<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

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

                 For the quarterly period ended March 31, 1998

                         Commission File Number 0-27490

                                 ALRENCO, INC.

             (Exact name of registrant as specified in its charter)

            Indiana                                   35-1480655
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                      Identification No.)

                                714 E. Kimbrough
                               Mesquite, TX 75149
                                 (972) 288-9327

                   (Address, including zip code and telephone
                   number, including area code of registrant's
                          principal executive offices)

                                      NONE
                     (Former name, former address and former
                    fiscal year if changed since last report)

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

The number of shares outstanding of the issuer's common stock, as of the close
of business May 11, 1998: 16,975,271






<PAGE>   2



                                 ALRENCO, INC.

                                     INDEX

<TABLE>
<CAPTION>


PART I. Financial Information                                                           Page No.
<S>                                                                                     <C>
     Item 1. Financial Statements

           Consolidated Balance Sheets as
                   of December 31, 1997 and March 31, 1998                                  3

           Consolidated Statements of Operations for
                   the three months ended March 31, 1997 and 1998                           4

           Consolidated Statements of Cash Flows for the
                   three months ended March 31, 1997 and 1998                               5

           Notes to Condensed Financial Statements                                          6

           Item 2. Management's Discussion and Analysis of
                   Financial Condition and Results of Operations                            7

Part II. Other Information

     Item 4. Submission of Matters to a Vote of Security Holders
    
     Item 5. Other Information

     Item 6. Exhibits and Reports on Form 8-K

</TABLE>

SIGNATURES



<PAGE>   3


                         PART I. FINANCIAL INFORMATION
                                      
Item 1. Financial Statements

                         ALRENCO, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                               December 31,        March 31,
                                                                   1997              1998
                                                                                 (Unaudited)
                                   ASSETS                      -------------    -------------

<S>                                                            <C>              <C>
Cash and cash equivalents                                       $  3,569,132     $  6,627,968
Rental merchandise, net                                           97,260,578       97,733,238
Prepaid expenses and other assets                                  6,342,919        6,831,905
Deferred income taxes                                              6,135,051        6,135,051
Property and equipment, net                                       15,038,978       15,936,327
Notes receivable                                                     243,535          191,891
Income tax receivable                                              2,429,249        2,417,669
Intangible assets, net                                            92,541,249       90,628,694
                                                               -------------    -------------
              Total assets                                      $223,560,691    $ 226,502,743
                                                               =============    =============
                     LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable, trade                                        $  18,701,265    $  20,035,323
Accrued liabilities                                               12,393,040       13,260,513
Deferred income taxes                                              1,293,919        1,293,919
Notes payable                                                     48,161,872       55,768,192
                                                               -------------    -------------
              Total liabilities                                   80,550,096       90,357,947
                                                               -------------    -------------

Commitments and contingencies

Stockholders' equity:
    Preferred stock, no par; 10,000,000 shares
       authorized; none issued or outstanding                           --                --
    Common stock, no par; 75,000,000 shares
        authorized; 16,957,119 and 16,973,448 shares
        issued and outstanding in 1997 and 1998,
        respectively                                             149,385,777      149,599,883
    Unamortized stock awards                                        (987,810)              --
    Accumulated deficit                                           (5,387,372)     (13,455,087)
                                                               -------------    -------------
              Total stockholders' equity                         143,010,595      136,144,796
                                                               -------------    -------------
              Total liabilities and stockholders' equity       $ 223,560,691    $ 226,502,743
                                                               =============    =============

</TABLE>

The accompanying notes are an integral part of these statements.




<PAGE>   4


                                      
                        ALRENCO, INC. AND SUBSIDIARIES
               Consolidated Statements of Earnings (Unaudited)


<TABLE>
<CAPTION>
                                                     For the Three Months Ended
                                                              March 31,
                                                    ----------------------------
                                                         1997           1998
                                                    ----------------------------
<S>                                                 <C>             <C>         
Revenue:
    Rental and fee revenue                          $ 50,971,556    $ 61,861,953
    Cash sales and other revenue                       2,373,929       3,680,907
                                                    ------------    ------------
             Total revenue                            53,345,485      65,542,860
                                                    ------------    ------------
Operating expenses:
    Direct store expenses:
        Depreciation and disposition of rental
             merchandise                              15,188,513      19,134,206
        Other                                         27,755,884      35,811,566
                                                    ------------    ------------
                                                      42,944,397      54,945,772
    Corporate expenses                                 5,340,527       5,671,274
    Cost of business combinations                        402,731      11,044,613
    Name change expense                                       --         407,575
    Amortization of intangibles                        2,793,436       1,939,355
                                                    ------------    ------------
             Total operating expenses                 51,481,091      74,008,589
                                                    ------------    ------------
             Operating income (loss)                   1,864,394      (8,465,729)
    Other income (expense):
        Interest expense                                (422,895)     (1,096,842)
        Interest income                                  120,223          73,981
        Other non-operating income (expense), net        (59,321)          5,605
                                                    ------------    ------------
             Income (loss) before income taxes         1,502,401      (9,482,985)
Income tax expense (benefit)                           1,183,353      (1,415,270)
                                                    ------------    ------------
             Net income (loss)                      $    319,048    $ (8,067,715)
                                                    ============    ============
Pro forma information:
    Pro forma income                                $    319,048   
    Pro forma income tax benefit                        (213,835)  
                                                    ------------    
    Pro forma net income                            $    532,883   
                                                    ============
Pro forma net income and net loss per share
    Basic                                           $        .03    $       (.48)
                                                    ============    ============
    Diluted                                         $        .03    $       (.48)
                                                    ============    ============
Weighted average shares outstanding
    Basic                                             16,919,357      16,961,462
                                                    ============    ============
    Diluted                                           17,056,564      16,961,462
                                                    ============    ============
</TABLE>


        The accompanying notes are an integral part of these statements.
                                                                 



<PAGE>   5



                        ALRENCO, INC. AND SUBSIDIARIES
              Consolidated Statements of Cash Flows (Unaudited)


<TABLE>
<CAPTION>

                                                               For the Three Months Ended
                                                                        March 31,
                                                            ----------------------------------
                                                                1997                  1998
                                                            -----------          -------------
<S>                                                         <C>                  <C>      
Cash flows from operating activities:
   Net income (loss)                                        $   319,048          $ (8,067,715)
   Adjustments to reconcile net income (loss) to net 
             cash provided by (used in) operating
             activities:
             Loss on sale of property and equipment              59,321               169,612
             Depreciation and disposition of rental
                 merchandise                                 15,188,513            19,134,206
             Amortization of intangibles and stock
                 awards                                       2,793,436             2,927,165
             Depreciation of property and equipment             713,597               893,625
             Deferred income taxes                             (184,582)                   --
   Changes in operating assets and liabilities,
             net of effects of acquisitions of
             businesses:
             Purchase of rental merchandise                 (16,484,308)          (19,232,179)
             Accounts payable and accrued expenses              963,897             2,201,531
             Prepaid expenses and other assets               (1,433,808)             (488,986)
             Income taxes receivable                            665,385                11,580
                                                           ------------          ------------
                    Net cash provided by (used in)
                        operating activities                  2,600,499            (2,451,161)
                                                           ------------          ------------
Cash flows from investing activities:
   Purchase of property and equipment                        (1,182,970)           (1,943,533)
   Proceeds from sale of property and equipment                  52,536                67,834
   Acquisitions of businesses, net of cash acquired         (33,606,004)             (486,374)
   Payments received on notes receivable                      1,058,689                51,644
                                                           ------------          ------------
               Net cash used in investing activities        (33,677,749)           (2,310,429)
                                                           ------------          ------------
Cash flows from financing activities:
   Purchase of common stock from dissenters                    (265,679)                   --
   Proceeds from stock options                                   39,088               214,106
   Net repayment of old revolving credit facilities                  --           (45,725,592)
   Net borrowings under old revolving credit
       facilities                                            10,116,807             4,036,307
   Net borrowings under new revolving credit
       facilities                                                    --            50,000,000
   Payments on notes payable and capital leases                      --              (704,395)
</TABLE>



<PAGE>   6

<TABLE>

<S>                                                                        <C>                  <C>         
    Distributions to S corporation shareholders                                 (76,616)                 -- 
                                                                            -----------          ---------- 
                  Net cash provided by financing                                                            
                        activities                                            9,813,600           7,820,426 
                                                                            -----------          ---------- 
Net increase (decrease) in cash                                             (21,263,650)          3,058,836 
Cash at beginning of period                                                  35,745,989           3,569,132 
                                                                            -----------          ---------- 
Cash at end of period                                                       $14,482,339          $6,627,968 
                                                                            ===========          ========== 
</TABLE>

        The accompanying notes are an integral part of these statements.



<PAGE>   7



                         ALRENCO, INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION. The accompanying unaudited consolidated financial 
   statements of Alrenco, Inc. (the "Company") have been prepared in accordance
   with generally accepted accounting principles for interim financial
   information and with the instructions to Rule 10-01 of Regulation S-X.
   Accordingly, they do not include all the information and footnotes required
   by generally accepted accounting principles for complete financial
   statements. In the opinion of the Company, the accompanying unaudited
   consolidated financial statements contain all adjustments (consisting of
   only normal recurring accruals) necessary to present fairly the financial
   position of the Company as of March 31, 1998, the results of operations for
   the three month periods ended March 31, 1997 and 1998, and the statements of
   cash flows for the three month periods ended March 31, 1997 and 1998. The
   results of operations for the three months ended March 31, 1998 are not
   necessarily indicative of the operating results for the full year. These
   interim financial statements should be read in conjunction with the Form
   10-K for the year ended December 31, 1997, including the financial
   statements and notes contained therein, filed with the Securities and
   Exchange Commission and the financial statements included in Part II, Item 5
   of this quarterly report on Form 10-Q.

2. ACQUISITIONS

      During the quarter ended March 31, 1997, the Company purchased 72 rental-
   purchase stores and 7 rental-purchase portfolios for $33.6 million which were
   accounted for as purchases. During the quarter ended March 31, 1998, the
   Company purchased 1 store which had not been opened, 1 store which was an
   operating location and 1 store portfolio for approximately $0.5 million.

      The above acquisitions have been accounted for as purchases, as defined
   by APB 16 and, accordingly, the operating results of the acquired businesses
   have been included in the results of operations since their respective
   acquisition dates. The purchase prices have been allocated as follows:


   <TABLE>
   <CAPTION>

                                                March 31, 1997     March 31, 1998
                                                --------------     --------------
   <S>                                          <C>                <C>
   Rental merchandise                            $ 9,966,564        $   374,687
   Property and equipment                          1,671,705             84,920
   Intangible assets                              28,968,152             26,767
   Other assets                                      207,175                 --
   Accounts payable and accrued expenses            (937,620)                --
   Notes payable assumed                          (1,169,972)                --
   Notes payable issued                           (5,100,000)                --
                                                 -----------       ------------   
            Cash paid, net of cash acquired      $33,606,004        $   486,374
                                                 ===========       ============

   </TABLE>

      The following summary, prepared on an unaudited pro forma basis, presents
   the results of operations (i) as if the above transactions had been purchased
   as of the beginning of the year of acquisition and (ii) to include the effect
   of adjustments for amortization of intangibles, interest, income taxes and
   weighted average shares outstanding:



   <TABLE>
   <CAPTION>

                                               Unaudited Pro Forma  
                                              Results of Operations
                                               Three Months Ended   
                                                 March 31, 1997       
                                              ---------------------
   <S>                                        <C>
   Revenue                                           $54,445,485
   Pro forma net income                              $   540,883
   Pro forma net income per share:
        Basic                                        $       .03
        Diluted                                      $       .03

   </TABLE>

      The results of operations for the stores acquired in 1998 have been
   excluded since the amounts are immaterial.

      The unaudited pro forma financial information is presented for
   informational purposes only and is not necessarily indicative of operating
   results that would have occurred had the acquisitions been consummated as of
   the above dates, nor are they necessarily indicative of future operating
   results.

   3. EARNINGS PER SHARE

      On December 31, 1997, the Company adopted provisions of Statement of
   Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." In
   accordance with SFAS 128, the Company computes basic pro forma net income and
   net loss based on the weighted-average number of common shares outstanding
   during each period presented. Diluted pro forma net income and net loss per
   share is computed based on the weighted-average number of common shares plus
   the dilutive effect of all potential dilutive securities, principally stock
   options and convertible notes, outstanding during each period presented. All
   prior period year pro forma net income and net income per share amounts have
   been restated to comply with the provisions of SFAS No. 128.

      Diluted pro forma net income for the three months ended March 31, 1997
   includes 137,207 weighted-average number of shares issuable upon exercise of
   stock option but excludes the effect of certain convertible notes, if
   converted, given these securities increase net income and would be
   antidilutive. Diluted net loss for the quarter ended March 31, 1998 excludes
   the effect of the weighted-average number of shares issuable upon exercise of
   stock options and the effect of convertible notes, if converted, given these
   securities decrease net loss and would be antidilutive.

   4. NOTES PAYABLE

      On February 26, 1998, immediately following the merger of RTO, Inc. with
   and into the Company (the "RTO Merger") the Company entered into a new
   revolving credit facility (the "Comerica Credit Agreement") with Comerica
   Bank, as lender and agent for certain other lenders, which provides for a
   $50,000,000 secured three-year credit facility. The Comerica Credit Agreement
   replaced the existing credit agreements of Alrenco, Inc. and RTO, Inc. The
   Comerica Credit Agreement provides for interest rates based on a base rate
   (as defined), the agent's prime rate or the federal funds rate plus 100 basic
   points, or a "Eurodollar Rate", plus an applicable margin. Under the Comerica
   Credit Agreement, the Company has the option, provided that certain
   conditions are met, to obtain an increase in the amount available under the
   Comerica Credit Agreement up to an aggregate amount of $100 million. The
   Comerica Credit Agreement is collateralized by substantially all assets of
   the Company and by a pledge of the stock of the Company's subsidiaries.

      On April 1, 1998, borrowings available under the Comerica Credit
   Agreement were increased to $60,000,000.

   5. RECLASSIFICATIONS

      Certain reclassifications were made to the prior period financial
   statements to conform with the current period presentation.

   6. STATEMENT OF CASH FLOWS

      Excluded from the Consolidated Statement of Cash Flows for the three
   months ended March 31, 1997 is the issuance of common stock to settle notes
   payable totalling $587,500 to certain shareholders. There were no noncash
   activities for the three months ended March 31, 1998.

   7. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

      The Company adopted Statement of Financial Accounting Standards No. 130
   "Reporting Comprehensive Income" ("SFAS No. 130") for its fiscal year ending
   December 31, 1998. SFAS No. 130 requires the Company to display an amount
   representing the total comprehensive income for the period in the financial
   statements which is displayed with the same prominence as other financial
   statements. The Company has no items of other comprehensive income in any
   period presented and therefore is not required to report comprehensive
   income.
   
<PAGE>   8

                                 ALRENCO, INC.

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

GENERAL

On February 26, 1998, Alrenco, Inc. (the "Company") completed its merger (the
"RTO Merger") with RTO, Inc. ("RTO"), pursuant to which RTO merged with and into
the Company. In connection with the RTO Merger, the corporate offices of the
Company were closed and relocated from Indiana to Texas by mid-March 1998. Costs
related to the RTO Merger and the relocation of the Alrenco office are included
in Costs of Business Combinations.

At March 31, 1998 the Company operated 440 stores. During the quarter ended
March 31, 1998 the Company acquired 1 store location, purchased 1 rental
portfolio and opened 14 new store locations. The Company also sold 1 store
and merged 6 stores into existing locations. During the quarter ended 
March 31, 1997, the Company opened 5 new stores, purchased 7 rental
portfolios and purchased 80 stores. At March 31, 1997, the Company operated
383 stores.

RESULTS OF OPERATIONS

         Revenue. Revenue for the quarter ended March 31, 1998 increased 
$12.2 million or 23% to $65.5 million from $53.3 million for the comparable
quarter in 1997. Same store revenue during the first quarter of 1998 increased
$3.6 million or 7.1% to $53.9 million from $50.3 million for the same quarter
last year. New stores opened in 1997 contributed $2.7 million to the increase
from the quarter ended March 31, 1997. Revenues from 1997 purchase acquisitions
increased $5.9 million from $2.9 million for the quarter ended March 31, 1997 to
$8.8 million for the quarter ended March 31, 1998. Revenues for the first
quarter 1998 increased $4.0 million or 6.5% from $61.5 million for the quarter
ended December 31, 1997.

         Depreciation and Disposition of Rental Merchandise. Depreciation and
disposition of rental merchandise increased $3.9 million or 26.0% to $19.1
million for the quarter ended March 31, 1998 from $15.2 million for the
comparable period in 1997. The increase in depreciation and disposition of
rental merchandise is primarily derived from (i) $2.0 million from existing
stores, (ii) $1.0 million from 1997 purchase acquisitions and (iii) $822,000
from new stores opened in 1997. As a percentage of revenues, depreciation and
disposition of rental merchandise for the first quarter of 1998 increased
slightly to 29.2% from 28.5% for the comparable quarter in 1997. As a
percentage of revenues, depreciation and disposition of rental merchandise for
the quarter ended March 31, 1998 decreased 2.0% from 31.2% for the quarter
ended December 31, 1997 primarily due to the 6.5% increase in revenues in 1998
from the fourth quarter in 1997.

         Other Direct Store Expenses. Other direct store expenses increased $8.1
million or 29.0% to $35.8 million for the quarter ended March 31, 1998 from
$27.8 million for the comparable period in 1997. The increase in other direct
store expenses is primarily attributable to (i) $2.3 million increased cost
from the 1997 new store openings, (ii) $1.4 million increase in costs from the
1997 purchase acquisitions, (iii) $500,000 from the 1998 new store openings and
$3.9 million from the Company's existing stores. As a percentage of revenues,
other direct store expenses increased 2.6% from 52.0% in 1997 to 54.6% in 1998.

         Corporate Expenses. Corporate expenses increased $331,000 or 6.2% to
$5.7 million for the first quarter in 1998 from $5.3 million for the comparable
period in 1997. The increase is a result of the increase in staff and
facilities necessary to administer the 1997 purchase and pooling acquisitions
and the RTO Merger offset by cost savings realized from closing and merging the
redundant corporate offices of the 1997 pooling acquisitions. As a percentage
of revenues, corporate expenses decreased to 8.7% in 1998 from 10.0% in 1997.

         Cost of Business Combinations. Cost of business combinations for the
quarter ended March 31, 1998 increased $10.6 million to $11.0 million from
$403,000 for the comparable period in 1997. In 1998, cost of business
combinations are attributable to costs associated



<PAGE>   9
with the RTO Merger. The RTO Merger costs included (i) investment banker fees,
proxy preparation, printing and other professional fees; (ii) employee severance
and other costs associated with relocating the corporate headquarters from
Indiana to Texas; (iii) costs related to closing and merging stores in same
markets following the RTO Merger; (iv) amortization expense of stock awards 
which vested fully upon the RTO Merger and (v) costs associated with terminating
certain leases. Cost of business combinations in 1997 were incurred in
connection with 7 pooling combinations acquired by RTO during the first quarter
of 1997.

         Name Change Expenses. During the quarter ended December 31, 1997, prior
to its merger with the Company, RTO initiated a program to change the name of
its stores to "HomeChoice Lease or Own" from the various trade names it
acquired in its 1996 and 1997 purchase and pooling acquisitions. The Company
incurred $408,000 during the quarter ended March 31, 1998 in connection with
the program. The Company expects these expenses to continue through the
remainder of 1998.

         Amortization of Intangibles. Amortization of intangibles decreased
$854,000 to $1.9 million in 1998 from $2.8 million in 1997. As a percentage of
revenues, amortization of intangibles decreased from 5.2% in 1997 to 3.0% in
1998. This decrease is attributable to the reduced amortization expense of  
the 1996 and 1997 purchase acquisitions primarily for customer rental agreements
which are amortized on an accelerated method over a life of 18 months.

         Net Income (Loss). Net income (loss) for the quarter ended March 31, 
1998 decreased $8.4 million from net income of $300,000 for the quarter ended
March 31, 1997 to a net loss of $8.1 million for the quarter ended March 31,
1998 principally due to increased cost of business combinations and name change
expenses. Net loss attributable to new store openings increased $450,000 to
$550,000 for the quarter ended March 31, 1998 from net losses of $100,000
during the comparable period in 1997.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary requirements for capital consist of the
acquisition of existing stores (including the retirement of any assumed
indebtedness), the opening of the new stores, the purchase of additional rental
merchandise for new store openings and replacement of rental merchandise which
has been sold, charged-off, rented to term or is no longer suitable for rent.

         Historically, the Company's growth has been financed through internally
generated working capital, borrowings under loan agreements and issuances of
common stock. During the three months ended March 31, 1997 and 1998, the Company
did not issue any common stock for purposes of capital.

         The Company expects to open 50 new stores during 1998, including
fourteen stores opened during the three months ended March 31, 1998. New stores
opened in 1998 are expected to operate at a loss for a period of six to nine
months from their respective openings. Acquired stores may also be unprofitable
when acquired or may become unprofitable during the period of acquisition due to
disruptions in their business operations caused by the acquisition. Some stores
acquired as part of an acquisition of a larger group of stores may be closed
because they are unprofitable. The operating results of the new and acquired
stores may also suffer because of disruptions associated with integrating their
operations into the existing operations of the Company. Because of these
factors,the growth of the Company's business through new store openings and
acquisitions of existing stores is likely to affect the Company's results of
operations and financial condition. Such factors may also cause results to vary
from quarter to quarter and may cause the market price of Common Stock to
fluctuate substantially.

         On February 26, 1998, immediately following the RTO Merger, the Company
entered into a revolving credit facility with Comerica Bank as lender and agent
for certain other lenders (the "Comerica Credit Agreement") which provides for a
$50,000,000 secured three-year credit facility. Under the Comerica Credit
Agreement, the Company has the option, provided that certain conditions are
met, to increase the amount available under the Comerica Credit Agreement to
$100 million. On April 1, 1998, the Company entered into an agreement to
increase the amount of the revolving line of credit under the Comerica Credit
Agreement to $60 million. While management of the Company does not believe that
the $60 million currently available under the Comerica Credit Agreement along
with the Company's current internal working capital will be sufficient to fully
meet all of the Company's capital requirements, management believes that the
Company will be able to meet the conditions required to increase the amount
available under the Comerica Credit Agreement to $100 million. In the opinion
of management, this additional available credit will allow the Company to fully
meet all of its capital requirements. If, for some reason, the Company does not
meet the conditions required to increase the amount of credit available under
the Comerica Credit Agreement and is unable to generate additional capital
through borrowing or other means, the Company may not be able to fully pursue
its strategic plan.


<PAGE>   10



                                 ALRENCO, INC.

                           PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

         On February 26, 1998, a special meeting of the Company's shareholders
was convened for the purpose of considering the Agreement and Plan of Merger
(the "Merger Agreement"), dated September 28, 1997, as amended, between the
Company and RTO. In addition to providing for the merger of RTO with and into
the Company, the Merger Agreement also provided that George D. Johnson, Jr.,
Michael D. Walts, Billy W. White, Sr., Edward W. Phifer, III, and John S. Rainey
would serve as the directors of the combined company. The Merger Agreement also
provided for the amendment and restatement of the Company's articles of
incorporation and bylaws. The Merger Agreement was approved by the Company's
shareholders by a vote of 4,802,474 votes in favor, 6,690 votes opposed and
5,029 votes abstaining.

Item 5. Other Information.

      Item 5 information included in this Quarterly Report on Form 10-Q of
Alrenco, Inc. (the "Company") includes the following information not previously
disclosed on Form 8-K which is not otherwise required by this Form:

     (a)     Resignation of Billy W. White as President of the Company

      On May 1, 1998, Billy W. White, Sr. resigned from his position as
President of the Company. On the same date James G. Steckart, Chief Operating
Officer of the Company, was elected to succeed Mr. White as President of the
Company. Mr. White will continue as Chief Executive Officer and a director of 
the Company.

     (b)     Comerica Bank Credit Agreement 

      On April 1, 1998, the Company signed the Amended and Restated Revolving
Credit Agreement with Comerica Bank, as agent, and Bank One, Texas, N.A., as
co-agent ("the Credit Agreement"). The Credit Agreement increased the
Company's revolving line of credit, to $60 million from $50 million.

     (c)      Restated Consolidated Financial Statements of the Company which
account for the RTO Merger, and related Management's Discussion and Analysis of
Financial Condition and Results of Operations for the years ended December 31,
1995, 1996 and 1997. The RTO Merger was accounted for as a pooling of interests
under Accounting Principals Board Opinion No. 16 ("APB 16"), and the
consolidated financial statements of the Company have been prepared to give
retroactive effect to the RTO Merger.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Company, and the accompanying notes
thereto included elsewhere in this report.
 
GENERAL
 
     On February 26, 1998, the Company merged (the "RTO Merger") with RTO, Inc.
("RTO") in the RTO Merger. Alrenco began operations in 1980 and RTO began
operations in 1996. Prior to the RTO Merger, the management of both the Company
and RTO grew their operations through diverse strategies which are described
below.
 
     Alrenco Acquisitions. The Company grew primarily through the opening of new
stores from its inception in 1980 through 1990. During the period from 1990 to
1993, management focused its efforts on improving the performance of the
Company's stores and, as a result, the Company increased its revenue from $16.3
million to $22.3 million. During the same period, operating profit increased
from $908,000 to $2.0 million and net earnings increased from $119,000 to $1.0
million.
 
     In 1994, the Company acquired 18 rental-purchase stores (the "1994 Alrenco
Acquisition"). The purchase price for the stores was $3.5 million, all of which
was borrowed under the Company's then existing bank loan agreement (the "Loan
Agreement").
 
     In September 1995, the Company acquired 15 stores (the "1995 Alrenco
Acquisition"). The purchase price for the stores was $5.9 million, all of which
was borrowed under the Loan Agreement.
 
     In 1996, the Company acquired 75 stores (the "1996 Alrenco Acquisitions")
in 23 separate transactions, for an aggregate purchase price of $25 million. The
Company utilized borrowings under the Loan Agreement and the Company's cash
reserves to fund these acquisitions.
 
     In 1997, the Company acquired 54 stores and 13 rental-purchase portfolios
in 19 separate transactions for an aggregate purchase price of $25.5 million
(the "1997 Alrenco Acquisitions"). The Company purchased the stores through
borrowings under the Loan Agreement and use of cash reserves.
 
     On February 26, 1998, the Company acquired 275 stores as a result of the
RTO Merger. The Merger Agreement provided that each of the 120,960 outstanding
shares of RTO Common Stock was to be converted into the right to receive 89.795
shares of Common Stock. As a result of the RTO Merger, the Company now operates
275 stores formerly operated by RTO.
 
     RTO Acquisitions.  RTO was incorporated on June 20, 1996 and since that
time has aggressively sought to establish its store base through multiple
significant store acquisitions, new store openings and smaller store
acquisitions.
 

<PAGE>   11

     In July and August of 1996, RTO purchased 109 stores (the "1996 RTO
Purchase Acquisitions") in two separate transactions which included the purchase
of Action TV & Appliance Rental, Inc.'s ("Action") 102 store chain (the "Action
Acquisition"). The 1996 RTO Purchase Acquisitions were accounted for under
"purchase" accounting as defined by Accounting Principles Board Opinion No. 16
("APB 16"). During 1997, RTO purchased, in transactions accounted for as
purchases, an additional 73 stores in a series of transactions for cash, notes
payable and convertible debt (the "1997 RTO Purchase Acquisitions"). Finally,
during the last three months of 1996 and the year ended December 31, 1997, RTO
acquired 59 stores in transactions accounted for as pooling-of-interests (the
"1996 RTO Pooling Acquisitions" and the "1997 RTO Pooling Acquisitions" and,
collectively with the 1996 RTO Purchase Acquisitions and the 1997 RTO Purchase
Acquisitions, the "RTO Acquisitions").
 
     RTO New Store Openings.  During the year ended December 31, 1997, RTO
opened 34 new stores. From January 1, 1998 until March 25, 1998, RTO opened
eight additional stores. Management of the Company expects to open 50 new stores
during 1998, including the eight stores opened to date.
 
     Operating Results of New and Acquired Stores.  New stores are expected to
operate at a loss for a period of six to nine months after opening. Acquired
stores may also be unprofitable when acquired or may become unprofitable during
the period of acquisition due to disruptions in their business operations caused
by the acquisition. Some stores acquired as part of an acquisition of a larger
group of stores may be closed because they are unprofitable. The operating
results of new and acquired stores may also suffer because of disruptions
associated with integrating their operations into the existing operations of the
Company. Because of these factors, the growth of the Company's business through
new store openings and acquisitions of existing stores is likely to affect the
Company's results of operations and financial condition. Such factors may also
cause results to vary from quarter to quarter and may cause the market price of
Common Stock to fluctuate substantially.
 
CERTAIN COMPONENTS OF NET EARNINGS
 
     
     Total Revenue.  The Company collects non-refundable rental payments and
fees in advance, generally on a weekly basis. This revenue is recognized as
collected over the rental term. Rental-purchase agreements include a discounted
early purchase option. Amounts received upon sales of merchandise pursuant to
these options and upon the sale of used merchandise are recognized as revenue
when the merchandise is sold.
 
     Depreciation and Disposition of Rental Merchandise.  Rental merchandise is
carried at the lower of cost or net realizable value. Depreciation is provided
using the income forecasting method or straight-line method over a period
designed to approximate the income forecasting method. The income forecasting
method is designed to match as closely as practicable the recognition of
depreciation expense with the consumption of the rental merchandise. The
consumption of rental merchandise occurs during periods of rental and directly
coincides with the receipt of rental revenue over the rental-purchase agreement
period, generally 18 to 24 months. Under the income forecasting method,
merchandise held for rent is not depreciated, and merchandise on rent is
depreciated in the proportion of rents received to total rents required to
obtain ownership as provided in the rental agreement. The income forecasting
method is an activity-based method similar to the units of production method.
Disposition of rental merchandise represents the expensing of the remaining
carrying value of rental merchandise sold, charged off or rented until owned by
the customer. Rental merchandise acquired by the Company prior to January 1,
1995 was being depreciated by the straight-line method over various estimated
useful lives, primarily 21 months. For rental merchandise acquired after January
1, 1995, the Company adopted the income forecasting method of depreciation. The
effect of the change in accounting method was to increase Alrenco's net earnings
by approximately $470,000 for the year ended December 31, 1995. Effective
January 1, 1997, RTO and its new subsidiaries elected to depreciate all
additions to rental merchandise acquired subsequent to December 31, 1996 using
the income forecasting method and make other conforming changes to the estimate
of depreciation expense. These changes were made to more accurately match
revenues and expenses. The impact of these changes on the results of operations
for the year ended December 31, 1997 decreased net loss by approximately
$400,000.

<PAGE>   12
     Other Direct Store Expenses.  Other direct store expenses include salaries,
wages and related expenses paid to all store level, regional management and
service department employees, store-level occupancy costs, advertising cost and
other direct store-level expenses, including general and administrative
expenses, delivery and collection expenses and non-rental depreciation.
 
     Corporate Expenses.  Corporate expenses include all overhead expenses
related to corporate and division offices such as salaries, taxes and benefits,
occupancy, training, travel expenses and certain performance bonuses to regional
managers and store personnel. Regional costs are included in "Direct Store
Expenses."
 
     Amortization of Intangibles.  Amortization of intangibles consists
primarily of the amortization of rental-purchase agreements, noncompetition
agreements and the excess of purchase price over the fair market value of
acquired assets.
 
     Income Tax Expense.  Income taxes are determined by use of the liability
method in which deferred income taxes are provided for temporary differences
between the financial reporting and income tax basis of assets and liabilities
using the income tax rates under existing legislation expected to be in effect
at the date such temporary differences are expected to reverse.
 
     Since certain of RTO's business combinations involved companies which were
nontaxable enterprises, unaudited pro forma tax expense (benefit) has been
presented for the nontaxable enterprises as if they had been taxable enterprises
for periods prior to consummation.
 
RESULTS OF OPERATIONS -- CONSOLIDATED RESULTS OF OPERATIONS OF THE COMPANY
 
     The consolidated financial statements reflect the financial position and 
results of operations of the 1996 Alrenco Acquisitions, the 1996 RTO Purchase
Acquisitions and the 1997 RTO Purchase Acquisitions from their respective dates
of acquisition through 1997, consistent with the requirements of APB 16 for
purchase acquisitions. In addition, the consolidated financial statements
reflect the financial position and results of operations of the 1996 RTO
Pooling Acquisitions and the 1997 RTO Pooling Acquisitions as though the
Company and the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling
Acquisitions had operated as a single business for all periods required to be
presented consistent with the requirements of APB 16 for pooling-of-interests
acquisitions.
 
     Acquisitions accounted for as pooling-of-interests transactions, as
compared to acquisitions accounted for as purchases, generally require a longer
period of time to consummate. During the period between the time that the
Company reaches an agreement in principle to purchase a business and the
consummation of the transaction, the operations of such business are still under
the control of the seller. Any failure of the seller to operate the business in
accordance with sound business practices may adversely affect the operating
results of such business.
 
     The operating results of certain of the 1996 RTO Pooling Acquisitions and
the 1997 RTO Pooling Acquisitions declined substantially during the last half of
1996 and the first half of 1997. Management believes that this decline is
attributable primarily to a failure of these businesses to properly replenish
rental merchandise while the acquisitions of the businesses were pending, which
resulted in the businesses not having adequate inventories during the fourth
quarter of 1996 and the first quarter of 1997. The failure of such businesses to
have adequate inventories of rental merchandise during such periods, together
with other factors relating to the operations of these businesses outside the
control of RTO, resulted in a substantial decline in revenues and net income of
these businesses for the years ended December 31, 1996 and 1997.
 
     Management of the Company continues to believe that the 1996 RTO Pooling
Acquisitions and the 1997 RTO Pooling Acquisitions can be operated profitably.
The 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions were
managed by diverse management teams with significant differences in (i) goals
and objectives relating to profitability, (ii) access to capital resources,
(iii) operating philosophies and strategies, and (iv) compensation programs.
Management has taken steps to replenish inventories at these businesses and to
implement operational controls, compensation plans and other systems designed to
improve the performance of these businesses. As a result of these steps, results
of operations of the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling
Acquisitions improved significantly during the third and fourth quarters of
1997.
 
<PAGE>   13
 
     The following table sets forth, for the periods indicated, certain
consolidated Statement of Operations data as a percentage of revenue.
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                                --------------------------
                                                                 1995      1996      1997
                                                                ------    ------    ------
<S>                                                             <C>       <C>       <C>
Rental and fee revenue......................................     96.7%     97.6%     96.7%
Cash sales and other revenue................................      3.3       2.4       3.3
                                                                -----     -----     -----
          Total revenue.....................................    100.0     100.0     100.0
                                                                -----     -----     -----
Depreciation and disposition of rental merchandise..........     32.3      29.5      29.1
Other direct store expenses.................................     51.6      54.4      55.4
                                                                -----     -----     -----
          Total direct store expenses.......................     83.9      83.9      84.5
Corporate expenses..........................................     10.3       8.6      11.3
Cost of business combinations...............................       --       1.4       0.3
Name change expenses........................................       --        --       0.3
Amortization of intangibles.................................      0.7       3.2       4.3
Key executive signing bonuses...............................       --       1.2       0.2
                                                                -----     -----     -----
          Total operating expenses..........................     94.9      98.3     100.9
                                                                -----     -----     -----
          Operating income (loss)...........................      5.1       1.7      (0.9)
Other income (expense):
  Interest expense..........................................     (3.2)     (1.3)     (1.1)
  Interest income...........................................      0.1       0.5       0.1
  Other non-operating income (expense), net.................      0.3       0.3      (0.1)
  Gain on sale of stores....................................      1.4       0.6       0.4
                                                                -----     -----     -----
          Income (loss) before income taxes and
            extraordinary item..............................      3.7       1.8      (1.6)
Income tax expense..........................................      1.2       0.9       0.1
                                                                -----     -----     -----
          Income (loss) before extraordinary item...........      2.5       0.9      (1.7)
Extraordinary item, net of income tax expense...............      4.3        --        --
                                                                -----     -----     -----
          Net income (loss).................................      6.8       0.9      (1.7)
                                                                =====     =====     =====
</TABLE>
 
 Comparison of Years Ended December 31, 1997 and 1996
 
     Revenue.  Revenue increased $106.8 million, or 86%, to $231.0 million for
the year ended December 31, 1997 from $124.2 million for the comparable period
in 1996. Revenue increased by approximately $105.7 million, or 99.0% of the
total increase, primarily as a result of the inclusion of revenue from the 1997
Alrenco Acquisitions and the 1997 RTO Purchase Acquisitions from the respective
dates of acquisition, and the inclusion of revenue of the 1996 Alrenco
Acquisitions and 1996 RTO Purchase Acquisitions for the full year in 1997.
During 1997, RTO opened 34 new stores generating $2.7 million, or 2.5%, of the
total increase in revenues from 1996 to 1997. The aforementioned revenue
increases were offset in part by a $2.2 million decrease in revenue from the
1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions. See
"-- General -- RTO Acquisitions."
 
     Depreciation and Disposition of Rental Merchandise.  Depreciation and
disposition of rental merchandise expense increased $30.7 million, or 83.9%, to
$67.3 million for the year ended December 31, 1997 from $36.6 million for the
comparable period in 1996. As a percentage of total revenue, depreciation and
disposition of rental merchandise decreased slightly from 29.5% in 1996 to 29.1%
in 1997 primarily due to (i) lower rental merchandise costs as a percentage of
revenue during 1997, due to the failure of certain of the 1996 RTO Pooling
Acquisitions and 1997 RTO Pooling Acquisitions to replenish rental merchandise
during the last quarter of 1996 and the first quarter of 1997 which affects
depreciation expenses because depreciation expense as a percentage of rental
revenue is generally lower for the rental of used merchandise as compared to new
merchandise, (ii) reducing, in accordance with policies of RTO, the percentage
of total revenues contributed by cash sales and other revenue (gross margins are
significantly lower on cash sales relative to margins generated on the rental of
merchandise) for certain of the 1996 RTO Pooling Acquisitions and 1997 RTO
<PAGE>   14
 
Pooling Acquisitions, (iii) increasing, during the year ended 1997, the revenue
generated as a multiple of rental merchandise cost for certain of the 1996 RTO
Pooling Acquisitions and 1997 RTO Pooling Acquisitions in order to conform the
pricing policies of such acquisitions to RTO's pricing policies, and (iv)
electing to depreciate all additions to rental merchandise acquired subsequent
to December 31, 1996 using the income forecasting method and other conforming
changes resulting in a nonrecurring decrease in depreciation expense.
Depreciation and disposition expense in 1997 as a percentage of total revenue
also decreased slightly partially as a result of a more aggressive pricing
strategy used by one of the 1997 RTO Purchase Acquisitions, thereby producing
greater revenues as a multiple of rental merchandise cost. The decreases
described above were offset by the increase in depreciation of rental
merchandise as a percentage of total revenue of Alrenco to 23.8% from 21.9% for
the year ended December 31, 1996, primarily as a result of price and term
discounting in the second, third and fourth quarters of 1997. The factors
contributing to the decline in depreciation of rental merchandise as a
percentage of revenue described in (i) and (iv) above are nonrecurring in nature
and caused depreciation and disposition of rental merchandise as a percentage of
revenue to decrease to a level lower than that which management for the company
believes is sustainable.
 
     Other Direct Store Expenses.  Other direct store expenses increased $60.4
million, or 89.3%, to $128.0 million for the year ended December 31, 1997 from
$67.6 million for the comparable period in 1996. As a percentage of revenue,
other direct store expenses rose from 54.5% in 1996 to 55.4% in 1997. The
increase in direct store expenses as a percentage of revenue is attributable to
(i) $4.7 million of expenses related to the 34 new stores opened in 1997, (ii) a
higher percentage of expenses for the 1996 RTO Purchase Acquisitions and the
1997 RTO Purchase Acquisitions, and (iii) a higher percentage of expenses for
the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions for the
reasons discussed under "-- Results of Operations" above, offset by a decrease
in other direct store expenses as a percentage of revenue for the Alrenco Stores
due to increased revenue from the stores acquired in the 1996 Alrenco
Acquisitions and the 1997 Alrenco Acquisitions.
 
     Corporate Expenses.  Corporate expenses increased $15.4 million, or 144%,
to $26.1 million for the year ended December 31, 1997 from $10.7 million for the
comparable period in 1996. The increase is attributable to (i) the inclusion of
expenses related to the 1996 RTO Purchase Acquisitions and the 1996 Alrenco
Acquisitions for the full year in 1997 and (ii) an increase in RTO and Alrenco's
staff to accommodate the increased stores managed by the Company in 1997 as a
result of the integration of stores acquired in the RTO Acquisitions, the 1996
Alrenco Acquisitions and the 1997 Alrenco Acquisitions. As a percentage of
revenue, corporate expenses increased to 11.3% from 8.6% for the comparable
period in 1996. This percentage increase was due primarily to the duplication of
certain corporate expenses during the transition periods subsequent to the
integration of the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling
Acquisitions and prior to the closing of the RTO Merger offset by advertising
and vendor co-op reimbursements received by Alrenco in the third quarter.
 
     Name Change Expenses.  Following the consummation of the 1996 RTO Pooling
Acquisitions and the 1997 RTO Pooling Acquisitions and the 1996 RTO Purchase
Acquisitions and the 1997 RTO Purchase Acquisitions, the management of RTO
launched a program to change the name of all its stores from the various trade
names acquired to "HomeChoice Lease or Own." RTO incurred nonrecurring costs
totaling $743,000 for items such as expensing the net carrying value of replaced
old signs and branded supplies at 165 of its 267 stores, as well as expensing
new vehicle decals, consistent with prior accounting policies, for 600 of its
750 vehicles. Name change expenses are expected to continue in 1998 for the
conversion of the remaining RTO stores and the conversion of a majority of the
Alrenco stores.
 
     Amortization of Intangibles.  Amortization of intangibles increased $5.9
million, or 147.5%, to $9.9 million in 1997 from $4.0 million in 1996, and as a
percentage of revenue, amortization of intangibles increased to 4.3% for 1997
from 3.2% for the comparable period in 1996. This increase was primarily
attributable to the amortization of noncompetition agreements, customer rental
agreements and goodwill from the 1996 RTO Purchase Acquisitions and the 1997 RTO
Purchase Acquisitions and the 1996 Alrenco Acquisitions and the 1997 Alrenco
Acquisitions.
 
<PAGE>   15
 
     Gain on Sale of Assets.  In August 1997, Alrenco sold eight marginally
performing stores in two separate transactions for an aggregate purchase price
of $3.0 million in cash. Net gain on these transactions was $950,400.
 
     Net Income (Loss).  Net income decreased $5.2 million, or 472.7% to a loss
of $4.1 million for the year ended December 31, 1997, from an income of $1.1
million for the comparable period in 1996, and as a percentage of revenue, net
income decreased to a negative 1.7% from a positive .9% for the comparable
period in 1996. These decreases occurred primarily as a result of higher
amortization of intangibles, operating losses attributable to the 34 new stores
opened by RTO during the year ended December 31, 1997, expenses related to the
Company's store name change program initiated in 1997, and increased corporate
expenses related to integration of the RTO Acquisitions, the 1996 Alrenco
Acquisitions and the 1997 Alrenco Acquisitions. The decrease in net income for
1997 is partially offset by lower business combination costs and related key
executive signing bonuses expensed in 1997 as compared to those expensed in
1996.
 
  Comparison of Years Ended December 31, 1996 and 1995
 
     Revenue.  Revenue increased $46.7 million, or 60.3%, to $124.2 million for
the year ended December 31, 1996, from $77.5 million in 1995. Revenue from
Alrenco's same store operations accounted for $1.3 million of the increase, and
the addition of revenue from the 1995 Alrenco Acquisition and the 1996 Alrenco
Acquisitions accounted for $25.0 million of the increase for the year. The
increase in Alrenco's same store revenue for the period was mainly attributable
to improved performance of the stores acquired in the 1994 Alrenco Acquisition
and the 1995 Alrenco Acquisition, an increase in the number of items on rent and
in revenue earned per item on rent, and improved collections. The remainder of
the increase consisted of the addition of revenue of $25.2 million from the 1996
RTO Purchase Acquisitions, offset in part by a $4.6 million decrease in revenue
resulting from the sale by RTO of thirteen stores in September 1995 and four
stores in September 1996. RTO's same store revenue (not including the results of
stores sold, closed, opened or bought during the periods) for the 1996 RTO
Pooling Acquisitions and 1997 RTO Pooling Acquisitions decreased by $1.5
million, or 4.5%, compared to 1995 due to the reasons discussed above. Revenue
from new stores acquired in 1995 and opened on various dates in 1995 and 1996
increased by $1.3 million.
 
     Depreciation and disposition of rental merchandise.  Depreciation and
disposition of rental merchandise increased $11.5 million, or 46.0%, to $36.6
million for the year ended December 31, 1996 from $25.1 million in 1995,
primarily as a result of the addition of depreciation and disposition expense of
the 1996 Alrenco Acquisitions and the 1996 RTO Purchase Acquisitions from their
respective dates of acquisition and the inclusion of depreciation and
disposition expense of the 1995 Alrenco Acquisitions for a full year, offset in
part by a $2.4 million decrease in depreciation and disposition expense for the
1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions. As a
percentage of revenue, depreciation and disposition of rental merchandise
expense decreased 2.9% from 32.3% in 1996 to 29.5% in the comparable period in
1996 partly as a continuing result of the changes in Alrenco's depreciation
method for new inventory additions. In addition, the decrease was a result of
(i) a reduction in the percentage of total RTO revenues contributed by cash
sales and other revenue (gross margins are significantly lower on cash sales
relative to margins generated on the rental merchandise) as a result of the
Action Acquisition, which had lower cash sales and other revenues as a
percentage of total revenues and (ii) the use of Action of a more aggressive
pricing strategy, thereby producing greater revenues as a multiple of rental
merchandise cost.
 
     Other Direct Store Expenses.  Other direct store expenses increased $27.6
million, or 69.0%, to $67.6 million for the year ended December 31, 1996 from
$40.0 million in 1995, primarily as a result of the 1996 RTO Purchase
Acquisitions and the 1996 Alrenco Acquisitions from their respective dates of
acquisition and the inclusion of other direct store expenses of the 1995 Alrenco
Acquisition for a full year. As a percentage of revenue, other direct store
expenses increased 2.8% from 51.6% in 1995 to 54.4% in the comparable period in
1996. The increase in other direct store expense as a percentage of revenue
resulted from: (i) higher other direct store expenses of the 1996 Alrenco
Acquisitions and the 1996 RTO Purchase Acquisitions, (ii) higher other direct
store expenses as a percentage of revenue for the 1996 RTO Pooling Acquisitions
and 1997 RTO Pooling Acquisitions attributable to the reasons discussed above
in "-- Depreciation and Disposition of Rental Merchandise," and (iii) higher
proportionate direct store expenses associated with six new locations opened by
RTO on various dates in 1995 and 1996.       
<PAGE>   16
 
     Corporate Expenses.  For the year ended December 31, 1996, corporate
expenses increased $2.7 million, or 33.8%, to $10.7 million from $8.0 million
for the year ended December 31, 1995, primarily as a result of the inclusion of
corporate expenses for the 1996 RTO Purchase Acquisitions and the hiring of
additional corporate and administrative personnel to support the 1996 Alrenco
Acquisitions and future store acquisitions. As a percentage of revenue,
corporate expenses decreased to 8.6% for the year ended December 31, 1996 from
10.3% for the year ended December 31, 1995 primarily as a result of increased
revenue from stores acquired by Alrenco in 1996, greater operating efficiencies
achieved through higher rental revenue and lower corporate expenses as a
percentage of revenue for the 1996 RTO Purchase Acquisitions, partially offset
by higher corporate expenses as a percentage of revenue for the 1996 RTO Pooling
Acquisitions and the 1997 RTO Pooling Acquisitions.
 
     Amortization of Intangibles.  Amortization of intangibles increased $3.4
million to $4.0 million for the year ended December 31, 1996, from $569,000
in 1995. This increase was attributable to intangible assets created by the
1995 Alrenco Acquisition, the 1996 Alrenco Acquisitions and the 1996 RTO
Purchase Acquisitions. As a percentage of revenue, amortization of intangibles
increased to 3.2% for the year ended December 31, 1996, from 0.7% in 1995 for
the same reasons.
 
     Interest Income.  Interest income increased $610,000 to $645,000 for the
year ended December 31, 1996 from $35,000 in 1995, primarily as a result of the
short term investment of excess proceeds from the issuance of common stock of
RTO, net of amounts required for completing the 1996 RTO Purchase Acquisitions
and the investment of the cash proceeds of the public offerings of Common Stock
by Alrenco.
 
     Interest Expense.  Interest expense decreased $0.9 million, or 36.0%, to
$1.6 million for the year ended December 31, 1996, from $2.5 million in 1995. As
a percentage of revenue, interest expense decreased to 1.3% for the year ended
December 31, 1996, from 3.2% in 1995, primarily as a result of (i) using the
capital raised by the public offerings of Common Stock to repay all then
outstanding indebtedness under the Loan Agreement, (ii) the use of proceeds from
the issuance of common stock of RTO to reduce the debt of the 1996 RTO Purchase
Acquisitions and the 1996 RTO Pooling Acquisitions and (iii) the forgiveness of
$2.9 million of RTO's debt of one of the 1997 RTO Pooling Acquisitions and $0.4
million of related accrued interest by a secured lender in 1995.
 
     Net Income.  Net earnings decreased $4.2 million, or 79.2%, to $1.1 million
for the year ended December 31, 1996, from $5.3 million in 1995, primarily as a
result of (i) costs of RTO's business combinations of $1.7 million, (ii)
nonrecurring key executive signing bonus expense of $1.5 million related to the
retention of key employees in the 1996 RTO Purchase Acquisitions, (iii) an
increase of amortization of intangibles in the amount of $2.5 million as a
result of the amortization of noncompetition agreements, customer rental
agreements and goodwill from the 1996 Alrenco Acquisitions and the 1996 RTO
Purchase Acquisitions, (iv) the increase of other direct store expenses in the
amount of $.8 million from the opening of six new RTO locations on various dates
in 1995 and 1996, (v) the decrease in same store revenue of $1.5 million for the
1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions; offset by
(vi) increased revenues and operating margins in 1996 for the stores acquired in
the 1994 Alrenco Acquisition and the 1995 Alrenco Acquisition. As a percentage
of revenue, net earnings decreased to 0.9% for the year ended December 31, 1996,
from 6.8% in 1995.

<PAGE>   17
     ALRENCO, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS

                      REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders
Alrenco, Inc.

We have audited the accompanying consolidated balance sheets of Alrenco, Inc.
and subsidiaries (the "Company") as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1997, after restatement for the 1998 pooling of interests with RTO, Inc.
("RTO") described in Note 1. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Alrenco, Inc. ("Alrenco") prior to the
combination with RTO, which statements reflect total assets constituting 37% and
40% of the restated total assets as of December 31, 1996 and 1997, respectively,
and total revenues constituting 48%, 51%, and 44% of the restated totals for the
years ended December 31, 1995, 1996, and 1997, respectively. The contribution of
Alrenco represented net income of $3,663,378 and $3,586,304 for the years ended
December 31, 1996 and 1997, respectively, compared to a restated consolidated
net income of $1,097,558 for the year ended December 31, 1996 and a restated
consolidated net loss of $4,117,594 for the year ended December 31, 1997. The
contribution of Alrenco to consolidated net income represented 24% of the
restated totals for the year ended December 31, 1995. Those financial statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Alrenco, is based
solely on the report of the other auditors.

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 and the report of the other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material aspects, the consolidated financial position of the Company at
December 31, 1996 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.


                                                  COOPERS & LYBRAND L.L.P.

Spartanburg, South Carolina
March 3, 1998




<PAGE>   18
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
Board of Directors
Alrenco, Inc.
 
     We have audited, prior to the restatement for the 1998 pooling of interests
with RTO, Inc., the balance sheets of Alrenco, Inc. as of December 31, 1997 and
1996, and the related statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997, which
are not presented herein. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alrenco, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
 
                                          GRANT THORNTON LLP
 
Dallas Texas
January 30, 1998
<PAGE>   19
 
                         ALRENCO, INC. AND SUBSIDIARIES
 
                         CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1996           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Cash and cash equivalents...................................  $ 35,745,989   $  3,569,132
Rental merchandise, net.....................................    58,723,990     97,260,578
Prepaid expenses and other assets...........................     2,827,461      6,342,919
Deferred income taxes.......................................     3,044,867      6,135,051
Property and equipment, net.................................     9,481,081     15,038,978
Notes receivable............................................     1,252,857        243,535
Income tax receivable.......................................            --      2,429,249
Intangible assets, net......................................    58,054,831     92,541,249
                                                              ------------   ------------
          Total assets......................................  $169,131,076   $223,560,691
                                                              ============   ============
 
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, trade.....................................  $  8,305,964   $ 18,701,265
Accrued liabilities.........................................     7,175,931     12,393,040
Deferred income taxes.......................................       532,580      1,293,919
Notes payable...............................................     6,772,269     48,161,872
                                                              ------------   ------------
          Total liabilities.................................    22,786,744     80,550,096
                                                              ------------   ------------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, no par; 10,000,000 shares authorized;
     none issued or outstanding.............................            --             --
  Common stock, no par; 75,000,000 shares authorized;
     16,903,197 and 16,957,119 shares issued and outstanding
     in 1996 and 1997, respectively.........................   148,719,632    149,385,777
  Unamortized value of stock awards.........................    (1,182,138)      (987,810)
  Accumulated deficit.......................................    (1,193,162)    (5,387,372)
                                                              ------------   ------------
          Total stockholders' equity........................   146,344,332    143,010,595
                                                              ------------   ------------
          Total liabilities and stockholders' equity........  $169,131,076   $223,560,691
                                                              ============   ============
</TABLE>
 
       The accompanying notes are an integral part of the consolidated
                             financial statements.
<PAGE>   20
 
                         ALRENCO, INC. AND SUBSIDIARIES
 
                    CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                        -----------------------------------------
                                                           1995           1996           1997
                                                        -----------   ------------   ------------
<S>                                                     <C>           <C>            <C>
Revenue:
  Rental and fee revenue..............................  $74,990,274   $121,145,016   $223,289,934
  Cash sales and other revenue........................    2,538,450      3,016,344      7,678,665
                                                        -----------   ------------   ------------
          Total revenue...............................   77,528,724    124,161,360    230,968,599
                                                        -----------   ------------   ------------
Operating expenses:
  Direct store expenses:
     Depreciation and disposition of rental
       merchandise....................................   25,054,452     36,581,109     67,257,744
     Other............................................   39,966,441     67,599,707    127,964,749
                                                        -----------   ------------   ------------
                                                         65,020,893    104,180,816    195,222,493
  Corporate expenses..................................    7,988,273     10,710,565     26,139,960
  Cost of business combinations.......................           --      1,743,433        934,717
  Name change expenses................................           --             --        742,541
  Amortization of intangibles.........................      568,386      3,982,093      9,902,303
  Key executive signing bonuses.......................           --      1,485,641        400,119
                                                        -----------   ------------   ------------
          Total operating expenses....................   73,577,552    122,102,548    233,342,133
                                                        -----------   ------------   ------------
          Operating income (loss).....................    3,951,172      2,058,812     (2,373,534)
Other income (expense):
  Interest expense....................................   (2,467,652)    (1,571,808)    (2,512,015)
  Interest income.....................................       35,415        645,291        218,118
  Other non-operating income (expense), net...........      261,537        403,255       (163,957)
  Gain on sale of stores..............................    1,048,923        750,800        950,366
                                                        -----------   ------------   ------------
          Income (loss) before income taxes and
            extraordinary item........................    2,829,395      2,286,350     (3,881,022)
Income tax expense....................................      877,177      1,188,792        236,572
                                                        -----------   ------------   ------------
          Income (loss) before extraordinary item.....    1,952,218      1,097,558     (4,117,594)
Extraordinary item, net of income tax expense.........    3,335,851             --             --
                                                        -----------   ------------   ------------
          Net income (loss)...........................  $ 5,288,069   $  1,097,558   $ (4,117,594)
                                                        ===========   ============   ============
Pro forma information (unaudited):
  Income (loss) before extraordinary item.............  $ 1,952,218   $  1,097,558   $ (4,117,594)
  Pro forma income tax expense (benefit)..............      290,000        200,674       (213,835)
                                                        -----------   ------------   ------------
          Pro forma income (loss) before extraordinary
            item......................................    1,662,218        896,884     (3,903,759)
  Extraordinary item, net of income tax expense.......    3,335,851             --             --
                                                        -----------   ------------   ------------
          Pro forma net income (loss).................  $ 4,998,069   $    896,884   $ (3,903,759)
                                                        ===========   ============   ============
Pro forma income (loss) before extraordinary item per
  share
  Basic...............................................  $       .37   $        .09   $       (.23)
  Diluted.............................................          .37            .09           (.23)
Extraordinary item per share
  Basic...............................................          .74             --             --
  Diluted.............................................          .74             --             --
Pro forma net income (loss) per share
  Basic...............................................         1.11            .09           (.23)
  Diluted.............................................         1.11            .09           (.23)
</TABLE>
 
       The accompanying notes are an integral part of the consolidated
                             financial statements.
 
<PAGE>   21
 
                         ALRENCO, INC. AND SUBSIDIARIES
 
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  FOR THE THREE YEARS ENDED DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
                             COMMON STOCK          UNAMORTIZED
                       -------------------------     VALUE OF     ACCUMULATED   UNREALIZED
                         SHARES        AMOUNT      STOCK AWARDS     DEFICIT        GAIN         TOTAL
                       ----------   ------------   ------------   -----------   ----------   ------------
<S>                    <C>          <C>            <C>            <C>           <C>          <C>
December 31, 1994....   4,377,994   $  3,945,184   $        --    $(4,826,135)   $ 30,097    $   (850,854)
Issuance of common
  stock..............      63,485        483,281            --             --          --         483,281
Contributions of
  capital............          --         45,498            --             --          --          45,498
Distributions to S
  corporation
  shareholders.......          --             --            --     (1,486,943)         --      (1,486,943)
Net change in
  unrealized gains,
  net of tax of
  $21,283............          --             --            --             --     (30,097)        (30,097)
Net income...........          --             --            --      5,288,069          --       5,288,069
                       ----------   ------------   -----------    -----------    --------    ------------
December 31, 1995....   4,441,479      4,473,963            --     (1,025,009)         --       3,448,954
Issuance of common
  stock..............  12,356,118    142,336,038            --             --          --     142,336,038
Restricted stock
  awards.............     105,000      1,470,000    (1,470,000)            --          --              --
Exercise of stock
  options............         600          8,400            --             --          --           8,400
Amortization of stock
  awards.............          --             --       287,862             --          --         287,862
Contributions of
  capital............          --        431,231            --             --          --         431,231
Distributions to S
  corporation
  shareholders.......          --             --            --     (1,265,711)         --      (1,265,711)
Net income...........          --             --            --      1,097,558          --       1,097,558
                       ----------   ------------   -----------    -----------    --------    ------------
December 31, 1996....  16,903,197    148,719,632    (1,182,138)    (1,193,162)         --     146,344,332
Issuance of common
  stock..............      49,567        690,000            --             --          --         690,000
Exercise of stock
  options............      21,416        241,824            --             --          --         241,824
Amortization of stock
  awards.............          --             --       194,328             --          --         194,328
Purchase and
  retirement of
  common stock from
  dissenters.........     (17,061)      (265,679)           --             --          --        (265,679)
Distributions to S
  corporation
  shareholders.......          --             --            --        (76,616)         --         (76,616)
Net loss.............          --             --            --     (4,117,594)         --      (4,117,594)
                       ----------   ------------   -----------    -----------    --------    ------------
December 31, 1997....  16,957,119   $149,385,777   $  (987,810)   $(5,387,372)   $     --    $143,010,595
                       ==========   ============   ===========    ===========    ========    ============
</TABLE>
 
       The accompanying notes are an integral part of the consolidated
                             financial statements.
 
<PAGE>   22
 
                         ALRENCO, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                              ------------------------------------------
                                                                  1995           1996           1997
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss).........................................  $  5,288,069   $  1,097,558   $ (4,117,594)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Extraordinary gain......................................    (3,335,851)            --             --
    Loss on sale of property and equipment..................       183,225        157,743        229,148
    Gain on sale of stores..................................    (1,048,923)      (750,800)      (950,366)
    Depreciation and disposition of rental merchandise......    25,054,452     36,581,109     67,257,744
    Amortization of intangibles.............................       570,034      3,985,279      9,902,303
    Depreciation of property and equipment..................     1,275,954      1,874,180      3,096,386
    Deferred income taxes...................................        71,845     (1,437,643)    (2,306,428)
    Amortization of stock awards............................            --        287,862        194,328
    Gain on sale of investments.............................       (99,930)            --             --
  Changes in operating assets and liabilities, net of
    effects of acquisitions of businesses and dispositions
    of stores:
    Purchase of rental merchandise..........................   (25,530,026)   (47,384,827)   (90,366,228)
    Accounts payable and accrued expenses...................     1,297,974      3,148,167     13,781,844
    Other assets............................................      (663,999)       218,068     (3,829,116)
    Income taxes payable....................................       164,766         38,566     (1,570,689)
                                                              ------------   ------------   ------------
         Net cash provided by (used in) operating
           activities.......................................     3,227,590     (2,184,738)    (8,678,668)
                                                              ------------   ------------   ------------
Cash flows from investing activities:
  Purchase of property and equipment........................    (1,070,066)    (3,036,474)    (9,251,093)
  Proceeds from sale of property and equipment..............       244,389         71,468      2,844,612
  Purchase of investments...................................       (58,581)            --             --
  Proceeds from sale of investments.........................       542,501             --             --
  Acquisitions of businesses, net of cash acquired..........    (7,205,060)   (74,502,919)   (50,628,896)
  Dispositions of stores, net of cash sold..................     2,700,000      1,043,058      3,031,691
  Amounts advanced on notes receivable......................      (114,425)      (336,225)            --
  Payments received on notes receivable.....................        67,179         98,261      1,098,246
  Increase in loan to stockholder...........................        (7,466)        (7,252)        (7,018)
                                                              ------------   ------------   ------------
         Net cash used in investing activities..............    (4,901,529)   (76,670,083)   (52,912,458)
                                                              ------------   ------------   ------------
Cash flows from financing activities:
  Purchase of common stock from dissenters..................            --             --       (265,679)
  Proceeds from issuance of common stock....................       483,281    142,336,038             --
  Proceeds from stock options...............................            --          8,400        241,824
  Proceeds from notes payable...............................     6,925,654      2,393,150     58,305,102
  Payments on notes payable and capital leases..............    (4,350,105)   (29,778,248)   (28,790,362)
  Payments for deferred loan fees...........................       (16,090)            --             --
  Contributions of capital..................................        45,498         51,610             --
  Distributions to S corporation shareholders...............    (1,328,012)    (1,520,151)       (76,616)
                                                              ------------   ------------   ------------
         Net cash provided by financing activities..........     1,760,226    113,490,799     29,414,269
                                                              ------------   ------------   ------------
Net increase (decrease) in cash.............................        86,287     34,635,978    (32,176,857)
Cash at beginning of period.................................     1,023,724      1,110,011     35,745,989
                                                              ------------   ------------   ------------
Cash at end of period.......................................  $  1,110,011   $ 35,745,989   $  3,569,132
                                                              ============   ============   ============
Supplemental disclosure of cash flow information:
  Cash paid for:
    Interest................................................  $  2,867,380   $  1,676,893   $  2,295,982
                                                              ============   ============   ============
    Income taxes............................................  $    683,074   $  2,615,322   $  4,886,911
                                                              ============   ============   ============
</TABLE>
 
  The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
<PAGE>   23
 
                         ALRENCO, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
 
     On February 26, 1998, RTO, Inc. ("RTO") merged with and into Alrenco, Inc.
("Alrenco"), with Alrenco being the surviving corporation in the merger (the
"RTO Merger"). These consolidated financial statements of Alrenco have been
prepared to give retroactive effect to the RTO Merger on February 26, 1998. 
 
               
     These consolidated financial statements include the combination of Alrenco
and RTO, the Purchase Acquisitions and the Pooling Acquisitions (as described in
Note 3) (collectively referred to as the "Company") as required by Accounting
Principles Board Opinion Number 16 ("APB 16").
 
     The Company develops, acquires, owns and operates a chain of stores that
rents durable household products such as consumer electronics, appliances,
furniture, jewelry and home furnishing accessories under cancelable
rental-purchase agreements renewable on a weekly or monthly basis. At December
31, 1997, the Company operated 432 stores in 23 states (see Note 3).
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
     The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
 
RENTAL MERCHANDISE
 
     Rental merchandise is carried at the lower of cost or net realizable value.
Depreciation is provided using the income forecasting method or straight-line
method over a period designed to approximate the income forecasting method. The
income forecasting method is designed to match as closely as practicable the
recognition of depreciation expense with the consumption of the rental
merchandise. The consumption of rental merchandise occurs during periods of
rental and directly coincides with the receipt of rental revenue over the
rental-purchase agreement period, generally 18 to 24 months. Under the income
forecasting method, merchandise held for rent is not depreciated, and
merchandise on rent is depreciated in the proportion of rents received to total
rents required to obtain ownership as provided in the rental-purchase agreement.
The income forecasting method is an activity-based method similar to the units
of production method.
 
     Rental merchandise acquired prior to January 1, 1995 by Alrenco, is being
depreciated by the straight-line method over various estimated useful lives,
primarily 21 months. The range of the various estimated useful lives is
generally one to three years. The Company adopted the income forecasting method
because management believes that it provides a more systematic and rational
allocation of the cost of rental merchandise to operations as its useful life
expires. The effect of the change in accounting method was to increase pro forma
net income and pro forma net income per basic and diluted share by approximately
$470,000 and $0.10, respectively, for the year ended December 31, 1995.
 
     Effective January 1, 1997, RTO and its new subsidiaries elected to
depreciate all additions to rental merchandise acquired subsequent to December
31, 1996 using the income forecasting method and make other conforming changes
to the estimate of depreciation expense. These changes were made to more
accurately match revenues and expenses. The impact of these changes on the
results of operations for the year ended
 
<PAGE>   24
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
December 31, 1997 was to decrease pro forma net loss by approximately $400,000
or $.02 per basic and diluted share.
 
RENTAL REVENUE
 
     Merchandise is rented to customers pursuant to rental-purchase agreements,
which provide for predominantly weekly rental terms with non-refundable rental
payments. Rental revenue is recognized as collected, since at the time of
collection the rental merchandise has been placed in service and costs of
installation and delivery have been incurred. Generally, the customer has the
right to acquire title through either a purchase option or through payment of
all rentals required to obtain ownership as provided in the rental-purchase
agreement. The customers may terminate rental-purchase agreements at any time,
and if terminated, the rental merchandise is returned to the Company. A
provision is made for estimated losses of rental merchandise damaged or not
returned by customers.
 
PERVASIVENESS 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.
 
CONCENTRATION OF CREDIT RISKS
 
     The Company maintained deposits and a money market mutual fund account
totaling $35,745,989 and $3,569,132 at December 31, 1996 and 1997, respectively,
with several financial institutions. Deposits in excess of $100,000 and mutual
funds are not insured by the Federal Deposit Insurance Corporation.
 
     During 1996, the Company invested excess funds in a money market mutual
fund account with a bank. As of December 31, 1996, the market value of the
securities approximates the carrying amount of $25,000,000.
 
CASH AND CASH EQUIVALENTS
 
     Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid instruments with maturities of three months or less when purchased. The
carrying amount of cash and cash equivalents is the estimated fair value at
December 31, 1996 and 1997.
 
PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION
 
     Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred and additions and improvements
that significantly extend the lives of depreciable assets are capitalized. Upon
sale or other retirement of depreciable property, the cost and accumulated
depreciation are removed from the related accounts and any gain or loss is
reflected in the results of operations. Depreciation of furniture and fixtures,
signs and vehicles is provided over the estimated useful lives of the respective
assets on a straight-line and an accelerated bases. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the term of the
lease and renewal period, if applicable.
 
<PAGE>   25
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
 
     The Company continually evaluates the propriety of the carrying value of
property and equipment, goodwill and other intangible assets based on the
estimated future undiscounted cash flows of the related investment, as well as
the amortization period to determine whether current events and circumstances
warrant adjustments to carrying value and/or revised estimates of useful lives.
At this time, the Company believes that no significant impairment of the
long-lived assets has occurred and that no reduction of the estimated useful
lives is warranted.
 
INCOME TAXES
 
     Income taxes for the Company are determined by use of the liability method
in which deferred income taxes are provided for temporary differences between
the financial reporting and income tax basis of assets and liabilities using the
income tax rates under existing legislation expected to be in effect at the date
such temporary differences are expected to reverse.
 
     Since certain of the business combinations accounted for as
poolings-of-interests as defined by APB 16 (see Note 3) involved companies which
were nontaxable enterprises prior to acquisition by the Company (e.g. S
Corporations), unaudited pro forma income tax expense (benefit) has been
presented for the nontaxable enterprises as if they had been a taxable
enterprise for all periods presented. Deferred tax assets and liabilities for
the tax effects of temporary differences for the nontaxable enterprises were
established through an adjustment to income tax expense (benefit) during the
period that the combinations were consummated (see Note 11).
 
ADVERTISING COSTS
 
     Advertising costs amounting to $4,839,000, $7,534,000 and $13,413,000 for
the years ended December 31, 1995, 1996, and 1997, respectively, are expensed as
incurred.
 
PRO FORMA INCOME (LOSS) PER SHARE
 
     On December 31, 1997, the Company adopted provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." In
accordance with SFAS 128, the Company computes basic pro forma income per share
based on the weighted-average number of common shares outstanding during each
period presented. Diluted pro forma income per share is computed based on the
weighted average number of common shares plus the dilutive effect of all
potential dilutive securities, principally stock options and convertible notes,
outstanding during each period presented. All prior year pro forma income per
share amounts have been restated to comply with the provisions of SFAS 128.
 
<TABLE>
<CAPTION>
                                        1995                              1996                               1997
                           -------------------------------   -------------------------------   ---------------------------------
                           PRO FORMA                 PER     PRO FORMA                 PER      PRO FORMA                  PER
                              NET                   SHARE       NET                   SHARE        NET                    SHARE
                             INCOME      SHARES     AMOUNT    INCOME       SHARES     AMOUNT      LOSS         SHARES     AMOUNT
                           ----------   ---------   ------   ---------   ----------   ------   -----------   ----------   ------
<S>                        <C>          <C>         <C>      <C>         <C>          <C>      <C>           <C>          <C>
Basic income per common
  share..................  $1,662,218   4,516,936    $.37    $896,884    10,219,487    $.09    $(3,903,759)  16,940,945   $(.23)
                                                     ====                              ====                               =====
Effect of dilutive
  options................          --          --                  --        42,353                     --      176,197
                           ----------   ---------            --------    ----------            -----------   ----------
Diluted income per common
  share..................  $1,662,218   4,516,936    $.37    $896,884    10,261,840    $.09     (3,903,759)  17,117,142   $(.23)
                           ==========   =========    ====    ========    ==========    ====    ===========   ==========   =====
</TABLE>
 
     Diluted income (loss) per share for the year ended December 31, 1997
presented above, as well as for all quarters in 1997 (see Note 14), excludes the
effect of the convertible notes, if converted, given these securities increase
net income or decrease net loss and would be antidilutive.
 
<PAGE>   26
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
STOCK-BASED COMPENSATION
 
     Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees" and related Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company's financial instruments consist of cash and debt whose carrying
value approximates fair value at December 31, 1996 and 1997.
 
STATEMENTS OF CASH FLOWS
 
     Excluded from the consolidated statements of cash flows was the effect of
the following noncash activities. During the year ended December 31, 1997, the
Company issued common stock to settle notes payable totaling $690,000 to certain
stockholders. Additionally, in connection with certain Purchase Acquisitions,
the Company issued a total of $7,100,000 of notes payable to individuals.
 
RECENT ACCOUNTING STANDARDS
 
     During June 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information". Preliminary analysis of
these new standards by the Company indicates that the standards will not have a
material impact on the Company. The standards are effective for financial
statements for fiscal years beginning after December 15, 1997.
 
RECLASSIFICATIONS
 
     Certain reclassifications were made to prior year balances to conform to
the 1997 presentation.
 
3. ACQUISITIONS
 
     During 1995, the Company purchased 16 rental-purchase stores for
$7,205,060, which were accounted for as a purchase. The operating results of
these acquired stores are included in the operating results of the Company since
the dates of acquisition.
 
     The Company purchased all of the issued and outstanding common stock of
Action TV & Appliance Rental, Inc. ("Action"), a 102 store chain, effective
August 1, 1996 for cash of approximately $45,300,000 and $2,600,000 for
noncompetition agreements. The Company purchased 14 stores from a company doing
business as Easy Rentals on March 1, 1996 for cash of approximately $6,500,000.
On August 1, 1996, the Company completed the acquisition of 14 stores for cash
of approximately $5,600,000. During 1996, the Company also acquired 55 stores in
22 unrelated transactions for an aggregate cash purchase price of approximately
$14,500,000.
 
     On January 2, 1997, the Company completed the acquisition of 28 stores
located in 4 states from Fastway Rentals, Inc. for an aggregate purchase price
of $11,900,000. The Company purchased the assets of 27 rent-to-own stores from
B&L Concepts, Inc. ("B&L") on January 6, 1997 for total consideration of
approximately $13,800,000 consisting of cash of approximately $10,800,000 and a
$3,000,000 convertible note (see Note 9).
<PAGE>   27
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACQUISITIONS -- (CONTINUED)
Additionally, during 1997, the Company acquired 72 stores in 9 unrelated
transactions for an aggregate purchase price of approximately $32,000,000
consisting of cash of $27,900,000 and notes totaling $4,100,000 (see Note 9).
 
     The above acquisitions (collectively referred to as the "Purchase
Acquisitions") have been accounted for as purchases, as defined by APB 16 and,
accordingly, the operating results of the acquired businesses have been included
in the results of operations since their respective acquisition dates. The
purchase prices have been allocated as follows:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ---------------------------
                                                                1996           1997
                                                            ------------   ------------
<S>                                                         <C>            <C>
Rental merchandise........................................  $ 27,048,141   $ 17,210,537
Property and equipment....................................     4,580,086      2,358,771
Intangible assets.........................................    56,711,492     44,515,140
Other assets..............................................     3,967,194        890,000
Accounts payable and accrued expenses.....................    (3,886,758)    (1,755,398)
Notes payable assumed.....................................   (13,917,236)    (5,151,794)
Notes payable issued......................................            --     (7,100,000)
Income tax liability......................................            --       (338,360)
                                                            ------------   ------------
          Cash paid, net of cash acquired.................  $ 74,502,919   $ 50,628,896
                                                            ============   ============
</TABLE>
 
     The following summary, prepared on an unaudited pro forma basis, presents
the results of operations (i) as if the above acquisitions had been purchased as
of the beginning of the year of acquisition and the beginning of the year for
the immediately preceding period, (ii) as if the initial capitalization of RTO
had occurred on January 1, 1995, and (iii) to include the effect of adjustments
of (i) and (ii) for amortization of intangibles, interest, income taxes and the
weighted average shares outstanding.
 
<TABLE>
<CAPTION>
                                                       UNAUDITED PRO FORMA RESULTS OF OPERATIONS
                                                                YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------
                                                           1995           1996           1997
                                                       ------------   ------------   ------------
<S>                                                    <C>            <C>            <C>
Revenue..............................................  $162,027,916   $230,622,179   $242,713,286
Pro forma income (loss) before extraordinary item....     3,103,527     (1,968,597)    (5,441,486)
Pro forma net income (loss)..........................     6,439,378     (1,968,597)    (5,441,486)
Pro forma income (loss) before extraordinary item per
  share:
  Basic..............................................  $        .22   $       (.12)  $       (.32)
  Diluted............................................           .22           (.12)          (.32)
Pro forma net income (loss) per share
  Basic..............................................  $        .46   $       (.12)  $       (.32)
  Diluted............................................           .46           (.12)          (.32)
</TABLE>
 
     The unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of operating
results that would have occurred had the acquisitions been consummated as of the
above dates, nor are they necessarily indicative of future operating results.
 
<PAGE>   28
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACQUISITIONS -- (CONTINUED)
     The Company entered into definitive agreements to merge with various
entities, which were consummated during 1996, 1997 and 1998 (the "Pooling
Acquisitions"). Under the terms of each merger agreement, shares of common stock
of each entity were multiplied by an exchange ratio and exchanged for shares of
the Company's common stock. A summary of each merger follows:
 
<TABLE>
<CAPTION>
                                                                                   SHARES OF
                                                                                    COMPANY
POOLING ACQUISITIONS                                           DATE OF MERGER     STOCK ISSUED
--------------------                                          -----------------   ------------
<S>                                                           <C>                 <C>
Home Choice, Inc. ("Home Choice")...........................  October 31, 1996         23,885
Yam's, Inc. ("Yam's").......................................  November 1, 1996        342,837
ARTO, Inc. ("ARTO").........................................  February 28, 1997       186,774
National TV Rental, Inc. ("National").......................  February 28, 1997       188,659
Seajay Group ("Seajay").....................................  February 28, 1997       179,500
Showtyme Group ("Showtyme").................................  February 28, 1997       214,520
ABC Group ("ABC")...........................................   March 11, 1997         170,611
Discount Centers of America, Inc. ("Discount")..............    May 12, 1997           98,415
The Hut Co. ("Hut").........................................    May 13, 1997           37,714
RTO, Inc. ("RTO")...........................................  February 26, 1998    12,280,316
</TABLE>
 
     The Pooling Acquisitions were accounted for as pooling of interests.
Separate unaudited results of the pooled entities prior to each date of the
merger for the years ended December 31, 1995, 1996 and 1997 are as follows
(unaudited):
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                -----------------------------------------
                                                   1995           1996           1997
                                                -----------   ------------   ------------
<S>                                             <C>           <C>            <C>
Total revenue:
  Alrenco.....................................  $37,575,639   $ 63,855,808   $102,598,240
  RTO.........................................           --     25,157,509    123,250,308
  Home Choice.................................      319,772        834,748             --
  Yam's.......................................    4,844,923      4,535,581             --
  ARTO........................................    3,811,243      4,153,355        684,753
  National....................................    7,260,425      6,378,971        850,086
  Seajay......................................   11,661,143      7,406,567      1,218,752
  Showtyme....................................    4,627,591      4,346,450        632,548
  ABC.........................................    3,239,992      3,451,139        550,938
  Discount....................................    2,369,852      2,385,037        742,969
  Hut.........................................    1,818,144      1,656,195        440,005
                                                -----------   ------------   ------------
  Combined....................................  $77,528,724   $124,161,360   $230,968,599
                                                ===========   ============   ============
</TABLE>
 
<PAGE>   29
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACQUISITIONS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                 -------------------------------------------------------------------------------
                                          1995                       1996                        1997
                                 -----------------------   -------------------------   -------------------------
                                   ACTUAL     PRO FORMA      ACTUAL       PRO FORMA      ACTUAL       PRO FORMA
                                 ----------   ----------   -----------   -----------   -----------   -----------
<S>                              <C>          <C>          <C>           <C>           <C>           <C>
Net income (loss):
  Alrenco......................  $1,266,592   $1,266,592   $ 3,663,378   $ 3,663,378   $ 3,586,304   $ 3,586,304
  RTO..........................          --           --    (3,175,692)   (3,141,549)   (8,735,940)   (8,593,384)
  Home Choice..................    (221,073)    (135,695)     (129,993)      (79,790)           --            --
  Yam's........................      59,313       59,313       (17,711)      (17,711)           --            --
  ARTO.........................     316,396      194,204       367,532       225,591         9,636         9,636
  National.....................      (6,232)      (3,825)      204,135       125,298       (74,480)      (52,813)
  Seajay (including
    extraordinary item of
    $3,335,851 in 1995)........   3,385,544    3,385,544       220,813       220,813       (34,204)      (34,204)
  Showtyme.....................     579,037      355,413       211,647       129,909        (2,776)       (3,577)
  ABC..........................      82,779       50,810       (45,303)      (27,807)      (76,500)      (26,087)
  Discount.....................     (11,041)     (11,041)      (99,064)      (99,064)      (45,335)      (45,335)
  Hut..........................    (161,409)    (161,409)      (57,826)      (57,826)       (6,299)       (6,299)
  Conforming adjustments.......      (1,837)      (1,837)      (44,358)      (44,358)    1,262,000     1,262,000
                                 ----------   ----------   -----------   -----------   -----------   -----------
  Combined.....................  $5,288,069   $4,998,069   $ 1,097,558   $   896,884   $(4,117,594)  $(3,903,759)
                                 ==========   ==========   ===========   ===========   ===========   ===========
</TABLE>
 
     Conforming adjustments relate to conforming amortization policies, net of
the related tax benefit.
 
4. SALE OF STORES
 
     During 1997, the Company sold eight stores for $3,031,691. In connection
with the transaction, the Company sold assets with a net book value of
$2,081,325, received cash of $3,031,691 and recorded a gain of $950,366.
 
     During 1996, the Company sold four stores for $1,410,700. In connection
with the transaction, the Company sold assets with a net book value of $659,900,
received $1,043,058 in cash and $367,642 to repay a portion of its debt, and
recorded a gain of $750,800.
 
     During 1995, the Company sold thirteen stores for $2,700,000. In connection
with the transaction, the Company sold assets with a net book value of
$1,651,077, received $2,700,000 in cash and recorded a gain of $1,048,923.
 
5. RENTAL MERCHANDISE
 
     Cost and accumulated depreciation of rental merchandise consist of the
following:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                             --------------------------
                                                                1996           1997
                                                             -----------   ------------
<S>                                                          <C>           <C>
Cost.......................................................  $85,888,698   $145,740,577
Less accumulated depreciation..............................   27,164,708     48,479,999
                                                             -----------   ------------
          Rental merchandise, net..........................  $58,723,990   $ 97,260,578
                                                             ===========   ============
</TABLE>
 
<PAGE>   30
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                  DEPRECIATION  -------------------------
                                                     PERIOD        1996          1997
                                                  ------------  -----------   -----------
<S>                                               <C>           <C>           <C>
Buildings.......................................    20 years    $   445,539   $   601,679
Furniture and equipment.........................   3-7 years     10,420,777    12,254,503
Leasehold improvements..........................   3-10 years     5,579,886     9,160,747
                                                                -----------   -----------
                                                                 16,446,202    22,016,929
Less: accumulated depreciation and
  amortization..................................                  7,080,548     7,093,378
                                                                -----------   -----------
                                                                  9,365,654    14,923,551
Land............................................                    115,427       115,427
                                                                -----------   -----------
          Property and equipment, net...........                $ 9,481,081   $15,038,978
                                                                ===========   ===========
</TABLE>
 
7. INTANGIBLE ASSETS
 
     Intangible assets consist of the following:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                AMORTIZATION  -------------------------
                                                   PERIOD        1996          1997
                                                ------------  -----------   -----------
<S>                                             <C>           <C>           <C>
Customer rental agreements....................  15-24 months  $ 3,071,317   $ 4,942,970
Noncompetition agreements.....................   2-10 years     4,566,300     7,783,006
Goodwill......................................  10-30 years    55,450,179    94,527,708
                                                              -----------   -----------
                                                               63,087,796   107,253,684
Less: accumulated amortization................                  5,032,965    14,712,435
                                                              -----------   -----------
          Intangible assets, net..............                $58,054,831   $92,541,249
                                                              ===========   ===========
</TABLE>
 
     Customer rental agreements represent the fair value of active customer
agreements of acquired stores at the acquisition date and are amortized in
proportion to and over the period of related estimated rental income on an
accelerated basis. The noncompetition agreements are amortized on the
straight-line and accelerated methods. Goodwill is amortized on the
straight-line method.
 
8. ACCRUED LIABILITIES
 
     Accrued liabilities consist of the following:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 1996         1997
                                                              ----------   -----------
<S>                                                           <C>          <C>
Salaries, wages, taxes and benefits.........................  $2,621,062   $ 4,596,457
Property taxes..............................................     220,124       454,779
Sales and use taxes payable.................................     773,264     1,810,134
Professional and advisory fees..............................     884,207     1,142,297
Bonuses.....................................................     468,842       974,421
Interest....................................................      94,668       254,803
Other.......................................................   2,113,764     3,160,149
                                                              ----------   -----------
          Accrued liabilities...............................  $7,175,931   $12,393,040
                                                              ==========   ===========
</TABLE>
 
<PAGE>   31
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. NOTES PAYABLE
 
     Notes payable consists of the following:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 1996         1997
                                                              ----------   -----------
<S>                                                           <C>          <C>
Note payable to individuals with an interest rate of 9.25%
  payable in equal annual installments of $700,000 plus
  accrued interest through January 3, 1999..................  $       --   $ 1,400,000
Convertible note payable to individuals with an interest
  rate of 6% payable quarterly with the principal due in
  January 1999..............................................          --     3,000,000
Convertible note payable to individuals with an interest
  rate of 6% payable quarterly with the principal due May
  30, 1999..................................................          --     2,000,000
Revolving credit facilities with lenders with variable
  interest rates and fixed rates as discussed below.........   1,317,593    41,689,285
Notes payable to banks......................................   3,119,987            --
Notes payable to affiliates.................................   1,670,811            --
Notes payable to individuals with interest rates at 10% and
  20%; payments ranging from $1,822 to interest only; some
  maturing on May 2002 and others no stated maturity date...     105,156        72,587
Equipment notes payable.....................................     200,520            --
Vehicle notes payable.......................................      85,399            --
Capital lease obligations...................................     272,803            --
                                                              ----------   -----------
          Notes payable.....................................  $6,772,269   $48,161,872
                                                              ==========   ===========
</TABLE>
 
     The Company had two revolving credit facilities at December 31, 1997. The
first facility (the "First Facility") was a variable interest rate based on
LIBOR (5.75% at December 31, 1997) plus 2.5% and matures on October 1, 1998. The
First Facility provided for maximum borrowings of $21 million. Borrowings under
the First Facility were also limited based on multiples of average monthly
receipts and rental income, as defined by the First Facility. At December 31,
1997, the Company had no additional borrowings available under the First
Facility. The weighted average interest rate was 8.05% and 8.23% at December 31,
1996 and 1997, respectively.
 
     The second facility (the "Second Facility") provided for maximum borrowings
of $30,000,000 and carried a three-year term scheduled to expire in 2000 with an
interest rate equal to prime (8.5% at December 31, 1997) minus  1/2% or LIBOR
plus 2 1/4%, at the election of the Company. Under the terms of the Second
Facility, the Company was required to pay a commitment fee of .125% per annum on
the unused portion of the Second Facility. As of December 31, 1997, $20,689,285
was outstanding under the Second Facility. The weighted average interest rate
was 10.1% and 8.7% at December 31, 1996 and 1997, respectively.
 
     The First and Second Facilities were collateralized by substantially all of
the Company's assets. The First and Second Facilities restricted the Company's
ability to pay dividends to a percentage of annual income, required the Company
to maintain minimum levels of tangible net worth, as defined, subjected the
Company to a maximum ratio of total liabilities to tangible net worth, limit
liabilities and capital expenditures, and required certain interest coverage
ratios. As of December 31, 1997, the Company was in violation of a financial
covenant under the Second Facility, which has been subsequently waived by the
bank. In February 1998, the Company entered into a new revolving credit facility
which replaced the First and Second Facilities. See Note 15 -- "Subsequent
Event."
 
     On January 6, 1997 and May 28, 1997, the Company issued two notes in the
amounts of $3,000,000 and $2,000,000, respectively, in connection with the
acquisitions of B&L and Instant Rent to Own, Inc. (see
 
<PAGE>   32
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. NOTES PAYABLE -- (CONTINUED)
Note 3). Upon certain events these notes are convertible into common stock of
the Company at a conversion rate of $13.92 per share, which will be adjusted for
stock splits, dividends, or recapitalizations of the Company.
 
     Aggregate maturities of notes payable at December 31, 1997 were as follows:
 
<TABLE>
<S>                                                           <C>
1998........................................................  $42,403,016
1999........................................................    5,715,001
2000........................................................       16,387
2001........................................................       17,902
2002........................................................        9,566
                                                              -----------
                                                              $48,161,872
                                                              ===========
</TABLE>
 
10. STOCK OPTION PLAN
 
     On November 8, 1995, Alrenco approved a stock incentive plan ("Alrenco
Plan") under which 450,000 common shares were reserved. Under the Alrenco Plan,
the Company was entitled to grant its employees incentive stock options or
nonqualified stock options to purchase a specified number of shares of common
stock at a price not less than fair market value on the date of grant and for a
term not to exceed 10 years. In addition to the stock options, the Company was
entitled to grant stock appreciation rights ("SAR"), restricted stock awards and
options to directors. SARs and options to directors were required to be granted
at a minimum of fair market value at the date of grant and restricted stock
awards at a price to be determined by the Board of Directors' compensation
committee. Directors who are not involved in day-to-day management of the
Company were initially entitled to a grant of 5,000 shares and on each of their
next five anniversaries, an automatic 1,000 share grant. On January 23, 1996,
the Company granted 105,000 shares of restricted stock to two key employees
which vest at the earlier of a change in control or at the end of seven years.
As a result of the merger with RTO, these shares automatically vested on
February 26, 1998. At December 31, 1997, there were 179,205 shares reserved for
issuance under the Alrenco Plan.
 
     RTO adopted the 1996 Employee Stock Option Plan (the "RTO Plan") to attract
and retain employees. Under the RTO Plan, RTO was entitled to grant options to
purchase a total of not more that 1,027,973 shares of common stock, subject to
anti-dilution and other adjustment provisions provided, however, that the
maximum number of shares subject to all options granted to an individual under
the Plan would not exceed 50% of the shares of common stock authorized for
issuance. No options could be granted under the RTO Plan after the tenth
anniversary of the RTO Plan. The options vest over a four-year period and expire
on the tenth anniversary following the date of grant.
 
     In August 1996, the compensation committee of RTO granted under the RTO
Plan, ten-year options to purchase common stock at an exercise price of $11.14
per share to numerous employees of RTO. Additional options have been granted
subsequent to this initial grant to employees joining RTO through acquisitions
or recruitment at exercise prices per share ranging from $11.14 to $15.59. The
option exercise price was equal to the fair market value of the stock on the
date of grant, as determined by the Board of Directors.
 
     RTO also adopted the 1996 Stock Option Plan for Non-Employee Directors (the
"Director's Plan") that provided for the granting to non-employee directors of
stock options to purchase up to 448,975 shares of the Company's common stock.
During 1997, the Company granted options to purchase 59,085 shares at exercise
prices per share ranging from $15.59 to $16.37. These options vest six months
after the date of grant. No options were issued under the Director's Plan in
1996 and no options were exercised during 1996 and 1997. At December 31, 1997,
50,644 options were exercisable under the Director's Plan at a weighted-average
exercise price of $15.59 per share.
 
<PAGE>   33
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. STOCK OPTION PLAN -- (CONTINUED)
     On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123"). As permitted by SFAS 123, the Company has
chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for its Plans. Accordingly,
no compensation cost has been recognized for options granted under the Plans.
Had compensation cost for the Company's Plans been determined based on fair
value at the grant dates for awards under the Plans consistent with the method
outlined in SFAS 123, the Company's pro forma net income (loss) and pro forma
net income (loss) per share would have been the amounts indicated below for the
years ended December 31, 1996 and 1997. The Plans had not been adopted during
the year ended December 31, 1995.
 
<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDED       FOR THE YEAR ENDED
                                                    DECEMBER 31, 1996         DECEMBER 31, 1997
                                                   --------------------   -------------------------
                                                      AS      SFAS 123        AS         SFAS 123
                                                   REPORTED   PRO FORMA    REPORTED      PRO FORMA
                                                   --------   ---------   -----------   -----------
<S>                                                <C>        <C>         <C>           <C>
Pro forma net income (loss)......................  $896,884    $46,595    $(3,903,759)  $(6,288,774)
Pro forma basic net income (loss) per share......       .09        .00           (.23)         (.37)
Pro forma diluted net income (loss) per share....       .09        .00           (.23)         (.37)
</TABLE>
 
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using the following assumptions for
grants in 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                      FOR THE YEAR ENDED   FOR THE YEAR ENDED
                                                         DECEMBER 31,         DECEMBER 31,
                                                             1996                 1997
                                                      ------------------   ------------------
<S>                                                   <C>                  <C>
Expected dividend rate..............................                0%                   0%
Volatility rate.....................................         0% to 40%            0% to 40%
Risk-free interest rate.............................    5.75% to 6.30%       5.75% to 6.00%
Expected life.......................................    5.5 to 6 years       5.0 to 6 years
</TABLE>
 
     A summary of the status of the Plan as of December 31, 1996 and 1997, and
changes during the periods are presented below:
 
<TABLE>
<CAPTION>
                                                                          WEIGHTED
                                                                          AVERAGE
                                                                          EXERCISE
                                                               SHARES      PRICE
                                                              ---------   --------
<S>                                                           <C>         <C>
Outstanding as of January 1, 1996...........................         --    $   --
  Granted...................................................    730,052     11.64
  Exercised.................................................       (600)    14.00
  Forfeited.................................................    (27,159)    11.18
                                                              ---------    ------
Outstanding as of December 31, 1996.........................    702,293     11.66
  Granted...................................................    630,016     14.72
  Exercised.................................................    (21,416)    11.29
  Forfeited.................................................   (177,647)    12.70
                                                              ---------    ------
Outstanding as of December 31, 1997.........................  1,133,246    $13.19
                                                              =========    ======
</TABLE>
 
<PAGE>   34
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. STOCK OPTION PLAN -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                          WEIGHTED
                                                                          AVERAGE
                                                                          EXERCISE
                                                               SHARES      PRICE
                                                              ---------   --------
<S>                                                           <C>         <C>
Options exercisable at December 31, 1996....................     66,645
                                                              =========
Options exercisable at December 31, 1997....................    210,909
                                                              =========
Weighted average fair value of options granted during the
  year ended December 31, 1996..............................  $    3.21
                                                              =========
Weighted average fair value of options granted during the
  year ended December 31, 1997..............................  $    5.32
                                                              =========
</TABLE>
 
     The following table summarizes information about the Plan's stock options
at December 31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                                   OPTIONS OUTSTANDING
                                                              ------------------------------
                                                                               WEIGHTED -
                                                                                AVERAGE
                                                                NUMBER         REMAINING
EXERCISE PRICE                                                OUTSTANDING   CONTRACTUAL LIFE
--------------                                                -----------   ----------------
<S>                                                           <C>           <C>
December 31, 1996
  $11.14....................................................     573,072       9.64 years
   13.92....................................................      27,926       9.89 years
   14.00....................................................     101,295       9.00 years
                                                               ---------
                                                                 702,293
                                                               =========
December 31, 1997
  $10.38....................................................       4,500       9.80 years
   10.81....................................................       3,000       9.80 years
   11.14....................................................     522,607       8.64 years
   13.92....................................................     133,076       9.01 years
   14.00....................................................      86,729       8.00 years
   15.59....................................................     374,894       8.92 years
   16.37....................................................       8,440       9.94 years
                                                               ---------
                                                               1,133,246
                                                               =========
</TABLE>
 
     Effective September 30, 1995, the Company rescinded existing deferred
compensation plans. Despite the rescission, the Company agreed to compensate the
executives for amounts accrued under the plans through September 30, 1995.
Compensation recognized under the deferred compensation plans was $119,603 for
the year ended December 31, 1995.
 
<PAGE>   35
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. INCOME TAXES
 
     The income tax expense (benefit) is comprised of the following components:
 
<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                    ------------------------------------
                                                      1995        1996          1997
                                                    --------   -----------   -----------
<S>                                                 <C>        <C>           <C>
Current:
  Federal.........................................  $622,758   $ 1,962,036   $ 1,985,961
  State...........................................   182,574       664,399       557,039
                                                    --------   -----------   -----------
          Total current...........................   805,332     2,626,435     2,543,000
Deferred..........................................    71,845    (1,437,643)   (2,306,428)
                                                    --------   -----------   -----------
          Total...................................  $877,177   $ 1,188,792   $   236,572
                                                    ========   ===========   ===========
</TABLE>
 
     Significant components of the Company's deferred income taxes are as
follows:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1996         1997
                                                              ----------   ----------
<S>                                                           <C>          <C>
Deferred tax assets:
  Net operating loss carry-forwards.........................  $1,272,439   $2,087,720
  Rental merchandise........................................     556,615      738,739
  Property and equipment....................................     282,000      405,891
  Intangibles...............................................     454,000    2,002,625
  Deferred compensation.....................................      34,644        5,072
  Tax credits...............................................     414,581      263,316
  Other.....................................................     121,151      435,846
  Accrued expenses..........................................          --      286,405
  Valuation allowance.......................................     (90,563)     (90,563)
                                                              ----------   ----------
          Net deferred tax assets...........................   3,044,867    6,135,051
                                                              ----------   ----------
Deferred tax liabilities:
  Intangible assets.........................................     518,580           --
  Rental merchandise........................................          --      955,511
  Fixed assets..............................................          --      194,605
  Other.....................................................      14,000      143,803
                                                              ----------   ----------
     Deferred tax liabilities...............................     532,580    1,293,919
                                                              ----------   ----------
                                                              $2,512,287   $4,841,132
                                                              ==========   ==========
</TABLE>
 
     In 1996, a net deferred tax asset of approximately $400,000 was established
upon the acquisition of Action for the difference in the tax and book basis of
the net assets acquired. In 1997, a net deferred tax asset of $22,417 was
established for one of the Purchase Acquisition for the difference in the tax
and book basis of the net assets acquired as of the date of acquisition.
 
     As of December 31, 1997, the Company has a total of $6,900,000 of net
operating loss carry-forwards for federal tax purposes, expiring 2007 and 2010.
The utilization may be subject to limitations under IRC Section 382.
Additionally, as of December 31, 1997, the Company had approximately $119,000 in
general business credit carry-forwards which expire, if unused, beginning in the
year 2000 and alternative minimum tax credits of approximately $145,000 which
are not subject to expiration. These credit carry-forwards relate to one of the
Purchase Acquisitions and utilization of these credits is limited to
approximately $118,000 per year.
 
     Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the carry-forwards. Although
realization is not assured, management believes it is more likely
 
<PAGE>   36
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. INCOME TAXES -- (CONTINUED)
than not that all of the net deferred tax asset will be realized. The amount of
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
 
     The income tax expense (benefit) reconciled to the tax computed at the
statutory Federal rate (34%) is as follows:
 
<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                    ------------------------------------
                                                      1995         1996         1997
                                                    ---------   ----------   -----------
<S>                                                 <C>         <C>          <C>
Federal income tax at the statutory rate..........  $ 961,994   $  777,359   $(1,319,547)
State income tax..................................    193,651      267,932        (6,122)
Nondeductible goodwill amortization and
  acquisitions cost...............................        283      272,177     1,057,802
Income from Subchapter S corporations, net........   (290,000)    (200,674)      213,835
Other.............................................     11,249       71,998       290,604
                                                    ---------   ----------   -----------
                                                    $ 877,177   $1,188,792   $   236,572
                                                    =========   ==========   ===========
</TABLE>
 
12. BENEFIT PLANS
 
     The Company has a defined contribution profit sharing plan covering
substantially all employees. The plan provides for Company contributions to be
determined annually by the Board of Directors. The Company contributed $50,000
and $120,000 to the plan during 1996 and 1997, respectively.
 
     The Company also has two qualified tax deferred retirement savings plans
under the provisions of Section 401(k) of the Internal Revenue Code. The plans
cover all full-time employees who have completed six months of service with the
Company. Under the first plan, the Company matches the first 4% of an eligible
employee's elective contributions. Additional contributions are made at the
discretion of the Board of Directors. The second plan calls for the Company to
match 25% of the first 6% of eligible employees' elective contributions. The
Company contributed approximately $135,000 and $338,000 to the Plans for 1996
and 1997, respectively.
 
13. COMMITMENTS AND CONTINGENCIES
 
     The Company leases its office and store facilities and transportation
equipment under operating leases expiring in various years through 2010. Rental
expense was $4,241,000, $8,846,200 and $15,907,118 for the years ended December
31, 1995, 1996 and 1997, respectively. Future minimum rental payments under
operating leases with remaining noncancelable terms in excess of one year at
December 31, 1997 are as follows:
 
<TABLE>
<S>                                                           <C>
1998........................................................  $17,390,088
1999........................................................   13,822,487
2000........................................................    9,046,179
2001........................................................    5,370,666
2002........................................................    2,374,380
Thereafter..................................................    1,809,171
                                                              -----------
                                                              $49,812,971
                                                              ===========
</TABLE>
 
     The Company leases its corporate office space from the Company's chief
executive officer, president, director and shareholder of the Company. Rental
expense pursuant to the lease was $86,250 and $207,000, for
 
<PAGE>   37
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
the years ended December 31, 1996 and 1997, respectively. The Company also
leases office space from a corporation owned by a shareholder and director of
the Company. Rental expense pursuant to the lease was $94,800, $126,010 and
$122,040, respectively, for each of the three years in the period ended December
31, 1997.
 
     The Company from time to time on an as needed basis charters an airplane
from a company owned by one of its stockholders. Fees charged during the year
ended December 31, 1996 and 1997 under this arrangement were $106,650 and
$120,870, respectively.
 
     The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that their outcome will not
have a material adverse effect on the Company's financial position or results of
operations.
 
     The Internal Revenue Service has completed an examination of Alrenco's
Federal income tax returns for the years 1992 through 1995. The Company was
assessed additional taxes of approximately $680,000, related principally to the
Company's method of depreciation on rental merchandise and excess compensation
paid for those years. The Company has paid approximately $167,000 of this
assessment in January 1998 related to the excess compensation portion of the
assessment, and is contesting the remaining amounts related to depreciation on
rental merchandise. Management has analyzed the outstanding matter with tax
advisors and believes it has meritorious defenses to the remaining assessments.
The Company believes that any additional amounts assessed will not have a
material effect on the Company's financial position or results of operations.
 
14. UNAUDITED QUARTERLY DATA
 
     Summarized quarterly proforma financial data for 1996 and 1997 (in
thousands, except for per share amounts) is as follows:
 
<TABLE>
<CAPTION>
                                             1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                             -----------   -----------   -----------   -----------
<S>                                          <C>           <C>           <C>           <C>
Year ended December 31, 1996:
  Revenue..................................    $21,843       $23,721       $35,857       $42,740
                                               =======       =======       =======       =======
  Operating income (loss)..................    $ 2,162       $ 2,034       $   288       $(2,425)
                                               =======       =======       =======       =======
  Pro forma net income (loss)..............    $ 1,107       $ 1,105       $   239       $(1,554)
                                               =======       =======       =======       =======
  Pro forma net income (loss) per share
     Basic.................................    $   .20       $   .19       $   .02       $  (.09)
                                               =======       =======       =======       =======
     Diluted...............................    $   .20       $   .19       $   .02       $  (.09)
                                               =======       =======       =======       =======
Year ended December 31, 1997:
  Revenue..................................    $53,345       $56,807       $59,274       $61,542
                                               =======       =======       =======       =======
  Operating income (loss)..................    $ 1,864       $ 2,365       $   (51)      $(6,551)
                                               =======       =======       =======       =======
  Pro forma net income (loss)..............    $   753       $   666       $  (181)      $(5,142)
                                               =======       =======       =======       =======
  Pro forma net income (loss) per share
     Basic.................................    $   .04       $   .04       $  (.01)      $  (.30)
                                               =======       =======       =======       =======
     Diluted...............................    $   .04       $   .04       $  (.01)      $  (.30)
                                               =======       =======       =======       =======
</TABLE>
 
<PAGE>   38
                         ALRENCO, INC. AND SUBSIDIARIES
 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
15. SUBSEQUENT EVENT
 
     On February 26, 1998, immediately following the RTO Merger, the Company
entered into a new revolving credit facility (the "Comerica Credit Agreement")
with Comerica Bank, as lender and as agent for certain other lenders, which
provides for a $50,000,000 secured three-year credit facility. The Comerica
Credit Agreement replaces the existing credit agreements described in Note 9.
The Comerica Credit Agreement provides for interest rates based on a base rate
(as defined), the agent's prime rate, or the federal funds rate plus 100 basic
points, or a "Eurodollar Rate", plus an applicable margin. Under the Comerica
Credit Agreement, the Company has the option, provided that certain conditions
are met, to obtain an increase in the amount available under the Comerica Credit
Agreement up to an aggregate amount of $100 million. The Comerica Credit
Agreement is collateralized by substantially all assets of the Company and by a
pledge of the stock of the Company's subsidiaries.


<PAGE>   39
Item 6. Exhibits and Reports on Form 8-K.

    (a) Exhibits 

     Exhibit 
     Numbers                      Description of Exhibits 
    
     2.1     -  Agreement and Plan of Merger, dated as of September 28, 1997,
                by and between Alrenco, Inc. and RTO, Inc., as amended
                (incorporated herein by reference to Exhibit 2 to Alrenco,
                Inc.'s Current Report of Form 8-K filed on October 9, 1997
                (File No.0-27490) and to Exhibit 2.1 to Alrenco, Inc.'s Current
                Report on Form 8-K filed on March 5, 1998 (File No. 0-27490))

     2.2     -  Stock Purchase Agreement dated July 31, 1996 by and between
                RTO, Inc. and Action TV and Appliance Rental, Inc.
                (incorporated herein by reference to Exhibit 2.2 to Alrenco,
                Inc.'s Registration Statement on Form S-4 filed on March 6,
                1998 (File No. 333-47521))

     2.3     -  Asset Purchase Agreement dated January 7, 1997 among Action
                Rent-to-Own of Florida, Inc., B&L Concepts, Inc., Bill Ogle and
                Larry Sutton (incorporated herein by reference to Exhibit 2.3
                to Alrenco, Inc.'s Registration Statement on Form S-4 filed on
                March 6, 1998 (File No. 333-47521))

     3.1     -  Amended and Restated Articles of Incorporation of Alrenco,
                Inc.(incorporated herein by reference to Exhibit 3.1 to
                Alrenco, Inc.'s Current Report on Form 8-K filed March 5, 1998)

     3.3     -  Amended and Restated Code of Bylaws of Alrenco, Inc.
                (incorporated herein by reference to Exhibit 3.2 to Alrenco, 
                Inc.'s Current Report on Form 8-K filed on March 1998)

     4.1     -  Specimen Stock Certificate (incorporated Herein by reference to
                exhibits filed with Alrenco, Inc.'s Registration Statement on
                Form S-1 (File No. 33-99438) filed under the Securities Act of
                1933)

     10.1    -  Noncompetition and Consulting Agreement between Alrenco, Inc.
                and Michael D. Walts dated February 26, 1998 (incorporated
                herein by reference to Exhibit 10.1 to Alrenco, Inc.'s Current
                Report on Form 8-K filed on March 5, 1998)

     10.2    -  Revolving Credit Agreement dated February 26, 1998 between
                Alrenco, Inc. and Comerica Bank (incorporated herein by 
                reference to Exhibit 10.2 to Alrenco, Inc.'s Current Report on
                Form 8-K filed on March 5, 1998)

     10.3    -  Guaranty Agreement dated as of February 26, 1998 (incorporated
                herein by reference to Exhibit 10.3 to Alrenco, Inc.'s Current
                Report on Form 8-K filed on March 5, 1998)

     10.4    -  Security Agreement dated February 26, 1998 (incorporated herein
                by reference to Exhibit 10.4 to Alrenco, Inc.'s Current Report
                on Form 8-K filed on March 5, 1998)

     10.5    -  Pledge Agreement of Alrenco, Inc. dated as of February 26, 1998
                (incorporated herein by reference to Exhibit 10.5 to Alrenco
                Inc.'s Current Report on Form 8-K filed on March 5, 1998.)

     10.6    -  Pledge Agreement of RTO Holding Co., Inc. dated February
                26, 1998 (incorporated herein by reference to Exhibit 10.6 to
                Alrenco, Inc.'s Current Report on Form 8-K filed on March
                5, 1998)

     10.7    -  Amended and Restated Revolving Credit Agreement dated as of
                April 1, 1998 with Comerica Bank, as agent, and Bank One,
                Texas, N.A. as co-agent (filed as part of this report)

     10.9    -  RTO, Inc. 1996 Employee Stock Option Plan (incorporated herein
                by reference to Exhibit 10.12 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     10.10   -  RTO, Inc. 1996 Stock Option Plan for Non-Employee Directors
                (incorporated herein by reference to Exhibit 10.13 to Alrenco,
                Inc.'s Registration Statement on Form S-4 filed on March 6,
                1998 (File No. 333-47521))

     10.11   -  Lease Agreement dated January 1, 1993 by and between Billy W.
                White d/b/a White Property Co. #2 and Action TV & Appliance
                Rental, Inc. as amended (incorporated herein by reference to
                Exhibit 10.16 to Alrenco, Inc.'s Registration Statement on Form
                S-4 filed on March 6, 1998 (File No. 333-47521))

     10.12   -  Lease Agreement dated June 1, 1992 by and between Bill White
                and Action TV & Appliance Rental, Inc. (incorporated herein by
                reference to Exhibit 10.17 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     10.13   -  Shopping Center Lease dated May 1, 1996 by and between White
                Property Co. No. 2, Ltd. and Action TV & Appliance Rental, Inc.
                (incorporated herein by reference to Exhibit 10.18 to Alrenco,
                Inc.'s Registration Statement on Form S-4 filed on March 6,
                1998 (File No. 333-47521))

     10.14   -  Aircraft Dry Lease dated April 8, 1997 by and between Wyoming
                Associates, Inc. and RTO, Inc. (incorporated herein by
                reference to Exhibit 10.19 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     10.15   -  Aircraft Dry Lease dated April 8, 1997 by and between Wyoming
                Associates, Inc. and RTO, Inc. (incorporated herein by
                reference to Exhibit 10.20 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     23.1    -  Consent of Coopers & Lybrand L.L.P. (filed as part of this 
                report)

     23.2    -  Consent of Grant Thornton LLP (filed as part of this report)

     27.1    -  Financial Data Schedules

     27.2   -   Restated Financial Data Schedules for the years ended December
                31, 1995, 1996 and 1997 and for the quarter ended March 31,
                1997 reflecting the merger of Alrenco, Inc. and RTO, Inc.

     99.1    -  Press Release dated April 30,1998 announcing 
                Billy W. White Sr.'s resignation as President of the Company 
                (filed as part of this report)

     (b)   Reports on Form 8-K
    
           The following reports on form 8-K were filed during the fiscal
           quarter ended March 31, 1998:

              (i) Current Report on Form 8-K dated February 6, 1998 reporting
financial results for the fiscal quarter and year ended December 31, 1997.

              (ii) Current Report on Form 8-K dated March 5, 1998 reporting
completion of the merger of the Company and RTO (the "RTO Merger") and the
change in the Company's certifying accountant resulting from the RTO Merger. In
addition, the Company reported the execution of a credit agreement between the
Company and Comerica Bank, as agent. This report contained the following
financial statements: (i) Supplemental Consolidated Financial Statements of
Alrenco, Inc., (ii) Consolidated Financial Statements of RTO, Inc., (iii)
Financial Statements of Action TV & Appliance Rental, Inc.; (iv) Financial
Statements of B&L Concepts, Inc.; and (v) pro forma financial statements
reflecting the pro forma combined financial data of the Company and RTO, Inc.
assuming consummation of the RTO Merger.


<PAGE>   40


SIGNATURES

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

Date: May 8, 1998

                                          ALRENCO, INC.
                                          -------------
                                          (Registrant)



                                          /s/ K. David Belt
                                          --------------------------------------
                                          K. David Belt, Chief Financial Officer
                                          (Principal Financial Officer and duly
                                          authorized signatory)
<PAGE>   41
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>


  EXHIBIT 
   NUMBERS      DESCRIPTION
  --------      ----------- 
    <S>         <C>
     2.1     -  Agreement and Plan of Merger, dated as of September 28, 1997,
                by and between Alrenco, Inc. and RTO, Inc., as amended
                (incorporated herein by reference to Exhibit 2 to Alrenco,
                Inc.'s Current Report of Form 8-K filed on October 9, 1997
                (File No.0-27490) and to Exhibit 2.1 to Alrenco, Inc.'s Current
                Report on Form 8-K filed on March 5, 1998 (File No. 0-27490))

     2.2     -  Stock Purchase Agreement dated July 31, 1996 by and between
                RTO, Inc. and Action TV and Appliance Rental, Inc.
                (incorporated herein by reference to Exhibit 2.2 to Alrenco,
                Inc.'s Registration Statement on Form S-4 filed on March 6,
                1998 (File No. 333-47521))

     2.3     -  Asset Purchase Agreement dated January 7, 1997 among Action
                Rent-to-Own of Florida, Inc., B&L Concepts, Inc., Bill Ogle and
                Larry Sutton (incorporated herein by reference to Exhibit 2.3
                to Alrenco, Inc.'s Registration Statement on Form S-4 filed on
                March 6, 1998 (File No. 333-47521))

     3.1     -  Amended and Restated Articles of Incorporation of Alrenco,
                Inc.(incorporated herein by reference to Exhibit 3.1 to
                Alrenco, Inc.'s Current Report on Form 8-K filed March 5, 1998)

     3.3     -  Amended and Restated Code of Bylaws of Alrenco, Inc.
                (incorporated herein by reference to Exhibit 3.2 to Alrenco, 
                Inc.'s Current Report on Form 8-K filed on March 1998)

     4.1     -  Specimen Stock Certificate (incorporated Herein by reference to
                exhibits filed with Alrenco, Inc.'s Registration Statement on
                Form S-1 (File No. 33-99438) filed under the Securities Act of
                1933)

     10.1    -  Noncompetition and Consulting Agreement between Alrenco, Inc.
                and Michael D. Walts dated February 26, 1998 (incorporated
                herein by reference to Exhibit 10.1 to Alrenco, Inc.'s Current
                Report on Form 8-K filed on March 5, 1998)

     10.2    -  Revolving Credit Agreement dated February 26, 1998 between
                Alrenco, Inc. and Comerica Bank (incorporated herein by 
                reference to Exhibit 10.2 to Alrenco, Inc.'s Current Report on
                Form 8-K filed on March 5, 1998)

     10.3    -  Guaranty Agreement dated as of February 26, 1998 (incorporated
                herein by reference to Exhibit 10.3 to Alrenco, Inc.'s Current
                Report on Form 8-K filed on March 5, 1998)

     10.4    -  Security Agreement dated February 26, 1998 (incorporated herein
                by reference to Exhibit 10.4 to Alrenco, Inc.'s Current Report
                on Form 8-K filed on March 5, 1998)

     10.5    -  Pledge Agreement of Alrenco, Inc. dated as of February 26, 1998
                (incorporated herein by reference to Exhibit 10.5 to Alrenco
                Inc.'s Current Report on Form 8-K filed on March 5, 1998.)

     10.6    -  Pledge Agreement of RTO Holding Co., Inc. dated February
                26, 1998 (incorporated herein by reference to Exhibit 10.6 to
                Alrenco, Inc.'s Current Report on Form 8-K filed on March
                5, 1998)

     10.7    -  Amended and Restated Revolving Credit Agreement dated as of
                April 1, 1998 with Comerica Bank, as agent, and Bank One,
                Texas, N.A. as co-agent (filed as part of this report)

     10.9    -  RTO, Inc. 1996 Employee Stock Option Plan (incorporated herein
                by reference to Exhibit 10.12 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     10.10   -  RTO, Inc. 1996 Stock Option Plan for Non-Employee Directors
                (incorporated herein by reference to Exhibit 10.13 to Alrenco,
                Inc.'s Registration Statement on Form S-4 filed on March 6,
                1998 (File No. 333-47521))

     10.11   -  Lease Agreement dated January 1, 1993 by and between Billy W.
                White d/b/a White Property Co. #2 and Action TV & Appliance
                Rental, Inc. as amended (incorporated herein by reference to
                Exhibit 10.16 to Alrenco, Inc.'s Registration Statement on Form
                S-4 filed on March 6, 1998 (File No. 333-47521))

     10.12   -  Lease Agreement dated June 1, 1992 by and between Bill White
                and Action TV & Appliance Rental, Inc. (incorporated herein by
                reference to Exhibit 10.17 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     10.13   -  Shopping Center Lease dated May 1, 1996 by and between White
                Property Co. No. 2, Ltd. and Action TV & Appliance Rental, Inc.
                (incorporated herein by reference to Exhibit 10.18 to Alrenco,
                Inc.'s Registration Statement on Form S-4 filed on March 6,
                1998 (File No. 333-47521))

     10.14   -  Aircraft Dry Lease dated April 8, 1997 by and between Wyoming
                Associates, Inc. and RTO, Inc. (incorporated herein by
                reference to Exhibit 10.19 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     10.15   -  Aircraft Dry Lease dated April 8, 1997 by and between Wyoming
                Associates, Inc. and RTO, Inc. (incorporated herein by
                reference to Exhibit 10.20 to Alrenco, Inc.'s Registration
                Statement on Form S-4 filed on March 6, 1998 (File No.
                333-47521))

     23.1    -  Consent of Coopers & Lybrand L.L.P. (filed as part of this 
                report)

     23.2    -  Consent of Grant Thornton LLP (filed as part of this report)

     27.1    -  Financial Data Schedules

     27.2    -  Restated Financial Data Schedules for the years ended December
                31, 1995, 1996 and 1997 and for the quarter ended March 31,
                1997 reflecting the merger of Alrenco, Inc. and RTO, Inc.

     99.1    -  Press Release dated April 30,1998 announcing Billy W. White 
                Sr.'s resignation as President of the Company (filed as part
                of this report)
</TABLE>