revenue to 3.1% from 3.2%.



Salaries and wages increased $367,379, or 6.8% to $5,781,583 for the six months ended January 31, 2005 from $5,414,204 for
the six months ended January 31, 2004 and increased .7% as a percentage of total revenue to 29.8% from 29.1%, relating to increased same store level labor costs due to additional store staffing and higher pay rates, additional personnel for one new
store opening in the year, as well as increased corporate level salaries.



Advertising expense increased $63,689, or 6.9% to $982,293 for the six months ended January 31, 2005 from $918,604 for the six months ended January 31, 2004 and increased .2% as a percentage of total revenue to 5.1%
from 4.9%, relating to an increase in the quantity of same store advertising flyers distributed, as well as advertising expense for one new store opening in the year.



Occupancy expense increased $60,218, or 4.8% to $1,311,171 for the six months ended January 31, 2005 from $1,250,953 for the
six months ended January 31, 2004 and increased .1% as a percentage of total revenue to 6.8% from 6.7%, relating to expansions or relocations of certain stores based on targeted market analysis.



Other operating expenses increased $361,977, or 6.5% to $5,894,385 for the
six months ended January 31, 2005 from $5,532,408 for the six months ended January 31, 2004 and increased .6% as a percentage of total revenue to 30.3% from 29.7%. The increase was primarily attributable to a number of factors, including other
operating expenses relating to one new store opening in the year, increased group insurance and workers compensation costs, increased vehicle lease costs, as well as additional costs relating to the Companys efforts to effect a going
private transaction by reducing its registered shareholders to less than 300.



Interest expense decreased $31,604, or 10.9% to $257,606 for the six months ended January 31, 2005 from $289,210 for the six months ended January 31, 2004 and decreased .3% as a percentage of total revenue to 1.3%
from 1.6%, relating to decreased indebtedness, offset with a higher effective interest rate.



Loss on sale of property and equipment increased $55,473, or 476.0% to $67,126 for the six months ended January 31, 2005 compared to $11,653 for the six months ended January 31, 2004, relating to the expansions or
relocations of certain stores based on targeted market analysis.



Income before income taxes decreased $584,600, or 163.1% to a loss of $226,085 for the six months ended January 31, 2005 compared to income of $358,515 for the six months ended January 31, 2004 and decreased 3.1% as a percentage of total
revenue to a loss of 1.2% compared to income of 1.9%, relating primarily to the Company transitioning to a more aggressive pricing model necessary to increase customer traffic. Management remains diligent in controlling costs and operating expenses
and believes that, combined with revenue increases, the Company will improve its profitability.



17



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)



Financial condition, liquidity and capital resources



For the six months ended January 31, 2005, the
Companys net cash flows from operating activities were $5,738,007 as compared to $5,536,883 for the six months ended January 31, 2004. The increase in cash provided by operations was primarily due to decreased outflow for working capital
commitments.



For the six months ended January 31, 2005, the
Companys net cash flows used in investing activities were $5,649,861 as compared to $4,333,789 for the six months ended January 31, 2004. The Companys investing activities reflects a $1,273,744 increase in the purchase of rental units.
The increase in the amount of rental merchandise purchased during the six months is a result of strong consumer demand. Additions to property and equipment increased $149,397 primarily due to relocating five store locations in the year, as well as
additions for one new store opening in the year.



For the six
months ended January 31, 2005, the Companys net cash flows used in financing activities were $79,833 as compared to $685,905 for the six months ended January 31, 2004. The decrease cash flows used in financing activities principally reflects
increased borrowings of the Companys debt.



On August
13, 2004, the Company amended and restated its Revolving Credit Loan Agreement with its lender. In the amendment, the lender extended the maturity date from May 31, 2006 to May 31, 2007 and modified certain covenants relating to Interest Coverage
Ratio and Profitability, as well as increased the aggregate amount for Capital Expenditures and Acquisitions.



On August 13, 2004, the Company and the lender amended the subordinated note payable to a limited partnership, which is a stockholder of the Company,
dated October 26, 2001. The amendment extended the maturity date from May 31, 2006 to May 31, 2007.



The Companys capital requirements relate primarily to purchasing rental merchandise and working capital requirements for new and existing stores.
The Companys primary source of liquidity and capital are from operations and borrowings. For the six months ended January 31, 2005, the Company had generated sufficient cash flows from operations to meet its operating and investing needs.
Management believes that operating cash flows combined with available line of credit of $6,100,000 under the Revolving Credit Loan Agreement provide adequate resources to meet the Companys future cash obligations.



Inflation



Although the Company cannot precisely determine the effects of inflation on
its business, it is managements belief that the effects on revenues and operating results have not been significant.



18



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)



Recently issued accounting principle



In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (revised 2004). This Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those
equity instruments. FAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. FAS 123(R) is effective for the Company beginning in fiscal year 2006. The Company is
in the process of assessing the impact of the adoption of FAS 123(R) on the Companys financial position and results of operations.



ITEM 4. CONTROLS AND PROCEDURES



The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to the Companys management, including the principal executive Officer and
the principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.



The Companys management, including the Companys principal executive officer and principal financial officer, conducted an evaluation of the
effectiveness of the Companys design and operation of its disclosure controls and procedures as of the end of the period covered by this Form 10-Q. The evaluation included consideration of facts and circumstances surrounding corrections of
presentations of the Companys cash flow activities. These corrections resulted in the restatement of the Companys consolidated financial statements as of July 31, 2004, 2003 and 2002 and for the interim period ended January 31, 2004 as
described in Note 11 of the condensed consolidated financial statements included in Item 1 of this Form 10-Q. As a result of the restatements and the related material weakness discussed below, the principal executive officer and the principal
financial officer concluded that, as of July 31, 2004, the Companys disclosure controls and procedures were not effective at a reasonable level of assurance. Notwithstanding this material weakness discussed below, the Companys management
has concluded that the restated condensed consolidated financial statements included in this report present fairly, in all material respects the Companys financial position and results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles.



A
material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of July
31, 2004, the Companys controls over assessment of cash flow activities were ineffective to ensure that cash flow activities were presented in accordance with generally accepted accounting principles. Specifically, the Company presented cash
flows from sales of rental merchandise as an operating activity rather than an investing activity, which resulted in restatements of the Companys consolidated financial statements for the years ended July 31, 2004, 2003 and 2002 and the
interim period ended January 31, 2004. Additionally, if the control deficiency is not remediated, it could result in a misstatement of the aforementioned financial statement accounts and disclosures that would result in a material misstatement to
annual or interim financial statements that would not be prevented or detected. Accordingly, management of the Company has concluded that this control deficiency constitutes a material weakness and effective internal control over financial reporting
was not maintained as of July 31, 2004.



Changes in Internal
Control over Financial Reporting



In the first quarter of
2005, the Company remediated the material weakness in internal control over financial reporting. The Company implemented controls to ensure that all cash flow activities are assessed in accordance with Statement of Financial Accounting Standards No.
95 Statement of Cash Flows.



Other than the
foregoing, there have been no changes in the Companys internal control over financial reporting that occurred since July 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.



19



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



PART II OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



In July
2003, the County Court of the Second Judicial District of Bolivar County, Mississippi entered final judgment against the Company in a lawsuit brought by a former lessor. The lessor alleged that the Company had breached the terms and conditions of a
lease agreement for a store location in Mississippi when the Company vacated the premises and failed to properly notify the lessor of its intentions not to exercise an option extending the original lease term. The judgment against the Company was
for approximately $70,000, including attorney fees. The Company appealed the judgment at the Circuit Court and on November 18, 2004, the judgment of the County Court was affirmed. The Company has appealed the Circuit Court judgment to the Supreme
Court of Mississippi. While the Company continues to believe that it has a meritorious defense to the plaintiffs claim, the Company had accrued the $70,000 judgment.



The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business.
Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, SIGNATURES



|                                                               |  |                                                                                                    
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------
|(a) Exhibits required by Item 601 of Regulation S-K           
|                                                               | 
|31.1*                                                          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|                                                               | 
|31.2*                                                          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|                                                               | 
|32.1*                                                          |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                                                               | 
|32.2*                                                          |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                                                              
|*  Filed herewith                                             
|                                                              
|(b) Report on Form 8-k for the quarter ended January 31, 2005:
|                                                              
|None                                                          



20



---

##### Table of Contents

|              |  |          
|------------- |  | ---------
|BESTWAY, INC. |  | FORM 10-Q



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.





April 15, 2005



BESTWAY, INC./s/ Beth A. DurrettBeth A. DurrettChief Financial Officer(Principal Financial Officer and duly authorized to sign on behalf of the Registrant)




21