# UNITED STATES

# SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C.
20549

_________________

FORM 10-Q

_________________

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

FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2003

OR

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

_________________

Commission File Number
0-22026

RENT-WAY, INC.

(Exact name of
registrant as specified in its charter)

_________________

|                                               |                                     
|---------------------------------------------- | ------------------------------------
|
|PENNSYLVANIA                                   | 25-1407782                          
|(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.)



ONE RENTWAY PLACE,
ERIE, PENNSYLVANIA 16505

(Address of principal
executive offices)

(814) 455-5378

(Registrants
telephone number)

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 [ ]

Indicate by check mark whether the
 registrant is an  accelerated  filer (as defined in Rule 12b-2 of the Act). Yes [ X ]
  No [  ]

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date.

|      |                                  
|----- | ---------------------------------
|
|Class | Outstanding as of August 11, 2003

---

RENT-WAY, INC.

|           |                                                                                                                 |     
|---------- | --------------------------------------------------------------------------------------------------------------- | ----
|
|PART I     | FINANCIAL INFORMATION                                                                                           | PAGE
|Item 1     | Financial Statements:                                                                                          
|           |                                                                                                                
|           | Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited) and September 30, 2002                    | 3   
|           | Condensed Consolidated Statements of Operations, three and nine months ended June 30, 2003 and 2002 (unaudited) | 4   
|           | Condensed Consolidated Statements of Cash Flows, nine months ended June 30,2003 and 2002 (unaudited)            | 5   
|           | Notes to Condensed Consolidated Financial Statements (unaudited)                                                | 6   
|           |                                                                                                                
|Item 2     | Management's Discussion and Analysis of Financial Condition and Results of Operations                           | 20  
|Item 3     | Quantitative and Qualitative Disclosures About Market Risk                                                      | 32  
|Item 4     | Controls and Procedures                                                                                         | 32  
|PART II    | OTHER INFORMATION                                                                                              
|Item 1     | Legal Proceedings                                                                                               | 34  
|Item 2     | Changes in Securities and Use of Proceeds                                                                       | 34  
|Item 6     | Exhibits and Reports on Form 8-K                                                                                | 35  
|Signatures |                                                                                                                 | 37  

---

RENT-WAY, INC.

CONDENSED CONSOLIDATED
BALANCE SHEETS(All dollar amounts in thousands)

|                                                         | JUNE 30,
2003 | SEPTEMBER 30,
2002
|-------------------------------------------------------- | ------------- | ------------------
|
|ASSETS                                                   |               |                   
|Cash and cash equivalents                                |               |                   
|Prepaid expenses                                         |               |                   
|Income tax receivable                                    |               |                   
|Rental merchandise, net                                  |               |                   
|Rental merchandise deposits and credits due from vendors |               |                   
|Property and equipment, net                              |               |                   
|Goodwill                                                 |               |                   
|Deferred financing costs, net                            |               |                   
|Intangible assets, net                                   |               |                   
|Other assets                                             |               |                   
|Assets held for sale (Note 2)                            |               |                   
|                                                         |               |                   
|Total assets                                             |               |                   
|                                                         |               |                   
|                                                         |               |                   
|LIABILITIES AND SHAREHOLDERS' EQUITY                     |               |                   
|Liabilities:                                             |               |                   
|Accounts payable                                         |               |                   
|Liabilities related to assets held for sale (Note 2) .   |               |                   
|Other liabilities                                        |               |                   
|Deferred tax liability                                   |               |                   
|Debt                                                     |               |                   
|                                                         |               |                   
|Total liabilities                                        |               |                   
|Contingencies (See Note 13)                              |               |                   
|Convertible redeemable preferred stock                   |               |                   
|SHAREHOLDERS' EQUITY:                                    |               |                   
|Preferred stock, without par value; 1,000,000 shares     |               |                   
|authorized;                                              |               |                   
|1,500 shares were issued as the convertible preferred    |               |                   
|shares issued and outstanding                            |               |                   
|Common stock, without par value; 50,000,000 shares       |               |                   
|authorized; 26,020,037 and 25,685,538 shares issued and  |               |                   
|outstanding, respectively                                |               |                   
|Common stock warrants; 100,000 outstanding               |               |                   
|Option to purchase convertible preferred stock           |               |                   
|Loans to shareholders                                    |               |                   
|Accumulated other comprehensive income                   |               |                   
|Accumulated deficit                                      |               |                   
|                                                         |               |                   
|Total shareholders' equity                               |               |                   
|                                                         |               |                   
|Total liabilities and shareholders' equity               |               |                   
|                                                         |               |                   

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

---

# RENT-WAY, INC.

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS                               (All dollar amounts in thousands,
except per share data)                                                     (Unaudited)

|                                           | Three Months Ended
June 30, | Nine Months Ended
June 30,
|------------------------------------------ | --------------------------- | --------------------------
|
|REVENUES:                                  |                             |                           
|Rental revenue                             |                             |                           
|Prepaid phone service revenue              |                             |                           
|Other revenues                             |                             |                           
|                                           |                             |                           
|Total revenues                             |                             |                           
|COSTS AND OPERATING EXPENSES:              |                             |                           
|Depreciation and amortization:             |                             |                           
|Rental merchandise                         |                             |                           
|Property and equipment                     |                             |                           
|Amortization of intangibles                |                             |                           
|Cost of prepaid phone service              |                             |                           
|Salaries and wages                         |                             |                           
|Advertising, net                           |                             |                           
|Occupancy                                  |                             |                           
|Restructuring costs                        |                             |                           
|Other operating expenses                   |                             |                           
|                                           |                             |                           
|Total costs and operating expenses         |                             |                           
|                                           |                             |                           
|Operating income                           |                             |                           
|OTHER INCOME (EXPENSE):                    |                             |                           
|Settlement of class action lawsuit         |                             |                           
|Interest expense                           |                             |                           
|Interest income                            |                             |                           
|Other income (expense), net                |                             |                           
|                                           |                             |                           
|Income (loss) before income taxes,         |                             |                           
|cumulative effect of change in             |                             |                           
|accounting principle and                   |                             |                           
|discontinued operations                    |                             |                           
|Income tax expense                         |                             |                           
|                                           |                             |                           
|Income (loss) before cumulative effect     |                             |                           
|of change in accounting principle          |                             |                           
|and discontinued operations                |                             |                           
|Cumulative effect of change in             |                             |                           
|accounting principle                       |                             |                           
|Income (loss) from discontinued            |                             |                           
|operations                                 |                             |                           
|                                           |                             |                           
|Net income (loss)                          |                             |                           
|                                           |                             |                           
|Amortization of deemed dividend            |                             |                           
|and accretion of preferred stock           |                             |                           
|                                           |                             |                           
|Net income (loss) available to common      |                             |                           
|shareholders                               |                             |                           
|                                           |                             |                           
|EARNINGS (LOSS) PER COMMON SHARE (NOTE 4:) |                             |                           
|Basic earnings (loss) per common share:    |                             |                           
|Income (loss) before cumulative            |                             |                           
|effect of change in accounting             |                             |                           
|principle and discontinued                 |                             |                           
|operations available to common             |                             |                           
|shareholders                               |                             |                           
|                                           |                             |                           
|Net income (loss) available to             |                             |                           
|common  shareholders                       |                             |                           
|                                           |                             |                           
|Diluted earnings (loss) per common         |                             |                           
|share:                                     |                             |                           
|Income (loss) before cumulative            |                             |                           
|effect of change in accounting             |                             |                           
|principle and discontinued                 |                             |                           
|operations available to common             |                             |                           
|shareholders                               |                             |                           
|                                           |                             |                           
|Net income (loss) available to             |                             |                           
|common shareholders                        |                             |                           
|                                           |                             |                           
|Weighted average common shares             |                             |                           
|outstanding:                               |                             |                           
|Basic                                      |                             |                           
|                                           |                             |                           
|Diluted                                    |                             |                           
|                                           |                             |                           

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

---

# 

# RENT-WAY, INC.

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS                                          (All dollar amounts in
thousands                                                     (Unaudited)

|                                                                | Nine Months Ended
June 30,
|--------------------------------------------------------------- | --------------------------
|
|OPERATING ACTIVITIES:                                           |                           
|Net loss                                                        |                           
|Adjustments to reconcile net loss to net cash provided by (used |                           
|in) operating activities:                                       |                           
|(Income) loss from discontinued operations                      |                           
|Depreciation and amortization                                   |                           
|Deferred income taxes                                           |                           
|Write-off of deferred financing costs                           |                           
|Goodwill impairment                                             |                           
|Market adjustment for preferred stock conversion option         |                           
|derivative                                                      |                           
|Write-off of property and equipment                             |                           
|Gain on sale of assets                                          |                           
|Changes in assets and liabilities:                              |                           
|Prepaid expenses                                                |                           
|Rental merchandise                                              |                           
|Rental merchandise deposits and credits due from vendors        |                           
|Income tax receivable                                           |                           
|Other assets                                                    |                           
|Accounts payable                                                |                           
|Other liabilities                                               |                           
|                                                                |                           
|Net cash provided by (used in) continuing operations            |                           
|Net cash provided by (used in) discontinued operations          |                           
|                                                                |                           
|Net cash provided by (used in) operating activities             |                           
|                                                                |                           
|INVESTING ACTIVITIES:                                           |                           
|Purchase of businesses, net of cash acquired                    |                           
|Purchases of property and equipment                             |                           
|Proceeds from sale of stores and other assets                   |                           
|                                                                |                           
|Net cash provided by (used in) investing activities .           |                           
|                                                                |                           
|FINANCING ACTIVITIES:                                           |                           
|Proceeds from borrowings                                        |                           
|Payments on borrowings                                          |                           
|Payment on capital leases                                       |                           
|Book overdraft                                                  |                           
|Proceeds from common stock issuance                             |                           
|Proceeds from convertible preferred stock                       |                           
|Deferred financing costs                                        |                           
|Interest on loans to directors                                  |                           
|Payment of shareholder/director loans                           |                           
|                                                                |                           
|Net cash  used in financing activities                          |                           
|                                                                |                           
|Decrease in cash                                                |                           
|                                                                |                           
|Cash and cash equivalents at beginning of period                |                           
|                                                                |                           
|Cash and cash equivalents at end of period                      |                           
|                                                                |                           

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

---

RENT-WAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(all dollars in thousands, except
per share data)

(Unaudited)

1.    
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION. Rent-Way,
Inc., (the Company or Rent-Way) is a corporation organized under
the laws of the Commonwealth of Pennsylvania. The Company operates a chain of
rental-purchase stores that rent durable household products such as home entertainment
equipment, furniture, computers, major appliances and jewelry to consumers on a weekly or
monthly basis. Commencing January 1, 2000, the Company also provides prepaid local phone
service to consumers on a monthly basis through its majority-owned subsidiary, dPi
Teleconnect, LLC (DPI). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to Form 10-Q,
and therefore, do not include all information and notes necessary for a fair presentation
of financial position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. In the opinion of
management, all adjustments which, except as discussed herein, consist of normal recurring
adjustments and are necessary for a fair statement of the financial position, results of
operations and cash flows of the Company have been made. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.

The condensed consolidated financial
statements include the accounts of the Company and its wholly and majority owned
subsidiaries. All significant inter-company transactions and balances have been
eliminated.

These financial statements and the
notes thereto should be read in conjunction with the Companys audited financial
statements included in its Annual Report on Form 10-K for the fiscal year ended September
30, 2002.

On June 2, 2003, the Company closed a
refinancing of its outstanding bank facility, through the issuance of $205,000 of senior
secured notes, borrowings under a new $60,000 bank revolving credit facility and the sale
of $15,000 of convertible preferred stock.

DEFERRED FINANCING COSTS. Deferred
financing costs consists of bond issuance costs and loan origination costs incurred in
connection with the sale of $205,000 of senior secured notes and a new $60,000 revolving
credit facility that closed June 2, 2003. The bond issuance costs of $6,864 are amortized
on a straight-line basis over the 7-year term of the bonds. The loan origination costs of
$2,027 are amortized on a straight-line basis over the 5-year bank credit agreement.
Deferred financing cost amortization was $479 and $325 and $1,615 and $1,021 for the
three- and nine-month periods ended June 30, 2003 and 2002, respectively. Deferred
financing cost amortization is included in interest expense. There was $1,105 of net
deferred financing costs from the previous credit facility charged to interest expense
during June 2003.

COMPANY INSURANCE PROGRAMS. The
Company is primarily self-insured for health, workers compensation, automobile, and
general liability costs. The self-insurance liability for health costs is determined
actuarially based on claims filed and an estimate of claims incurred but not yet reported.
The self-insurance liability for workers compensation, automobile and general
liability costs are determined actuarially based on claims filed and company experience.
Losses in the workers compensation, automobile and general liability programs are
pre-funded based on the insurance companys loss estimates. Loss estimates will be
adjusted for developed incurred losses at 18 months from policy inception and every 12
months thereafter. Retrospective adjustments to loss estimates are recorded when
determinable and probable. The adjustment for income of $4,618 for ultimate and incurred
losses offsets insurance costs included in other operating expense for the three-months
and nine-months ending June 30, 2003, which include income adjustments of $3,597 and
$1,055 for the policy years ended December 31, 2002 and 2001, respectively, and, an
expense adjustment of $34 for the policy year ended December 31, 2000.

DISCONTINUED OPERATIONS. On December
17, 2002, the Company entered into a definitive purchase agreement to sell rental
merchandise and related contracts of 295 stores to Rent-A-Center, Inc. Rent-A-Center, Inc.
purchased certain fixed assets and assumed related store leases of 125 of these stores.
Accordingly, for financial statement purposes, the assets, liabilities, results of
operations and cash flows of this component have been segregated from those of continuing
operations and are presented in the Companys financial statements as discontinued
operations (see Note 2).

RECLASSIFICATIONS.    
          Certain amounts in the Condensed Consolidated Balance Sheet for September 30,
          2002, the Condensed Consolidated Statement of Operations for the three- and
          nine-months ended June 30, 2002, and the Condensed Consolidated Statement of
          Cash Flows for the nine-months ended June 30, 2002, were reclassified to conform
          to the June 30, 2003, presentation.

2.    
          DISCONTINUED OPERATIONS:

On December 17, 2002, the Company
entered into a definitive purchase agreement to sell rental merchandise and related
contracts of 295 stores to Rent-A-Center, Inc. for approximately $101,500. These stores
are all included in the household rental segment. Rent-A-Center, Inc. purchased certain
fixed assets and assumed related store leases of 125 of these stores. The transaction
closed on February 8, 2003. The final purchase price for the stores was approximately
$100,400. As required under the Companys credit agreement, all proceeds of the sale,
net of transaction costs, store closing and similar expenses, were used to pay existing
bank debt. Of the approximate $100,400 purchase price, $10,000 was being held back by
Rent-A-Center, Inc., to secure the Companys indemnification obligations, $5,000 for
90 days following closing, which was refunded to the Company May, 2003, and an additional
$5,000 for 18 months following closing. The Company recorded a receivable for this based
upon its ability to fully satisfy the indemnification obligations of the agreement. The
$5,000 held back by Rent-A-Center, Inc. for 18 months was discounted by $820 to record at
the present value. The $820 discount will be amortized into income over the 18-month hold
back period. Also, there was a $24,500 escrow held by National City Bank to fund
transaction-related expenses. The escrow balance of approximately $3,000 was used to pay
down debt at the closing of the refinancing on June 2, 2003. The assets sold include
rental merchandise, vehicles under capital leases and certain fixed assets. Vehicle lease
obligations were paid by the Company out of the proceeds from the sale.

The asset group is distinguishable as
a component of the Company and classified as held for sale in accordance with Statement of
Financial Accounting Standards No. 144 (SFAS 144), Accounting for the
Impairment on Disposal of Long-Lived Assets. Direct costs to transact the sale were
comprised of, but not limited to, broker commissions, legal and title transfer fees and
closing costs.

In connection with the sale of the
stores, the Company has and will continue to incur additional direct costs related to the
sale and exit costs related to these discontinued operations. Costs associated with an
exit activity include, but are not limited to termination benefits, costs to terminate a
contract that is not a capital lease and costs to consolidate facilities or relocate
employees, in accordance with Statement of Financial Accounting Standards No. 146
(SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities. There was a transition period as defined in the asset purchase agreement
comprised of a period of thirty days from the date immediately following the closing date.
During this transition period, the Company was liable for certain exit costs attributable
to the operation and transition of the purchased stores, including, but not limited to,
rent, utilities, costs applicable to office equipment, costs associated with vehicles,
employee payroll, health and other employee benefits, workers compensation claims, health
care claims and all other costs related to transition personnel. The Company accrued for
employee separation costs as costs were incurred. These costs are included in the results
of discontinued operations in accordance with SFAS 146.

Related operating results have been
reported as discontinued operations in accordance with SFAS 144. The Company has
reclassified the results of operations of the component to be disposed for the prior
period in accordance with provisions of SFAS 144. There have been no corporate expenses
(including advertising expense) included in expenses from discontinued operations.
Interest on debt that is required to be repaid as a result of the disposal transaction is
allocated to income (loss) from discontinued operations. The effective interest rate on
the outstanding debt of the Company at the end of the period reported is applied to the
$68,643 estimated debt pay-down from the proceeds. The amount of interest reclassified to
loss from discontinued operations is $0 and $2,168 for the three-month periods and $3,036
and $6,454 for the nine-month periods ended June 30, 2003 and 2002, respectively. Revenues
and net income (loss) from the discontinued operations were as follows:

|                                               | Three Months Ended June 30, | Nine Months Ended June 30,
|---------------------------------------------- | --------------------------- | --------------------------
|
|Operating revenues                             |                             |                           
|Operating expenses from discontinued           |                             |                           
|operations (including exit costs) (1)          |                             |                           
|Rental merchandise fair value adjustment       |                             |                           
|Reserve for present value of future minimum    |                             |                           
|lease payments on vacated stores (2)           |                             |                           
|Loss on sale of stores                         |                             |                           
|Interest expense                               |                             |                           
|Income tax benefit                             |                             |                           
|                                               |                             |                           
|Net income (loss) from discontinued operations |                             |                           
|                                               |                             |                           

|(1) |  | The Company records exit costs associated with the operation and transition of
               the stores to Rent-A-Center, Inc. for 30 days after closing, and monthly rent
               and common area maintenance charges until leases are terminated or expired, in
               accordance with SFAS 146.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The reserve for future lease payments on vacated stores relates to the 170
               stores for which Rent-A-Center, Inc. did not assume the leases. These costs are
               associated with the exit activity related to the sale of the 295 stores to
               Rent-A-Center, Inc., and are recorded in accordance with SFAS 146.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assets and liabilities of the stores
held for sale included in the Condensed Consolidated Balance Sheet are as follows:

|                            | June 30,
2003 | September 30,
2002
|--------------------------- | ------------- | ------------------
|
|Assets:                     |               |                   
|Rental Merchandise, net     |               |                   
|Goodwill                    |               |                   
|Property and equipment, net |               |                   
|Costs of sale               |               |                   
|Utility Deposits            |               |                   
|                            |               |                   
|                            |               |                   
|                            |               |                   
|Liabilities:                |               |                   
|Vehicle lease obligation    |               |                   
|Customer deposits           |               |                   
|                            |               |                   
|                            |               |                   
|                            |               |                   

Property and equipment held for sale was
comprised of the following:

|                            | June 30,
2003 | September 30,
2002
|--------------------------- | ------------- | ------------------
|
|Leasehold improvements      |               |                   
|Computer equipment          |               |                   
|Furniture and fixtures      |               |                   
|Vehicles                    |               |                   
|Accumulated depreciation..  |               |                   
|                            |               |                   
|Property and equipment, net |               |                   
|                            |               |                   

3.    
          BUSINESS RATIONALIZATION:

The Company periodically closes
under-performing stores and takes other actions to maximize its overall profitability. In
connection with the closing of stores and taking other actions, it incurs employee
severance, fixed asset write offs, lease termination costs and other direct exit costs
related to these activities. The Company recorded employee severance costs of $1,423 of
which $1,298 is employee severance costs and termination benefits included in discontinued
operations, in the nine months ended June 30, 2003. The Company recorded $2,024 of fixed
asset write-offs associated with restructuring costs that are included in the $2,251 fixed
asset write-off provided for and utilized during the nine months ended June 30, 2003.
There were no fixed asset write-offs included in discontinued operations. There was $8,351
of lease termination costs recorded in discontinued operations not included in the
business rationalization footnote (see Note 2). The net amount of these costs were as
follows:

|                               | Fixed Asset
Write Offs | Lease
Termination Costs | Total
|------------------------------ | ---------------------- | ----------------------- | -----
|
|Balance at September 30, 2001  |                        |                         | $    
|Fiscal 2002 Provision          |                        |                         |      
|Amount utilized in fiscal 2002 |                        |                         |      
|                               |                        |                         |      
|Balance at September 30, 2002  |                        |                         |      
|Fiscal 2003 Provision          |                        |                         |      
|Amount utilized in Fiscal 2003 |                        |                         |      
|                               |                        |                         |      
|Balance at June 30, 2003       |                        |                         | $    
|                               |                        |                         |      

Lease termination costs will be paid
according to the contract terms.

4.    
          EARNINGS (LOSS) PER COMMON SHARE:

Basic earnings (loss) per common
share is computed using income (loss) available to common shareholders divided by the
weighted average number of common shares outstanding. Diluted earnings (loss) per common
share is computed using income (loss) available to common shareholders adjusted for
anticipated dividend savings and accretion on conversion of the Companys convertible
preferred stock and the weighted average number of shares outstanding adjusted for the
potential impact of options and warrants and shares issuable upon conversion of preferred
stock where the effects are dilutive. Because operating results were a loss for the
three-month period ended June 30, 2002, and for the nine-month periods ended June 30, 2003
and 2002, basic and diluted loss per common share were the same.

The following table reconciles the
basic and diluted earnings (loss) per common share computation:

|                                                    | Three Months Ended
June 30, | Nine Months Ended
June 30, |  
|--------------------------------------------------- | --------------------------- | -------------------------- | -
|
|COMPUTATION OF EARNINGS (LOSS) PER SHARE:           |                             |                            |  
|BASIC                                               |                             |                           
|Income (loss) before cumulative effect of change    |                             |                           
|in accounting principle and discontinued operations |                             |                            | $
|Cumulative effect of change in accounting principle |                             |                            |  
|Income (loss) from discontinued operations          |                             |                            |  
|                                                    |                             |                            |  
|Net income (loss)                                   |                             |                            |  
|Amortization of deemed dividend and accretion       |                             |                           
|of preferred stock                                  |                             |                            |  
|                                                    |                             |                            |  
|Net income (loss) available to common shareholders  |                             |                            | $
|                                                    |                             |                            |  
|Weighted average common shares outstanding          |                             |                            |  
|                                                    |                             |                            |  
|Earnings (loss) per share:                          |                             |                           
|Income (loss) before cumulative effect of           |                             |                           
|change in accounting principle and discontinued     |                             |                           
|operations available to common shareholders         |                             |                            | $
|Cumulative effect of change in accounting           |                             |                           
|principle                                           |                             |                            |  
|Income (loss) from discontinued operations          |                             |                            |  
|                                                    |                             |                            |  
|Net income (loss) available to common shareholders  |                             |                            | $
|                                                    |                             |                            |  
|DILUTED                                             |                             |                           
|Net income (loss) available to common               |                             |                           
|shareholders for basic earnings (loss) per share    |                             |                            | $
|Plus:  income impact of assumed conversion          |                             |                           
|Convert derivative market value adjustment (2)      |                             |                            |  
|Dividends on 8% convertible preferred stock (2)     |                             |                            |  
|Accretion to preferred stock redemption amount (2)  |                             |                            |  
|                                                    |                             |                            |  
|Net income (loss) available to common               |                             |                           
|shareholders for diluted earnings (loss) per        |                             |                           
|share and assumed conversion                        |                             |                            | $
|                                                    |                             |                            |  
|Weighted average common shares used in              |                             |                           
|calculating basic earnings (loss) per share         |                             |                            |  
|Add incremental shares representing:                |                             |                           
|Shares issuable upon exercise of stock options,     |                             |                           
|warrants and escrowed shares (1)                    |                             |                            |  
|Contingent shares issuable upon the exercise of     |                             |                           
|warrants to purchase 8% convertible preferred       |                             |                           
|stock (2)                                           |                             |                            |  
|Shares issuable upon conversion of 8% convertible   |                             |                           
|preferred stock (2)                                 |                             |                            |  
|Weighted average number of shares used in           |                             |                           
|calculation of diluted earnings (loss) per share    |                             |                            |  
|                                                    |                             |                            |  
|Earnings (loss) per share:                          |                             |                           
|Income (loss) before cumulative effect of           |                             |                           
|change in accounting principle and discontinued     |                             |                           
|operations available to common shareholders         |                             |                            | $
|Cumulative effect of change in accounting principle |                             |                            |  
|Income (loss) from discontinued operations          |                             |                            |  
|                                                    |                             |                            |  
|Net income (loss) available to common               |                             |                           
|shareholders                                        |                             |                            | $
|                                                    |                             |                            |  

|(1) |  | For the three- and nine-month periods ended June 30, 2003, the number of stock
               options that were outstanding but not included in the computation of diluted
               earnings per common share because their exercise price was greater than the
               average market price of common stock, and therefore anti-dilutive, was 3,340 and
               3,340, respectively. The number of stock options that were outstanding but not
               included in the computation of diluted earnings per common share in which their
               exercise price was less than the average market price of common stock was 16 for
               the three- and nine-months ended June 30, 2003. For the three- and nine-month
               period ended June 30, 2002, the number of stock options that were outstanding
               but not included in the computation of diluted earnings per share because their
               exercise price was greater than the average market rice of common stock, and
               therefore anti-dilutive, was 7,830 and 3,544, respectively. There was also 4,186
               contingent warrants not included in the computation of diluted earnings per
               common share because they were anti-dilutive for the three- and nine-month
               periods ended June 30, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Including the effects of these items for the three-month and nine-month periods
               ended June 30, 2003 would be anti-dilutive. Therefore, 752 contingent shares
               issuable upon exercise of warrants to purchase 8% convertible preferred stock
               and 2,500 shares issuable upon conversion of 8% convertible preferred stock are
               excluded from consideration in the calculation of diluted earnings (loss) per
               share for the three-months and nine months ended June 30, 2003. There were
               convert derivative market value adjustment of $233, dividends on convertible
               preferred stock of $95 and accretion to preferred stock redemption amount of $29
               income impact of assumed conversion not added to net income (loss) available to
               common shareholders for basic earnings (loss) per share in the diluted earnings
               (loss) per share because including the effects of these items would be
               anti-dilutive
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.    
          GOODWILLADOPTION OF STATEMENT 142:

Effective October 1, 2001, the
Company adopted Statement of Financial Accounting Standards No. 142 (SFAS
142), Goodwill and Other Intangible Assets. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill and intangible assets with indefinite lives, including such
assets recorded in past business combinations, ceases upon adoption. Thus, no amortization
for such goodwill and indefinite lived intangibles was recognized in the accompanying
Condensed Consolidated Statements of Operations for the three-and nine-months ended June
30, 2003 and 2002. On an annual basis and when there is reason to suspect that their
values have been diminished or impaired, these assets must be tested for impairment, and a
write down may be necessary.

In accordance with the provisions of
SFAS 142, during fiscal 2002 the Company performed, with the assistance of an independent
valuation firm, the impairment test of the carrying value of goodwill. This assessment
resulted in an impairment write-down of $58,900, recorded in Cumulative Effect of
Change in Accounting Principle in the amount of $41,500 (net of $17,400 in income
taxes). In accordance with the transitional implementation guidance of SFAS 142, the write
down was recorded retroactive to the Companys first quarter results of operations.

The Rent-A-Center, Inc., transaction
(see Note 2) is an event that triggers an impairment assessment under the provisions of
SFAS 142. The Company performed an impairment test of the carrying value of goodwill
remaining after allocation of the fair value of goodwill to the assets held for sale.
There was no impairment of goodwill as a result of this event. Goodwill held for sale was
determined based on the ratio of the fair value of the 295 stores sold to Rent-A-Center,
Inc., to the fair value of the entire Company before the sale of the stores. Goodwill
allocated to the disposal group was $41,291.

The following table shows the net
carrying value of goodwill as of June 30, 2003 for the Companys segments:

|         | Household
Rental Segment | Prepaid
Telephone
Service Segment | Total
Segments
|-------- | ------------------------ | --------------------------------- | --------------
|
|Goodwill |                          |                                   | $             

The following table reflects the
components of amortizable intangible assets at June 30, 2003:

|                               | Purchase
Amount | Cumulative
Amortization | Net
Carrying
Amount
|------------------------------ | --------------- | ----------------------- | -------------------
|
|Amortizable intangible assets: |                 |                         |                    
|Non-compete agreements         |                 |                         | $                  
|Customer contracts             |                 |                         |                    
|Exclusivity agreement          |                 |                         |                    
|                               |                 |                         |                    
|                               |                 |                         | $                  
|                               |                 |                         |                    

There were no changes to the
amortization methods and lives of the amortizable intangible assets.

6.    
          DEBT:

Debt consists of the following:

|                          | June 30,
2003 | September 30,
2002
|------------------------- | ------------- | ------------------
|
|Senior credit facility    |               |                   
|Senior secured notes      |               |                   
|Revolving credit facility |               |                   
|Note payable              |               |                   
|                          |               |                   
|                          |               |                   
|                          |               |                   

Senior Credit Facility
Refinanced

On June 2, 2003, the Company
completed the sale of $205,000 of 11.875% senior secured notes (the secured
notes), closed a new $60,000 revolving credit facility and sold $15,000 in newly
authorized 8% convertible preferred stock through a private placement. Net proceeds of
$194,553 from the secured notes, $33,000 borrowed under a new revolving bank credit
facility, and $14,129 from the sale of convertible preferred stock were used to pay down
$50,269 of the Companys term loan A facility, $127,348 of its term loan B facility,
$38,714 of its revolver and $23,263 of accrued interest. The remaining net proceeds were
used for general corporate purposes.

Senior Secured Notes

The $205,000 of secured notes bears
interest at 11.875%, which is payable semiannually on June 15 and December 15, beginning
December 15, 2003. The secured notes are guaranteed on a senior basis by all existing and
future domestic restricted subsidiaries of the Company other than dPi, which is an
unrestricted subsidiary. The Company may redeem the secured notes, in whole or in part, at
any time prior to June 15, 2010, at a redemption price equal to the greater of:

|a) |  | 100% of the principal amount of the notes to be redeemed; and
|-- |  | -------------------------------------------------------------

|b) |  | the sum of the present values of (i) 100% of the principal amount of the notes
               to be redeemed at June 15, 2010, and (ii) the remaining scheduled payments of
               interest from the redemption date through June 15, 2010, but excluding accrued
               and unpaid interest to the redemption date, discounted to the redemption date at
               the treasury rate plus 175 basis points;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

plus, in either case, accrued and
unpaid interest to the redemption date.

In addition, at any time prior to June
15, 2006, up to 25% of the aggregate principal amount of the secured notes may be redeemed
at the Companys option, within 75 days of certain public equity offerings, at a
redemption price of 111.875% of the principal amount, together with accrued and unpaid
interest. Such redemption can occur provided that after giving effect to any such
redemption, at least 75% of the original aggregate principal amount of the notes issued
(including any notes issued in future permitted issuances) remains outstanding.

The secured notes were offered at a
discount of $3,583, which is being amortized using the effective interest method, over the
term of the secured notes. Amortization of the discount was $25 for the three and nine
months ended June 30, 2003. Costs representing underwriting fees and other professional
fees of $6,864 are being amortized, using the straight-line method, over the term of the
secured notes. The secured notes rank senior in right to all of the Companys
existing and future subordinated debt, have a lien position ranking second to the bank
revolving credit facility and effectively junior in right of payment to all existing and
future debt and other liabilities of the Companys subsidiaries that are not
subsidiary guarantors. The secured notes contain covenants that will, among other things,
limit the Companys ability to incur additional debt, make restricted payments, incur
any additional liens, sell certain assets, pay dividend distributions from restricted
subsidiaries, transact with affiliates, conduct certain sale and leaseback transactions
and use excess cash flow.

If (a) the Company has any excess
cash flow or amounts on deposit in the excess cash flow collateral account, (b) the
leverage ratio is equal to or greater than 2.50 to 1.00 or the rent-adjusted leverage
ratio is equal or greater than 4.00 to 1.00, and (c) the Company has cash and cash
equivalents of more than $10,000, the Company must repay debt (if any) outstanding under
the revolving credit facility in an amount equal to the remainder (if positive) of 1) the
amount of such cash and cash equivalents minus 2) the sum of $10,000 plus such excess cash
flow. Thereafter, if (a) the Company has any excess cash flow with respect to such fiscal
year plus amounts on deposit in the excess cash flow collateral account of at least $1,000
in the aggregate and (b) the coverage ratio is equal to or greater than 2.50 to 1.00 or
the rent-adjusted leverage ratio is equal to or greater than 4.00 to 1.00, then the
Company either shall use such excess cash flow plus such amounts on deposit to repay debt
(if any) outstanding under the revolving credit facility or, subject to limitations, shall
use 75% of any excess cash flow plus such amounts on deposit remaining after repayment of
debt outstanding under the revolving credit facility to make an offer to purchase notes at
a purchase price equal to 104.25% of the aggregate principal amount thereof, plus accrued
and unpaid interest to the purchase date. The Company shall deposit in the excess cash
flow collateral account all of the portion of the 75% of such remaining excess cash flow
not used to purchase notes. The Company may use 25% of the excess cash flow remaining with
respect to such fiscal year after repayment of debt outstanding under the revolving credit
facility. All of the Companys obligations in the excess cash flow covenant shall
terminate upon the first fiscal year end of the Company at which both a) the leverage
ratio is less than 2.50 to 1.00 and b) the rent-adjusted leverage ratio is less than 4.00
to 1.00.

Revolving Credit Facility

The Company closed a new revolving
credit facility with Harris Trust and Savings Bank, acting as administrative agent, and
Bank of Montreal as lead arranger, and providing for National City Bank to act as
syndication agent for a new revolving credit facility providing for senior secured
revolving loans of up to $60,000 including a $15,000 sub-limit for standby and commercial
letters of credit and a $5,000 swingline sub-limit. This credit facility will expire five
years from closing (June 2, 2008). The balance at June 30, 2003 was $33,000. Loan
origination costs of $2,027 are being amortized, on a straight-line basis, over the 5-year
term of the bank agreement. The new revolving credit facility is guaranteed by all of the
wholly owned domestic subsidiaries and secured by first priority liens on substantially
all of the Companys and subsidiary guarantors assets, including rental
contracts and the stock held in domestic subsidiaries. The Company may elect that each
borrowing of revolving loans be either base rate loans or Eurodollar loans. The Eurodollar
loans bear interest at a rate per annum equal to an applicable margin plus LIBOR adjusted
for a reserve percentage. Under the base rate option, the Company will borrow money based
on the greater of (a) the prime interest rate or (b) the federal funds rate plus 0.50%,
plus, in each case, a specified margin. A 0.50% commitment fee will be payable quarterly
on the unused amount of the revolving credit facility. Upon a default, interest will
accrue at 2% over the applicable rate. The Company will be required to make specified
mandatory prepayments upon subsequent debt or equity offerings and asset dispositions.

The financial covenants required
under the provisions of the new revolving credit facility include the following:

| | The
leverage ratio is total funded debt less an amount on deposit in the excess cash flow
escrow account to EBITDA for the four fiscal quarters then ended. The leverage ratio
cannot exceed 5.00 to 1.00 through March 31, 2004, 4.75 to 1.00 from April 1, 2004 though
June 30, 2004, 4.50 to 1.00 from July 1, 2004 through September 30, 2004, 4.00 to 1.00
from October 1, 2004 through September 30, 2005, 3.75 to 1.00 from October 1, 2005 though
September 30, 2006, 3.25 to 1.00 from October 1, 2006 through September 30, 2007, 2.75 to
1.00 from October 1, 2007 thereafter.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fixed charge coverage ratio is EBITDA for the four fiscal quarters then ended less
capital expenditures not financed by capital leases to fixed charges for the same four
fiscal quarters then ended. EBITDA does not include depreciation of rental merchandise
and is adjusted for one-time non-cash charges. Fixed charges are the sum of all principal
payments made on indebtedness but excluding payments on revolving credit plus interest
expense, restricted payments, all prepayments on senior notes and income taxes paid or
payable. The fixed charge coverage ratio shall not be less than 1.05 to 1.00 through June
30, 2003, 1.15 to 1.00 from July 1, 2003 through September 30, 2003, 1.20 to 1.00 from
October 1, 2003 through March 31, 2004 and 1.25 to 1.00 from April 1, 2004 through the
revolving credit termination date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot allow the book value of rental merchandise under lease to be less than 74%
of the total value of rental merchandise held for rent at the end of each calendar month
ending September 30, October 31 and November 30 in each fiscal year and 77% for all other
calendar months in each fiscal year. The value of jewelry cannot exceed 7.5% of the total
value of rental merchandise as measured at the end of each calendar month commencing June
30, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot incur capital expenditures in an amount in excess of $20,000 in the
aggregate during any fiscal year increased for the preceding years unused permitted
amount not to exceed $2,500.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consolidated net worth shall not be less than $85,000 plus 75% of positive net income
with no deduction for losses (for each quarter of each fiscal year ending on or after
September 30, 2003), and 90% of any subsequent incremental issuance of new equity
securities, other than equities issues in connection with the exercise of employee stock
options and capital stock issued to the seller of an acquired business in connection with
a permitted acquisition.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot permit EBITDA for the twelve consecutive calendar months then ended to be
less than:
| | -------------------------------------------------------------------------------------------------------

|For the month ending:            | Minimum EBITDA:
|-------------------------------- | ---------------
|
|June 2003                        |                
|July 2003                        |                
|August2003                       |                
|September 2003                   |                
|October 2003                     |                
|November 2003                    |                
|December 2003                    |                
|January 2004                     |                
|February 2004                    |                
|March 2004                       |                
|April 2004                       |                
|May 2004                         |                
|June 2004                        |                
|July 2004                        |                
|August 2004                      |                
|September 2004                   |                
|October 2004                     |                
|November 2004                    |                
|December 2004                    |                
|January 2005                     |                
|February 2005                    |                
|March 2005                       |                
|April 2005 through February 2006 |                
|March 2006 through December 2006 |                
|January 2007 and thereafter      |                

7.    
          CONVERTIBLE REDEEMABLE PREFERRED STOCK:

On June 2, 2003, the Company issued
1,500 shares of its Series A convertible preferred stock, for $10 per share (the
convertible preferred stock) and granted a one-year option to purchase an
additional 500 shares of convertible preferred stock (the additional preferred
shares). The net proceeds from the sale of the convertible preferred stock was used
to repay the senior credit facility (see Note 6.). The net proceeds of $14,129 from the
issuance of the convertible preferred stock are net of issuance costs of $871, and are
classified outside of permanent equity because of the mandatory redemption date and other
redemption provisions except for $142 classified as option to purchase convertible
preferred stock included in permanent equity. The convertible preferred stock is being
accreted to its maximum mandatory redemption amount possible pursuant to Topic D-98,
Classification and Measurement of Redeemable Securities, using the effective
interest method from the issuance date to the 7-year mandatory redemption date.

The terms of the convertible
preferred stock include a number of conversion and redemption provisions that represent
derivatives under Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, (SFAS 133) (See Note 11).
Certain features of the convertible preferred stock are accounted for as embedded
derivatives. The Company has determined that the option to purchase additional preferred
shares is an embedded derivative that qualifies for scope exemption under the provisions
of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock. As such, this derivative was
initially required to be bifurcated and recorded at fair value upon issuance but does not
require mark to market accounting. The Company also has determined the convertible feature
of the convertible preferred stock is a derivative that does not qualify for scope
exemption under EIFT 00-19, and is required to be bifurcated, recorded at fair value, and
marked to market. The fair values of the derivatives were determined with the assistance
of an independent valuation firm.

Below is a description of the
material terms of the convertible preferred stock.

Dividends.    
          From the date of issuance, dividends on the stated value of the series A
          preferred stock will accrue daily at a rate of 8.0% per annum. Dividends on the
          preferred stock will be payable beginning July 1, 2003, and on the first day of
          each calendar quarter in cash or in shares of Company common stock at the
          Companys option; provided, however, that if the Company elects to pay
          dividends in shares of common stock, (i) a registration statement must be
          effective with respect to such shares of common stock and (ii) the payment would
          be at 95% of the arithmetic average of the daily volume weighted average prices
          of the common stock for the five trading days immediately preceding the second
          trading day prior to the applicable dividend payment date. The Company shall be
          required to pay dividends in cash if a triggering event occurs or an event that
          with the passage of time and without being cured would constitute a triggering
          event. Dividends not paid within five business days of the dividend payment date
          will bear interest at 15.0% per annum until paid in full. During the period
          commencing upon the occurrence of a share liquidity event and ending when such
          event is cured, the dividend rate shall increase to 15% per annum. Preferred
          dividends of $95 were accrued and charged to accumulated deficit at June 30,
          2003.

Conversion provisions. Subject to
certain limitations, each share of preferred stock is convertible at the holders
option. Preferred stock is convertible in the Companys common stock by dividing the
stated value of such shares by the conversion price. The conversion price is $6.00 per
share for preferred stock issued at the initial closing and $6.65 per share for any
additional preferred shares issued, subject to certain anti-dilution adjustments.

Limitation on beneficial ownership.
The Company has no obligation to effect any conversion, and no holder of preferred shares
has the right to convert any preferred shares, to the extent that after giving effect to
such conversion, the beneficial ownership of a number of shares exceeds 4.99% of the
number of shares of common stock outstanding immediately after giving effect to such
conversion.

Mandatory redemption at maturity. If
any preferred shares remain outstanding on the maturity date (June 2, 2011), the Company
shall redeem in cash such shares at a redemption price equal to the stated value of such
shares plus accrued but unpaid dividends.

Purchase rights. If at any time the
Company grants, issues or sells any options, convertible securities or rights to purchase
stock, warrants, securities or other property pro rata to the record holders of any class
of common stock, then the holders of preferred shares will be entitled to acquire, upon
the terms applicable to such purchase rights, the aggregate purchase rights which such
holder would have acquired if such holder had held the number of shares of common stock
acquirable upon complete conversion of the preferred shares.

Re-organization, reclassification,
consolidation, merger or sale. Prior to the consummation of any sales of all or
substantially all of the Companys assets to an acquiring person or other change
following which the Company is not a surviving entity, the Company will secure from the
person purchasing such assets or the successor, a written agreement to deliver to each
holder of preferred shares in exchange for such shares, a security of the acquiring entity
evidenced by a written instrument substantially similar in form and substance to the
preferred shares, including, without limitation, having a stated value and liquidation
preference equal to the stated value and liquidation preference of the preferred shares.

Companys Redemption
Provisions.

On the date the Company publicly
discloses a pending, proposed or intended change of control, the Company has the right, in
its sole discretion, to require that all, but not less than all, of the outstanding
preferred shares be redeemed at a price per preferred share equal to the applicable change
of control redemption price discussed below.

Subject to certain requirements, the
Company can redeem the preferred stock at any time from and after June 2, 2008, in whole
or in part, for an amount in cash equal to the conversion amount of the preferred shares
selected for redemption.

Holders Redemption
Provisions.

Upon a change of control each holder
of preferred shares has the option to require the Company to redeem all or a portion of
the preferred shares held in cash at a premium determined as follows.

The change of control redemption
price is determined as follows:

|1) |  | If the acquiring entity is a publicly-traded entity, the redemption price is the
               greater of (A) the product of (i) the change of control redemption percentage
               (discussed below) and (ii) the conversion amount; or (B) the sum of (i) the
               stated value and (ii) a Black-Scholes valuation amount,
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2) |  | If the acquiring entity is not a publicly-traded entity, the redemption price is
               the product of (i) the change of control redemption percentage and (ii) the
               conversion amount.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The change of control redemption
percentage is:

|1) |  | 125% for the period commencing on the initial issuance date and ending on the
               second anniversary of the initial issuance date,
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|2) |  | 120% for the period commencing on the day after the second anniversary and
               ending on the third anniversary of the initial issuance date,
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|3) |  | 115% for the period commencing on the date after the third anniversary of the
               initial issuance date and ending on the maturity date.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

At any time on and after the six
month anniversary of the repayment, redemption or retirement of all of the senior secured
notes and all amounts outstanding under the senior credit facility, each holder has the
option to require the Company to redeem at any time all or a portion of such holders
preferred shares at a price per preferred share equal to the conversion amount.

Voting rights. Holders of preferred
shares have no voting rights, except as required by law.

Liquidation.    
          In the event of any liquidation, dissolution or winding up of the Company, the
          holders of the preferred shares are entitled to receive cash in an amount equal
          to its stated value plus accrued but unpaid dividends before any amount shall be
          paid to common stock holders.

Restriction on redemption and cash
dividends. Unless all of the preferred shares have been converted or redeemed, the Company
shall not, directly or indirectly, redeem, or declare or pay any cash dividend or
distribution on its capital stock.

Registration rights. The Company has
filed a registration statement on Form S-3 covering the shares of common stock issuable
upon conversion of the preferred stock acquired in the initial closing, which became
effective on July 11, 2003. In the event the holders acquire additional shares of
preferred stock, the Company is required to file a registration statement on Form S-3
covering the common stock issuable on conversion of the preferred stock so acquired within
30 days of such acquisition and to cause the registration statement to become effective
within 90 days thereafter. The Company will pay cash liquidated damages to the holders of
the preferred stock in the event the Company does not meet these requirements, and also in
the event the registration statement becomes unavailable to the holders for periods beyond
specified grace periods.

8.    
          STOCK OPTIONS:

The Company accounts for stock based
compensation issued to its employees and directors in accordance with APB No. 25, and has
elected to adopt the disclosure only provisions of SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure. SFAS
148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require new prominent disclosures
in both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results.

For SFAS No. 148 purposes, the fair
value of each option granted under the 1992 Plan, the 1995 Plan, and the 1999 Plan is
estimated as of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for options granted in fiscal 2002, 2001 and
2000: expected volatility ranging from 47.41% to 95.23%, risk-free interest rates between
3.40% and 6.81%, and an expected life of five years.

If the Company had elected to
recognize the compensation cost of its stock option plans based on the fair value of the
awards under those plans in accordance with SFAS No. 148, net loss and loss per common
share would have been increased to the pro-forma amounts below:

|                                               | For the Nine-Month Period Ended June 30,
|---------------------------------------------- | ----------------------------------------
|
|Net loss before cumulative effect of change in |                                         
|accounting principle and discontinued          |                                         
|operations:                                    |                                         
|As reported                                    |                                         
|Compensation expense                           |                                         
|                                               |                                         
|Pro-forma                                      |                                         
|                                               |                                         
|Net loss:                                      |                                         
|As reported                                    |                                         
|Compensation expense                           |                                         
|                                               |                                         
|Pro-forma                                      |                                         
|                                               |                                         
|Diluted loss per common share:                 |                                         
|Net loss before cumulative effect of change in |                                         
|accounting principle and extraordinary item    |                                         
|As reported                                    |                                         
|Pro-forma                                      |                                         
|                                               |                                         
|Net loss                                       |                                         
|As reported                                    |                                         
|Pro-forma                                      |                                         
|                                               |                                         

During fiscal year 2002, there was a
cancellation/re-issuance program for certain options. The re-issued options vest 50% on
the re-issuance date (June 13, 2002) and 50% on the first anniversary. There have been no
options granted during fiscal year 2003 through June 30, 2003.

9.    
          SHAREHOLDERS EQUITY:

On April 18, 2002, the Company sold
1.0 million restricted common shares and warrants to acquire 100,000 common shares to Calm
Waters Partnership and two other investors for $6,000. The warrants have an exercise price
of $9.35 per share, subject to adjustment. The Company issued 332,999 additional warrants
to these investors as of April 1, 2003, at an exercise price of $1.50 per share, which
were exercised on June 19, 2003.

10.    
          RESTRUCTURING COSTS:

During the second quarter of fiscal
year 2003, the Company formulated a plan to restructure the corporate office through
reductions in the corporate workforce to rationalize corporate costs for the 766 remaining
stores and to sublease, assign or terminate operating leases that the Company would no
longer operate as a rent-to-own business activity subsequent to the sale to Rent-A-Center,
Inc. As a result of this plan, the Company paid total pre-tax restructuring charges of
$1,214 for the three-months and $3,429 for the nine-months ending June 30, 2003. The
restructuring costs for nine-month period ended June 30, 2003, includes $988 of employee
severance and termination benefits, $2,024 of fixed asset write-offs and $417 of
depreciation taken for leasehold improvements related to the leased facilities vacated as
a result the Rent-A-Center sale.

11.    
          DERIVATIVE FINANCIAL INSTRUMENTS:

On June 2, 2003, the Company issued
1,500 shares of convertible redeemable preferred stock (see Note 7). The terms of this
preferred stock include a number of conversion and redemption provisions that represent
derivatives under SFAS No. 133. The Company has determined that the option to purchase
additional preferred shares is an embedded derivative that qualifies for SFAS 133 scope
exemption under the provisions of EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. As
such this derivative was initially bifurcated and recorded in shareholders equity.
This derivative does not require mark to market accounting and is accreted into
convertible redeemable preferred stock over the one-year option period.

The Company also has determined the
convertible feature of the convertible redeemable preferred stock is a derivative that
does not qualify for SFAS 133 scope exemption under EITF 00-19. It was bifurcated and
recorded in the temporary equity classification on the balance sheet. The positive change
in the fair market value of the convertible feature from issuance on June 2, 2003 to June
30, 2003 was $233, which was recorded to other income (expense) in the Companys
Consolidated Statements of Operations.

At June 30, 2003, the Company had
interest rate swaps on a notional debt amount of $101,700 and a fair market value of
($6,088). The variable pay interest rate ranges from 5.09% to 6.97%. The maturity dates
run through August 2005.

The Companys interest rate
swaps do not meet the qualifications for hedge accounting treatment under Statement of
Financial Accounting Standards No. 133. The Companys positive change in the fair
market value of the interest rate swap portfolio was $1,044 and $3,623 for the
three-months and nine-months ended June 30, 2003, respectively. This was recorded to other
income in the Companys Condensed Consolidated Statements of Operations.

12.    
          COMPREHENSIVE INCOME:

Comprehensive income encompasses net
income and changes in the components of accumulated other comprehensive income not
reflected in the Companys Condensed Consolidated Statements of Operations during the
periods presented. Accumulated other comprehensive income consists of the transition asset
recorded at the time of adoption of SFAS No. 133.

|                             | Comprehensive
Income (Loss) | Accumulated Other
Comprehensive Income (Loss)
|---------------------------- | --------------------------- | ---------------------------------------------
|
|Net loss for the nine months |                             |                                              
|ended June 30, 2003          |                             |                                              
|SFAS 133 Transition amount   |                             |                                              
|Amortization of SFAS 133     |                             |                                              
|Transition amount.           |                             |                                              
|                             |                             |                                              
|Total for the nine months    |                             |                                              
|ended June 30, 2003          |                             |                                              
|                             |                             |                                              

13.    
          CONTINGENCIES:

As previously reported, the Company,
its independent accountants, and certain of its current and former officers have been
named in a consolidated class action complaint filed in the U.S. District Court for the
Western District of Pennsylvania alleging violations of the securities laws and seeking
damages in unspecified amounts purportedly on behalf of a class of shareholders. On April
18, 2003, the Company entered into an agreement settling the class action. The settlement
requires the Company to pay the class the sum of $25,000, with $21,000 in cash and $4,000
in 6% unsecured subordinated notes payable in four equal installments over two years
commencing December 31, 2003. Of the $21,000 payable in cash, $11,000 is to be funded from
available insurance proceeds. The settlement agreement provides for the release of the
Company and all other defendants except the Companys former controller and the
Companys independent accountants. The settlement is subject to several conditions
including Court approval. The Companys independent accountants have opposed the
motion of the lead plaintiff in the class action, Cramer Rosenthal McGlynn LLC, seeking
class certification and appointment as class representative. If the motion is not granted,
the Court could reject the settlement.

As previously reported, certain of
the Companys officers and directors and the Company, as nominal defendant, were sued
in a shareholder derivative action brought on behalf of the Company in the U.S. District
Court for the Western District of Pennsylvania. The Court granted a motion to dismiss this
suit without prejudice on May 14, 2003.

The Company is subject to legal
proceedings and claims in the ordinary course of its business that have not been finally
adjudicated. Certain of these cases, exclusive of the class action mentioned above, have
resulted in initial claims totaling $20,638. However, all but $1,823 of such claims are,
in the opinion of management, covered by insurance policies or indemnification agreements,
or create only remote potential of any liability exposure to the Company and therefore
should not have a material effect on the Companys financial position, results of
operations or cash flows. Additionally, threatened claims exist for which management is
not yet able to reasonably estimate a potential loss. In managements opinion, none
of these threatened claims will have a material adverse effect on the Companys
financial position, results of operations or cash flows.

The Company is self-insured for
certain losses related to workers compensation, employee medical, vehicle and
general liability. The Company has purchased stop-loss coverage in order to limit its
exposure to any significant levels of claims. Self-insurance reserves are accrued based
upon the Companys estimates of the aggregate liability for uninsured claims incurred
using certain actuarial assumptions followed in the insurance industry and the
Companys historical experience. The Company has obtained letters of credit of $6,000
to guarantee the payment of future claims.

14.    
          INCOME TAXES:

During the first nine months of
fiscal 2003, the Company recorded income tax expense and a deferred tax liability of
$4,065 because the Company can no longer look to the reversal of the deferred tax
liability associated with tax-deductible goodwill to offset a portion of its deferred tax
asset, following the adoption of SFAS 142. Also during the first nine months of fiscal
2003, a tax benefit of $875 was recorded resulting from the carryback of certain AMT net
operating losses, which were allowed as a result of the Jobs Creation and Workers
Assistance Act of 2002, which suspended the AMT utilization limits for a two-year period.
The deferred tax asset, net of liabilities excluding goodwill, increased from $63,944 at
September 30, 2002, to $68,987 at June 30, 2003. This increase of $5,045 for the nine
months ended June 30, 2003, is the tax effect of net losses before income taxes, reduced
by the tax effect of expenses which are nondeductible for tax, primarily nondeductible
goodwill allocated to the sale of the stores. Of this amount, $2,226 represents a
reduction of the gross deferred tax asset and related valuation allowance as a result of
the current quarter income before taxes. A full valuation allowance has been provided
against the net deferred tax assets.

15.    
          SEGMENT INFORMATION:

Rent-Way is a national
rental-purchase chain that provides a variety of services to its customers including
rental of household items and prepaid local telephone service on a week-by-week or a
month-by-month basis. The Company has determined that its reportable segments are those
that are based on the Companys method of internal reporting, which disaggregates its
business by product category. The Companys reportable segments are household rentals
and prepaid telephone service. Its household rental segment rents name brand merchandise
such as furniture, appliances, electronics and computers on a weekly, biweekly,
semimonthly or bimonthly basis. Its prepaid telephone service segment provides a local
dial tone on a month-by-month basis.

The financial results of the
Companys segments follow the same accounting policies as described in Summary
of Significant Accounting Policies (see Note 1).

|For the three months ended June 30, 2003 | Household
Rental
Service | Prepaid
Telephone
Service | Inter-segment
Activity | Total  
|---------------------------------------- | ------------------------ | ------------------------- | ---------------------- | -------
|
|Total revenue                            |                          |                           | $                      | 113,628
|                                         |                          |                           |                        |        
|Operating income                         |                          |                           | $                      | 14,733 
|                                         |                          |                           |                        |        
|Net income                               |                          |                           | $                      | 4,077  
|                                         |                          |                           |                        |        
|Total Assets                             |                          |                           | $                      | 452,517
|                                         |                          |                           |                        |        

|For the nine months ended June 30, 2003 | Household
Rental
Service | Prepaid
Telephone
Service | Inter-segment
Activity | Total  
|--------------------------------------- | ------------------------ | ------------------------- | ---------------------- | -------
|
|Total revenue                           |                          |                           | $                      | 345,303
|                                        |                          |                           |                        |        
|Operating income                        |                          |                           | $                      | 26,952 
|                                        |                          |                           |                        |        
|Net loss                                |                          |                           | $                      | (28,863
|                                        |                          |                           |                        |        
|Total Assets                            |                          |                           | $                      | 452,517
|                                        |                          |                           |                        |        

16.    
          SUBSEQUENT EVENTS:

Investigation of Accounting Matters.
On July 22, 2003, the SEC and the Department of Justice announced the conclusion of their
investigation pertaining to the accounting improprieties discovered in October 2000. The
SEC filed a complaint against the Company, charging violations of the books and
record provisions of the Securities Exchange Act of 1934 but seeking no fine or
penalty. Contemporaneously with the filing of the SEC complaint, the Company agreed to
settle the SEC action without admitting or denying the violations by consenting to the
entry of an injunction in federal court enjoining it from future violations of the books
and records provisions of the Exchange Act. No fines, penalties or other sanctions were
assessed against the Company. The Department of Justice concluded its investigation with
no action against the Company.

17.    
          RECENT ACCOUNTING PRONOUNCEMENTS:

In May, 2003, the Financial
Accounting Standards Board (the FASB) issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity (SFAS 150). SFAS 150 establishes
standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some
circumstances). This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. The Company has adopted the provisions of this
Statement.

On April 30, 2003, the Financial
Accounting Standards Board (the FASB) issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 improves financial reporting by
requiring that contracts with comparable characteristics be accounted for similarly. SFAS
149 clarifies 1) the circumstances in which a contract with an initial net investment
meets the characteristics of a derivative, 2) when a derivative contains a financing
component and amends certain other existing pronouncements. This Statement is effective
for contracts entered into or modified after June 30, 2003. The Company is currently
evaluating the provisions of this Statement.

On January 15, 2003, the FASB issued
FIN 46, Consolidation of Variable Interest Entities. The objective of this
interpretation is to improve financial reporting by enterprises involved with variable
interest entities. This interpretation applies to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has no variable interest
entities that are not currently consolidated and is evaluating the provisions of this
interpretation.

On November 25, 2002, the FASB issued
FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, An Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No.34". The
Interpretation requires than upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that obligation. The
Company has evaluated the provisions of this Interpretation and determined it does not
have an impact on these financial statements upon its adoption.

---

ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS ANDRESULTS OF OPERATIONS

OVERVIEW

Rent-Way operates 753 stores located
in 33 states, the second largest number of stores in the rental-purchase industry. The
Company offers quality brand name home entertainment equipment, computers, furniture,
appliances, and jewelry to customers under full-service rental-purchase agreements that
generally allow the customer to obtain ownership of the merchandise at the conclusion of
an agreed upon rental period. The Company also provides prepaid local phone service to
consumers on a monthly basis through its majority-owned subsidiary, dPi Teleconnect,
L.L.C. (DPI). DPI is a non-facilities based provider of local phone service.

Since late 2000, the Company has
focused on improving gross margins, decreasing operating expenses, and reducing debt. To
accomplish these objectives, the Company has significantly upgraded its merchandise mix,
implemented higher rental rates, and closed, combined, or sold under-performing stores. As
a result of these activities, the Company reduced outstanding bank debt from $387.9
million on September 30, 2000 to $234.5 million on June 30, 2003. The reduction in bank
debt reflects the Companys ability to generate internal cash flow.

On June 2, 2003, the Company closed a
refinancing of its bank credit facility through the issuance of $205.0 million of senior
secured notes, borrowings under a new $60.0 million bank revolving credit facility and the
sale of $15.0 million of convertible preferred stock.

The Company generates revenues from
three categories: rental revenue, prepaid phone service revenue, and other revenue. The
household rental business revenues include both rental revenue and other revenue. Rental
revenue consists of revenues derived from rental-purchase agreements. Prepaid phone
service revenue represents revenues from DPI. Other revenue includes revenues related to
services offered that complement the rental-purchase agreements and the sale of rental
merchandise. These revenues include insurance fees, liability damage waiver premiums,
Preferred Customer Club fees, early purchase option revenues, and revenues from the sale
of merchandise.

New rental agreements for a store
typically offset the number of agreements that are terminated as products are returned.
Therefore, while there is constant turnover within the portfolio of rental agreements, the
total number of rental agreements in a store does not change significantly. This stability
in the number of rental agreements facilitates revenue forecasting. The typical store
experiences a slight decrease in the number of agreements during the summer months while,
on balance, the rest of the year demonstrates growth in agreements.

The major components of the
Companys cost structure are the cost of rental-purchase merchandise and personnel
and, to a lesser extent, sales and marketing expense and general and administrative costs.
Costs associated with rental-purchase merchandise are driven by the need to purchase
merchandise to maintain the quality and availability of the product mix and to maximize
inventory utilization rates. Compensation, incentives, and employee benefits are the main
components of personnel costs. Sales and marketing expenses are driven primarily by
business development activities, the development of new service offerings, and advertising
costs. Other operating expenses include general and administrative costs, which primarily
include corporate overhead expenses, costs associated with our information technology
infrastructure, and other store related expenses.

The Company considers the
rental-purchase business and prepaid telephone services to be two separate business units
(see Note 15). Separate information in this discussion regarding the prepaid telephone
service business is not presented except in the discussion of total revenues and cost of
prepaid phone service. The Company believes that other items for the prepaid telephone
service business are immaterial.

USE OF ESTIMATES IN OUR
FINANCIAL STATEMENTS

The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the 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. On an ongoing basis, management reviews its estimates, including those related
to litigation, liability for self-insurance, impairment of goodwill and other intangibles,
based on currently available information. Changes in facts and circumstances may result in
revised estimates.

---

SIGNIFICANT ACCOUNTING
POLICIES

Revenue.    
          Rental merchandise is rented to customers pursuant to rental agreements, which
          provide for either weekly, biweekly, semi-monthly or monthly rental payments
          collected in advance. Revenue is recognized as collected, not over the rental
          term, since at the time of collection the rental merchandise has been placed in
          service and costs of installation and delivery have been incurred. This method
          of revenue recognition does not produce materially different results than if
          rental revenue was recognized over the weekly, biweekly, semi-monthly or monthly
          rental term.

Rental Merchandise Depreciation. The
Company uses the units of activity depreciation method for all rental merchandise except
computers. Under the units of activity method, rental merchandise is depreciated as
revenue is collected. Thus rental merchandise is not depreciated during periods when it is
not on rent and therefore not generating rental revenue. Personal computers, added to the
Companys product line in June 1999, are principally depreciated on the straight-line
basis beginning on acquisition date over 12 months to 24 months, depending on the type of
computer. Write-offs of rental merchandise arising from customers failure to return
merchandise, obsolescence and losses due to excessive wear and tear of merchandise are
recognized using the direct write-off method, which is materially consistent with the
results that would be recognized under the allowance method.

Prepaid Phone Service. Prepaid phone
service is provided to customers on a prepaid month-to-month basis. Prepaid phone service
revenues are comprised of monthly service revenues and activation revenues. Monthly
service revenues are recognized on a straight-line basis over the related monthly service
period, commencing when the service period begins. The cost of monthly service is also
recognized over the monthly service period and is included in cost of prepaid phone
service in the Statement of Operations. Activation revenues are recognized on a
straight-line basis over the average life of the customer relationship. Activation costs
are expensed as incurred and are included in cost of prepaid phone service in
the Statement of Operations.

Closed Store Reserves. From time to
time, the Company closes or consolidates retail stores. An estimate is recorded of the
future obligation related to closed stores based upon the present value of the future
lease payments and related commitments, net of estimated sublease income. At June 30, 2003
and 2002, the reserve for closed stores for normal operating activities was $1.5 million
and $2.9 million, respectively, with the decrease primarily related to the number of
stores closed during the period. In addition, there was a $8.3 million reserve for vacated
stores related to the 170 stores for which Rent-A-Center, Inc. did not assume the leases
and is included in net loss from discontinued operations.

Company Insurance Programs. The
Company is primarily self-insured for health, workers compensation, automobile, and
general liability costs. The self-insurance liability for health costs is determined
actuarially based on claims filed and an estimate of claims incurred but not yet reported.
The self-insurance liability for workers compensation, automobile and general
liability costs are determined actuarially based on claims filed and company experience.
Losses in the workers compensation, automobile and general liability programs are
pre-funded based on the insurance companys loss estimates. Loss estimates will be
adjusted for developed incurred losses at 18 months from policy inception and every 12
months thereafter. Retrospective adjustments to loss estimates are recorded when
determinable and probable.

Legal Expenditures. Legal costs are
recorded as incurred. The Companys experience with outside legal counsel is that
services rendered are billed within 30 days of the close of the month the work was
performed.

The Company executed an interim
agreement for reimbursement and advancement of defense costs with its insurance carrier
related to the shareholder class action lawsuit. The insurance carrier reimburses the
Company for claim defense costs, claim investigative costs, and settlement costs incurred
by the Company, its directors and officers. The Company offsets current legal costs with
reimbursements when they have been agreed in principle with the insurance carrier.

Discontinued Operations. On December
17, 2002, the Company entered into a definitive purchase agreement to sell rental
merchandise and related contracts of 295 stores to Rent-A-Center, Inc., which transaction
has since closed. Accordingly, for financial statement purposes, the assets, liabilities,
results of operations and cash flows of this component have been segregated from those of
continuing operations and are presented in the Companys financial statements as
discontinued operations (see Note 2).

Deferred Financing Costs. Deferred
financing costs consists of bond issuance costs and loan origination costs incurred in
connection with the sale of $205.0 million of senior secured notes and a new $60.0 million
revolving credit facility that closed June 2, 2003. The bond issuance costs of $6.9
million are amortized on a straight-line basis over the 7-year term of the bonds. The loan
origination costs of $2.0 million are amortized on a straight-line basis over the 5-year
bank credit agreement. Deferred financing costs amortization was $0.5 and $0.3 million and
$1.6 and $1.0 million for the three and nine-month periods ended June 30, 2003 and 2002,
respectively. Deferred financing cost amortization is included in interest expense. There
was $1.1 million of net deferred financing costs from the previous credit facility charged
to interest expense during June 2003.

---

RESULTS OF OPERATIONS

The following discussion relates only
to continuing operations.

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

|                                           | Three Months Ended
June 30, | Nine Months Ended
June 30,
|------------------------------------------ | --------------------------- | --------------------------
|
|REVENUES:                                  |                             |                           
|Rental revenue                             | 81.0%                       | 80.2%                     
|Prepaid phone service revenue              | 7.4                         | 7.8                       
|Other revenue                              | 11.6                        | 12.0                      
|Total revenues                             | 100.0                       | 100.0                     
|                                           |                             |                           
|COSTS AND OPERATING EXPENSES:             
|Depreciation and amortization             
|Rental merchandise                         | 24.6                        | 26.3                      
|Property and equipment                     | 3.4                         | 4.7                       
|Amortization of other intangibles          | 0.2                         | 0.5                       
|                                           |                             |                           
|Total depreciation and                    
|amortization                               | 28.2                        | 31.5                      
|Cost of prepaid phone service              | 4.5                         | 5.0                       
|Salaries and wages                         | 26.4                        | 24.1                      
|Advertising, net                           | 2.9                         | 4.4                       
|Occupancy                                  | 6.9                         | 6.2                       
|Restructuring costs                        | 1.0                         | --                        
|Other operating expenses                   | 17.7                        | 23.4                      
|                                           |                             |                           
|Total costs and operating expenses         | 87.6                        | 94.6                      
|                                           |                             |                           
|Operating income                           | 12.4                        | 5.4                       
|Settlement of class action lawsuit         | --                          | --                        
|Interest expense                           | (7.9)                       | (7.7)                     
|Interest income                            | --                          | --                        
|Other income (expense), net                | 1.2                         | (1.2)                     
|                                           |                             |                           
|Income (loss) before income taxes,        
|cumulative effect of change in accounting 
|principle and discontinued operations      | 5.7                         | (3.5)                     
|Income tax expense                         | 0.9                         | 1.5                       
|                                           |                             |                           
|Income (loss) before cumulative effect    
|of change in accounting principle         
|and discontinued operations                | 4.8                         | (5.0)                     
|Cumulative effect of change in            
|accounting principle                       | --                          | --                        
|Income (loss) from discontinued operations | (1.1)                       | 0.2                       
|                                           |                             |                           
|Net income (loss)                          | 3.7%                        | (4.8)%                    
|                                           |                             |                           

COMPARISON OF THREE
MONTHS ENDED JUNE 30, 2003 AND 2002

Total revenues. Total revenues
decreased $3.5 million, or 2.8%, to $122.4 million from $125.9 million. The decrease is
attributable to a decrease in revenues of $2.7 million in the household rental segment and
a $0.8 million decrease in revenues in the prepaid telephone service segment. The $2.7
million decrease in the household rental segment is due to a 1.9% decrease in same store
revenues and 18 fewer stores in fiscal 2003.

This decrease in same store revenues
is due to a decrease in both rental revenues and fee revenue offset by an increase in
early purchase option and sales revenue. The decrease in fee revenue was 7.7% as compared
to the same period last year, and is attributed to fewer rental-purchase agreements in the
portfolio and reductions in liability damage waiver fees due to customers shifting to the
Preferred Customer Club program. The Preferred Customer Club program is a fee-based
membership program that provides special loss and damage protection and, at a discounted
rate, an additional one year of service protection on rental merchandise, preferred
treatment in the event of involuntary job loss and accidental death and dismemberment
insurance. The decrease in rental revenue was 2.4% as compared to the same period last
year. This decrease is primarily due to lower agreements on rent for the three month
period ended June 30, 2003 as compared to the same period last year. Early purchase option
and sales revenue increased 24.5% as compared to the same period last year. This increase
is primarily due to more customers exercising the early purchase option as a result of an
120 days same as cash promotion. In addition, this increase was due to an
increase in sales and early purchases of computers prior to the expiration of computer
rental-purchase agreements.

---

Depreciation and Amortization.
Depreciation expense related to rental merchandise decreased to 24.6% as a percentage of
total revenues from 26.3%. In fiscal 2002, the Company took steps to increase gross profit
margins on rental contracts. These steps included increasing weekly rental rates of
personal computers to competitive market rates, implementing a program to eliminate free
Internet service by replacing it with a prepaid, unlimited Internet product, increasing
rental rates on certain core products to competitive market rates, and introducing
higher-end, higher-margin merchandise to the stores. The Company expects depreciation
expense as a percentage of total revenues to continue decreasing during the remainder of
fiscal 2003 as product margins improve due to continued execution of the Companys
pricing strategy.

Depreciation expense related to
property and equipment decreased to 3.4% as a percentage of total revenues from 4.7%. This
decrease is primarily due to the closing or selling of 18 stores since June 30, 2002. This
decrease is also due to the expiration of depreciation periods for certain fixed assets.
Without new store openings and store acquisitions, the Company is undertaking fewer store
build-out projects than in previous periods.

Amortization of goodwill and other
intangibles decreased to 0.2% from 0.5% as a percentage of total revenues. This is due to
the expiration of the amortization periods for certain non-compete agreements and customer
contracts. Amortization expense decreased $0.3 million as compared to the same period last
year. On October 1, 2001, the Company adopted SFAS 142. SFAS 142 requires the cessation of
amortization of goodwill and other indefinite-lived intangibles on the balance sheet.
Goodwill and other indefinite lived intangibles on the balance sheet must then be tested
for impairment at least annually.

Cost of Prepaid Phone Service. The
cost of prepaid phone service decreased to $5.5 million or 4.5% of total revenues from
$6.3 million, or 5.0% as a percentage of total revenues. The cost of prepaid phone service
as a percentage of prepaid phone service revenue decreased to 61.6% from 64.4%. This
decrease is attributable to a general decrease in customer base of 14% and a decrease of
new customers year over year, which matches less costs of activation to the revenue
recognized.

Salaries and Wages. Salaries and
wages increased by $2.0 million to $32.3 million from $30.3 million. The Company initiated
an employee upgrade program directed at attracting and keeping better talent. This
resulted in higher salaries in fiscal 2003. Salaries and wages increased to 26.4% as a
percentage of total revenues from 24.1%.

Advertising.    
          Advertising expense decreased from $5.6 million to $3.6 million. This decrease
          is primarily due to a decrease in radio production and local store marketing
          expenses. The Company has implemented a more balanced media investment strategy
          in 2003, which includes 295 less stores because of the sale of stores to
          Rent-A-Center, Inc.

Occupancy.    
          Occupancy expense increased to $8.4 million from $7.8 million, or to 6.9% as a
          percentage of total revenues from 6.2%. The increase is attributable to the
          general rent increases, which approximate 2% per year. Also, the escalation
          clauses of leases remaining after the Rent-A-Center sale resulted in a $0.2
          million increase to lease expense for the three-months ended June 30, 2003.

Restructuring Costs. During the
second quarter of fiscal year 2003, the Company formulated a plan to restructure the
corporate office through reductions in the corporate workforce to rationalize corporate
costs for the stores remaining subsequent to the sale to Rent-A-Center, Inc. As a result
of this plan, the Company recorded total pre-tax restructuring charges of $1.2 million in
the three-month period ended June 30, 2003. The restructuring costs include $0.3 million
of employee severance and termination benefits and $0.4 million of fixed asset write-offs
in the household rental segment, and $0.5 million in depreciation expense for leasehold
improvements for vacated stores for which Rent-A-Center, Inc. did not assume the leases
during the sale.

Other Operating Expense. Other
operating expense decreased by $7.8 million and decreased to 17.7% as a percentage of
total revenues from 23.4%. This decrease is principally due to an adjustment for income of
$4.6 million for ultimate and incurred losses, which offset insurance costs recorded in
other operating expense. Also, a $0.3 million retrospective downward adjustment was
recorded for the Companys calendar 2002 medical insurance premium. This decrease is
also due to a $1.5 million adjustment to the Companys personal property tax accruals
as a result of the receipt of actual tax assessments.

During the third quarter of fiscal
2002, there was a recovery of accounting and legal fees related to the investigation and
shareholder litigation in the amount of $1.9 million, which offset $0.7 million of fees
for the quarter. During the third quarter of fiscal 2003, accounting and legal fees
related to the investigation and shareholder litigation and consulting fees related to
bank refinancing were $0.3 million.

Interest Expense. Interest expense
increased from 7.7% to 7.9% as a percentage of total revenues. This increase is primarily
due to the write off of $1.1 million in bank fees associated with refinancing of the
previous credit facility. On June 2, 2003, the Company completed the sale of $205.0
million of senior secured notes, closed a new $60.0 million revolving line of credit, and
sold $15.0 million in 8% convertible preferred stock through a private placement. The
proceeds from these transactions were used to repay all amounts outstanding under the
previous credit facility (see Note 6).

Other Income (Expense), net. Other
income was $1.4 million for the three months ended June 30, 2003, compared to expense of
$1.5 million in the three months ended June 30, 2002. This change is primarily due to a
positive change in the fair market value of the interest rate swap portfolio of $1.0
million in the three month period ended June 30, 2003 compared to a negative change of
$1.7 million in the same period last year.

Income Tax Expense. During the third
quarter of fiscal 2003, the Company recorded income tax expense of $1.1 million due to the
Companys inability to look to the reversal of the deferred tax liability associated
with tax deductible goodwill to offset a portion of its deferred tax asset following the
adoption of SFAS 142. During the third quarter of fiscal 2002, the Company recorded income
tax expense of $2.0 million due to the Companys inability to look to the reversal of
the deferred tax liability associated with tax deductible goodwill to offset a portion of
its deferred tax asset following the adoption of SFAS 142 on October 1, 2001.

Income (Loss) From Discontinued
Operations. On December 17, 2002, the Company entered into a definitive purchase agreement
to sell 295 stores to Rent-A-Center, Inc., for approximately $101.5 million, which closed
February 8, 2003. These stores are all included in the household rental segment. Related
operating results, in accordance with SFAS 144, have been reported as discontinued
operations (see Note 2). Loss from discontinued operations was $1.4 million in the period
ended June 30, 2003, as compared to income from discontinued operations of $0.3 million in
the same period last year. This change is mainly due to transition period costs recorded
in the three-month period ended June 30, 2003.

Net Income (Loss). The Company
generated a net income of $4.5 million in the period ended June 30, 2003, as a result of
the factors described above compared to a net loss of $6.0 million in the same period last
year.

Net income (loss) available to common
shareholders. On June 2, 2003, the Company issued 1,500 shares of convertible redeemable
preferred stock for $0.01 per share and a one-year option to purchase an additional 500
shares of convertible redeemable preferred stock. The net proceeds from the sale of the
preferred stock was used to repay the senior credit facility. The net proceeds from the
issuance of $14.1 million are net of issuance cost of $0.9 million. There are two
derivatives embedded in the convertible preferred stock: 1) the one-year option to
purchase additional shares with a market value of $0.1 million and 2) the conversion
feature of the preferred stock with a market value of $8.6 million. The $0.1 million
market value of the purchase option was classified as option to purchase convertible
preferred stock in permanent equity and the $8.6 million market value of the conversion
feature remains in temporary equity. The net $5.4 million preferred stock carrying value
is being accreted to its maximum mandatory redemption amount from the issuance date to the
7-year mandatory redemption date. The preferred stock dividends and accretion totaled $0.1
million and are charged to accumulated deficit, but reduce net income (loss) to net income
(loss) available to common stockholders.

COMPARISON OF NINE MONTHS
ENDED JUNE 30, 2003 AND 2002

Total revenues. Total revenues
decreased $3.1 million, or 0.8%, to $372.5 million from $375.6 million. The decrease is
attributable to a decrease in revenues of $2.1 million in the household rental segment and
a $1.0 million decrease in revenues in the prepaid telephone segment. The $2.1 million
decrease in revenue in the household rental segment is primarily due to the sale or merger
of 18 under-performing stores since June 30, 2002 offset by a 0.8% increase in same store
revenues.

This increase in same store revenues
is due to an increase in both rental revenues and early purchase option and sales revenue
offset by a decrease in fee revenue. The decrease in fee revenue was 5.7% as compared to
the same period last year, and is attributed to fewer rental-purchase agreements in the
portfolio and reductions in liability damage waiver fees due to customers shifting to the
Preferred Customer Club program. The Preferred Customer Club program is a fee-based
membership program that provides special loss and damage protection and, at a discounted
rate, an additional one year of service protection on rental merchandise, preferred
treatment in the event of involuntary job loss and accidental death and dismemberment
insurance. The increase in rental revenue was 0.5% as compared to the same period last
year. This increase is the result of improvements in collections. Early purchase option
and sales revenue increased 18.4% as compared to the same period last year. This increase
is primarily due to more customers exercising the early purchase option as a result of a
120 days same as cash promotion. In addition, this increase is due to an
increase in sales and early payouts on computers due to the maturity of the computer
rental program.

Depreciation and Amortization.
Depreciation expense related to rental merchandise decreased to 24.7% as a percentage of
total revenues from 27.6%. In fiscal 2002, the Company took steps to increase gross profit
margins on rental contracts. These steps included increasing weekly rental rates of
personal computers to competitive market rates, implementing a program to eliminate free
Internet service by replacing it with a prepaid, unlimited Internet product, increasing
rental rates on certain core products to competitive market rates, and introducing
higher-end, higher-margin merchandise to the stores. The Company expects depreciation
expense as a percentage of total revenues to continue decreasing during the remainder of
fiscal 2003 as product margins improve due to continued execution of the Companys
pricing strategy.

Depreciation expense related to
property and equipment decreased to 4.0% as a percentage of total revenues from 4.9%. This
decrease is primarily due to the closing or selling of 18 stores since June 30, 2002. This
decrease is also due to the expiration of depreciation periods for certain fixed assets.
Without new store openings and store acquisitions, the Company is undertaking fewer store
build-out projects than in previous periods.

Amortization of goodwill and other
intangibles decreased to 0.3% from 0.5% as a percentage of total revenues. This is due to
the expiration of the amortization periods for certain non-compete agreements and customer
contracts. Amortization expense decreased $0.6 million as compared to the same period last
year. On October 1, 2001, the Company adopted SFAS 142. SFAS 142 requires the cessation of
amortization of goodwill and other indefinite-lived intangibles on the balance sheet.
Goodwill and other indefinite lived intangibles on the balance sheet must then be tested
for impairment at least annually.

Cost of Prepaid Phone Service. The
cost of prepaid phone service decreased to $17.3 million or 4.6% of total revenues from
$18.2 million, or 4.8% as a percentage of total revenues. The cost of prepaid phone
service as a percentage of prepaid phone service revenue decreased to 61.3% from 62.2%.
This decrease is attributable to a general decrease in customer base of 14% and a decrease
of new customers year over year, which matches less costs of activation to the revenue
recognized. This decrease also is the result of the FCC allowing the ILECs to increase End
User Communication Line (EUCL) monthly charges for residential lines during
mid-year calendar 2001. The Company has reacted to the EUCL increases by adjusting retail
prices to the customer based on targeted margins. These price increases were implemented
in the first quarter of fiscal 2002 and the Company is starting to see the benefits
through improved margins.

Salaries and Wages. Salaries and
wages increased by $8.1 million to $98.6 million from $90.5 million. A portion of this
increase, $1.3 million, is due to a new bonus program implemented during the first quarter
of 2003. This new bonus program better aligns the store and field management incentive
programs with the Companys strategic objectives. In addition, the Company initiated
an employee upgrade program directed at attracting and keeping better talent. This
resulted in higher salaries during the first nine months of 2003. Salaries and wages
increased to 26.5% as a percentage of total revenues from 24.1%.

Advertising.    
          Advertising expense decreased from $21.1 million to $17.1 million. This decrease
          is primarily due to $1.5 million of media costs incurred in the fourth quarter
          of fiscal year 2002 related to the fiscal year 2003 advertising campaign
          entitled Fall Kickoff Extravaganza. The Company has also implemented
          a more balanced media investment strategy in 2003, which includes 295 less
          stores because of the sale of stores to Rent-A-Center, Inc.

Occupancy.    
          Occupancy expense increased to $24.5 million from $23.8 million and increased to
          6.6% as a percentage of total revenues from 6.4%. The increase is attributable
          to the general rent increases, which approximate 2% per year. Also, the
          escalation clauses of leases remaining after the Rent-A-Center sale resulted in
          a $0.2 million increase to lease expense for the three-months ended June 30,
          2003, which includes 295 less stores because of the sale of stores to
          Rent-A-Center, Inc.

Restructuring Costs. During the
second quarter of fiscal year 2003, the Company formulated a plan to restructure the
corporate office through reductions in the corporate workforce to rationalize corporate
costs for the stores remaining subsequent to the sale to Rent-A-Center, Inc. As a result
of this plan, the Company recorded total pre-tax restructuring charges of $3.4 million in
the nine-month period ending June 30, 2003. The restructuring costs include $1.0 million
of employee severance and termination benefits, $2.0 million of fixed asset write-offs in
the household rental segment, and $0.4 million in depreciation expense for leasehold
improvements for vacated stores for which Rent-A-Center, Inc. did not assume the leases in
the sale.

Other Operating Expense. Other
operating expense decreased by $3.5 million and decreased to 20.4% as a percentage of
total revenues from 21.2%. This decrease is principally due to an adjustment for income of
$4.6 million for ultimate and incurred losses, which offset insurance costs recorded in
other operating activities. Also, a $0.3 million retrospective downward adjustment was
recorded for the Companys 2002 medical insurance premium. This decrease is also due
to a $1.5 million adjustment to the Companys personal property tax assessments.
These decreases were offset by increases in payroll taxes and health insurance costs,
property and casualty insurance costs, and legal, professional and consulting fees.

During the first nine months of
fiscal 2002, accounting fees, legal fees and consulting fees related to the investigation,
shareholder litigation and the fiscal 2000 audit were $1.4 million, of which $1.9 million
was reimbursed as a result of an insurance recovery. During the nine-month period ended
June 30, 2003, accounting and legal fees related to the investigation and shareholder
litigation and consulting fees related to bank refinancing were $2.5 million.

---

Settlement of Class Action Lawsuit.
The Company reached an agreement to settle the consolidated class action pending against
the Company in the U.S. District Court for the Western District of Pennsylvania. Under the
settlement, the Company will pay $25.0 million to the class, consisting of $4.0 million in
two-year 6% subordinated unsecured notes and $21.0 million in cash, of which $11.0 million
is to be funded from available insurance proceeds. The net $14.0 million was expensed in
the second quarter of fiscal 2003. The Company has funded $10.0 million in cash and the
insurance carrier has funded $11.0 million in cash into escrow as of July 1, 2003; the
Company has also issued the unsecured notes in escrow.

Interest Expense. Interest expense
decreased from 9.3% to 7.5% as a percentage of total revenues. This decrease is primarily
due to a $68.2 million decrease in debt as compared to the same period last year. Debt was
$234.5 million as of June 30, 2003 as compared to $302.7 million as of June 30, 2002. The
decrease in debt is primarily due to the repayment of $63.6 million with the proceeds
received from the sale of stores to Rent-A-Center, Inc. In addition, deferred financing
costs of $3.4 million were reclassified from an extraordinary item as reported in fiscal
2002 to interest expense for the nine-month period ended June 30, 2002, as a result of
adoption of SFAS 145. These decreases were offset by the write off of $1.1 million in bank
fees associated with amendments to the previous credit facility in the period ended 2003.
On June 2, 2003, the Company completed the sale of $205.0 million of secured notes, closed
a new $60.0 million revolving line of credit, and sold $15.0 million in 8% convertible
preferred stock through a private placement. The net proceeds from these transactions were
used to repay all amounts outstanding under the old senior credit facility (see Note 6).

Other Income. Other income was $4.7
million for the nine months ended June 30, 2003, compared to $2.9 million in the nine
months ended June 30, 2002. This change is primarily due to a decrease in the positive
change in the fair market value of the interest rate swap portfolio.

Income Tax Expense. During the first
nine months of fiscal 2003, the Company recorded income tax expense of $4.1 million due to
the Companys inability to book the reversal of the deferred tax liability associated
with tax deductible goodwill to offset a portion of its deferred tax asset following the
adoption of SFAS 142. Also, during the first nine months of fiscal 2003, a tax benefit of
$0.9 million was recorded as a result of carrying back AMT net operating losses. The net
expense for the nine months was $3.2 million. During the first nine months of fiscal 2002,
the Company recorded income tax expense of $14.6 million due to the Companys
inability to look to the reversal of the deferred tax liability associated with tax
deductible goodwill to offset a portion of its deferred tax asset following the adoption
of SFAS 142 on October 1, 2001.

Cumulative Effect of Change in
Accounting Principle. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. During the quarter ended September 30, 2002, the
Company performed, with the assistance of an independent valuation firm, the phase two
impairment test of the carrying value to determine the amount of the write down. This
assessment resulted in an impairment write-down of $58.9 million, recorded in
Cumulative Effect of Change in Accounting Principle in the amount of $41.5
million (net of $17.4 million in income taxes). In accordance with the transitional
implementation guidance of SFAS 142, the write down was recorded retroactive to the
Companys first quarter results of operations (see Note 6).

Income (Loss) From Discontinued
Operations. On December 17, 2002, the Company entered into a definitive purchase agreement
to sell 295 stores to Rent-A-Center, Inc., for approximately $101.5 million, which
transaction has since closed. These stores are all included in the household rental
segment. Related operating results, in accordance with SFAS 144, have been reported as
discontinued operations (see Note 3). Loss from discontinued operations was $15.6 million
in the nine months ending June 30, 2003 as compared to income from discontinued operations
of $0.6 million in the same period last year. This decrease is mainly due to a $7.9
million charge for lease obligations related to vacated stores and a $6.1 million decrease
in operating income of the stores due to transition period costs recorded in the
nine-month period ended June 30, 2003.

Net Loss. The Company generated a net
loss of $28.8 million in the period as a result of the factors described above compared to
a net loss of $68.6 million in the same period last year.

Net income (loss) available to common
shareholders. On June 2, 2003, the Company issued 1,500 shares of convertible redeemable
preferred stock for $0.01 per share and a one-year option to purchase an additional 500
shares of convertible redeemable preferred stock. The net proceeds from the sale of the
preferred stock were used to repay the senior credit facility. The net proceeds from the
issuance of $14.1 million are net of issuance cost of $0.9 million. There are two
derivatives embedded in the convertible preferred stock: 1) the one-year option to
purchase additional shares with a market value of $0.1 million and 2) the conversion
feature of the preferred stock with a market value of $8.6 million. The $0.1 million
market value of the purchase option was classified as option to purchase convertible
preferred stock in permanent equity and the $8.6 million market value of the conversion
feature remains in temporary equity. The net $5.4 million preferred stock carrying value
is being accreted to its maximum mandatory redemption amount from the issuance date to the
7-year mandatory redemption date. The preferred stock dividends and accretion totaled $0.1
million and are charged to accumulated deficit but reduce net income (loss) to net income
(loss) available to common stockholders.

LIQUIDITY AND CAPITAL
RESOURCES

On June 2, 2003, the Company
completed the sale of $205.0 million of senior secured notes, closed a new $60.0 million
revolving line of credit facility and sold $15.0 million in newly authorized 8%
convertible preferred stock through a private placement. The net proceeds of the
offerings, together with borrowings under the new revolving credit facility and the net
proceeds of the sale of the convertible preferred stock repaid all amounts outstanding
under the Companys previous senior bank credit facility. As a result of the
completion of the refinancing, the Companys corporate credit rating was raised by
Standard & Poors Ratings Services from CCC to B+'.

On February 8, 2003, the Company sold
295 stores to Rent-A-Center, Inc. for approximately $100.4 million in cash. Of the sale
price, the Company paid $14.7 million in transaction, store closing and similar expenses
and Rent-A-Center, Inc. held back $10.0 million to secure the Companys
indemnification obligations in the sale. As required by the purchase agreement,
Rent-A-Center, Inc. released $5.0 million of the holdback to the Company on May 8, 2003
and, unless Rent-A-Center, Inc. has indemnification claims against the Company, it is
required to release the remaining $5.0 million to the Company on August 8, 2004. As
required by the Companys then existing senior credit facility, the Company used
$73.6 million of the sale proceeds to reduce outstanding bank debt. In addition, $2.9
million was used to reduce outstanding borrowings under the old credit facility upon the
closing of the revolving credit facility.

The Companys capital
requirements relate primarily to purchasing additional rental merchandise and replacing
rental merchandise that has been sold or is no longer suitable for rent. The
Companys principal sources of liquidity are cash flows from operations, debt
capacity available under the credit facility and available cash reserves.

For the nine months ended June 30,
2003, operations used $46.1 million of cash flow compared to operations providing $12.9
million for the nine months ended June 30, 2002. The increase in cash used in operating
activities is primarily attributable to an increase in other assets and decreases in
accounts payable and other liabilities. The increase in other assets is attributable to an
$11.0 million receivable recorded in the second quarter of fiscal year 2003 for insurance
proceeds that will be received for the settlement of the class action lawsuit and a
receivable of approximately $10.0 million was recorded in the second quarter of fiscal
year 2003 for the Rent-A-Center, Inc., sale hold back. Of the $10.0 million hold back,
$5.0 million was received in the third quarter. The increase in other liabilities is
attributable to a $25.0 million dollar liability recorded for settlement of the class
action lawsuit. Also, other liabilities was affected by a $7.9 million liability recorded
in the second quarter of fiscal 2003 for future lease payments in 170 vacated stores , the
leases for which Rent-A-Center, Inc., did not assume in the sale.

Net cash provided by investing
activities was $86.8 million for the nine months ended June 30, 2003, compared to $8.1
million used in investing activities for the nine months ended June 30, 2002. On February
8, 2003, the Company sold 295 stores to Rent-A-Center, Inc., for $100.4 million. Of the
$100.4 million purchase price, $10.0 million is being held back by Rent-A-Center, Inc., to
secure the Companys indemnification obligations; $5.0 million for 90 days following
the closing and $5.0 million for 18 months following the closing. In the fiscal 2003
period, the purchase of property and equipment accounted for $3.5 million. In the fiscal
2002 period, the purchase of property and equipment accounted for $9.1 million.

For the nine months ended June 30,
2003, financing activities used $42.4 million as compared to $5.9 million in the nine
months ended June 30, 2002. In the fiscal 2003 period, the Company borrowed $662.4 million
and repaid $711.5 million. In the fiscal 2002 period, the borrowings were $522.0 million
and repayments were $535.1 million. The company also incurred $8.7 million and $2.9
million in deferred financing costs during the nine-month periods ended June 30, 2003 and
2002, respectively.

Rental Merchandise. The Company
purchased $160.6 million and $140.9 million of rental merchandise during the nine-month
periods ended June 30, 2003 and 2002, respectively. There was a $4.3 million credit for
jewelry inventory returns. The credit will offset cost of merchandise as credits are
applied to future purchases.

Accounts Payable. The decrease in
accounts payable from September 30, 2002, is attributable to the sale of 295 stores to
Rent-A-Center, Inc. that closed February 8, 2003.

Other Assets. The Company reached an
agreement to settle the consolidated class action, which resulted in an $11.0 million
receivable from insurance proceeds recorded in other assets. Of the approximate $100.4
million sales price to Rent-A-Center, Inc. for the sale of 295 stores, $10.0 million was
being held back by Rent-A-Center, Inc., to secure the Companys indemnification
obligations, $5.0 million for 90 days following closing, which was refunded to the Company
May, 2003 and an additional $5.0 million for 18 months following closing. The 18-month
$5.0 million holdback is recorded as a receivable in other assets. There was a receivable
recorded for the $4.6 million adjustment for income for ultimate and incurred losses
related to the Companys retrospective insurance programs.

The Company issued $205.0 million of
senior secured notes on June 2, 2003, that bear interest at 11.875%. The interest on the
secured notes is payable semiannually on June 15 and December 15 beginning December 15,
2003. The secured notes are guaranteed on a senior basis by all existing and future
domestic restricted subsidiaries of the Company other than dPi, which is an unrestricted
subsidiary. The Company may redeem the secured notes, in whole or in part, at any time
prior to June 15, 2010, at a redemption price equal to the greater of:

|a) |  | 100% of the principal amount of the notes to be redeemed; and
|-- |  | -------------------------------------------------------------

|b) |  | the sum of the present values of (i) 100% of the principal amount of the notes
               to be redeemed at June 15, 2010, and (ii) the remaining scheduled payments of
               interest from the redemption date through June 15, 2010, but excluding accrued
               and unpaid interest to the redemption date, discounted to the redemption date at
               the treasury rate plus 175 basis points;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

plus, in either case, accrued and
unpaid interest to the redemption date.

In addition, at any time prior to June
15, 2006, up to 25% of the aggregate principal amount of the secured notes may be redeemed
at the Companys option, within 75 days of certain public equity offerings, at a
redemption price of 111.875% of the principal amount, together with accrued and unpaid
interest. Such redemption can occur provided that after giving effect to any such
redemption, at least 75% of the original aggregate principal amount of the notes issued
(including any additional notes) remains outstanding.

The secured notes were offered at a
discount of $3.6 million, which is being amortized using the effective interest method,
over the term of the secured notes. Amortization of the discount was $0.03 million for the
three and nine months ended June 30, 2003. Costs representing underwriting fees and other
professional fees of $6.9 million are being amortized, using the straight-line method,
over the term of the secured notes. The secured notes rank senior in right to all of the
Companys existing and future subordinated debt, have a lien position ranking second
to the bank revolving credit facility and effectively junior in right of payment to all
existing and future debt and other liabilities of the Companys subsidiaries that are
not subsidiary guarantors. The secured notes contain covenants that will, among other
things, limit the Companys ability to incur additional debt, make restricted
payments, incur any additional liens, sell certain assets, pay dividend distributions from
restricted subsidiaries, transact with affiliates, conduct certain sale and leaseback
transactions and use excess cash flow.

If (a) the Company has any excess
cash flow or amounts on deposit in the excess cash flow collateral account, (b) the
leverage ratio is equal to or greater than 2.50 to 1.00 or the rent-adjusted leverage
ratio is equal or greater than 4.00 to 1.00, and (c) the Company has cash and cash
equivalents of more than $10,000, the Company shall repay debt (if any) outstanding under
the revolving credit facility in an amount equal to the remainder (if positive) of 1) the
amount of such cash and cash equivalents minus 2) the sum of $10,000 plus such excess cash
flow. Thereafter, if (a) the Company has any excess cash flow with respect to such fiscal
year plus amounts on deposit in the excess cash flow collateral account of at least $1.0
million in the aggregate and (b) the coverage ratio is equal to or greater than 2.50 to
1.00 or the rent-adjusted leverage ratio is equal to or greater than 4.00 to 1.00, then
the Company either shall use such excess cash flow plus such amounts on deposit to repay
debt (if any) outstanding under the revolving credit facility or, subject to limitations,
shall use 75% of any excess cash flow plus such amounts on deposit remaining after
repayment of debt outstanding under the revolving credit facility to make an offer to
purchase notes at a purchase price equal to 104.25% of the aggregate principal amount
thereof, plus accrued and unpaid interest to the purchase date. The Company shall deposit
in the excess cash flow collateral account all of the portion of the 75% of such remaining
excess cash flow not used to purchase notes. The Company may use 25% of the excess cash
flow remaining with respect to such fiscal year after repayment of debt outstanding under
the revolving credit facility. All of the Companys obligations in the excess cash
flow covenant shall terminate upon the first fiscal year end of the Company at which both
a) the leverage ratio is less than 2.50 to 1.00 and b) the rent-adjusted leverage ratio is
less than 4.00 to 1.00.

The Company sold $15.0 million of
newly authorized 8% convertible preferred stock in a private placement. The preferred
stock bears dividends at a rate per annum of eight percent of stated value, payable at the
Companys option either in cash or, under specified circumstances, shares of common
stock. The preferred stock will mature no sooner than seven and one-half years after
issuance and will be convertible into shares of common stock at any time at the option of
the investors. The initial conversion price of the preferred stock will be $6.00 per
share, subject to anti-dilution and other adjustments that could result in the issuance of
additional shares of common stock. If several conditions are met, the preferred stock will
be redeemable at the Companys option at its stated value plus accumulated but unpaid
dividends after the fifth anniversary of its issuance. The conditions to this right of
redemption are expected to include the Companys having complied with obligations to
deliver shares of common stock on conversion of the preferred stock, that is listed on,
and that there have been no threatened delisting of Company shares from, either the NYSE
or the NASDAQ National Market, there having occurred no announcement of a change of
control of the Company, that the registration statement covering the shares of common
stock underlying the preferred stock remains effective for periods of time prior to and
following the redemption date and the Company has been in material compliance with and not
have materially breached any provision of any agreement with the investors. The investors
may require the Company to repurchase the preferred stock at its stated value plus
accumulated but unpaid dividends at any time after the six month anniversary of the date
when none of the notes and no indebtedness under the new revolving credit facility is
outstanding. The investors may require the Company to repurchase the preferred stock at a
premium, subject to the restricted payment limitations imposed by the indenture for the
notes, and require any unredeemed preferred stock to accrue dividends at 15.0% per annum,
upon the failure of the common stock to be listed on the NYSE or the NASDAQ National
Market or upon a change of control. The Company will also have the right to repurchase the
preferred stock at a premium upon a change of control. In the event the Company fails to
redeem the preferred stock on notice from the investors, or to convert the preferred stock
on a timely basis, in whole or in part, when required, the investors will have the option
of voiding the related redemption or conversion notice and receiving a downward
adjustment, if appropriate, to then applicable conversion price based on the weighted
average trading price of common stock in the periods prior to the voiding of the notice.
The investors will have the option to acquire an additional $5.0 million of preferred
stock, having an initial conversion price of $6.65 per share, for a one-year period
following the closing date of the $15.0 million private placement.

The Company closed a new revolving
credit facility with Harris Trust and Savings Bank, acting as administrative agent, and
Bank of Montreal as lead arranger, and providing for National City Bank to act as
syndication agent for a new revolving credit facility providing for senior secured
revolving loans of up to $60.0 million including a $15.0 million sublimit for standby and
commercial letters of credit and a $5.0 million swingline sublimit. This credit facility
will expire five years from closing (June 2, 2008). The new revolving credit facility is
guaranteed by all of the wholly owned domestic subsidiaries and secured by first priority
liens on substantially all of the Companys and subsidiary guarantors assets,
including rental contracts and the stock held in domestic subsidiaries. The Company may
elect that each borrowing of revolving loans be either base rate loans or Eurodollar
loans. The Eurodollar loans bear interest at a rate per annum equal to an applicable
margin plus LIBOR adjusted for a reserve percentage. Under the base rate option, the
Company will borrow money based on the greater of (a) the prime interest rate or (b) the
federal funds rate plus 0.50%, plus, in each case, a specified margin. A 0.50% commitment
fee will be payable quarterly on the unused amount of the revolving credit facility. Upon
a default, interest will accrue at 2% over the applicable rate. The Company will be
required to make specified mandatory prepayments upon subsequent debt or equity offerings
and asset dispositions.

The financial covenants required
under the provisions of the new revolving credit facility include the following:

| | The
leverage ratio is total funded debt less an amount on deposit in excess cash flow escrow
account to EBITDA for the four fiscal quarters then ended. The leverage ratio cannot
exceed 5.00 to 1.00 through March 31, 2004, 4.75 to 1.00 from April 1, 2004 though June
30, 2004, 4.50 to 1.00 from July 1, 2004 through September 30, 2004, 4.00 to 1.00 from
October 1, 2004 through September 30, 2005, 3.75 to 1.00 from October 1, 2005 though
September 30, 2006, 3.25 to 1.00 from October 1, 2006 through September 30, 2007, 2.75 to
1.00 from October 1, 2007 thereafter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fixed charge coverage ratio is EBITDA for the four fiscal quarters then ended less
capital expenditures not financed by capital leases to fixed charges for the same four
fiscal quarters then ended. EBITDA does not include depreciation of rental merchandise
and is adjusted for one-time non-cash charges. Fixed Charges are the sum of all principal
payments made on indebtedness but excluding payments on revolving credit plus interest
expense, restricted payments, all prepayments on senior notes and income taxes paid or
payable. The fixed Charge coverage ratio shall not be less than 1.05 to 1.00 through June
30, 2003, 1.15 to 1.00 from July 1, 2003 through September 30, 2003, 1.20 to 1.00 from
October 1, 2003 through March 31, 2004 and 1.25 to 1.00 from April 1, 2004 through the
revolving credit termination date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot allow the book value of rental merchandise under lease to be less than 74%
of the total value of rental merchandise held for rent at the end of each calendar month
ending September 30, October 31 and November 30 in each fiscal year and 77% for all other
calendar months in each fiscal year. The value of jewelry cannot exceed 7.5% of the total
value of rental merchandise as measured at the end of each calendar month commencing June
30, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot incur capital expenditures in an amount in excess of $20.0 million in the
aggregate during any fiscal year increased for the preceding year permitted amount excess
over the actual capital expenditure not to exceed $2.5 million additional capital
expenditures.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consolidated net worth shall not be less than $85.0 million plus 75% of positive net
income with no deduction for losses (for each quarter of each fiscal year ending on or
after September 30, 2003), and 90% of any subsequent incremental issuance of new equity
securities, other than equities issues in connection with the exercise of employee stock
options and capital stock issued to the seller of an acquired business in connection with
a permitted acquisition.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot permit EBITDA for the twelve consecutive calendar months then ended to be
less than:
| | -------------------------------------------------------------------------------------------------------

|For the month ending:            | Minimum EBITDA:
|-------------------------------- | ---------------
|
|June 2003                        |                
|July 2003                        |                
|August2003                       |                
|September 2003                   |                
|October 2003                     |                
|November 2003                    |                
|December 2003                    |                
|January 2004                     |                
|February 2004                    |                
|March 2004                       |                
|April 2004                       |                
|May 2004                         |                
|June 2004                        |                
|July 2004                        |                
|August 2004                      |                
|September 2004                   |                
|October 2004                     |                
|November 2004                    |                
|December 2004                    |                
|January 2005                     |                
|February 2005                    |                
|March 2005                       |                
|April 2005 through February 2006 |                
|March 2006 through December 2006 |                
|January 2007 and thereafter      |                

On April 28, 2002, the Company sold
one million shares of common stock and warrants (valued according to the Black-Scholes
valuation method) to acquire another 100,000 shares of common stock in a private placement
to Calm Waters Partnership and two other investors for $6.0 million. The warrants have an
exercise price of $9.35 per share, which was reduced to $6.00 per share upon the sale of
$15.0 million of convertible preferred stock. In addition, the agreement required the
investors to purchase an additional 2,640,000 shares of common stock for $16.5 million and
a warrant to purchase another 250,000 shares of common stock at an exercise price equal to
the greater of 105% of the last reported sale price of common stock on the day preceding
the second closing date or $1.50. The investors obligation to purchase the shares
and the warrant was subject to certain conditions including the Companys replacement
of its existing senior credit facility on or prior to December 31, 2002, conditions
related to the existing class action litigation and ongoing investigations, and
achievement of specified amounts of quarterly aggregate EBITDA (as defined in the
agreement with the investors). These conditions were not satisfied and the investors did
not purchase the additional shares and warrant on the second closing date. The Company
also agreed to issue a warrant to purchase additional shares of common stock to the
investors if the Company failed to achieve aggregate EBITDA of $80.0 million or more for
the 12-month period commencing on April 1, 2002. The warrant exercise price per share was
based upon the EBITDA for such period. The Company did not meet this EBITDA target and
issued 332,999 additional warrants at an exercise price per share of $1.50 in April 2003,
which were subsequently exercised in June 2003.

The following table presents
obligations and commitments to make future payments under contracts and contingent
commitments at June 30, 2003:

|Contractual Cash Obligations* | Total | Due in less
than one year | Due in
1-3 years | Due in
4-5 years | Due after
5 years
|----------------------------- | ----- | ------------------------- | ---------------- | ---------------- | -----------------
|
|Debt (1)                      |       |                           | $                | 234,442          |                  
|Capital lease obligations     |       |                           |                  | 12,482           |                  
|Operating leases              |       |                           |                  | 123,720          |                  
|Notes payable                 |       |                           |                  | 74               |                  
|Settlement of class action    |       |                           |                  | 14,000           |                  
|lawsuit (2)                   |       |                          
|                              |       |                           |                  |                  |                  
|Total cash obligations        |       |                           | $                | 384,718          |                  
|                              |       |                           |                  |                  |                  

*Excludes the 401(k) restorative
payments program as well as contingent liabilities that cannot be estimated. (1) Consists
of Senior Secured Notes and revolving loans. (2) Net of insurance proceeds to be funded by
the insurance carrier.

---

|Amount of Commitment Expiration Per Period
|------------------------------------------
|
|Lines of credit                           
|Standby letters of credit                 
|Guarantees                                
|                                          
|Total commercial                          
|commitments                               
|                                          

SEASONALITY AND INFLATION

The Companys operating results
are subject to seasonality. The first quarter typically has a greater number of
rental-purchase agreements entered into because of traditional holiday shopping patterns.
Management plans for these seasonal variances and takes particular advantage of the first
quarter with product promotions, marketing campaigns, and employee incentives. Because
many of the Companys expenses do not fluctuate with seasonal revenue changes, such
revenue changes may cause fluctuations in the Companys quarterly earnings.

In the event of a prolonged
recession, the Company acknowledges the possibility of a decrease in demand, particularly
for higher-end products.

RECENT ACCOUNTING
PRONOUNCEMENTS

In May, 2003, the Financial
Accounting Standards Board (the FASB) issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity (SFAS 150). SFAS 150 establishes
standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some
circumstances). This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The Company has adopted the provisions of this
Statement.

On April 30, 2003, the Financial
Accounting Standards Board (the FASB) issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 improves financial reporting by
requiring that contracts with comparable characteristics be accounted for similarly. SFAS
149 clarifies 1) the circumstances in which a contract with an initial net investment
meets the characteristics of a derivative, 2) when a derivative contains a financing
component and amends certain other existing pronouncements. This Statement is effective
for contracts entered into or modified after June 30, 2003. The Company is currently
evaluating the provisions of this Statement.

On January 15, 2003, the FASB issued
FIN 46, Consolidation of Variable Interest Entities. The objective of this
interpretation is to improve financial reporting by enterprises involved with variable
interest entities. This interpretation applies to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has no variable interest
entities that are not currently consolidated and is evaluating the provisions of this
interpretation.

On November 25, 2002, the FASB issued
FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, An Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No.34". The
Interpretation requires than upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that obligation. The
Company has evaluated the provisions of this Interpretation and determined it does not
have an impact on these financial statements upon its adoption.

CAUTIONARY STATEMENT

This report includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. See particularly Item
2, Managements Discussion and Analysis of Financial Condition, among
others. These statements may be identified by terms and phrases such as
anticipate, believe, intend, estimate,
expect, continue, should, could,
may, plan, project, predict,
will and similar expressions and relate to future events and occurrences.
These statements are subject to uncertainties and other factors that could cause actual
results to differ materially from such statements. Factors that could cause actual results
to differ materially from those expressed or implied in such statements include but are
not limited to:

|o | Rent-Ways
ability to control and normalize operating expenses and to continue to realize operating
efficiencies.
|- | -----------------------------------------------------------------------------------------------------------------

|o | Rent-Ways
ability to make principal and interest payments on its high-level of outstanding bank
debt.
|- | ------------------------------------------------------------------------------------------------------

|o | The
outcome of the class action commenced against Rent-Way and its officers and directors.
|- | ------------------------------------------------------------------------------------------

|o | Rent-Ways
ability to develop, implement, and maintain reliable and adequate internal accounting
systems and controls.
|- | ----------------------------------------------------------------------------------------------------------------------

|o | Rent-Ways
ability to retain existing senior management and attract additional management employees.
|- | ----------------------------------------------------------------------------------------------------

|o | General
economic, business, and demographic conditions, including demand for Rent-Ways
products and services.
|- | --------------------------------------------------------------------------------------------------------------

|o | General
conditions relating to the rental-purchase industry and the prepaid local phone service
industry, including the impact of state and federal laws regulating or otherwise affecting
the rental-purchase transaction and prepaid local phone service transaction.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Competition
in the rental-purchase industry and prepaid local phone service industry, including
competition with traditional retailers.
|- | ---------------------------------------------------------------------------------------------------------------------------------------

|o | Rent-Ways
ability to enter into and to maintain relationships with vendors of its rental
merchandise including its ability to obtain goods and services on favorable credit terms.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Rent-Ways
ability to reduce corporate and other expenses following the completion of the
Rent-A-Center, Inc. transaction.
|- | --------------------------------------------------------------------------------------------------------------------------

Given these factors, undue reliance
should not be placed on any forward-looking statements and statements regarding Rent-Ways
future prospects and performance. Such statements speak only as of the date made.
Rent-Way undertakes no obligation to update or revise any such statements whether as a
result of new information, the occurrence of future events, or otherwise.

The Company manages its exposure to
changes in short-term interest rates, particularly to reduce the impact on floating-rate
borrowings, by entering into interest rate swap agreements. These swap agreements involve
the receipt of amounts by the Company when floating rates exceed fixed rates and the
payment of amounts by the Company to the counter parties when fixed rates exceed the
floating rates in the agreements over their term. The Company accrues the differential as
interest rates change, and recognizes it as an adjustment to the floating rate interest
expense related to the debt. The counter parties to these contracts are high credit
quality commercial banks, which the Company believes minimizes the risk of counter party
default, to a large extent.

At June 30, 2003, the Company had
swap agreements with total notional principal amounts of $101.7 million, which effectively
fixed the interest rate on obligations in the notional amount of $33.0 million of debt
under the $60.0 million revolving credit facility. The swap agreements lock in a LIBOR
rate ranging from 5.09% to 6.97% and have maturities ranging from 2003 to 2005. Falling
interest rates and/or a flattening of the yield curve will negatively impact the market
value of the interest rate swaps. Changes in the valuation of such swap agreements are
recorded directly to earnings. The face value of interest rate swap agreements was a
liability of approximately $6.1 million at June 30, 2003. A 1% adverse change in the
interest rates on variable rate obligations would not have a material adverse impact on
the future earnings and cash flows of the Company.

The Company dose not enter into
derivative financial instruments for trading or speculative purposes.

|A. |  | Evaluation of Disclosure Controls and Procedures. As of the date of this report,
               the Company carried out
               an evaluation, under the supervision and with the participation of the
               Companys management, including the Companys Chief Executive
               Officer and Chief Financial Officer, of the effectiveness of the design and
               operation of the Companys disclosure controls and procedures pursuant
               to Exchange Act Rule 13a-15. Based upon the evaluation, the Companys
               Chief Executive Officer and Chief Financial Officer concluded that the
               Companys disclosure controls and procedures are effective  to ensure
               that information
               required to be disclosed in Company reports filed or submitted under the
               Exchange Act is made known to them on a timely basis, and that this information is
               recorded, processed, summarized and reported within the
               time periods specified in the Securities and Exchange
               Commissions rules and forms.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|B. |  | Changes in Internal Controls. There has not been any change in our internal
               control over financial reporting that occurred during the last fiscal quarter
               that has materially affected, or is reasonably likely to materially affect, our
               internal control over financial reporting.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

PART II  OTHER
INFORMATION

As previously reported, the SEC and
the Department of Justice had commenced investigations of the Companys financial
reporting arising from the Companys discovery of improper accounting entries made in
fiscal 2000, 1999 and 1998. On July 22, 2003, the U.S. Securities and Exchange Commission
announced that it had reached a settlement with the Company under which the Company
consented to the entry of a final judgment in the U. S. District for the Western District
of Pennsylvania that permanently enjoins it from violations of the reporting and books and
records provisions of the Securities Exchange Act. In determining to accept the
settlement, the SEC considered that the Company undertook remedial actions and cooperated
with the SEC staff. The Court entered the final consent judgment on July 23, 2003. The SEC
did not seek any financial penalty against the Company, its current officers or directors.
The Department of Justice did not bring any charges against the Company or current
officers and directors. Based on public statements from the SEC staff and representatives
of the Department of Justice, the Company believes the governments investigations
into its past accounting improprieties are concluded and that no action will be taken
against any current Company employee or director.

As previously reported, the Company,
its independent auditors, and certain of its current and former officers have been named
in a consolidated class action complaint filed in the U.S. District Court for the Western
District of Pennsylvania alleging violations of the securities laws and seeking damages in
unspecified amounts purportedly on behalf of a class of shareholders. As of April 18,
2003, the Company entered into an agreement settling the class action. The settlement
requires the Company to pay the class the sum of $25.0 million, with $21.0 million in cash
and $4.0 million in 6% unsecured subordinated notes payable in four equal installments
over two years commencing December 31, 2003. Of the $21.0 million payable in cash, $11.0
million is to be funded from available insurance proceeds. The settlement agreement
provides for the release of the Company and all other defendants except the Companys
former controller and the Companys auditors. The settlement is subject to several
conditions including Court approval. The Companys auditors have opposed the motion
of the lead plaintiff in the class action, Cramer Rosenthal McGlynn LLC, seeking
certification and appointment as class representative. If the motion is not granted, the
Court could reject the settlement.

As previously reported, certain of
the Companys officers and directors and the Company, as nominal defendant, were sued
in a shareholder derivative action brought on behalf of the Company in the U.S. District
Court for the Western District of Pennsylvania. The Court granted a motion to dismiss this
suit without prejudice on May 14, 2003.

On June 2, 2003, the Company sold
1,500 shares of its Series A preferred stock, no par value, in a private placement to
several institutional investors for $15.0 million. The purchasers have a one-year option
to purchase an additional $5.0 million of Series A preferred stock. The Series A preferred
stock bears dividends at a rate per annum of eight percent of stated value, payable at the
Companys option either in cash or, under specified circumstances, shares of the
Companys common stock. The Series A preferred stock matures June 2, 2011 and is
convertible into shares of the Companys common stock at any time at the option of
the investors. The initial conversion price of the Series A preferred stock is $6.00 per
share, subject to anti-dilution and other adjustments that could result in the issuance of
additional shares of the Companys common stock. If several conditions are met, the
Series A preferred stock will be redeemable by the Company at its option at its stated
value plus accrued but unpaid dividends after June 2, 2008. The investors may also require
the Company to repurchase the Series A preferred stock at a premium and require any
unredeemed Series A preferred stock to accrue dividends at 15% per annum, upon the failure
of the Companys common stock to be listed on the NYSE or the NASDAQ National Market
or upon a change in control of the Company. The Company also has the right to repurchase
the Series A preferred stock at a premium upon change of control of the Company.

On June 29, 2003, the Company filed a
registration statement of Form S-3 to register the shares of common stock issuable upon
conversion of the preferred stock acquired in the initial closing, which became effective
on July 11, 2003. The Company will not receive any proceeds from the sale of the common
stock registered by such registration statement. In the event the holders acquire
additional shares of preferred stock, the Company is required to file a registration
statement on Form S-3 covering the common stock issuable on conversion of the preferred
stock so acquired within 30 days of such acquisition and to cause the registration
statement to become effective within 90 days thereafter. The Company will pay cash
liquidated damages to the holders of the preferred stock in the event the Company does not
meet these requirements, and also in the event the registration statement becomes
unavailable to the holders for periods beyond specified grace periods.

The issuance of the Companys
Series A preferred stock described above is exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof or Regulation D promulgated
thereunder.

a.       
          EXHIBITS

See
exhibit index.

b.       
          REPORTS ON FORM 8-K

The
Company filed the following reports on Form 8-K in the quarter ended June 30, 2003:

|(1) |  | On June 3, 2003, the Company filed a Current Report on Form 8-K, which reported
          it had closed its previously announced sale of $205 million of senior secured
          notes.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | On June 3, 2003, the Company filed a Current Report on Form 8-K, which filed the
          material agreements entered into by the Company in connection with the
          Companys sale of senior secured notes and the closing of its new revolving
          line of credit.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On May 29, 2003, the Company filed a Current Report on Form 8-K, which reported
          the issuance of a press release announcing an agreement to sell $205 million of
          senior secured notes and $15 million of 8% convertible preferred stock in a
          private placement.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | On May 9, 2003, the Company filed a Current Report on Form 8-K, which reported
          pursuant to Rule 135c of the Securities Act the issuance of a press release
          announcing that it plans to offer $215 million of senior secured notes in a
          transaction exempt from the registration requirements of the Securities Act of
          1933.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | On May 1, 2003, the Company filed a Current Report on Form 8-K which was filed
          to give effect to the Companys sale on February 8, 2003 of 295 stores to
          Rent-A-Center, Inc., on the Companys audited financial statements and
          managements discussion and analysis of financial condition and results of
          operations for the fiscal years ended September 30, 2002, 2001 and 2000
          appearing in the Companys Form 10-K for the year ended September 30, 2002
          (filed December 30, 2002), as amended by Form 10-K/A (filed March 31, 2003).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | On April 2, 2003, the Company filed a Current Report on Form 8-K, which reported
          the correction in the beneficial ownership information reported for its
          director, Robert B. Fagenson, in its proxy statement for the annual meeting of
          shareholders held March 12, 2003, as filed with the Securities and Exchange
          Commission on January 28, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | On April 2, 2003, the Company filed a Current Report on Form 8-K/A, which
          amended its current report on Form 8-K, filed February 25, 2003, to supply the
          cover sheet and signature page that were inadvertently omitted
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | On April 2, 2003, the Company filed a Current Report on Form 8-K/A, which
          amended its current report on Form 8-K, filed February 25, 2003, to supply the
          cover sheet and signature page that were inadvertently omitted.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | On April 2, 2003, the Company filed a Current Report on Form 8-K/A, which
          amended its current report on Form 8-K, filed February 24, 2003, to supply the
          cover sheet and signature page that were inadvertently omitted.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company furnished the following reports on Form 8-K in the quarter ended June 30, 2003:

|(1) |  | On June 25, 2003, the Company furnished a Current Report on Form 8-K, which
          reported it had closed its previously announced sale of $205 million of senior
          secured notes.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | On May 30, 2003, the Company furnished a Current Report on Form 8-K, to provide
          information regarding the Companys results of operations for the completed
          fiscal periods presented.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On May 12, 2003, the Company furnished a Current Report on Form 8-K, to provide
          information regarding the Companys EBITDA and adjusted EBITDA for the
          periods presented.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

RENT-WAY, INC.

SIGNATURES

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

Rent-Way,
Inc.                                                            (Registrant)

|                |                                           
|--------------- | ------------------------------------------
|
|By:             |                                           
|August 14, 2003 | /S/ WILLIAM A. MCDONNELL                  
|Date            | (Signature)                               
|                | William A. McDonnell                      
|                | Vice President and Chief Financial Officer
|By:            
|August 14, 2003 | /S/ JOHN A. LOMBARDI                      
|Date            | (Signature)                               
|                | John A. Lombardi                          
|                | Chief Accounting Officer and Controller   

---

EXHIBIT INDEX

No.               Exhibit Name

| |  |  |  | 3.1 |  | Articles of Incorporation of Rent-Way, Inc., as amended (incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended September
30, 1997, filed November 6, 1997.)
| |  |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | 3.2 |  | Bylaws of Rent-Way, Inc., as amended (incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K for the year ended September 30, 2000, filed
July 2, 2001.)
| |  |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | 10.1* |  | First
Omnibus Amendment to Credit Agreement and Security Agreement
| |  |  |  | ----- |  | ------------------------------------------------------------------

| |  |  |  | 31.1* |  | Certification
of Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act
                 of 2002.
| |  |  |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  |  | 31.2* |  | Certification
of Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act
                 of 2002.
| |  |  |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  |  | 32* |  | Certifications
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| |  |  |  | --- |  | -------------------------------------------------------------------------

*Filed herewith.