# UNITED STATESU.S.
SECURITIES AND EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

_________________

# FORM 10-K

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

FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 2004

|[ | ]
     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 of Incorporation)               
(I.R.S. Employer Identification Number)

ONE RENTWAY PLACE,
ERIE, PENNSYLVANIA 16505 (Address of principal executive offices)

(814) 455-5378
 (Registrants telephone number,including area code)

SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

|                           | 
|-------------------------- | 
|TITLE OF CLASS             | 
|COMMON STOCK, NO PAR VALUE | 

SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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 if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

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

The aggregate market value of common
stock held by non-affiliates of the registrant as of March 31, 2004, was $197,491,483.

The number of shares outstanding of
the registrants common stock as of December 6, 2004 was 26,243,676.

DOCUMENTS INCORPORATED
BY REFERENCE:

Portions of the registrants
definitive proxy statement for its 2004 Annual Meeting of Shareholders are incorporated
by reference into Part III of this report.

---

RENT-WAY, INC.

TABLE OF CONTENTS

|           |                                                                                                              |   
|---------- | ------------------------------------------------------------------------------------------------------------ | --
|PART I     | PAGE                                                                                                         |   
|           |                                                                                                              |   
|Item 1     | Business                                                                                                     | 1 
|Item 2     | Properties                                                                                                   | 11
|Item 3     | Legal Proceedings                                                                                            | 11
|Item 4     | Submission of Matters to a Vote of Security Holders                                                          | 11
|           |                                                                                                              |   
|PART II   
|           |                                                                                                              |   
|Item 5     | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 12
|          
|Item 6     | Selected Financial Data                                                                                      | 13
|Item 7     | Management's Discussion and Analysis of Financial Condition and Results of Operations                        | 14
|Item 7A    | Quantitative and Qualitative Disclosures About Market Risk                                                   | 27
|Item 8     | Financial Statements and Supplementary Data                                                                  | 29
|Item 9     | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         | 68
|Item 9A    | Controls and Procedures                                                                                      | 68
|Item 9B    | Other Information                                                                                           
|           |                                                                                                              |   
|PART III  
|           |                                                                                                              |   
|Item 10    | Directors and Executive Officers of the Registrant                                                           | 69
|Item 11    | Executive Compensation                                                                                       | 69
|Item 12    | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              
|           |                                                                                                              | 69
|Item 13    | Certain Relationships and Related Transactions                                                               | 69
|Item 14    | Principal Accountant Fees and Services                                                                       | 69
|           |                                                                                                              |   
|PART IV   
|           |                                                                                                              |   
|Item 15    | Exhibits and Financial Statement Schedules                                                                   | 70
|           |                                                                                                              |   
|SIGNATURES |                                                                                                              | 71

---

RENT-WAY, INC.

PART I

# ITEM I. BUSINESS

GENERAL

Rent-Way,
Inc. (the Company or Rent-Way) operates 754 rental-purchase stores
located in 33 states. The Company offers quality, brand name home entertainment equipment,
furniture, computers, major 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 dPi Teleconnect LLC
(DPI), its 83.5%-owned subsidiary. DPI is a non-facilities based provider of
local phone service.

The
Companys principal executive offices are located at One RentWay Place, Erie,
Pennsylvania 16505; and its telephone number is (814) 455-5378. The Companys
Internet address is http://www.rentway.com. Rent-Way makes available at no cost
through the Investor Relations section of its internet website its annual report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after this material is filed with
or furnished to the SEC. The Companys corporate governance guidelines, its board
committee charters, and its codes of conduct are also available through the investor
relations section of its Internet website where they may be accessed without charge. The
Company will mail any of the foregoing documents without charge to any shareholder on
request. Requests for mailings should be made to the Companys Investor Relations
Coordinator at the telephone number above.

BUSINESS HISTORY

William
Morgenstern, the Chief Executive Officer and Chairman of the Board, co-founded the Company
in 1981 to operate a rental-purchase store in Erie, Pennsylvania. By 1993, the Company was
operating 19 stores in three states and had completed its initial public offering.
Concurrent with the initial public offering, the Company began implementing a strategy of
aggressive store expansion driven primarily by acquisitions and facilitated by the
consolidation trend in the rent-to-own market. From 1993 to 1998, the Company acquired 420
stores in various transactions. In fiscal 1999, the Company became the second largest
company in the rental-purchase industry based on number of stores as a result of a merger
with Home Choice Holdings, Inc., in which 458 stores were acquired, and the acquisition of
250 stores from Rentavision, Inc. and 21 stores from Americas Rent-to-Own Center,
Inc. In November 2000, the Company operated 1,147 stores, which was the largest number of
stores the Company has operated in its history. The Company acquired a 70% interest in DPI
in 2000 for $7.5 million and acquired an additional 13.5% in 2004 for $0.4 million. In
October 2000, the Company discovered accounting improprieties that had the effect of
overstating operating income.

Following
the discovery of the accounting improprieties, management concentrated on addressing the
business performance problems that had been masked by the improprieties, managing the
litigation and governmental investigations arising from the improprieties, and refinancing
its outstanding bank debt. In 2001, management developed and implemented a plan to
increase gross margins, reduce debt and close or combine under-performing stores.

In
November 2002, management identified 295 under-performing stores that would have required
a significant amount of capital investment to meet company performance targets and in
which the Company was not willing to invest at that time. On December 17, 2002, the
Company entered into a definitive purchase agreement to sell rental merchandise and
related contracts of these 295 stores to Rent-A-Center, Inc. Rent-A-Center purchased
certain fixed assets and assumed related store leases of 125 of these stores. The
transaction closed on February 8, 2003, for approximately $100.4 million. Of the sale
price, $14.7 million was paid for transaction, store closing and similar expenses.
Rent-A-Center held back $10.0 million to secure the indemnification obligations in the
sale. Rent-A-Center released $5.0 million of the holdback on May 8, 2003, and the
remaining $5.0 million on August 8, 2004. The net sale proceeds were used to reduce
outstanding bank debt. During the second quarter of fiscal 2003, management formulated a
plan to restructure the corporate office through workforce reductions to rationalize
corporate costs subsequent to the sale to Rent-A-Center. These restructuring activities
were completed during the fiscal quarter ended March 31, 2003.

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% redeemable convertible preferred stock through a private placement.
The net proceeds of the offerings, together with borrowing under the new revolving credit
facility and the net proceeds of the sale of the redeemable 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 Rating Services from
CCC to B+'.

THE RENTAL-PURCHASE
INDUSTRY

Begun
in the mid- to late-1960s, the rental-purchase business offers an alternative to
traditional retail installment sales and generally serves customers that have annual
household incomes ranging from $20,000 to $40,000. The Association of Progressive Rental
Organizations (APRO), the industrys trade association, estimated that at
the end of 2003 the industry comprised approximately 8,300 stores providing 7.7 million
products to 2.7 million households. Based on estimates from APRO, the rental-purchase
industry generated gross revenues of $6.2 billion in 2003 from these transactions. The
rental-purchase industry has grown consistently over the past several years despite
significant fluctuations in the U.S. economy. From 1996 to 2003, revenues generated by the
industry have increased with no year in the period reflecting growth less than 5.1%. Over
the past five years, the industry has experienced significant consolidation.

STRATEGY

In
Fiscal year 2004 the company increased revenues, improved operating margins and
profitability and the management team renewed its efforts to grow by opening new stores
and leveraging its core competencies.

The priorities for the Company in
2005 will be:

| | Continue
to increase revenues, profits and cash flow in core stores. The Company continues to
believe it has the ability to increase revenue and overall profitability of its existing
stores. In 2004 the Company made significant investments to maximize gross margins in
2005 including focused training to improve gross margin, the purchase of rental
merchandise handling equipment and the implementation of better refurbishing programs at
its stores.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company regularly monitors the weekly rental rates of the products it rents. From time to
time the Company adjusts those rates to bring them in line with competitive market rates.
The Company believes nominal increases in prices on certain items will enhance profit and
will not negatively impact its efforts to increase customer and potential rental revenue
growth.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company has developed more formal staffing models for existing stores based
on rental volume and customer count that it believes will lead to more efficient use of
payroll dollars.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Open
new stores to leverage existing infrastructure. The Company has launched an
aggressive new store opening program and anticipates the opening of 40-50 stores in
fiscal 2005. The Company expects to selectively open new stores in existing markets to
leverage its existing management team, corporate infrastructure and advertising budgets.
More stores will provide the Companys customers greater access to its products. The
new store opening program is managed by Todd Homberger, the Vice President of New Store
Development. The program includes the enforcement of pre-set criteria and accountability
in the areas of site selection, profit and loss, marketing and human resource management.
From the moment a new store is open, the store and regional managers, as well as senior
management, have at risk compensation that is dependent on the success of the stores
opened.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes the recent acquisition by its largest competitor of two large chains of
rental purchase stores, in markets contiguous to its own, has created an opportunity for
immediate expansion. The Company has proactively identified multiple sites, hired several
store and regional managers and is moving quickly to seize the opportunities it believes
have been created.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Enhance
training and development programs. The Company recently hired an experienced director
of training to focus on enhancing the Companys online and store-front training and
development programs to support the Companys growth initiatives. In addition, the
director of training will work to enhance the overall training and organizational
development programs including succession planning.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Enhance
and Expand Retail-Focused Marketing Efforts.The Companys 2005
advertising strategy is designed to attract prospective customers to its stores,
encourage past customers to return, and motivate its store employees. In fiscal 2003, the
Company launched a marketing program that emphasized its Welcome, Wanted and
Importantbusiness philosophy. The Welcome Wanted and Important philosophy
seeks to improve the Companys performance by emphasizing the creation of personal
relationships with customers. The Companys television and print advertising
featured Rent-Way employees and highlighted the brand identity it wished to communicate
by incorporating the popular song, We Are Family. The campaign was continued
throughout 2004 in an effort to build brand awareness and a distinctive brand
personality. The Company intends to shift to a more aggressive retail-oriented campaign
in 2005 with a larger percentage of the marketing budget being devoted to advertising
exposure and a more aggressive retail message. The Company also plans to significantly
increase the frequency of direct mail advertising to include 52 weeks of exposure without
sacrificing television exposure. The We Are Family music will continue to
help reinforce a distinctive brand personality consistent with the companys Welcome,
Wanted and Important business philosophy.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that its branding and marketing strategies and its customer-focused
philosophy have already produced positive results.
| | -------------------------------------------------------------------------------------------------------------------------------------------

OPERATIONS

Store
Locations. The Company uses a variety of information sources to identify store
locations that are readily accessible to low and middle income customers. An ideal
location for store is in a high traffic and high visibility area, such as neighborhood
shopping centers that include a supermarket. The Company believes this type of location is
convenient for its customers and enables customers to visit the stores on a more frequent
basis.

The
Companys stores average approximately 4,000 square feet in floor space and are
generally uniform in interior appearance and design and display of available merchandise.
The stores have separate storage areas, but generally do not use warehouse facilities.

As of September 30, 2004, the Company
operated 754 stores in 33 states as follows:

|LOCATION       | NUMBER OF STORES | LOCATION      | NUMBER OF STORES | LOCATION      | NUMBER OF STORES
|-------------- | ---------------- | ------------- | ---------------- | ------------- | ----------------
|Florida        | 67               | Indiana       | 22               | New Hampshire | 9               
|New York       | 67               | Arkansas      | 20               | Kansas        | 8               
|Texas          | 61               | Georgia       | 19               | Missouri      | 8               
|Pennsylvania   | 53               | Alabama       | 18               | Maine         | 7               
|South Carolina | 53               | Michigan      | 18               | Oklahoma      | 7               
|Ohio           | 51               | Illinois      | 17               | West Virginia | 7               
|North Carolina | 45               | Arizona       | 13               | Vermont       | 6               
|Kentucky       | 31               | Massachusetts | 12               | New Mexico    | 6               
|Virginia       | 30               | Nebraska      | 12               | Iowa          | 5               
|Louisiana      | 29               | Mississippi   | 11               | Delaware      | 4               
|Tennessee      | 26               | Maryland      | 9                | Connecticut   | 3               

Product
Selection. The Company offers home entertainment equipment, furniture, personal
computers, major appliances and jewelry. Home entertainment equipment includes television
sets, DVD players, home theater systems, camcorders and stereos. Major appliances include
refrigerators, ranges, washers and dryers. The Companys product line currently
includes the Sharp, RCA, JVC, Phillips and Panasonic brands of home entertainment
equipment; the Ashley, Bassett, Catnapper, Progressive and England Corsair brands of
furniture; the Dell, IBM and Gateway brand of personal computers; and, the Amana, Crosley,
Maytag, Sears Kenmore and General Electric brands of major appliances. The Company closely
monitors inventory levels and customer rental requests and adjusts its product mix
accordingly. Prepaid local phone service is also provided through DPI.

For
the fiscal year ended September 30, 2004, payments under rental-purchase contracts for
home entertainment products, furniture, personal computers, major appliances and jewelry
accounted for approximately 37.2%, 27.2%, 16.7%, 16.0%, and 2.9% of the Companys
rental revenues, respectively. Customers may rent either new merchandise or previously
rented merchandise. As of September 30, 2004, weekly rentals currently range from $7.99 to
$49.99 for home entertainment equipment, from $6.99 to $41.99 for furniture, from $14.99
to $44.99 for personal computers, from $9.99 to $31.99 for major appliances and from $9.99
to $25.99 for jewelry. Previously rented merchandise is typically offered at the same
weekly or monthly rental rate as is offered for new merchandise but with an opportunity to
obtain ownership of the merchandise after fewer rental payments.

Rental-Purchase Agreements. Merchandise is provided to customers under written
rental-purchase agreements that set forth the terms and conditions of the transaction. The
Company uses standard form rental-purchase agreements, which are reviewed by legal counsel
and customized to meet the legal requirements of the various states in which they are to
be used. Generally, the rental-purchase agreement is signed at the store, but may be
signed at the customers residence if the customer orders the product by telephone
and requests home delivery. Customers rent merchandise on a week-to-week and, to a lesser
extent, on a month-to-month basis with rent payable in advance. At the end of the initial
and each subsequent rental period, the customer retains the merchandise for an additional
week or month by paying the required rent or may terminate the agreement without further
obligation. If the customer decides to terminate the agreement, the merchandise is
returned to the store and is then available for rent to another customer. The Company
retains title to the merchandise during the term of the rental-purchase agreement. If a
customer rents merchandise for a sufficient period of time, usually 12 to 24 months,
ownership is transferred to the customer without further payments being required, except
in North Carolina where a final purchase option payment is required. Customers typically
make rental payments in cash or by check or money order. The Company does not extend
credit. See   Government Regulation.

Product
Turnover. Generally, a minimum rental term of between 12 and 24 months is required to
obtain ownership of new merchandise. An item of rental merchandise typically remains in
the Companys store inventory for about 24 months. During this period, the Company
ordinarily rents the item to three to five different customers. If a customer returns the
product, and if the product continues to meet certain quality standards, the Company will
continue to rent the item. If the item no longer satisfies quality standards, the item is
sold or discarded. Based upon merchandise returns for the year ended September 30, 2004,
the Company believes that the average period of time during which customers rent
merchandise is 16 to 18 weeks. However, turnover varies significantly based on the type of
merchandise being rented. Certain consumer electronic products, such as camcorders,
generally being rented for shorter periods, while computers, appliances and furniture are
generally rented for longer periods. Most rental-purchase transactions require delivery
and pickup of the product, weekly or monthly payment processing and, in some cases, repair
and refurbishment of the product. Rental-purchase agreements require larger aggregate
payments than are generally charged under installment purchase or credit plans for similar
merchandise, primarily to cover the operating expenses generated by greater product
turnover.

Customer
Service. The Company offers same-day delivery, installation and pick-up of its
merchandise. The Company also provides any required service or repair without charge,
except for damage in excess of normal wear and tear. If the product cannot be repaired at
the customers residence, the Company provides a temporary replacement while the
product is being repaired. The customer is fully liable for damage, loss or destruction of
the merchandise, unless the customer purchases an optional loss/damage waiver or chooses
to participate in the Preferred Customer Club program. Most of the products offered by the
Company are covered by a manufacturers warranty for varying periods, which, subject
to the terms of the warranty, is transferred to the customer in the event that the
customer obtains ownership. Repair services are provided through in-house service
technicians or independent contractors.. The Company offers Preferred Customer Club, a
fee-based membership program that provides special loss and damage protection in the event
of involuntary job loss, accidental death and dismemberment insurance, as well as other
discounts on merchandise and services.

Collections. Management
believes that effective collection procedures are important to the           Companys
success. The Companys collection procedures increase the           revenue per
product, decrease the likelihood of default and reduce charge-offs.           Senior
management and store managers use the Companys computerized           management
information system to monitor cash collections on a daily basis. In           the event a
customer fails to make a rental payment when due, store employees           will attempt
to contact the customer to obtain payment and reinstate the           contract or will
terminate the account and arrange to regain possession of the           merchandise.
However, store managers are given latitude to determine the           appropriate
collection action to be pursued based on individual circumstances.           Depending on
state regulatory requirements, the Company charges for the           reinstatement of
terminated accounts or collects a delinquent account fee. Such           fees are
standard in the industry and may be subject to state law limitations.           See   Government
Regulation. Despite the fact that the Company           is not subject to the
federal Fair Debt Collection Practices Act, it is the           Companys policy in
its collection procedures to generally abide by the           primary restrictions of
this law, which contains specific restrictions regarding           communication with
consumers designed to prohibit abusive debt collection           practices. Charge-offs
due to lost or stolen merchandise and discards were           approximately 2.7%, 2.7%
and 3.3 % of the Companys household rental           segment total revenues for the
years ended September 30, 2004, 2003, and 2002,           respectively. The charge-off
rate for chains with over 40 stores reporting to           APRO in 2003 was 2.9%.

Management. The
Companys stores are organized geographically with several levels of
          management. At the individual store level, each store manager is responsible
for           customer relations, deliveries, pick-ups, inventory management, staffing
and           local marketing efforts. A Company store normally employs one store
manager, one           assistant manager, two account managers, and one full-time
delivery or           installation technician. The staffing of a store depends on the
number of           rental-purchase contracts serviced by the store.

Each
store manager reports to one regional manager, who typically oversees seven to ten stores.
Regional managers are primarily responsible for monitoring individual store performance
and inventory levels within their respective regions. The Companys regional managers
report to divisional vice presidents, who monitor the operations of their divisions and,
through their regional managers, individual store performance. The divisional vice
presidents report to one of two senior vice presidents, who monitor the overall operations
of their assigned geographic area. The senior vice presidents report to the chief
operating officer, who is responsible for overall Company-wide store operations. Senior
management at the Companys headquarters directs and coordinates purchasing,
financial planning and controls, management information systems, employee training,
personnel matters, advertising, and acquisitions. Personnel at the corporate headquarters
also evaluate the performance of each store.

Management
Information System. The Company uses an integrated computerized management
information and control system to track units of merchandise, rental-purchase
agreements and customers. The system also includes management software that provides
extensive report generating capabilities specifically tailored to the Companys
operating procedures. Each store has the ability to track individual components of
revenue, idle items, items on rent, product on order, delinquent accounts and other
account and customer information. Management electronically gathers each days
activity report and has access to operating and financial information about any store
location or region in which the Company operates. Management reports are generated on a
daily, weekly, month-to-date and year-to-date basis. Utilizing the management
information system, senior management, regional managers and store managers can
closely monitor the productivity of stores under their supervision.

Purchasing
and Distribution. The Companys general product mix is determined by senior
management based on an analysis of customer rental patterns and introduction of new
products on a test basis. Individual store managers are responsible for determining
the particular product selection for their store from a list of products approved
by senior management. Store managers order products on-line using the Companys
Intranet. These electronic purchase orders are reviewed, approved and
executed through regional managers, divisional vice presidents and the
Companys purchasing department to ensure that inventory levels and mix at the
store level are appropriate. Merchandise is generally shipped by vendors directly to
each store and held for rental at the individual locations. The Company purchases its
merchandise directly from manufacturers or distributors. The Company believes that its
size enables it to purchase large volumes of inventory from the suppliers at favorable
terms. The Company generally does not enter into written contracts with its
suppliers. Although the Company currently expects to continue its existing
relationships, management believes there are numerous sources of products available
to the Company and does not believe that the success of the Company is dependent on
any one or more of its current suppliers.

Inventory
Management. Because inventory management is critical to the business, the Company has
developed numerous controls and management tools to optimize inventory use. The Company
uses an online inventory management system to monitor the inventory down to the store
level on a daily basis. For each store, the Company has developed optimum, or
par, levels of inventory in each category based on that stores showroom
size and volume of rental-purchase agreements. These par levels and actual levels are
updated through the internal software program and are automatically refreshed as inventory
changes in the store.

Operations
management, from regional managers to executive management, can review the inventory at
each of the stores on a continuous basis to ensure both the proper level and mix of
inventory. The Company considers it part of a regional managers daily responsibility
to ensure that his or her stores are properly merchandised. Rental products are actively
transferred from one store or region to another whenever store stocks are out of balance.
The Company has implemented additional controls that prohibit a store from ordering
additional inventory if existing par inventory levels are exceeded.

Operations
and corporate management meet weekly to discuss merchandise inventory levels, merchandise
utilization rates and merchandise needed for promotions and seasonality. In addition, the
Company performs a quarterly obsolescence review of the rental and service history of the
key product categories, as well as idle and age parameters of the merchandise. If a
product category has been identified as not meeting the expectations for gross margins or
if a product has had higher than average service problems throughout its life cycle, the
stores are notified to accelerate the product through the system by either selling it or
renting it at a discount. Whatever merchandise in that category remains unsold or not on
rent at the end of the quarter is written off. The Company believes that the inventory
management policies ensure that the highest quality of inventory is available to the
customer.

Marketing
and Advertising. The Company promotes its products and services through direct mail
and direct-response television advertising on national cable networks and syndicated
programs. The Company also solicits via local telemarketing. The advertisements
emphasize feature sale pricing, 100% satisfaction guarantee, 1-800 RentWay toll-free
satisfaction line, 120 days same as cash payment terms, product and brand name selection,
prompt delivery and repair, and the absence of any down payment, credit investigation
or long-term obligation. Advertising expense as a percentage of revenue for the years
ended September 30, 2004, 2003 and 2002 were 4.0%, 4.5% and 5.5%, respectively.
In addition to the national advertising efforts, the Company manages an automated
on-line local store-marketing plan to allow the stores to leverage
market-specific knowledge. The local store marketing effort plays an active role in
the communities in which it operates and targets the customer base through direct mail
promotions. As the Company obtains new stores in its existing markets,
the advertising expense of each store in the market is reduced by listing
all stores in the same market-wide advertisement.

Competition. The
Company is one of the largest operators of stores in the rental-purchase
          industry; however, the rental-purchase industry is highly competitive. The
          Company competes with other rental-purchase businesses and, to a lesser
          extent, with rental stores that do not offer their customers a purchase
          option. Competition is based primarily on customer service, although it is
          also based on rental rates and terms, product selection and product
          availability. With respect to consumers who are able to purchase a
          product for cash or on credit, the Company also competes with department
          stores, discount stores and retail outlets that offer an installment sales
          program or offer comparable products and prices.

Personnel. As
of September 30, 2004, the Company had 3,929 employees, 159 of whom are corporate employees located at the corporate headquarters in Erie,
          Pennsylvania. None of the Companys employees are represented by a
          labor union. The Company believes that its relationship with employees is good.
          This belief is supported by annual internal employee surveys.

Government
Regulation. Forty-seven states have enacted legislation for the express purpose
of regulating rental-purchase transactions. All of these state laws, with the
exception of Montanas, were enacted five or more years ago and have had no material
amendments. These laws generally require certain contractual and advertising
disclosures concerning the nature of the rental-purchase transaction and also provide
varying levels of substantive consumer protection, such as requiring a grace period
for late payments, limiting certain fees or the total amount of rental payments that may
be charged, and providing contract reinstatement rights in the event a rental-purchase
agreement is terminated for non-payment. No federal legislation has been
enacted regulating the rental-purchase transaction, although industry supported
legislation has been introduced in Congress from time to time.

All
of the states in which the Company operates, except North Carolina, impose some type
of statutory disclosure requirements either in rental-purchase agreements or in
advertising or both. Rental-purchase legislation or other statutes in the majority of
these states distinguish rental-purchase transactions from credit sales. Court
decisions in the remaining states in which the Company operates have characterized
rental-purchase transactions as leases rather than credit sales. Court decisions in
Minnesota, New Jersey and Wisconsin, states where the Company has no operations, have
characterized rental-purchase transactions as credit sales subject to consumer lending
requirements and accordingly have created a regulatory environment in those states that is
prohibitive to traditional rental-purchase transactions.

The
Company instructs operations personnel in procedures required by applicable laws
through policy manuals and on-the-job training. Management believes that the
Companys operations and point-of-sale systems are in compliance with the
requirements of applicable laws in all material respects.

Management
believes that the potential for new or amendatory state or federal legislation
re-characterizing rental-purchase transactions as credit sales is remote.
The Company, in conjunction with competitors, closely monitors legislative and
judicial activity and is working to legislatively resolve issues created by
unfavorable court decisions in Minnesota, New Jersey and Wisconsin.

Service
Marks. The Company has registered the Rent-Way and We Are
Family service marks and related designs under the Lanham Act. The Company believes
that these marks have acquired significant market recognition and goodwill in the
communities in which its stores are located.

Business
of dPi Teleconnect LLC. DPI provides local prepaid telephone service on a
month-to-month basis to subscribers who have been disconnected by the local telephone
company. Generally, this is because they have previously failed to pay a local or
long distance phone bill or, due to poor credit, are asked to remit a deposit
to their local telephone company, which they are unable to do. Because DPI does
not require credit checks or deposits, it is an attractive alternative to
these customers.

DPI
was formed in late 1998. The Telecommunications Act of 1996, which encouraged the
establishment of competitive local exchange carriers, or CLECs, made this business
possible. DPI currently operates in a niche segment of the CLEC industry. CLECs
compete with the regional Bell operating companies or incumbent local telephone service
providers, or ILECs. The market for DPIs prepaid local telephone services is
principally consumers whose credit rating or whose prior payment history with the
ILEC is poor. Although not identical, the Company believes DPIs potential
customer base overlaps significantly with the Companys customer base.

In
order to conduct its business, DPI is required to obtain governmental authorization
in each state in which it provides local telephone service. At the present time, DPI
has obtained or has pending such authorization in 41 states. DPIs licenses must
be renewed on a periodic basis. In addition to governmental approval, DPI must enter
into a resale contract with an ILEC to purchase service for resale. Under applicable
federal law, all ILECs are required to negotiate these contracts with CLECs. At the
present time, DPI has resale agreements in place with all existing major ILECs and is
moving forward on agreements with several smaller regional ILECs. DPI markets and
sells its services through a network of agents. As of September 30, 2004, the Company
had 635 stores offering the service and was DPIs largest agent based on
revenues. Customers generally pay the Company and other agents of DPI between $30.00
and $65.00 per month for prepaid local telephone services, depending on area retail
pricing and additional feature services. Under the contract with DPI, the Company is
entitled to retain 10% of the customers payments as its agents fee, which
is consistent with the fees retained by DPIs other agents. As of September 30,
2004, DPI had approximately 27,000 customers.

The
Company owns 83.5% of DPI. The holder of the remaining 16.5% interest in DPI, DPI
Holdings, Inc., has the right in January 2005 to require DPI to purchase its 16.5%
interest at a price equal to the fair market value of the interest. Under applicable GAAP
rules, the Company currently records 100% of DPI losses and will record 100% of the income
until losses are recovered, whereupon based on an agreement with DPI Holdings the minority
interest will be recognized and income/loss will be recorded based on percentage of
ownership of DPI.

CERTAIN FACTORS AFFECTING
FORWARD LOOKING STATEMENTS

Certain
written and oral statements made by the Company may constitute forward-looking
statements as defined under the Private Securities Litigation Reform Act of 1995,
including statements made in this report and in other filings with the Securities and
Exchange Commission. Generally, the words believe, expect,
intend, estimate, anticipate, project,
will and similar expressions identify forward-looking statements, which
generally are not historical in nature. All statements that address operating performance,
events or developments that the Company expects or anticipates will occur in the
futureincluding statements relating to future financial results and statements
expressing general optimism about future operating resultsare forward-looking
statements. Forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from the Companys historical
experience and the Companys present expectations or projections. Caution should be
taken not to place undue reliance on any such forward-looking statements since such
statements speak only as of the date made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

The
following are some of the factors that could cause the Companys actual results to
differ materially from the expected results described in or underlying the Companys
forward-looking statements.

The
Companys significant indebtedness and dividend payment obligations limit cash flow
availability for operations. The Company has incurred substantial debt to finance
growth and has pledged substantially all assets as collateral for debt. The Company may
need to incur additional indebtedness to operate the business successfully. The debt under
the Companys bank credit facility is subject to variable rates of interest. This
exposes the Company to the risk that interest rates will rise and the amount of interest
the Company pays to the bank lenders will increase. The Company also has dividend payment
obligations on its $20 million of outstanding Series A preferred stock. The Series A
preferred stock bears dividends at 8% per year of stated value, payable at the
Companys option either in cash or, under specified circumstances, shares of common
stock.

The
degree to which the Company is leveraged could have other important consequences to
holders of the common stock, including the following:

|o |  | The
Company must dedicate a substantial portion of its cash flow from operations to the
payment of principal and interest on debt and dividends on the Series A preferred stock,
and, under the indenture for the Companys $205 million of senior notes, must make
an offer to purchase senior notes on an annual basis from excess cash flow, reducing the
funds available for operations;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | The
Company's ability to obtain additional financing is limited;
|- |  | ----------------------------------------------------------------

|o |  | The
Company's flexibility in planning for, or reacting to, changes in the markets in which
the Company          competes is limited;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

|o |  | The
Company is at a competitive disadvantage relative to competitors with less indebtedness;
and
|- |  | ------------------------------------------------------------------------------------------------

|o |  | The
Company is rendered more vulnerable to general adverse economic and industry conditions.
|- |  | --------------------------------------------------------------------------------------------

The Companys revolving
credit facility imposes restrictions that limit operating and financial flexibility.

Covenants
in the Companys revolving credit facility will restrict the Companys ability
to:

|o |  | incur
liens and debt,
|- |  | ---------------------

|o |  | pay
dividends;
|- |  | --------------

|o |  | make
redemptions and repurchases of capital stock;
|- |  | --------------------------------------------------

|o |  | make
loans, investments and capital expenditures;
|- |  | -------------------------------------------------

|o |  | prepay,
redeem or repurchase debt;
|- |  | ----------------------------------

|o |  | engage
in mergers, consolidations, asset dispositions, sale-leaseback transactions and affiliate
transactions; and
|- |  | ------------------------------------------------------------------------------------------------------------------

|o |  | change
the business.
|- |  | --------------------

These
covenants will also require the Company to maintain compliance with financial ratios,
each as defined in the credit facility, such as a minimum fixed charge coverage ratio, a
maximum leverage ratio, a minimum rental merchandise usage ratio, and minimum levels of
net worth and monthly EBITDA, among others. If the Company is unable to meet the terms of
these covenants or if the Company breaches any of these covenants, a default could result
under the credit facility. A default, if not waived by the Companys lenders, could
impair the Companys ability to borrow additional funds under the credit facility
and could result in outstanding amounts there under becoming immediately due and payable.
If acceleration occurs, the Company may not be able to repay its debt and the Company may
not be able to borrow sufficient additional funds to refinance the debt. If the Company
is unable to repay outstanding amounts under our revolving credit facility, the holders
of the debt could foreclose on the Companys assets securing this debt.

Restrictive
covenants in the indenture for the Companys senior notes may also limit operating
and financial flexibility.

The
terms of the indenture for the senior notes contain a number of operating and financial
covenants that will restrict the Companys ability to, among other things:

|o |  | incur additional
debt;
|- |  | ----------------------

|o |  | pay
dividends or make other restricted payments;
|- |  | ------------------------------------------------

|o |  | create
or permit certain liens;
|- |  | -------------------------------

|o |  | sell
assets;
|- |  | ------------

|o |  | create
or permit restrictions on the ability of restricted subsidiaries to pay dividends or make
other distributions to the Company or grant liens to secure debt under the indenture;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | enter
into transactions with affiliates;
|- |  | ----------------------------------------

|o |  | enter
into sale and leaseback transactions; and
|- |  | -----------------------------------------------

|o |  | consolidate
or merge with or into other companies or sell all or substantially all of the Companys
assets.
|- |  | -----------------------------------------------------------------------------------------------------------

The
Companys ability to comply with the covenants contained in the indenture may be
affected by events beyond its control, including economic, financial and industry
conditions. The Companys failure to comply with these covenants could result in an
event of default which, if not cured or waived, could require repayment of the notes
prior to their maturity, which would adversely affect the Companys financial
condition. In addition, an event of default under the indenture for the senior notes will
also constitute an event of default under the senior credit facility. Even if the Company
is able to comply with all applicable covenants, the restrictions on its ability to
manage the business could adversely affect business by, among other things, limiting the
Companys ability to take advantage of financings, mergers, acquisitions and other
corporate opportunities that the Company believes would be beneficial to it.

The
Company may still be able to incur substantially more debt, which could increase the
risks described above. The terms of the Companys revolving credit facility and
the indenture governing the senior notes do not fully prohibit the Company or its
subsidiaries from incurring additional debt. As a result, The Company may be able to
incur substantial additional debt in the future. If the Company does so, the risks
described above could intensify.

The Company depends, to a certain extent, on its subsidiaries for cash needed to service
obligations, and these subsidiaries may not be able to distribute cash to the Company.
The Company needs the cash generated by its subsidiaries operations to service
obligations. The Companys subsidiaries are not obligated to make funds available.
Subsidiaries ability to make payments to the Company will depend upon their
operating results and will also be subject to applicable laws and contractual
restrictions. Some subsidiaries may become subject to loan agreements and indentures that
restrict sales of assets and prohibit or significantly restrict the payment of dividends
or the making of distributions, loans or advances to shareholders and partners.
Furthermore, the indenture governing the notes permits subsidiaries to incur debt with
similar prohibitions and restrictions in the future.

If
the Company does not have sufficient capital, the Company may not be able to operate the
business successfully. The Companys capital needs are significant. The
Company needs capital:

|o |  | to
purchase new rental merchandise for stores;
|- |  | ----------------------------------------------

|o |  | to
service our debt; and
|- |  | ------------------------

|o |  | to
open or acquire new stores.
|- |  | ------------------------------

The
Company may have to issue debt or equity securities that are senior to its common stock.
The Company may have to issue additional shares of common stock that may dilute the
ownership interest of existing shareholders. The Company may not be able to raise
additional capital on terms acceptable to the Company. In April 2002, the Company raised
capital by selling common stock and warrants to acquire common stock in a private
placement at a price that was below the then prevailing market price of the Companys
common stock. The terms of the Series A preferred stock prohibit the Company from issuing
any additional shares of preferred stock that would be senior to or pari passu with the
Series A preferred stock. If the Company is unable to raise additional capital, it may
not be able to purchase new rental merchandise for stores, service or repay outstanding
debt or open or acquire new stores.

Since
a substantial portion of the Companys assets consists of intangible assets, the
value of some of these intangible assets may not be realized.A substantial portion
of the Companys assets consist of intangible assets, including goodwill and
covenants not to compete relating to acquired stores.The value of the Companys
intangible assets may not be realized on sale, liquidation or otherwise. The Company will
also be required to reduce the carrying value of intangible assets if their value becomes
impaired. This type of reduction could reduce earnings significantly.

If the Company is unable to offer new products or services or to continue strategic
relationships with suppliers, the Company may be unable to attract new customers and to
maintain existing customers. New product offerings help the Company attract new
customers and satisfy the needs and demands of existing customers. The Companys new
product offerings may be unsuccessful for several reasons, including:

|o |  | The
Company may have overestimated customers demand for these products;
|- |  | ------------------------------------------------------------------------

|o |  | The
Company may have mispriced these products given limited experience with them;
|- |  | ---------------------------------------------------------------------------------

|o |  | The
Company may have underestimated the costs required to support new product offerings;
|- |  | ----------------------------------------------------------------------------------------

|o |  | The
Company may have underestimated the difficulty in training store personnel to sell and
service these  products;
|- |  | -------------------------------------------------------------------------------------------------------------------

|o |  | The
Company may incur disruptions in relationships with suppliers of these new products;
|- |  | ----------------------------------------------------------------------------------------

|o |  | The
Company may experience a decrease in demand due to technological obsolescence of some of
new products; and
|- |  | --------------------------------------------------------------------------------------------------------------

|o |  | The
Company may face competition from current rental-purchase competitors and other retailers
who offer similar products to their customers.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------

If the Company is unable to open new stores and operate them profitably, sales growth and
profits may be reduced. An important part of the Companys growth strategy is to
increase the number of stores the Company operates and to operate those stores profitably.
In fiscal 2005 and 2006, the Company expects to open between 40 and 50 new stores each
year. The Companys failure to execute this growth strategy could reduce future sales
growth and profitability. New stores generally operate at a loss for approximately eight
months after opening. There can be no assurances that future new stores will achieve
profitability levels comparable to those of existing stores within the expected time frame
or become profitable at all.

A
number of other factors could also affect the Companys ability to open new
profitable stores consistent with its strategy. These factors include:

|o |  | continued
customer demand for the Companys products at levels that can support acceptable
profit margins;
|- |  | ----------------------------------------------------------------------------------------------------------

|o |  | the
hiring, training and retaining of skilled personnel;
|- |  | --------------------------------------------------------

|o |  | the
availability of adequate management and financial resources;
|- |  | ----------------------------------------------------------------

|o |  | the
ability and willingness of suppliers to supply merchandise on a timely basis at
competitive prices
|- |  | ------------------------------------------------------------------------------------------------------

|o |  | the
identification and acquisition of suitable sites and the negotiation of acceptable leases
for such sites; and
|- |  | -----------------------------------------------------------------------------------------------------------------

|o |  | non-compete
provisions of Company agreements to sell stores under which the Company agrees not to
open new stores within specified radius of the store sold.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Companys continued growth also depends on its ability to increase sales in existing
stores. The opening of additional stores in an existing market could result in lower
sales at existing stores in that market.

The Company needs to continue to improve operations in order to improve financial
condition, but operations will not improve if the Company cannot continue to effectively
implement its business strategy or if general economic conditions are unfavorable. To
improve operations, management developed and is implementing business strategy focused on
controlling operating expenses, providing higher margin products, engaging in marketing
efforts to differentiate the Company from its competitors, enhancing relationships with
customers and selectively opening new stores in new and existing markets. If the Company
is not successful in implementing its business strategy, or if the business strategy is
not effective, the Company may not be able to continue to improve operations. The
Companys operating success is also dependent on its ability to maintain appropriate
levels of inventory, achieve and maintain a product mix that satisfies changing customer
demands and preferences and purchase high quality merchandise at attractive prices. In
addition, any adverse change in general economic conditions may reduce consumer demand for
products and reduce sales. Failure to continue to improve operations or a decline in
general economic conditions would cause revenues and operating income to decline and
impair the Companys ability to service its debt.

The
Company is dependent on its management team, and the loss of their services may result in
poor business performance including lower revenues and operating income.The success
of the Companys business is materially dependent upon the continued services of its
management team. The loss of key personnel could result in poor performance including
lower revenues, lower operating income and loss of employee and supplier confidence.
Additionally, the Company cannot assure you that it will be able to attract or retain
other skilled personnel in the future. The Company does not maintain keyman life
insurance policies on any member of its management team.

If the Company fails to comply with extensive laws and governmental regulations relating
to the rental-purchase industry or other operations, it could suffer penalties or be
required to make significant changes to its operations. Forty-seven states have
enacted laws regulating or otherwise impacting rental-purchase transactions. All states in
which the Companys stores are located have enacted these types of laws. These laws
generally require specific written disclosures concerning the nature of the transaction.
They also may require a grace period for late payments and contract reinstatement rights
in the event the rental-purchase agreement is terminated for non-payment. The
rental-purchase laws of some states limit the total dollar amount of payments that may be
charged over the life of the rental-purchase agreement. States having these laws include
Michigan, New York, Ohio, Pennsylvania and West Virginia. Enactment of new or revised
rental purchase laws could require the Company to change the way in which it does business
which could increase its operating expenses and thus decrease its profitability.

In
addition, the Company offers prepaid local phone service through DPI. DPIs business
was made possible by the Telecommunications Act of 1996. In order to conduct this
business, DPI must obtain governmental authorization in each state in which it provides
local telephone service. Any state or federal regulation that limits the
Telecommunications Act of 1996 or any of the state laws regulating this business may
require DPI to change the way it does business or to discontinue providing this service
in some or all states.

The
Company faces intense competition in the rental-purchase industry, which could reduce its
market share in existing markets and affect its entry into new markets. The Company
competes with other rental-purchase businesses, and, to a lesser degree, with rental
stores that do not offer their customers a purchase option as well as with traditional
retail businesses that offer an installment sales program or offer comparable products and
prices. Competition with these businesses is based primarily on customer service, although
competition with other rental-purchase businesses is also based on prices, terms, product
selection and product availability. The Companys inability to compete effectively
with other businesses and other rental stores could cause customers to choose these other
businesses or rental stores for their rental-purchase needs. Our largest industry
competitor is Rent-A-Center, Inc. Rent-A-Center is national in scope and has significantly
greater financial resources and name recognition than the Company. As a result,
Rent-A-Center may be able to adapt more quickly to changes in customer requirements and
may also be able to devote greater resources to the promotion and rental of its products.

Furthermore,
new competitors may emerge. The cost of entering the rental-purchase business is
relatively low. Current and potential competitors may establish financial or strategic
relationships among themselves or with third parties. Accordingly, it is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share.

---

# ITEM 2. PROPERTIES

The
Company leases substantially all of its store facilities under operating leases that
generally have terms of three to five years and require the payment of real estate taxes,
utilities and maintenance. There are optional renewal privileges on most of the
leases for additional periods ranging from three to five years at rental rates
generally adjusted for increases in the cost of living. There is no assurance that
the Company can renew the leases that do not contain renewal options or that if it
can renew them, the terms will be favorable to the Company. Management believes that
suitable store space is generally available for lease and that the stores would be
able to relocate without significant difficulty should the Company be unable to renew any
particular lease. Management also expects that additional space will be
readily available at competitive rates for new store openings.

The
Company owns the corporate headquarters located in Erie, Pennsylvania, which
comprises 74,000 square feet. The Company also owns a portion of another office
building in Erie, Pennsylvania, which is used for record storage and comprises
approximately 8,200 square feet.

# ITEM 3. LEGAL PROCEEDINGS

The
Company is subject to litigation in the ordinary course of business. The Company believes
the ultimate outcome of any pending litigation would not have a material adverse effect on
its financial condition, results of operation or
..

# ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

None.

---

RENT-WAY, INC.

PART II

# ITEM 5.  MARKET FOR
REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

The
Companys common stock is traded on the New York Stock Exchange under the symbol
RWY. The following table sets forth, for the periods indicated, the high
and low sales prices per share of the common stock as reported on New York Stock
Exchange.

|               | YEAR ENDED
SEPTEMBER 30, 2004 | YEAR ENDED
SEPTEMBER 30, 2003
|-------------- | ----------------------------- | -----------------------------
|
|
|First Quarter  |                               |                              
|Second Quarter |                               |                              
|Third Quarter  |                               |                              
|Fourth Quarter |                               |                              

As
of September 30, 2004, there were 338 shareholders of record of
Rent-Ways common stock.

The
Company has not paid any cash dividends to common stock shareholders. The Companys
bank credit facility prohibits the payment of common stock dividends.
 Management intends to use earnings, if any, to repay bank debt and, to
the extent permitted by the Companys bank lenders, to develop and expand
the Companys business. The declaration of any common stock cash dividends
will be at the discretion of the Board of Directors and will depend upon earnings,
capital requirements and the financial position of the Company, general economic
conditions and other pertinent factors. The Company has no current plan for the
eventual payment of any common stock cash dividends.

The
Company maintains the 1992, 1995, 1999 and 2004 Stock Option Plans. The Company also has
options to acquire its common stock outstanding under stock option plans assumed in
connection with the Companys acquisition of Home Choice Holdings, Inc. in
December 1998. The Company also has individual option award agreements outside of
these plans with three employees covering an aggregate of 40,000 options to acquire
shares of common stock. These non-plan options are evidenced by written agreements
and have the following terms: expiration is five years from option grant date (June 13,
2002), vesting is one-half on grant date, one-half on first anniversary of grant
date; the options terminate immediately on termination of employment except in the
event of death, disability or involuntary termination, in which case they
are exercisable (to the extent exercisable at termination) for an additional
three months.

|Plan category                                  | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a) | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)
|---------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Rent Way, Inc. equity compensation plans       |                                                                                                 |                                                                                 |                                                                                                                                                
|approved by security holders                   |                                                                                                 |                                                                                 |                                                                                                                                                
|Home Choice Holdings, Inc. equity compensation |                                                                                                 |                                                                                
|plans approved by security holders             |                                                                                                 |                                                                                 |                                                                                                                                                
|Individual compensation arrangements           |                                                                                                 |                                                                                 |                                                                                                                                                
|                                              
|Total                                          |                                                                                                 |                                                                                 |                                                                                                                                                

---

# ITEM 6. SELECTED
FINANCIAL DATA

The
following selected financial data for the years ended September 30, 2000, 2001, 2002,
2003 and 2004 were derived from the audited financial statements of the Company for
those periods. The historical financial data are qualified in their entirety by, and
should be read in conjunction with, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements of the
Company and notes thereto included elsewhere in this report.

|                                                           | YEAR ENDED SEPTEMBER 30,
|---------------------------------------------------------- | ------------------------
|
|
|STATEMENT OF OPERATIONS DATA:                              |                         
|Total revenues                                             |                         
|Operating profit (loss)                                    |                         
|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 (1)             |                         
|Net income (loss)                                          |                         
|Preferred stock dividend and accretion of preferred stock  |                         
|Net income (loss) allocable to common shareholders         |                         
|Adjusted net income (loss) (2)                             |                         
|Basic earnings (loss) per common share:                    |                         
|Income (loss) before cumulative effect of change in        |                         
|accounting principle and discontinued operations           |                         
|Net income (loss)                                          |                         
|Net income (loss) allocable to common shareholders         |                         
|Adjusted net income (loss) (2)                             |                         
|Diluted earnings (loss) per common share:                  |                         
|Income (loss) before cumulative effect of change in        |                         
|accounting principle and discontinued operations           |                         
|Net income (loss)                                          |                         
|Net income (loss) allocable to common shareholders         |                         
|Adjusted net income (loss) (2)                             |                         
|Weighted average shares outstanding (in thousands):        |                         
|Basic                                                      |                         
|Diluted                                                    |                         
|BALANCE SHEET DATA:                                        |                         
|Rental merchandise, net                                    |                         
|Total assets                                               |                         
|Long-term obligations, including capital lease obligations |                         
|Convertible redeemable preferred stock                     |                         
|Shareholders' equity                                       |                         
|                                                           |                         

|(1) |  | On February 8, 2003, the company sold 295 stores. As a result of such sale, the
               Company reclassified the consolidated financial statements to reflect the sale
               and to treat the operating results of such stores as discontinued operations as
               required by SFAS 144.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The adjusted net income (loss) reflects previously reported net loss adjusted to
               exclude goodwill amortization as if Statement of Financial Accounting Standards
               No. 142, Goodwill and Other Intangible Assets (SFAS No.
               142) had been adopted in fiscal years 2000 and 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# ITEM 7.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements
discussion and analysis (MD&A) is provided as a supplement to, and should be read in
conjunction with, the financial statements and accompanying notes to the consolidated
financial statements of Rent-Way. The purpose of this discussion is to provide the reader
with information that will assist in understanding the financial statements, the changes
in certain key items in those financial statements from year to year, and the primary
factors that accounted for those changes, as well as how certain accounting principles
affect the financial statements.

OVERVIEW

At
September 30, 2004, Rent-Way operated 754 rental-purchase stores located in 33 states. The
Company offers quality brand name home entertainment equipment, furniture, computers,
major 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 DPI. DPI is a
non-facilities based provider of local phone service.

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,
liability damage waiver fees, Preferred Customer Club fees and revenues from the sale of
merchandise.

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. 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
major components of the Companys cost structure are the cost of rental merchandise
and personnel and, to a lesser extent, occupancy, sales and marketing expense and general
and administrative costs. Costs associated with rental 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 advertising costs, business development activities, and the development of new service
offerings. Other operating expenses include general and administrative costs, which
primarily include corporate overhead expenses, costs associated with the 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. Separate business unit information is presented in Note 21 of the
notes to the consolidated financial statements. 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.

Rent-Way
operates in the highly competitive rental-purchase industry in the United States. The
Company faces strong sales competition from other rental-purchase businesses, department
stores, discount stores and retail outlets that offer an installment sales program or
comparable products and prices. Additionally, Rent-Way competes with a number of companies
for prime retail site locations, as well as for attracting and retaining quality
employees. Rent-Way, along with other rental-purchase and retail companies, is influenced
by a number of factors including, but not limited to: cost of merchandise, consumer debt
levels, economic conditions, customer preferences, employment, inflation, fuel prices and
weather patterns.

Through
sales, closures and combinations, the number of stores operated by the Company has
decreased from 1,087 as of September 30, 2001, to 754 as of September 30, 2004. The
following table shows the number of stores opened, acquired, sold, closed and/or
combined during this three-year period.

|                            | YEARS ENDED SEPTEMBER 30,
|--------------------------- | -------------------------
|
|Open at Beginning of Period |                          
|Opened                      |                          
|Locations Sold              |                          
|Closed or Combined          |                          
|                            |                          
|Open at End of Period       |                          
|                            |                          

FINANCIAL STRATEGIES

FISCAL 2005

Having
demonstrated the ability to drive top line performance, improve operating margins and
return the Company to profitability, the management team has renewed its efforts to grow
by opening new stores and leveraging its core competencies. The Company will focus
financial strategies in 2005 on the following items:

|o |  | Continue
to increase revenues, profits and cash flows in core stores.
|- |  | ---------------------------------------------------------------------

|o |  | Open
new stores to leverage existing infrastructure.
|- |  | ----------------------------------------------------

|o |  | Enhance
training and development programs.
|- |  | ------------------------------------------

|o |  | Enhance
and expand retail-focused marketing efforts.
|- |  | ----------------------------------------------------

FISCAL 2004

The
strategic priorities in 2004 were focused on returning the Company to profitability and
identifying opportunities to leverage existing infrastructure and management. The Company
continued to optimize its people and facilities to more deeply penetrate existing markets,
prepare to enter new markets, gain competitive advantage through the development of name
and brand recognition and provide the rental-purchase customer with the opportunity to
obtain high-quality, state-of-the-art merchandise by maintaining a broad selection of
products representing the latest in technology and style. Since the refinancing of the
bank credit facility and settlement of the class action lawsuit, the Company shifted its
financial strategies to pursue its long-term business plan of becoming the preferred
choice for rent-to-own customers.

The Company achieved the following
objectives in 2004:

|o |  | increased
its same store performance, improved collections and controlled overhead costs.
|- |  | -----------------------------------------------------------------------------------------

|o |  | featured
employees and highlighted the brand identity in its advertising campaigns.
|- |  | -----------------------------------------------------------------------------------

|o |  | conducted
customer surveys that provided insight into consumer perceptions of brand and performance
relative to competitors.
|- |  | ----------------------------------------------------------------------------------------------------------------------------

|o |  | initiated
a new store growth program to selectively open new stores in existing markets to leverage
its existing management, corporate infrastructure and advertising budgets. There were two
new stores opened by September 30, 2004.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | reported
net income and improved overall profitability.
|- |  | -------------------------------------------------------

FISCAL 2003

The
strategies for fiscal 2003 were focused on securing financial resources necessary to grow
the business and increase profitability. The Company sold 295 stores to Rent-A-Center,
settled the class action lawsuit following the discovery of accounting improprieties in
October 2000, and refinanced the Companys outstanding bank debt on more favorable
terms with sufficient borrowing availability to allow for new store openings and growth in
its remaining stores.

In
November 2002, management identified 295 under-performing stores that would have required
a significant amount of capital investment to meet Company performance targets. On
February 8, 2003, the Company sold rental merchandise and related contracts of these 295
stores to Rent-A-Center, Inc. for approximately $100.4 million. Rent-A-Center purchased
certain fixed assets and assumed related store leases of 125 of these stores. The net
sales proceeds were used to reduce outstanding bank debt. During the second quarter of
fiscal 2003, management formulated a plan to restructure the corporate office through
workforce reductions to rationalize corporate costs subsequent to the sale of certain
stores to Rent-A-Center.

On
April 18, 2003, the Company entered into an agreement settling the class action brought
against it following the discovery of accounting improprieties in October 2000. The
settlement required 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 was funded from available insurance proceeds, and the remaining $10.0
was funded out of operations.

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% redeemable convertible preferred stock through a private placement.
The net proceeds of the offerings, together with borrowing under the new revolving credit
facility and the net proceeds of the sale of the redeemable 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 revised by Standard and Poors Rating Services from CCC
to B+".

FISCAL 2002

The
Companys strategy in fiscal 2002 was to return to profitability following the
discovery of the accounting improprieties and concentration in addressing the business
performance problems that had been masked by the improper accounting. This would allow the
Company to obtain lower-cost financing. The Company pursued these objectives in fiscal
2002:

|o |  | The
Company drove its philosophy of Welcome, Wanted and Important which created a
store atmosphere conducive to customer loyalty.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------

|o |  | The
Company enhanced branding and marketing efforts.
|- |  | ----------------------------------------------------

|o |  | The
Company enhanced product lines and looked to leverage its distribution channel to offer
additional higher-margin products and services not traditionally offered to the
rental-purchase customer.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | The
Company upgraded its point of sale software system.
|- |  | -------------------------------------------------------

|o |  | The
Company continued to improve existing store performance and control corporate overhead
costs.
|- |  | -------------------------------------------------------------------------------------------------

CRITICAL ACCOUNTING
ESTIMATES

The
preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. In applying accounting principles,
management must often make individual estimates and assumptions regarding expected
outcomes or uncertainties. The actual results of outcomes are generally different than the
estimated or assumed amounts. These differences are usually insignificant and are included
in the consolidated financial statements as soon as they are known. The estimates,
judgments and assumptions are continually evaluated based on available information and
experience. Because of the use of estimates inherent in the financial reporting process,
actual results could differ from these estimates.

Insurance
liability for workers compensation, automobile and general liability may be adjusted
based on higher or lower actual loss experience. Although there is greater risk with
respect to the accuracy of these estimates because of the period over which actual results
may emerge, such risk is mitigated by managements ability to make changes to these
estimates as they occur.

An
estimate is recorded for the future lease obligation related to closed stores based upon
the present value of the future minimum lease payments and related lease commitments, net
of estimated sublease income. These estimates may be adjusted for lease terminations in
which the Company negotiates an amount with the landlord to terminate the lease prior to
lease expiration. Also, estimated sublease reserves offsetting the obligation may become
uncollectible.

Management
is required to make judgments about future events that are inherently uncertain. In making
its determinations of likely outcomes of litigation matters, management considers the
evaluation of inside counsel who consults with outside counsel knowledgeable about each
matter, as well as know outcomes in case law. See Item 3, Legal Proceedings
for a discussion of the key litigation matters the Company faces.

The
Company completes, with the assistance of an independent valuation firm, goodwill
impairment testing, which requires a comparison of the fair value of its reporting units
with their carrying amount. This is based on discounted expected future cash flows. The
discount rate applied to these cash flows represents the Companys implied cost of
debt. If the comparison of a reporting units fair value and carrying amount identifies
indication of possible impairment, the Company, with the assistance of an independent
valuation firm, determines a total enterprise value based on a combination of the market
multiple, discounted cash flow and comparable transaction approaches. This analysis is
performed annually, or upon certain triggering events.

Management
exercises judgment about future results in assessing the realizability of its deferred tax
assets. The net deferred tax asset after adjustment for deductible goodwill was $73.2
million at September 30, 2004. This asset was fully offset by a valuation allowance based
on managements determination that realization of the asset is uncertain.

Actual
results related to the estimates and assumptions made by management in preparing the
consolidated financial statements will emerge over periods of time. These estimates and
assumptions are closely monitored by management and periodically adjusted as circumstances
warrant.

CRITICAL 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 were recognized over
          the weekly, biweekly, semi-monthly or monthly rental term.

Rental
Merchandise and Rental Merchandise Depreciation. The Company uses the units of
activity depreciation method for all rental merchandise except computers and
computer games. Under the units of activity method, rental merchandise is depreciated
as revenue is collected or earned during free-rent promotions. Thus, rental
merchandise is not depreciated during periods when it is not on rent and therefore
not generating rental revenue. Personal computers and gaming systems are principally
depreciated on the straight-line basis beginning on acquisition date over 12 months
to 24 months. 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 allowance method. Beginning in the three-month
period ended September 30, 2004, the Company began recording rental merchandise write-offs
on the allowance method. This change to the allowance method had the effect of increasing
other operating expenses for a one-time adjustment of approximately $1.1 million to set up
a rental merchandise allowance reserve on the balance sheet. The Company expects rental
merchandise adjustments in the future under this new method to be materially consistent
with prior years adjustments under the direct write-off 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 Consolidated Statement of Operations. Activation revenues and costs
are recognized on a straight-line basis over the average estimated life of
the customer relationship. The Company reviews the average estimated life of
the customer relationship from time to time in making this determination of average
estimated life.

Closed
Store Reserves. From time to time, the Company closes or consolidates 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 lease commitments, net of estimated
sublease income. If the estimates related to sublease income are not correct, the
actual liability may be more or less than the liability recorded, and the Company
adjusts the liability accordingly.

Health
Insurance Program. The Company determines insurance liability based on funding factors
determined by cost plus rates for a fully insured plan and monthly headcount. The
contracted rate is determined based on experience, prior claims filed and an estimate of
future claims. A retrospective adjustment for over (under) funding of claims is recorded
when determinable and probable.

Liability
Insurance Programs. Starting in 2001, the insurance liability for workers
compensation, automobile and general liability costs are determined 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 following policy inception and every 12 months thereafter.
Retrospective adjustments to loss estimates are recorded when determinable and
probable.

For
fiscal years 2000 and 1998, the Company was insured under deductible programs with
aggregate stop loss coverage on major claims. Claims within the insured deductible limits
that were less than stop loss aggregates, were funded as claims developed using AM Best
loss development factors. The fiscal 1999 workers compensation insurance had no
aggregate retention and was funded as claims developed using AM Best loss development
factors.

Goodwill.  Effective
October 1, 2001, the Company adopted Statement of Financial           Accounting
Standards No. 142 (SFAS 142), Goodwill and           Other Intangible
Assets. SFAS 142 requires that intangible assets not           subject to amortization
and goodwill be tested for impairment annually, or           more frequently if
events or changes in circumstances indicate that the           carrying value may not be
recoverable. The annual impairment testing           consists of a comparison of the fair
value of a reporting unit with its carrying           amount. The total enterprise value,
as determined by an independent valuation           firm, represents a combination of the
market multiple, discounted cash flow and           comparable transaction approaches.
Amortization of goodwill and intangible           assets with indefinite lives,
including such assets recorded in past           business combinations, ceased upon adoption.
Thus, no amortization for such           goodwill and indefinite-lived intangibles
was recognized in the           accompanying Consolidated Statements of Operations
for fiscal years ended           September 30, 2004, 2003 and 2002. During the quarter
ended September 30, 2002,           the Company calculated an impairment to goodwill
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). For the           years ended September 30, 2004 and 2003,
there was no impairment of goodwill.

RESULTS OF OPERATIONS

Analysis of Consolidated Statements of Operations. On February 8, 2003, the
Company completed the sale of 295 stores. Accordingly, the financial statements for all
periods presented have been reclassified to report the results of these stores as
discontinued operations. As an aid to understanding the Companys operating results,
the following table expresses certain items of the Companys consolidated
statements of operations for the years ended September 30, 2004, 2003 and 2002 as a
year-over-year percentage change.

|                                                   | For the Years Ended September 30, | Percent Change
|-------------------------------------------------- | --------------------------------- | --------------
|
|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                                    |                                   |               
|Amortization and write-off of                      |                                   |               
|deferred financing costs                           |                                   |               
|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                               |                                   |               
|Loss from discontinued                             |                                   |               
|operations                                         |                                   |               
|                                                   |                                   |               
|Net income (loss)                                  |                                   |               
|                                                   |                                   |               
|Amortization of deemed                             |                                   |               
|dividend and accretion of                          |                                   |               
|preferred stock                                    |                                   |               
|                                                   |                                   |               
|Net income (loss) allocable to common shareholders |                                   |               
|                                                   |                                   |               

Refer
to the above analysis of consolidated statements of operations while reading the
discussion below.

COMPANY PERFORMANCE
MEASURES

Management
uses a number of metrics to assess its performance. The following are the more important
of these metrics:

| |  | o |  | Same
store revenue is a measure that indicates whether the Companys existing stores
continue to grow. Same store revenues consists of revenues from stores in the household
rental segment that have been operating for more than fifteen months and have had no
changes affecting operations during that time, i.e. mergers, dispositions or
acquisitions. Stores that experienced mergers, dispositions or acquisitions during that
period are not included in the calculation of same store revenues. Same store revenues
increased 5.16% for fiscal 2004 versus 1.09% in fiscal 2003. This is attributable to an
increase of 21,000 rental agreements year over year, continuation of offering higher-end
revenue-generating merchandise to customers, and increasing rental rates on certain
products.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Gross
weekly rental revenue (GWRR) is a key measure of the Companys growth. GWRR is the
total potential rental revenue that could be collected from all active rental agreements
based on a weekly payment cycle. This is monitored at the individual store level and
Company level. Total GWRR was $8.5 million based on active agreements at September 30,
2004, versus $8.0 million for active agreements at September 30, 2003. This is
attributable to an increase of 21,000 agreements year over year, continuation of offering
higher revenue-generating merchandise to stores, and increasing rental rates on certain
products.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Performance
percentage is a metric that measures store and Company overall operating performance. The
Company defines performance percentage as total rental revenue collected as a percentage
of total GWRR or, potential revenue. Performance percentage was 89.6% for fiscal 2004 and
89.8% for fiscal 2003. Senior management, as well as store managers, use the Companys
computerized management information system to monitor cash collection on a daily basis.
There are daily cash collections expectations conveyed to the field and closely monitored
by senior management.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Rental
merchandise depreciation as a percentage of rental revenue plus other revenue has long
been an indicator of gross profit margins on rental contracts. The Company uses the units
of activity depreciation method for all rental merchandise except computers and game
systems, which are depreciated on the straight-line method. 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. Rental merchandise depreciation as a percentage of rental
revenue plus other revenue was 27.7% for fiscal 2004 versus 26.8% in fiscal 2003. The
Company continues to introduce higher revenue-generating merchandise to the stores and
increase rental rates on certain products. The increase in rental merchandise
depreciation is attributable to the Companys purchasing cycle for computer
merchandise. The Company added significantly more computers to the portfolio in 2003
versus 2004. There is an entire year of straight-line depreciation on those computers in
2004 versus a partial year in 2003.
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Operating
income of the household rental segment is a key measure that management uses to monitor
how revenue growth and cost control measures impact profitability. Operating income of
the household rental segment was 9.0% of total revenue for fiscal 2004 versus 8.0% of
total revenues for fiscal 2003. This is attributable to the continuation of offering
higher-end revenue-generating merchandise to customers, increasing rental rates on
certain products, managing daily cash collections, and holding the field and corporate
more accountable for budgets and cost management.
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Management
believes that an important reason for the Companys positive store-level financial
performance and growth has been the structure of its management compensation system. A
significant portion of the Companys regional and store managers total
compensation is dependent upon store performance. Profit incentives are tied to certain
key performance metrics and can count for as much as 30% of a store managers pay.

FISCAL 2004 COMPARED TO
FISCAL 2003

Total
Revenues. Total revenues increased $12.5 million to $503.8 million from $491.3 million.
Rental revenue increased $19.2 million which is attributable to an increase of 21,000
agreements year over year, continuation of offering high revenue-generating merchandise to
stores, and increasing rental rates on certain products. The $19.2 million increase in rental
revenue is offset by at $10.3 million decrease in
prepaid phone service revenue. Much of the $10.3 million decrease in prepaid phone service
revenue is attributable to the loss of 10,000 DPI customers year over year due to an
increase in competition. There was an increase in other revenues driven by a $2.1 million
increase in cash sales of rental merchandise year over year. This is attributable to
continued efforts to better manage older, slower-moving merchandise through cash sales
rather than write-offs.

Rental
Merchandise Depreciation. Depreciation expense of rental merchandise increased to $132.8
million from $122.3 million for the same period last year. Rental merchandise depreciation
as a percentage of rental revenue and other revenue is 27.7% for fiscal 2004 versus 26.8%
for fiscal 2003. This increase is driven by the purchasing cycle for computer merchandise.
The Company added significantly more computers to the portfolio in 2003 versus 2004. There
is an entire year of straight-line depreciation in 2004 versus a partial year in 2003.

Amortization
of Intangibles. Amortization of intangibles decreased $1.0 million as compared to the same
period last year. This is attributable to the expiration of non-compete agreements and
customer contracts during the year.

Cost
of Prepaid Phone Service. The cost of prepaid phone service decreased to $16.4
million from $21.9 million. The decrease in costs year over year is due to a general
decrease in the customer base year over year. Also, the Company did not recover activation
costs of a two-month sales promotion earlier in the year.

Salaries
and Wages. Salaries and wages increased by $3.3 million to $134.0 million from $130.7
million. This 2.5% increase in salaries and wages is primarily attributable to a general
3% increase in salaries and wage rates granted by the Company to its employees.

Advertising.       Advertising
expense decreased $2.2 million, to $20.1 million in 2004 from           $22.3
million in 2003. This decrease is primarily attributable to a reduction in
          radio advertising.

Occupancy.      Occupancy
expense increased to $34.4 million from $32.8 million. The increase is
          attributable to general rent increases, which approximate 2% per year for new
          leases entered into with higher rates, and the addition of lease commitments
for           new stores.

Restructuring
Costs. During the second quarter of fiscal 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. As a result of this plan, the Company recorded total pre-tax restructuring
charges of $3.0 million in 2003. The restructuring costs include $1.0 million of employee
severance and termination benefits and $2.0 million of fixed asset write-offs in the
household rental segment. This restructuring was largely completed by the end of fiscal
2003.

Other
Operating Expenses. Other operating expenses increased by $8.4 million to $109.1 million
from $100.7 million. This increase is attributable to these items:

|1) |  | A
$2.1 million increase in service repair costs is due to an increase in merchandise on
rent and a Company-wide initiative to better care for used merchandise, which increased
the store-level repair volume. Also, the Company implemented a third party service
program for which the associated revenue was recorded in other revenue on the
consolidated statement of operations.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2) |  | A
               $2.8 million increase in liability insurance costs because the fiscal 2004
               retroactive refunds were $2.8 million less compared to fiscal 2003.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) |  | State and local taxes for fiscal 2004 were $1.2 million higher than fiscal 2003
               because there was a reversal of a $1.6 million accrual in 2003 and no such
               reversal occurred in fiscal 2004.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4) |  | Beginning in the three-month period ended September 30, 2004, the Company began
               recording rental merchandise losses on the allowance method. This change to the
               allowance method had the effect of increasing other operating expenses for a
               one-time adjustment of approximately $1.1 million to set up a rental merchandise
               allowance reserve on the balance sheet. The Company expects rental merchandise
               write-offs in the future under this new method to be materially consistent with
               prior years adjustments under the direct write-off method.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Settlement
of Class Action Lawsuit. The Company settled the consolidated class action lawsuit.
Under the settlement, the Company paid $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 was funded from available insurance proceeds. The $10.0 million in cash was
funded by the Company, was held in escrow and was classified as restricted cash on the
balance sheet at September 30, 2003. The net $14.0 million was expensed in the second
quarter of fiscal 2003.

Interest
Expense. Interest expense decreased $2.8 million to $30.3 million from $33.1million. 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 though a private placement. The proceeds from these
transactions were used to repay all amounts outstanding under the Companys previous
credit facility. See Note 10 and 11 to the Companys consolidated financial
statements appearing at Item 8 of this report. The decrease in interest expense is
attributable to reduced debt levels after the refinancing.

Amortization
and Write-Off of Deferred Financing Costs. Amortization of deferred financing costs
decreased to $1.0 million from $3.1 million. This decrease is mainly due to the write-off
of $1.1 million in bank fees associated with refinancing the Companys previous
credit facility in fiscal 2003. There was no such write-off in fiscal 2004. See Note 10 to
the Companys consolidated financial statements appearing at Item 8 of this
report.

Other
Income , Net. Other income was $6.4 million in 2004 compared to $4.0 million in 2003.
This change is primarily due to a change in the fair market value of the
convertibility feature of the convertible redeemable preferred stock, which resulted in
income of $1.8 million for 2004, compared to an expense of $1.9 million for 2003. These
changes were offset by a year over year decrease of $1.0 million in the fair market value
adjustments for the interest rate swaps. The interest rate swap fair market value
adjustments resulted in income of $3.6 million for 2004, compared to income of $4.6
million for 2003.

Income
Tax Expense. For 2004, the Company recorded income tax expense of $5.6 million. This
deferred expense of $5.6 million is a result of the impact of applying SFAS 142. SFAS 142
stops the amortization of goodwill for book purposes, but for tax purposes it continues to
be deductible and amortizable in accordance with current tax laws. The income tax expense
for fiscal 2004 attributable to the impact of SFAS 142 adoption results from an increase
to the valuation allowance because the Company can no longer look to the reversal of the
deferred tax liability associated with the tax deductible goodwill to offset its deferred
tax assets in accordance with SFAS 109 Accounting for Income Taxes. The impact
of the continued tax-deductible goodwill will result in tax expense in future years to the
extent the Company has a full valuation allowance. The Company recorded no income tax
benefit for fiscal years 2004 and 2003, related to the income tax losses due to the uncertainty of their
realization. There are approximately $11.1 million of net income tax that expire
during fiscal years 2005 through 2018. Net operating losses approximating $42.6 million,
$36.3 million, $48.1 million, $28.2, $9.1 million and $35.1 million expire during fiscal
years 2019, 2020, 2021, 2022, 2023 and 2024, respectively. The net deferred tax asset
after adjustment for tax deductible goodwill of $73.2 million for fiscal 2004 and the net
deferred tax asset of $73.1 million for fiscal 2003 has been fully offset by a valuation
allowance based on managements determination that their realization is uncertain.

In
October 2004, the American Jobs Creation Act of 2004 was passed. Management is in the
process of evaluating its impact on the Company.

Loss
From Discontinued Operations.Loss from discontinued operations was $2.3 million in
2004 compared to $15.8 million in fiscal 2003 as a result of the sale of agreements and
merchandise of 295 stores to Rent-A-Center in fiscal 2003. The fiscal 2004 expenses relate
to occupancy charges and write-offs on leasehold improvements for store leases not assumed
by Rent-A-Center. The Company is in the process of winding down those leases. The fiscal
2003 expense is mainly due to a $8.4 million charge for lease obligations related to
vacated stores; a $7.3 million decrease in operating income of the stores due to
transition period costs including, but not limited to, rent, utilities, costs applicable
to office equipment, costs associated with other employee benefits, workers compensation
claims, health care claims and all other costs related to transition personnel and,
interest expense of $3.0 million recorded as a result of the sale.

Net
Income (Loss). The Company generated net income of $9.2 million in 2004 as a result of the
factors described above compared to a net loss of $29.4 million in 2003.

Net
Income (Loss) Allocable To Common Shareholders. On June 2, 2003, the Company issued 1,500
shares of convertible redeemable preferred stock for $10,000 per share and a one-year
option to purchase an additional 500 shares of convertible redeemable preferred stock. The
options to purchase an additional 500 shares of convertible redeemable preferred stock
were exercised in 2004. See Note 11 to the Companys consolidated financial
statements appearing at Item 8 of this report. The preferred stock dividends and
accretion totaled $1.8 million in fiscal 2004 and $0.5 million in fiscal 2003, and are
charged to accumulated deficit, but reduce net income (loss) allocable to common
stockholders. The increase is due to a full year of dividends and accretion in 2004 versus
a partial year in 2003.

FISCAL 2003 COMPARED TO
FISCAL 2002

Total
Revenues. Total revenues decreased $2.1 million to $491.3 million from $493.4
million. This decrease is attributable to a decrease in revenues of $2.4 million in
the prepaid telephone service segment offset by an increase in revenues of $0.3
million in the household rental segment. The $2.4 million decrease in the prepaid
telephone service segment is due to a decrease in customers due to an increase in
competition. The $0.3 million increase in revenue in the household rental segment is
due to improved collections and increases in early purchase options and cash sales revenue
for the year ended September 30, 2003, 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 that offered customers the
opportunity to purchase rented merchandise at a discount. In addition, the 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
$122.3 million from $133.4 million. In fiscal 2002, the Company took steps to
increase gross profit margins on rental contracts. These steps included introducing
higher-end, higher-margin merchandise to the stores, increasing rental rates on
certain core products to competitive market rates, and increasing weekly rental rates
of personal computers to competitive market rates. The Company continued these
efforts in fiscal 2003.

Amortization
of Other Intangibles. Amortization of other intangibles decreased to $1.4 million from
$2.3 million. This is due to the expiration of the amortization periods for certain
non-compete agreements and customer contracts.

Cost
of Prepaid Phone Service. The cost of prepaid phone service decreased to $21.9
million from $23.7 million. Cost of prepaid phone service, as a percentage of prepaid
phone service revenues, decreased to 61.9% from 62.8%. This decrease is due to a general
decrease in the customer base and a decrease in new customers year over year. This
decrease in new customers results in a decrease in activation costs in relation to the
revenues recognized.

Salaries
and Wages. Salaries and wages increased by $9.5 million to $130.7 million from $121.2
million. The Company initiated an employee upgrade program directed at attracting and
keeping better talent. This resulted in higher salaries in 2003.

Advertising.     Advertising
expense decreased $4.8 million, from $27.1 million in 2002 to           $22.3
million in 2003. This decrease is primarily due to a decrease in           television
production and local store marketing expenses and the sale of 295           stores to
Rent-A-Center.

Occupancy. Occupancy
expense increased to $32.8 million from $31.7 million. The increase is
          attributable to general rent increases, which approximate 2% per year for new
          leases entered into with higher rates.

Other
Operating Expense. Other operating expense decreased by $5.3 million to $100.7
million, from $106.0 million. This decrease is principally due to income of $4.6 million
for an adjustment of ultimate and incurred losses for workers comp, general
liability and automobile, which was recorded in insurance costs in other operating
expense, a $1.6 million downward adjustment to the Companys personal property tax
accruals was recorded as a result of the receipt of finalized actual tax assessments and a
reversal of a $1.8 million provision established in prior years related to rental
merchandise was determined to be no longer required. These items were offset by $2.7
million of legal and professional and consulting fees. During 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 $1.3 million of fees for the year. During 2003,
there was a recovery of accounting and legal fees related to the investigation and
shareholder litigation in the amount of $0.8 million, which offsets $3.5 million of fees
for the year.

Settlement
of Class Action Lawsuit. The Company settled the consolidated class action lawsuit.
Under the settlement, the Company paid $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 was funded from available insurance proceeds. The $10.0 million in cash was
funded by the Company from an amount held in escrow, which was classified as restricted
cash on the balance sheet at September 30, 2003. The net $14.0 million was expensed in the
second quarter of fiscal 2003.

Interest
Expense. Interest expense decreased $6.1 million to $33.1 million from $39.2 million. This
decrease is primarily due to a $62.6 million decrease in debt from $277.2 million as of
September 30, 2002, to $214.6 million as of September 30, 2003. 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
though a private placement. The proceeds from these transactions were used to repay all
amounts outstanding under the Companys previous credit facility. See Note 10 and 11
to the Companys consolidated financial statements appearing at Item 8 of this
report.

Amortization
and Write-Off of Deferred Financing Costs. Amortization of deferred financing costs
decreased to $3.1 million from $5.2 million. This decrease is mainly due to the write-off
of $1.1 million in bank fees associated with refinancing the Companys previous
credit facility in fiscal 2003 versus a $3.8 million write-off of deferred financing costs
in fiscal 2002. This decrease is partially offset by increased amortization related to an
increase in deferred financing costs as a result of the refinancing. Deferred financing
cost amortization, excluding write-offs, was $1.9 million and $1.4 million for the years
ended September 30, 2003 and 2002, respectively. See Note 10 to the Companys
consolidated financial statements appearing at Item 8 of this report.

Other
Income , Net. Other income was $4.0 million in 2003 compared to $2.4 million in 2002.
This change is primarily due to an increase in the positive change in the fair market
value of the interest rate swap portfolio, which resulted in income of $4.6 million
for 2003, compared to income of $0.6 million for 2002. Other income for 2003 also includes
gains on the sale of vehicles under capital leases of $1.2 million. These income items for
2003 were offset by a charge of $1.9 million to record the convertible option derivative
liability for the convertible preferred stock at its fair market value as of September 30,
2003. Other income for fiscal 2002 includes a gain on the sale of stores. The
Company entered into several small transactions to sell 15 under-performing
stores. The Company recognized a net gain of $0.9 million on these store
sale transactions.

Income
Tax Expense. For 2003, the Company recorded income tax expense of $4.0 million.
Deferred tax expense of $4.9 million as a result of the impact of applying SFAS 142 was
offset by a tax benefit of $0.9 million primarily as a result of changes in net operating
loss carryback rules. SFAS 142 stops the amortization of goodwill for book purposes, but
for tax purposes it continues to be deductible and amortizable in accordance with current
tax laws. The income tax expense for fiscal 2003 attributable to the impact of SFAS 142
adoption results from an increase to the valuation allowance because the Company can no
longer look to the reversal of the deferred tax liability associated with the tax
deductible goodwill to offset its deferred tax assets in accordance with SFAS 109
Accounting for Income Taxes. The impact of the continued tax-deductible
goodwill will result in tax expense in future years to the extent the Company has a full
valuation allowance. The Company recorded no income tax benefit for fiscal 2003 and 2002
related to the operating losses due to the uncertainty of their realization. There are
approximately $11.1 million of net operating losses that expire during fiscal years 2005
through 2018. Net operating losses approximating $42.6 million, $36.3 million, $48.1
million, $28.2 million and $41.3 million expire during fiscal years 2019, 2020, 2021, 2022
and 2023 respectively. The net deferred tax asset after adjustment for tax deductible
goodwill of $73.1 million for fiscal 2003 and the net deferred tax asset of $66.0 million
for fiscal 2002 has been fully offset by a valuation allowance based on managements
determination that their realization is uncertain. The Companys federal and state
tax benefit for fiscal 2003 and fiscal 2002 is lower than the statutory rate primarily due
to the deferred tax valuation allowance and nondeductible goodwill.

Cumulative
Effect of Change in Accounting Principle. Effective October 1, 2001, the Company
adopted SFAS 142. Thus, no amortization for goodwill and indefinite-lived intangibles
was recognized in the accompanying consolidated statements of operations for fiscal
years 2003 and 2002. During the year ended September 30, 2002 the Company calculated an
impairment to goodwill 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). Testing for fiscal 2003 resulted in no impairment.

Loss
From Discontinued Operations.Loss from discontinued operations was $15.8 million
as a result of the sale in 2003, as compared to $0.1 million in 2002. This decrease is
mainly due to a $8.4 million charge for lease obligations related to vacated stores, a
$7.3 million decrease in operating income of the stores due to transition period costs and
interest expense of $3.0 recorded as a result of the sale in 2003.

Net
Loss. The Company generated a net loss of $29.4 million in 2003 as a result of the factors
described above compared to a net loss of $76.5 million in the same period last year.

Net
Loss Allocable To Common Shareholders. On June 2, 2003, the Company issued 1,500 shares of
convertible redeemable preferred stock for $10,000 per share and a one-year option to
purchase an additional 500 shares of convertible redeemable preferred stock. See Note 11
to the Companys consolidated financial statements appearing at Item 8 of this
report.  The preferred stock dividends and accretion totaled $0.5 million and are
charged to accumulated deficit, but reduce net income (loss) allocable to common
stockholders.

---

LIQUIDITY AND CAPITAL
RESOURCES

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 and new store openings. The Companys principal sources of liquidity are
cash flows from operations, debt capacity available under its revolving credit facility
and available cash reserves.

Cash
flows from operating activities.  The Companys statements of cash flows are
summarized as follows (in millions):

|                                                    | For the Years Ended September 30,
|--------------------------------------------------- | ---------------------------------
|
|Net cash provided by (used in) operating activities |                                  
|                                                    |                                  

Cash
flows from operating activities increased by $55.5 million for 2004 compared to 2003. The
key component of this increase was increased profits in 2004 versus 2003. The following
items also significantly impacted cash flows between the two years:

|o |  | Funding
of the settlement of the class action lawsuit, which used $10.0 million in cash in fiscal
2003, and, $2.0 million in fiscal 2004.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|o |  | Decreases
in rental merchandise purchases year over year of $36.3 million as a result of the sale
of stores in 2003.
|- |  | --------------------------------------------------------------------------------------------------------------------

|o |  | Reduction
in cash used in discontinued operations of $7.6 million year over year.
|- |  | ---------------------------------------------------------------------------------

Cash
flows from operating activities decreased by $77.5 million for 2003 compared to 2002. The
settlement of the class action lawsuit and the change in cash used in discontinued
operations accounts for $33.1 million of the change year over year. The following items
also significantly impacted cash flows between the years:

|o |  | Increases
in rental merchandise purchases year over year of $23.4 million as a result of planned
increases in store inventory levels to fuel growth.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Payment
of payment-in-kind interest related to the old bank credit facility of $23.2 million in
the refinancing during 2003.
|- |  | ----------------------------------------------------------------------------------------------------------------------------

Cash
flows from investing activities.

|                                                    | For the Years Ended September 30,
|--------------------------------------------------- | ---------------------------------
|
|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 |                                  
|                                                    |                                  

Purchases
of property, plant and equipment accounted for the most significant outlays for investing
activities, $9.3 million in 2004, $8.1 million in 2003 and $11.4 million in 2002. The
Company received $95.6 million from the sale of stores to Rent-A-Center in 2003. The
Company currently estimates that purchases of property, plant and equipment in 2005 will
be approximately $14.0 million.

Financing Activities. The
Companys cash flows used in financing activities are as follows (in millions):

|                                              | For the Years Ended September 30,
|--------------------------------------------- | ---------------------------------
|
|Proceeds from borrowings                      |                                  
|Payments on borrowings                        |                                  
|Payments on class action lawsuit note payable |                                  
|Payments on capital leases                    |                                  
|Cash overdraft                                |                                  
|Proceeds from convertible preferred stock     |                                  
|Deferred financing costs                      |                                  
|Issuance of common stock                      |                                  
|Dividends paid                                |                                  
|Interest on shareholder loans                 |                                  
|Payment of loans by directors/shareholders    |                                  
|                                              |                                  
|Net cash used in financing activities         |                                  
|                                              |                                  

Proceeds
and payments on borrowings included both short-term and long-term financing activities. On
September 30, 2004, the Company had $54.8 million available of its $60.0 million bank
revolving credit facility. There is no outstanding balance in the bank revolving credit
facility and there were $5.2 million letters of credits drawn against the revolver.

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% redeemable convertible preferred stock through a private placement.
The net proceeds of the offerings, together with borrowing under the new revolving credit
facility and the net proceeds of the sale of the redeemable 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 revised by Standard and Poors Rating Services from CCC
to B+". The Company paid $8.6 million in deferred financing costs related to
this refinancing. The terms and covenants of the secured notes bank revolving credit
facility are discussed in Note 10 to the Companys consolidated financial statements
appearing at Item 8 of this report. The Company is in compliance with all covenants at
September 30, 2004, and expects to be able to comply with covenants based upon its fiscal
2005 projections. In December 2004, the Company amended its bank credit facility to change
the financial covenants to allow for the effect of opening new stores. The leverage ratio
and minimum financial EBITDA covenants were amended as shown in the financial covenants
required under the credit facility in the following section.

The
secured notes contain covenants that, 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.

The
terms of the Companys revolving credit facility and the indenture governing the
senior notes do not fully prohibit the Company or its subsidiaries from incurring
additional debt. As a result, The Company may be able to incur substantial additional debt
in the future.

The
financial covenants required under the credit facility are as follows:

| | 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. As of the last day of
each fiscal quarter ending during each of the periods specified below, the leverage ratio
at such time should not be greater than:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                |                                  | Shall Not Exceed
|--------------- | -------------------------------- | ----------------
|
|July 1, 2004    | September 30, 2004               | 4.50 to 1.00    
|October 1, 2004 | September 30, 2005               | 4.00 to 1.00    
|July 1, 2004    | June 30, 2005                    | --              
|October 1, 2005 | September 30, 2006               | 3.75 to 1.00    
|July 1, 2005    | December 31, 2005                | --              
|January 1, 2006 | March 31, 2006                   | --              
|April 1, 2006   | June 30, 2006                    | --              
|July 1, 2006    | Credit AgreementTermination Date | --              
|               
|October 1, 2006 | September 30, 2007               | 3.25 to 1.00    
|October 1, 2007 | Credit AgreementTermination Date | 2.75 to 1.00    
|               

| | 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 1.20 to 1.00 from October
1, 2003 through March 31, 2004 and 1.25 to 1.00 from April 1, 2004 through June 2, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot incur capital expenditures in an amount in excess of $20,000 in the
aggregate during any fiscal year. The $20,000 maximum is increased for any unused
preceding year permitted amount not to exceed $22,500 in a fiscal year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
net worth shall not be less than $85,000 plus 75% of positive net income with no
deduction for losses 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:
| | -------------------------------------------------------------------------------------------------------

|                                       | Minimum EBITDA
|-------------------------------------- | --------------
|
|
|September 2004                         | $55.5 million 
|October 2004                           | $56.5 million 
|November 2004                          | $57.0 million 
|December 2004                          | $58.0 million 
|January 2005                           | $58.0 million 
|February 2005                          | $59.0 million 
|March 2005                             | $59.0 million 
|April 2005 through February 2006       | $60.0 million 
|March 2006 through December 2006       | $62.5 million 
|January 2007 and thereafter            | $65.0 million 
|April 2005                             | --            
|May 2005                               | --            
|June 2005                              | --            
|July 2005                              | --            
|August 2005                            | --            
|September 2005 - August 2006           | --            
|September 2006 - Each Month Thereafter | --            

There
was an option for the preferred shareholders to purchase an additional 500 shares at
$10,000 per share. Those options were exercised during 2004.

The
Company paid $2.0 million on the note payable from the settlement of the class action
lawsuit related to accounting improprieties in 2004.

Off
Balance Sheet Arrangements. The Company is not subject to any off-balance sheet
arrangements within the meaning of Rule 303(a)(4) of Regulation S-K.

Contractual
Obligations. The following table presents obligations and commitments to make future
payments under contracts and contingent commitments at September 30, 2004:

|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)                               |       |                           | $                | 201,877          |                  
|Capital lease obligations             |       |                           |                  | 14,970           |                  
|Operating leases                      |       |                           |                  | 79,034           |                  
|Notes payable                         |       |                           |                  | 52               |                  
|Settlement of class action lawsuit(2) |       |                           |                  | 2,000            |                  
|                                      |       |                           |                  |                  |                  
|Total cash obligations                |       |                           | $                | 297,933          |                  
|                                      |       |                           |                  |                  |                  

*Excludes
the 401(k) restorative payments program as well as contingent liabilities that cannot be
estimated (See Notes 19 and 14 to financial statements appearing at Item 8 of this report,
respectively).

(1)       
          Consists of senior secured notes, net of discount. The Companys $60.0
          million revolving bank credit facility was at zero at September 30, 2004.

(2)       
          Consists of principal due on outstanding note.

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

Standby letters of credit are
generally required for fleet and insurance guarantees. These one year letters are renewed
on an annual basis.

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 and
marketing campaigns. 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. During the year ended September 30, 2004, the costs of rental
merchandise, store lease rental expense and salaries and wages have increased
modestly. These increases have not had a significant effect on the Companys
results of operations because the Company has been able to charge commensurately
higher rental for its merchandise. This trend is expected to continue in
the foreseeable future.

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. The Company has adopted the provisions of this Statement which did not have
a material effect on the financial statements.

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 is effective for
financial statements for periods after March 15, 2004.The Company has no variable
interest entities that are not currently consolidated.

In
March 2004, the FASB issued a proposed Statement, Share-Based Payment  an amendment
of Statements No. 123 and 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on fair value of the
enterprises equity instruments or that may be settled by the issuance of such equity
instruments. The proposed Statement would eliminate the ability to account for share-based
compensation transactions and generally would require instead that such transactions be
accounted for using a fair-value based method. On October 13, 2004, the FASB concluded
that Statement 123R, Share-Based Payment, would be effective for public companies for
interim or annual periods beginning after June 15, 2005. The Company does not know how the
provisions of this proposed statement will effect financial statements of the Company.

# ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The
Companys major market risk exposure is primarily due to fluctuations in interest
rates. The Company manages its exposure to changes in short-term interest rates,
particularly to reduce the impact on floating-rate borrowings under its revolving credit
facility, 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
September 30, 2004, the Company had swap agreements with total notional principal amounts
of $40.0 million, which effectively fixed the interest rate on obligations of debt under
the $60.0 million revolving credit facility. The swap agreements lock in a LIBOR rate
ranging from 6.88% to 6.965% and have maturities through 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 $1.6 million at September 30, 2004. A 1% adverse change in the interest
rates on variable rate obligations would affect pre-tax earnings by approximately $0.4
million.

The
Company does not enter into derivative financial instruments for trading or speculative
purposes. As of June 2, 2003, the Company is over-hedged because of the refinancing. The
existing interest rate swaps hedged a portion of the previous LIBOR debt. As a result of
the refinancing, the only LIBOR debt the Company has is the $60.0 million revolving credit
facility, of which $0 million was outstanding at September 30, 2004. The Company will
reduce its interest rate swap position as they mature through August 2005, rather than
terminate these agreements early because of the current high cost to terminate.

---

# ITEM 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

|                                                             |     
|------------------------------------------------------------ | ----
|                                                             | PAGE
|Index to Financial Statements                               
|Reports of Independent Registered Public Accounting Firms    | 30  
|Financial Statements:                                       
|Consolidated Balance Sheets, Years Ended                    
|September 30, 2004 and 2003                                  | 32  
|Consolidated Statements of Operations, Years Ended          
|September 30, 2004, 2003, 2002                               | 33  
|Consolidated Statements of Shareholders' Equity, Years Ended
|September 30, 2004, 2003, 2002                               | 34  
|Consolidated Statements of Cash Flows, Years Ended          
|September 30, 2004, 2003, 2002                               | 35  
|Notes to Consolidated Financial Statements                   | 36  

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors and
Shareholders of Rent-Way, Inc.

We have audited the accompanying
consolidated balance sheet of Rent-Way, Inc. and subsidiaries as of September 30, 2004,
and the related consolidated statements of operations, shareholders equity, and cash
flows for the year then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Rent-Way, Inc. and subsidiaries at September 30, 2004, and the
consolidated results of their operations and their cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.

/s/ Ernst&Young LLP

Pittsburgh, PA November 11, 2004, except for
the debt amendment discussed in Note 10, as to which the date is December 7, 2004

---

RENT-WAY, INC.

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF RENT-WAY, INC.:

In
our opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Rent-Way, Inc. and its
subsidiaries at September 30, 2003, and the results of their operations and their cash
flows for each of the two years in the period ended September 30, 2003 in conformity with
accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our responsibility is
to express an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

As
discussed in Note 2 to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, effective October 1, 2002 and, as discussed in
Note 5 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
effective October 1, 2001.

/s/
PricewaterhouseCoopers LLP

Cleveland, OhioNovember
19, 2003

---

RENT-WAY, INC.

CONSOLIDATED BALANCE
SHEETS (all dollars in thousands, except share and per share data)

|                                                                       | September 30,
|---------------------------------------------------------------------- | -------------
|
|ASSETS                                                                 |              
|Cash and cash equivalents                                              |              
|Restricted cash (Note 1)                                               |              
|Prepaid expenses                                                       |              
|Income tax receivable                                                  |              
|Rental merchandise, net (Note 6)                                       |              
|Rental merchandise credits due from vendors (Note 7)                   |              
|Deferred income taxes, net of valuation allowance of                   |              
|$73,242 and $73,095, respectively (Note 15)                            |              
|Property and equipment, net (Note 6)                                   |              
|Goodwill (Note 5)                                                      |              
|Deferred financing costs, net of accumulated amortization of $1,346    |              
|and $457, respectively                                                 |              
|Intangible assets, net of accumulated amortization of $3,682 and       |              
|$5,342, respectively (Note 5)                                          |              
|Other assets (Note 8)                                                  |              
|                                                                       |              
|Total assets                                                           |              
|                                                                       |              
|LIABILITIES AND SHAREHOLDERS' EQUITY                                   |              
|Liabilities:                                                           |              
|Accounts payable                                                       |              
|Other liabilities (Note 9)                                             |              
|Deferred tax liability (Note 15)                                       |              
|Debt (Note 10)                                                         |              
|                                                                       |              
|Total liabilities                                                      |              
|                                                                       |              
|Contingencies (Note 14)                                                |              
|Convertible redeemable preferred stock (Note 11)                       |              
|                                                                       |              
|Shareholders' equity:                                                  |              
|Preferred stock, without par value; 1,000,000 shares authorized; 2,000 |              
|and 1,500 shares were issued and outstanding as Series A convertible   |              
|preferred shares at September 30, 2004 and 2003, respectively          |              
|Common stock, without par value; 50,000,000 shares authorized;         |              
|26,243,676 and 26,022,037 shares issued and outstanding, respectively  |              
|Common stock warrants; 100,000 outstanding                             |              
|Option to purchase convertible preferred stock                         |              
|Accumulated other comprehensive loss                                   |              
|Accumulated deficit                                                    |              
|                                                                       |              
|Total shareholders' equity                                             |              
|                                                                       |              
|Total liabilities and shareholders' equity                             |              
|                                                                       |              

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

---

RENT-WAY, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS (all dollars in thousands, except per share data)

|                                                        | For the Years Ended September 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                                         |                                  
|Amortization and write-off of deferred financing costs  |                                  
|Other income, 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     |                                  
|Loss from discontinued operations                       |                                  
|                                                        |                                  
|Net income (loss)                                       |                                  
|                                                        |                                  
|Preferred stock dividend and accretion of preferred     |                                  
|stock                                                   |                                  
|                                                        |                                  
|Net income (loss) allocable to common shareholders      |                                  
|                                                        |                                  
|EARNINGS (LOSS) PER COMMON SHARE:                       |                                  
|Basic earnings (loss) per common share:                 |                                  
|Income (loss) before cumulative effect of change in     |                                  
|accounting principle and discontinued operations        |                                  
|                                                        |                                  
|Net income (loss) allocable to common                   |                                  
|shareholders                                            |                                  
|                                                        |                                  
|Diluted earnings (loss) per common share:               |                                  
|Income (loss) before cumulative effect of change in     |                                  
|accounting principle and discontinued operations        |                                  
|                                                        |                                  
|Net income (loss) allocable to common shareholders      |                                  
|                                                        |                                  
|Weighted average number of shares outstanding:          |                                  
|Basic                                                   |                                  
|                                                        |                                  
|Diluted                                                 |                                  
|                                                        |                                  

The
accompanying notes are an integral part of these financial statements

RENT-WAY, INC.

CONSOLIDATED STATEMENTS
OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002(all dollars and shares in thousands)

|                                                                                  | Common Stock | Common Stock Warrants |  |        |  |   |         |  
|--------------------------------------------------------------------------------- | ------------ | --------------------- |  | ------ |  | - | ------- | -
|
|Balance at October 1, 2001                                                        |              |                       |  | 24,510 |  | $ | 295,610 |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Net loss                                                                          |              |                       |  | --     |  |   | --      |  
|Amortization of transitional asset (Note 12)                                      |              |                       |  | --     |  |   | --      |  
|Issuance of common stock under stock option plans including tax benefit (Note 17) |              |                       |  | 62     |  |   | 251     |  
|Issuance of common stock to Calm Waters                                           |              |                      
|Partnership (Note 18)                                                             |              |                       |  | 1,000  |  |   | 5,356   |  
|Issuance of stock warrants to Calm Waters                                         |              |                       |  |        |  |   |         |  
|Partnership (Note 18)                                                             |              |                       |  | --     |  |   | --      |  
|Option to purchase convertible preferred stock                                    |              |                       |  | 114    |  |   | 1,107   |  
|Costs associated to private placement of                                          |              |                      
|securities                                                                        |              |                       |  | --     |  |   | (106    | )
|Payment of loans by directors (Note 16)                                           |              |                       |  | --     |  |   | --      |  
|Interest on loans to directors (Note 16)                                          |              |                       |  | --     |  |   | --      |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Total comprehensive income (loss)                                                 |              |                       |  | --     |  |   | --      |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Balance at September 30, 2002                                                     |              |                       |  | 25,686 |  |   | 302,218 |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Net loss                                                                          |              |                       |  | --     |  |   | --      |  
|Amortization of transitional asset (Note 12)                                      |              |                       |  | --     |  |   | --      |  
|Issuance of common stock under stock option plans including tax benefit (Note 17) |              |                       |  | 3      |  |   | 14      |  
|Issuance of common stock to Calm Waters                                           |              |                      
|Partnership (Note 18)                                                             |              |                       |  | 333    |  |   | 500     |  
|Option to purchase convertible preferred stock .                                  |              |                       |  | --     |  |   | --      |  
|Revaluation of stock warrants (Note18)                                            |              |                       |  | --     |  |   | 488     |  
|Payment of loans by directors (Note 16)                                           |              |                       |  | --     |  |   | --      |  
|Interest on loans to directors (Note 16)                                          |              |                       |  | --     |  |   | --      |  
|Preferred stock dividend                                                          |              |                       |  | --     |  |   | --      |  
|Accretion of preferred stock                                                      |              |                       |  | --     |  |   | --      |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Total comprehensive income (loss)                                                 |              |                       |  | --     |  |   | --      |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Balance at September 30, 2003                                                     |              |                       |  | 26,022 |  |   | 303,220 |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Net income                                                                        |              |                       |  | --     |  |   | --      |  
|Amortization of transitional asset (Note 12)                                      |              |                       |  | --     |  |   | --      |  
|Issuance of common stock under stock option plans including tax benefit (Note 17) |              |                       |  | 122    |  |   | 529     |  
|Issuance of common stock to Calm Waters                                           |              |                      
|Partnership (Note 18)                                                             |              |                       |  | 100    |  |   | 490     |  
|Issuance of convertible preferred stock                                           |              |                       |  | --     |  |   | --      |  
|Exercise of Calm Waters Warrants                                                  |              |                       |  | --     |  |   | 156     |  
|Preferred stock dividend                                                          |              |                       |  | --     |  |   | --      |  
|Accretion of preferred stock                                                      |              |                       |  | --     |  |   | --      |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Total comprehensive income                                                        |              |                       |  | --     |  |   | --      |  
|                                                                                  |              |                       |  |        |  |   |         |  
|Balance at September 30, 2004                                                     |              |                       |  | 26,244 |  | $ | 304,395 |  
|                                                                                  |              |                       |  |        |  |   |         |  

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

---

RENT-WAY, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS (all dollars in thousands, except share and per share data)

|                                                                       | For the Years Ended September 30,
|---------------------------------------------------------------------- | ---------------------------------
|
|OPERATING ACTIVITIES:                                                  |                                  
|Net income (loss)                                                      |                                  
|Adjustments to reconcile net income (loss) to net cash                 |                                  
|provided by (used in) operating activities:                            |                                  
|Loss from discontinued operations                                      |                                  
|Depreciation and amortization                                          |                                  
|Deferred income taxes                                                  |                                  
|Write-off of deferred financing costs                                  |                                  
|Goodwill impairment                                                    |                                  
|Market adjustment for interest rate swap derivative                    |                                  
|Market adjustment for preferred stock conversion option                |                                  
|derivative                                                             |                                  
|Write-off of property and equipment                                    |                                  
|Gain on sale of assets                                                 |                                  
|Changes in assets and liabilities:                                     |                                  
|Decrease (increase) in restricted cash                                 |                                  
|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 (used in) provided by discontinued operations                 |                                  
|                                                                       |                                  
|Net cash (used in) provided by operating activities                    |                                  
|                                                                       |                                  
|                                                                       |                                  
|INVESTING ACTIVITIES:                                                  |                                  
|                                                                       |                                  
|Investments in subsidiaries and other 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                                                 |                                  
|Payments on class action lawsuit note payable                          |                                  
|Payments on capital leases                                             |                                  
|Cash overdraft                                                         |                                  
|Proceeds from convertible preferred stock                              |                                  
|Deferred financing costs                                               |                                  
|Issuance of common stock                                               |                                  
|Dividends paid                                                         |                                  
|Interest on shareholder loans                                          |                                  
|Payment of loans by directors/shareholders                             |                                  
|                                                                       |                                  
|Net cash used in financing activities                                  |                                  
|                                                                       |                                  
|Increase (decrease) in cash and cash equivalents                       |                                  
|Cash and cash equivalents at beginning of year                         |                                  
|                                                                       |                                  
|Cash and cash equivalents at end of year                               |                                  
|                                                                       |                                  

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

---

RENT-WAY, INC. NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (all dollars in thousands, except share and per share data)

1.    
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS
AND ORGANIZATION. 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 stores that rent durable household products such as home
entertainment equipment, furniture, major appliances, computers, and jewelry to
consumers on a weekly , bi-weekly, semi-monthly or monthly basis in thirty-three
states. The stores are primarily located in the Midwestern, Eastern and Southern
regions of the United States. The Company also provides prepaid local phone service
to consumers on a monthly basis through its majority-owned subsidiary,
dPi Teleconnect, LLC (DPI).

BASIS
OF PRESENTATION. The Company presents an unclassified balance sheet to conform to practice
in the industry in which it operates. The consolidated financial statements include the
accounts of the Company and its wholly owned and majority owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.

ACCOUNTING
ESTIMATES. The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.

RESTRICTED
CASH. The Company entered into an agreement settling its securities class action on April
18, 2003, which was approved by the court on December 23, 2003. The settlement required
the Company to pay $25,000 to the class. The $25,000 payment consisted of $21,000 in cash
and $4,000 in two-year, unsecured subordinated notes payable bearing interest at 6%. Of
the $21,000 payable in cash, $11,000 was funded from available insurance proceeds. The
remaining $10,000, which was previously funded into escrow, was reflected as restricted
cash on the consolidated balance sheet at September 30, 2003 and was subsequently paid in
the first fiscal quarter of fiscal year 2004 (See Note 14).

RENTAL
MERCHANDISE, RENTAL REVENUE AND DEPRECIATION. 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. Rental revenue is
recognized as collected, since at the time of collection the rental merchandise has
been placed in service and costs of installation and delivery have been incurred.
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. At the end of each rental period, the customer can renew the rental
agreement.

Merchandise
rented to customers or available for rent is classified in the consolidated balance
sheet as rental merchandise and is valued at cost on a specific identification
method. Write-offs of rental merchandise arising from customers failure to
return merchandise and losses due to excessive wear and tear of merchandise are
recognized using the allowance method. Beginning in the three-month period ended September
30, 2004, the Company began recording rental merchandise adjustments to the allowance
method. This change to the allowance method had the effect of increasing other operating
expenses for a one-time adjustment of approximately $1,100, or approximately $0.04 per
basic share, to record a rental merchandise allowance reserve on the balance sheet. The
Company expects rental merchandise adjustments in the future under this new method to be
materially consistent with prior years adjustments under the direct write-off
method.

The
Company uses the units of activity depreciation method for all rental
merchandise except computers and computer game systems. Under the units of activity
method, rental merchandise is depreciated as revenue is collected or earned during
free-rent promotions. Thus, rental merchandise is not depreciated during periods when
it is not on rent and therefore not generating rental revenue. Personal computers are
principally depreciated on the straight-line basis beginning on acquisition date over
12 months to 24 months, depending on the type of computer.

VOLUME
REBATES. The Company participates in volume rebate programs with some of its rental
merchandise suppliers. On an annual basis, management calculates the amount of the
rebate and submits a request for payment. Upon receipt of the rebate, the

Company records deferred income. The
rebate is amortized on a straight-line basis over 18 to 20 months, the average life
of the underlying rental merchandise, commencing on the date cash is received and is
recorded as an offset to rental merchandise depreciation expense.

PREPAID
PHONE SERVICE. Prepaid phone service is provided to customers on a 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 and costs are recognized on a straight-line basis over the
estimated average life of the customer relationship.

CONVERTIBLE
REDEEMABLE PREFERRED STOCK. On June 2, 2003, the Company sold $15,000 in newly authorized
convertible redeemable preferred stock through a private placement. The proceeds of
$14,161, net of issuance costs of $839, were used to repay the previous senior credit
facility. The net proceeds are classified outside of permanent equity because of the
mandatory redemption date and other redemption provisions, except for an option to
purchase convertible preferred stock included in permanent equity (see Note 11). The
carrying value of this option was $0 and $142 at September 30, 2004 and 2003,
respectively. The option to purchase an additional $5,000 of convertible preferred stock
was fully exercised as of September 30, 2004.

OTHER
REVENUE. Other revenue includes revenue from various services and charges to rental
customers, including service revenues, late fees, liability waiver fees, processing
fees, sales of used merchandise and Preferred Customer Club membership fees. Other
revenue is recognized as collected. This method of revenue recognition does not
produce materially different results than if other revenue was recognized when
earned.

COMPREHENSIVE
INCOME (LOSS). Comprehensive income (loss) encompasses net income and changes in the
components of accumulated other comprehensive income not reflected in the
Companys consolidated statements of operations during the periods presented.
Accumulated other comprehensive income (loss) consists of the transition asset
recorded at the time of adoption of SFAS No. 133.

STATEMENT
OF CASH FLOWS INFORMATION. Cash and cash equivalents consist of cash on hand and on
deposit and highly liquid investments with maturities of three months or less when
purchased. Cash equivalents are stated at cost, which approximates market value. The
Company maintains deposits with several financial institutions. The Federal Deposit
Insurance Corporation does not insure deposits in excess of $100 and mutual funds.

Supplemental
disclosures of cash flow information for the years ended September 30, 2004, 2003, and
2002, are as follows:

|                                              | Year Ended September 30,
|--------------------------------------------- | ------------------------
|
|CASH PAID (RECEIVED) DURING THE YEAR FOR:     |                         
|Interest                                      |                         
|Income taxes (refunds)                        |                         
|NONCASH INVESTING ACTIVITIES:                 |                         
|Assets acquired under capital lease (Note 14) |                         
|NONCASH FINANCING ACTIVITIES:                 |                         
|Dividends                                     |                         

At September 30, 2004, 2003 and 2002
cash overdrafts of $1,312, $2,703, and $306, respectively, were included in accounts
payable in the accompanying consolidated balance sheets.

PROPERTY
AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION. Property and equipment are
stated at cost. Additions and improvements that significantly extend the lives of
depreciable assets are capitalized. Upon sale or other retirement of depreciable
property, the cost and accumulated depreciation are removed from the related accounts
and any gain or loss is reflected in the results of operations. The Companys
corporate headquarters and other buildings are depreciated over periods ranging from
20 to 40 years on a straight-line basis. Depreciation of furniture and fixtures,
signs and vehicles is provided over the estimated useful lives of the respective
assets (three to five years) on a straight-line basis. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the effective term of
the lease. Property under capital leases is amortized over the respective lease
term on a straight-line basis (see Note 14). The Company incurs repairs
and maintenance costs and costs for signage applied to its owned and
leased vehicles.

The
Company reviews the recoverability of the carrying value of long-term assets using an
undiscounted cash flow method. During fiscal 2004, 2003 and 2002, the Company believes
that no impairment of long-lived assets has occurred, and that no reduction of the
estimated useful lives is warranted.

INCOME
TAXES. Deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax and financial statement basis of assets and
liabilities at year end using income tax rates under existing legislation expected to
be in effect at the date such temporary differences are expected to reverse. A
valuation allowance is provided for deferred tax assets if it is more likely than not
that these items will expire before the Company is able to realize their benefit, or
that future deductibility is uncertain. Deferred income taxes are adjusted for tax
rate changes as they occur.

GOODWILL.  Effective
October 1, 2001, the Company adopted Statement of Financial           Accounting
Standards No. 142 (SFAS 142), Goodwill and           Other Intangible
Assets. SFAS 142 requires that intangible assets not           subject to amortization
and goodwill be tested for impairment annually, or           more frequently if
events or changes in circumstances indicate that the           carrying value may not be
recoverable. Amortization of goodwill and           intangible assets with indefinite lives,
including such assets recorded in           past business combinations, ceased upon adoption.
Thus, no amortization for           such goodwill and indefinite-lived intangibles
was recognized in the           accompanying condensed consolidated statements of operations.
The Company           calculated an impairment to goodwill of $58,935, recorded in
          Cumulative Effect of Change in Accounting Principle in the
          amount of $41,527 (net of $17,408 in income taxes) for the fiscal year
          ended September 30, 2002 (see Note 5).

INTANGIBLE
ASSETS. Customer contracts are stated at cost less amortization calculated on a
straight-line basis over 18 months. Non-compete agreements and prepaid consulting
fees are stated at cost less amortization calculated on a straight-line basis over
the terms of the related agreements, which range from two to seven years.

ADVERTISING
EXPENSE. The Company incurs three types of advertising costs: production and
printing, distribution, consisting primarily of postage, and communication.
Advertising costs for production and printing are generally expensed when incurred.
Advertising costs for distribution, consisting primarily of postage, are expensed
when the promotion begins. Cost of communicating is expensed as the communication occurs
as advertisements.

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. Legal contingencies are recorded when they are estimable
and probable in accordance with Statement of Financial Accounting Statements No. 5,
Accounting for Contingencies.

DEFERRED
FINANCING COSTS. Deferred financing costs consists of bond issuance costs and loan
origination costs which were incurred in connection with the sale of $205,000 of senior
secured notes and a new $60,000 revolving credit facility that was closed June 2, 2003.
The bond issuance costs of $6,704 are amortized using the effective interest method over
the seven-year term of the bonds. The loan origination costs of $2,062 are amortized on a
straight-line basis over the five-year bank credit agreement. Deferred financing cost
amortization and write-offs were $1,025, $3,061 and $5,205 for the years ended September
30, 2004, 2003 and 2002, respectively.

COMPANY
HEALTH INSURANCE PROGRAM. The Company determines insurance liability based on funding
factors determined by cost plus rates for a fully insured plan and monthly headcount. The
contracted rate is determined based on experience, prior claims filed and an estimate of
future claims. A retrospective adjustment for over (under) funding of claims is recorded
when determinable and probable.

COMPANY
LIABILITY INSURANCE PROGRAMS. Starting in 2001, the insurance liability for
workers compensation, automobile and general liability costs are determined
based on claims filed and company experience. Losses under the deductible in the
workers compensation, automobile and general liability programs are pre-funded
based on the insurance companys loss estimates. Loss estimates are adjusted for
developed incurred losses at 18 months following policy inception and every 12 months
thereafter. Retrospective adjustments to loss estimates are recorded when
determinable and probable. The Company received refunds for the retrospective insurance
adjustments of $1,773 and $4,618 for fiscal years ended September 30, 2004 and 2003,
respectively, and paid $3,613 for the retrospective insurance adjustment for the fiscal
year ended September 30, 2002.

For
fiscal years 2000 and 1998, the Company was insured under deductible programs with
aggregate stop loss coverage on major claims. Claims within the insured deductible limits
that were less than stop loss aggregates, were funded as claims developed using AM Best
loss development factors. The fiscal 1999 workers compensation insurance had no
aggregate retention and was funded as claims developed using AM Best loss development
factors. Reserves were developed by independent actuaries and totaled $994 and $1,357 at
September 30, 2004 and 2003, respectively.

EARNINGS
(LOSS) PER COMMON SHARE. Basic earnings (loss) per common share is computed using income
(losses) allocable to common shareholders divided by the weighted average number
of common shares outstanding. Diluted earnings (loss) per common share is computed
using income (losses) allocable to common shareholders adjusted for anticipated
interest savings, net of related taxes, for convertible subordinated notes
and debentures, convert derivative market value adjustment, and the weighted average
number of shares outstanding is adjusted for the potential impact of options,
warrants and convertible subordinated notes and debentures where the effects are
dilutive (See Note 20).

FAIR
VALUE DISCLOSURE. Fair values of the Companys interest rate swap agreements and
convert option of preferred stock derivative financial instruments have been determined
from information obtained from independent third parties. Fair values of other assets
and liabilities including letters of credit, debt and accounts payable are estimated
to approximate their carrying values.

The
estimated fair value of the Companys financial instruments at September 30, 2004 is
as follows:

|                    | Carrying
Value | Fair
Value
|------------------- | -------------- | ----------
|
|Interest Rate Swaps |                |           
|                    |                |           
|Convert Option of   |                |           
|Preferred stock     |                |           
|                    |                |           

The
estimated fair value of the Companys financial instruments at September 30, 2003 is
as follows:

|                    | Carrying
Value | Fair
Value
|------------------- | -------------- | ----------
|
|Interest Rate Swaps |                |           
|                    |                |           
|Convert Option of   |                |           
|Preferred stock     |                |           
|                    |                |           

DERIVATIVE
FINANCIAL INSTRUMENTS. The Company uses derivative financial instruments to reduce
the impact on interest expense of fluctuations in interest rates on a portion of its
credit facility (see Notes 11 and 12). The Company does not enter into derivative
financial instruments for trading or speculative purposes. As of June 2, 2003, the
Company is over-hedged because of the refinancing. The existing interest rate swaps hedged
a portion of the previous LIBOR debt. As a result of the refinancing, the only LIBOR debt
the Company has is the $60,000 revolver credit facility, of which $0 was outstanding at
September 30, 2004. The Company will reduce its interest rate swap position as they mature
through August 2005, rather than terminate these agreements early because of the current
high cost to terminate.

STOCK-BASED
COMPENSATION. The Company accounts for stock based compensation issued to its employees
and directors in accordance with Accounting Principle Board No. 25 and has elected to
adopt the disclosure only provisions of SFAS 123 as amended by provisions of
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. SFAS 148 amends SFAS 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 compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require new permanent disclosure in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used in reported results.

For
SFAS No. 148 purposes, the fair value of each option granted under the 1992 Plan, the 1995
Plan, the 1999 Plan and the 2004 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 2004, 2003 and 2002: expected volatility ranging from 94.39%
to 99.98%, risk-free interest rates between 2.87% and 4.79%, and an expected life of five
to six years. The Company uses the straight-line method of recognizing compensation cost
for fixed awards with pro-rata vesting.

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
income (loss) and income (loss) per common share would have been decreased to the
pro-forma amounts below:

|                                                | For The Year Ended September 30,
|----------------------------------------------- | --------------------------------
|
|Net income (loss) before cumulative effect of   |                                 
|change in accounting principle and discontinued |                                 
|operations:                                     |                                 
|As reported                                     |                                 
|Pro-forma                                       |                                 
|Net income (loss):                              |                                 
|As reported                                     |                                 
|Pro-forma                                       |                                 
|Diluted earnings (loss) per common share:       |                                 
|Net income (loss) before cumulative effect of   |                                 
|change in accounting principle and discontinued |                                 
|operations:                                     |                                 
|As reported                                     |                                 
|                                                |                                 
|Pro-forma                                       |                                 
|                                                |                                 
|Net income (loss):                              |                                 
|As reported                                     |                                 
|                                                |                                 
|Pro-forma                                       |                                 
|                                                |                                 

DISCONTINUED
OPERATIONS. On February 8, 2003, the Company sold 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 September 30, 2003 and 2002 consolidated financial
          statements were reclassified to conform to the September 30, 2004
          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 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 in
May, 2003, and an additional $5,000 for 18 months, which was refunded to the Company in
August 2004. 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 was amortized into income over the 18-month hold back period. Also,
there was a $24,500 escrow held by National City Bank, which was used to pay transaction
costs, store closing and similar expenses. The balance of this escrow, 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, certain vehicles under capital leases and certain
other fixed assets. Vehicle lease obligations were paid by the Company out of the proceeds
from the sale.

The
asset group was 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 and are accounted for 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 employee separation costs as
costs were incurred in accordance with SFAS 146. These costs are included in the results
of discontinued operations in accordance with SFAS 144.

Related
operating results have been reported as discontinued operations in accordance with SFAS
144. The Company reclassified the results of operations of the disposed component for the
prior periods 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 required to be repaid as a result of the disposal transaction
was allocated to loss from discontinued operations. The effective interest rate on the
outstanding debt of the Company at the end of the period reported was applied to the
$68,643 estimated debt pay-down from the proceeds. The amount of interest reclassified to
loss from discontinued operations was $0, $3,036 and $8,587 for the periods ended
September 30, 2004, 2003 and 2002, respectively. Revenues and net loss from the
discontinued operations were as follows:

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

|(1) |  | The Company recorded 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 were 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. In 2004,
               there was a reduction to the number of these leases that were originally
               anticipated to be bought out or terminated which resulted in a change in
               estimate in 2004.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

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, net of sublease revenue, and other direct exit costs related to
these activities. Employee severance costs related to the closing of under-performing
stores were immaterial in each of the periods reported below. The net amount of these
costs charged to income 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 September 30, 2003  |                        |                         |      
|                               |                        |                         |      
|Fiscal 2004 Provision          |                        |                         |      
|Amount utilized in fiscal 2004 |                        |                         |      
|                               |                        |                         |      
|Balance at September 30, 2004  |                        |                         | $    
|                               |                        |                         |      

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

During
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
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 of 295
stores to Rent-A-Center, Inc. There was $48, $3,046 and $0 of restructuring costs for the
fiscal years ended September 30, 2004, 2003 and 2002, respectively. The $3,046 of
restructuring costs incurred in fiscal year 2003 consists of fixed asset write-offs
totaling $2,065 included in the table above, and $981 of employee severance and
termination benefits not included in the table above.

In
addition to lease termination costs incurred in normal operating activities summarized in
the table above, the Company incurred an additional lease obligation for the leases of the
170 stores that Rent-A-Center, Inc. did not assume in the sale. The total original gross
obligation was $13,491 on February 8, 2003 and was reduced for estimated sublease income
of $3,834 and further reduced by $1,286 to reflect the present value of that obligation in
accordance with Statement of Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. These lease termination costs
have been reported as discontinued operations in accordance with SFAS 144. At September
30, 2004, the net obligation is $1,919.

4.    
          NEW ACCOUNTING STANDARDS:

In
May, 2003, 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. The Company has adopted the provisions of this Statement which did not have
a material effect on the financial statements.

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 is effective for
financial statements for periods ending after March 15, 2004. The Company has no variable
interest entities that are not currently consolidated.

In
March 2004, the FASB issued a proposed Statement, Share-Based Payment  an amendment
of Statements No. 123 and 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on fair value of the
enterprises equity instruments or that may be settled by the issuance of such equity
instruments. The proposed Statement would eliminate the ability to account for share-based
compensation transactions and generally would require instead that such transactions be
accounted for using a fair-value based method. On October 13, 2004, the FASB concluded
that Statement 123R, Share-Based Payment, would be effective for public companies for
interim or annual periods beginning after June 15, 2005. The Company does not know how the
provisions of this proposed statement will effect financial statements of the Company.

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 requires that intangible assets not subject to amortization and goodwill be
tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the carrying value may not be recoverable. SFAS 142
prescribes a two-phase process for impairment testing of goodwill. The first phase
screens for impairment while the second phase, if necessary, measures the impairment.
Amortization of goodwill and intangible assets with indefinite lives, including such
assets recorded in past business combinations, ceased upon adoption. Thus, no
amortization for such goodwill and indefinite lived intangibles was recognized in the
accompanying Consolidated Statements of Operations for fiscal years ended September
30, 2004, 2003 and 2002. On an annual basis and when there is a reason to suspect that the
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, the Company completed, with the
assistance of an independent valuation firm, phase one of the impairment test
consisting of a comparison of the fair value of a reporting unit with its carrying amount
for goodwill and indefinite lived intangibles that existed on the Companys
balance sheet at the date of its adoption. Based upon its analysis from
the phase one impairment test, the Company identified indicators of
possible impairment resulting from a reduction of forecasted cash flows related to
the household rental segment. The total enterprise value, as determined by an
independent valuation firm, represents a combination of the market multiple, discounted
cash flow and comparable transaction approaches.

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 $58,935, recorded in Cumulative Effect of Change in Accounting
Principle in the amount of $41,527 (net of $17,408 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 transaction (see Note 2) was an event that triggered 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 as set forth in the Rent-A-Center purchase agreement as of
December 17, 2002, the date of the agreement. There was no impairment of goodwill as a
result of this assessment.

The
following table reflects the components of amortizable intangible assets at September 30,
2004:

|Balance at September 30, 2004: | Purchase
Amount | Cumulative
Amortization | Net
Carrying
Amount
|------------------------------ | --------------- | ----------------------- | -------------------
|
|Amortizable intangible assets: |                 |                         |                    
|Non-compete agreements         |                 |                         | $                  
|Customer contracts             |                 |                         |                    
|                               |                 |                         |                    
|                               |                 |                         | $                  
|                               |                 |                         |                    

|Balance at September 30, 2003: | Purchase
Amount | Cumulative
Amortization | Net
Carrying
Amount
|------------------------------ | --------------- | ----------------------- | -------------------
|
|Amortizable intangible assets: |                 |                         |                    
|Non-compete agreements         |                 |                         | $                  
|Customer contracts             |                 |                         |                    
|Exclusivity agreement          |                 |                         |                    
|                               |                 |                         |                    
|                               |                 |                         | $                  
|                               |                 |                         |                    

At
September 30, 2004, future aggregate annual amortization of amortizable intangible assets
is as follows:

|Fiscal Year | Amount
|----------- | ------
|2005        | $  97 
|2006        | 10    
|2007        | 5     
|            |       
|            | $112  
|            |       

Amortization
expense of amortizable intangible assets for the year ended September 30, 2004, 2003 and
2002 was $391, $1,361, and $2,277, respectively. There were no changes to the amortization
methods and lives of the amortizable intangible assets.

The
changes in the carrying amount of goodwill for the fiscal years ended September 30 were as
follows:

|                              | Household
Rental Segment | Prepaid Telephone
Service Segment | Total |        
|----------------------------- | ------------------------ | --------------------------------- | ----- | -------
|Balance at September 30, 2001 |                          |                                   | $     | 285,490
|Impairment                    |                          |                                   |       | (58,935
|Other (1)                     |                          |                                   |       | (3,359 
|                              |                          |                                   |       |        
|Balance at September 30,2002  |                          |                                   |       | 223,196
|Additions                     |                          |                                   |       | --     
|Disposal (2)                  |                          |                                   |       | (41,291
|                              |                          |                                   |       |        
|Balance at September 30, 2003 |                          |                                   |       | 181,905
|                              |                          |                                   |       |        
|Additions                     |                          |                                   |       | --     
|Disposal                      |                          |                                   |       | --     
|                              |                          |                                   |       |        
|Balance at September 30, 2004 |                          |                                   | $     | 181,905
|                              |                          |                                   |       |        

|(1) |  | Reversal of an income tax contingency established as a part of purchase
               accounting in prior years, which was determined to be no longer needed during
               the fourth quarter of 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Disposal of 295 stores to Rent-A-Center on February 8, 2003.
|--- |  | ------------------------------------------------------------

|(3) |  | Includes
goodwill held for sale of $41,291.
|--- |  | -------------------------------------------

|(4) |  | On April 7, 2004, the Company purchased 100 shares of DPI Holdings, Inc. from           the
former chief operating officer.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

6.    
          RENTAL MERCHANDISE AND PROPERTY AND EQUIPMENT:

Cost
and accumulated depreciation of rental merchandise consists of the following:

|                              | Year Ended September 30,
|----------------------------- | ------------------------
|
|Cost                          |                         
|Less accumulated depreciation |                         
|Less reserve for losses       |                         
|Less deferred credits         |                         
|                              |                         
|                              |                         
|                              |                         

The
Company uses a direct-ship policy from their vendors to the stores. As a result, the
Company has eliminated the need for internal warehousing and distribution. This policy
reduces the amount of rental merchandise not on rent. On-rent and held for rent levels of
net rental merchandise consists of the following:

|                          | Year Ended September 30,
|------------------------- | ------------------------
|
|On-rent merchandise       |                         
|Held for rent merchandise |                         
|                          |                         
|                          |                         
|                          |                         

Beginning
in 2004 the Company uses the allowance method in accounting for losses (see Note 1). This
change to the allowance method had the effect of increasing other operating expenses for a
one-time adjustment of approximately $1,100 to set up a rental merchandise allowance
reserve on the balance sheet. The Company expects rental merchandise adjustments in the
future under this new method to be materially consistent with prior years
adjustments under the direct write-off method. These losses are recorded in other
operating expenses and were incurred as follows:

|                                                | Year Ended September 30,
|----------------------------------------------- | ------------------------
|
|Lost merchandise                                |                         
|Stolen merchandise                              |                         
|Discarded merchandise                           |                         
|Reserve for losses                              |                         
|                                                |                         
|                                                |                         
|Less losses included in discontinued operations |                         
|                                                |                         
|Losses included in continuing operations        |                         
|                                                |                         

Property
and equipment consists of the following:

|                                               | Year Ended September 30,
|---------------------------------------------- | ------------------------
|
|Transportation equipment                       |                         
|Furniture and fixtures                         |                         
|Leasehold improvements                         |                         
|Signs                                          |                         
|Buildings                                      |                         
|Land                                           |                         
|                                               |                         
|                                               |                         
|Less accumulated depreciation and amortization |                         
|                                               |                         
|                                               |                         
|                                               |                         

7.    
          RENTAL MERCHANDISE CREDITS DUE FROM VENDORS:

The
Company had credits due from vendors for the return of merchandise in the amount of
$3,242, $4,156 and $995 as of September 30, 2004, 2003 and 2002, respectively. The
credits are reduced when the Company purchases additional products from the vendors.

8.    
          OTHER ASSETS:

Other
assets consist of the following:

|                                      | Year Ended September 30,
|------------------------------------- | ------------------------
|
|Receivable from insurance proceeds    |                         
|Receivable from sale to Rent-A-Center |                         
|Other receivables                     |                         
|Other inventory                       |                         
|Deposits                              |                         
|Other                                 |                         
|                                      |                         
|Total other assets                    |                         
|                                      |                         

9.    
          OTHER LIABILITIES:

Other
liabilities consist of the following:

|                                               | Year Ended September 30,
|---------------------------------------------- | ------------------------
|
|Accrual for settlement of class action lawsuit |                         
|Accrued salaries, wages, tax and benefits      |                         
|Capital lease obligations                      |                         
|Accrued preferred dividend and interest        |                         
|Vacant facility lease obligations              |                         
|Swap liability                                 |                         
|Accrued property taxes                         |                         
|Other                                          |                         
|                                               |                         
|Total other liabilities                        |                         
|                                               |                         

10. DEBT:

Debt
consists of the following:

|                             | Year Ended September 30,
|---------------------------- | ------------------------
|
|Senior secured notes         |                         
|Revolving credit facility    |                         
|Note payable lawsuit settled |                         
|Note payable and other       |                         
|                             |                         
|                             |                         
|                             |                         

The
Companys senior secured notes have the following important terms. The $205,000
principal amount of senior secured notes bear interest at 11.875% and are due June 15,
2010. The interest on the secured notes is payable semiannually on June 15 and December
15. 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 is recorded as interest expense and was $356 and $104 for the years ended
September 30, 2004 and 2003, respectively. Costs representing underwriting fees and other
professional fees of $6,704 are being amortized, using the effective interest 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.

Under
the indenture for the secured notes, if the Company (a) has any excess cash flow or
amounts on deposit in the excess cash flow collateral account, (b) has a leverage ratio
equal to or greater than 2.50 to 1.00 or a rent-adjusted leverage ratio equal or greater
than 4.00 to 1.00, and (c) 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 the Company (a)
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 must use the
excess cash flow plus such amounts on deposit to repay debt (if any) outstanding under the
revolving credit facility or, subject to limitations, must 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 must 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 to use excess cash flow as described above 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. Under the
indenture, excess cash flow means for any fiscal year, EBITDA for the Company
and its consolidated restricted subsidiaries for such year, adjusted for certain items.
Excess cash collateral account is an account maintained by the collateral
agent in which the Company deposits all of the portion of the 75% of the excess cash flow
remaining after payment of debt outstanding under the revolving credit facility. The
Company is in compliance with all covenants at September 30, 2004, and expects to comply
with covenants based upon its fiscal 2005 projections.

The
Companys bank revolving credit facility has the following material terms. The
facility is with Harris Trust and Savings Bank, acting as administrative agent, and Bank
of Montreal as lead arranger, and provides for National City Bank to act as syndication
agent and provides 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 swing line sub-limit.
The credit facility will expire five years from closing (June 2, 2008). There is no
outstanding balance on the bank credit facility with $54,820 available at September 30,
2004. Deferred financing costs of $2,062 are being amortized, over the 5-year term of the
bank agreement. The credit facility is guaranteed by all of the wholly owned domestic
subsidiaries and collateralized 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.

Effective
December 7, 2004, the Company amended its bank revolving credit facility to change the
financial covenants to allow for the effect of opening new stores. The leverage ratio and
minimum financial EBITDA covenants were amended as shown in the financial covenants
required under the credit facility in the following section.

The
financial covenants required under the credit facility are as follows:

| | 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. As of the last day of
each fiscal quarter ending during each of the periods specified below, the leverage ratio
at such time should not be greater than:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                |                    | Shall Not Exceed
|--------------- | ------------------ | ----------------
|
|July 1, 2004    | September 30, 2004 | 4.50 to 1.00    
|October 1, 2004 | September 30, 2005 | 4.00 to 1.00    
|July 1, 2004    | June 30, 2005      | --              
|October 1, 2005 | September 30, 2006 | 3.75 to 1.00    
|July 1, 2005    | December 31, 2005  | --              
|January 1, 2006 | March 31, 2006     | --              
|April 1, 2006   | June 30, 2006      | --              
|July 1, 2006    | Credit Agreement   | --              
|                | Termination Date   |                 
|October 1, 2006 | September 30, 2007 | 3.25 to 1.00    
|October 1, 2007 | Credit Agreement   | 2.75 to 1.00    
|                | Termination Date   |                 
|                |                    |                 

| | 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 1.20 to 1.00 from October
1, 2003 through March 31, 2004 and 1.25 to 1.00 from April 1, 2004 through June 2, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot incur capital expenditures in an amount in excess of $20,000 in the
aggregate during any fiscal year. The $20,000 maximum is increased for any unused
preceding year permitted amount not to exceed $22,500 in a fiscal year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
net worth shall not be less than $85,000 plus 75% of positive net income with no
deduction for losses 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:

|                                       | Minimum EBITDA
|-------------------------------------- | --------------
|
|September 2004                         | $55.5 million 
|October 2004                           | $56.5 million 
|November 2004                          | $57.0 million 
|December 2004                          | $58.0 million 
|January 2005                           | $58.0 million 
|February 2005                          | $59.0 million 
|March 2005                             | $59.0 million 
|April 2005 through February 2006       | $60.0 million 
|March 2006 through December 2006       | $62.5 million 
|January 2007 and thereafter            | $65.0 million 
|April 2005                             | --            
|May 2005                               | --            
|June 2005                              | --            
|July 2005                              | --            
|August 2005                            | --            
|September 2005 - August 2006           | --            
|September 2006 - Each Month Thereafter | --            

The
Company is in compliance with all covenants at September 30, 2004, and expects to be able
to comply with covenants based upon its fiscal 2005 projections.

The
Companys note payable for lawsuit settlement was agreed to in the settlement of the
class action lawsuit. The note payable consists of a $4,000 unsecured subordinated note,
which bears interest at 6% annually and payable in four equal installments over two years
on June 30 and December 31. The first $1,000 was paid on December 31, 2003 and the second
$1,000 was paid on June 30, 2004. The remaining balance at September 30, 2004 was $2,000.

At
September 30, 2004 and 2003, the Company had outstanding standby letters of credit of
$5,180 and $8,670, respectively. The letters of credit typically act as a guarantee of
payment to certain third parties in accordance with specified terms and conditions. The
Company guarantees standby letters of credit for DPI, it majority owned subsidiary, in the
amount of $280 and $20, at September 30, 2004 and 2003, respectively, which are included
in the total outstanding letters of credit disclosed above.

11.    
          CONVERTIBLE PREFERRED STOCK:

On
June 2, 2003, the Company issued 1,500 shares of its Series A convertible preferred stock,
for $10,000 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 were used to repay the Companys prior senior credit
facility (See Note 10.). The net proceeds of $14,161 from the issuance of the convertible
preferred stock are net of issuance costs of $839, and are classified outside of permanent
equity because of the redemption date and other redemption provisions, except the option
to purchase additional convertible preferred stock which was included in permanent equity.
The remaining options to purchase additional shares were exercised in 2004. The
convertible preferred stock is being accreted to its maximum 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 June
2, 2011, redemption date.

The
terms of the convertible preferred stock include a number of conversion and redemption
provisions that represent derivative financial instruments under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, (SFAS 133) (See Note 12). Certain features of the convertible
preferred stock are accounted for as embedded derivative financial instruments. The
Company has determined that the option to purchase additional preferred shares was an
embedded derivative financial instrument that qualified 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 (EITF-0019).
As such, this derivative was initially required to be bifurcated and recorded at fair
value in the equity section of the consolidated balance sheet upon issuance but does not
require mark to market accounting. The carrying value of this derivative financial
instrument was reduced to $0 during the quarter ended June 30, 2004 due to the exercise
of the remaining options. The Company also has determined the convertible feature of the
convertible preferred stock is a derivative financial instrument that does not qualify
for scope exemption under EITF 00-19; and, is required to be bifurcated, recorded at fair
value, and marked to market. The market value of this derivative financial instrument was
$13,330 and $10,509 at September 30, 2004 and 2003, respectively, and is recorded in
convertible redeemable preferred stock in the consolidated balance sheet. 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.  Dividends
will accrue daily at a rate of 8.0% per annum. Dividends on the           preferred stock
are payable 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 is required to pay dividends in           cash if a
triggering event occurs. Dividends not paid within five business days           of the
dividend payment date 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 $1,382 and $399 were accrued and charged           to
accumulated deficit for the years ended September 30, 2004 and 2003,
          respectively.

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. The holders can convert the preferred stock to 3,251,880 shares of common
stock with a market value of $22,275 at September 30, 2004.

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. The stated value
plus unpaid dividends is $20,397 and $15,303 at September 30, 2004 and 2003, respectively.

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 sale of all or substantially
all of the Companys assets 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 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 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.

Restriction
of Additional Preferred Stock. Without the consent of the holders of the Series A
preferred shares, the Company may not issue any other preferred shares that would rank
senior to or pari passu with the Series A preferred with respect to payments of dividends
or on liquidation.

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. The Company has also filed a
registration statement on Form S-3 covering shares of common stock issuable upon
conversion of the preferred stock acquired in the subsequent closings, which became
effective July 27, 2004.

12.    
          DERIVATIVE FINANCIAL INSTRUMENTS:

On
June 2, 2003, the Company issued 1,500 shares of convertible redeemable preferred stock
(see Note 11). The terms of this preferred stock include a number of conversion and
redemption provisions that represent derivatives under SFAS No. 133. The Company
determined that the option to purchase additional preferred shares was an embedded
derivative financial instrument that qualified for SFAS 133 scope exemption under the
provisions of EITF 00-19. As such this derivative was initially bifurcated and recorded in
shareholders equity. This derivative did not require mark to market accounting.

The
Company also has determined the convertible feature of the convertible redeemable
preferred stock is a derivative financial instrument 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 change in the fair market value of the conversion
feature resulted in income of $1,776 in 2004 and expense of $1,899 in 2003, which was
recorded to other income in the Companys consolidated statements of operations.

At
September 30, 2004, the Company had interest rate swaps on a notional debt amount of
$40,000 and a fair market value of ($1,572). The variable pay interest rate ranges from
6.88% 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 SFAS No. 133. The Companys positive change in the fair market value
of the interest rate swap portfolio was $3,564 and $4,576 for the years ended September
30, 2004 and 2003, respectively. This was recorded to other income in the Companys
consolidated statements of operations. The fair-value of the swap agreements are based
upon quoted market prices as determined by the financial institution that holds them.
These values represent the estimated amount the Company would receive or pay to terminate
agreements taking into consideration current interest rates and the credit worthiness of
the counter parties.

13.    
          INSURANCE CHARGE AND RECOVERY

In
fiscal 2004, the Company recorded income of $1,773 for ultimate and incurred losses
related to the Companys revised estimates for retrospective liability insurance
programs, which offset insurance costs included in other operating expense. The adjustment
was comprised of income in the amount of $605, $373 and $795 for the policy years ended
December 31, 2001, 2002 and 2003. In fiscal 2003, the Company recorded income of $4,618
for ultimate and incurred losses related to the Companys revised estimates for
retrospective insurance programs, which offset insurance costs included in other operating
expense. The adjustment was comprised of income in the amount of $3,597 and $1,055 for the
policy years ended December 31, 2002 and 2001, respectively, and, an expense of $34 for
the policy year ended December 31, 2000. In fiscal 2002 the Company also recorded an
expense of $4,600, which consisted of adjustments to several of the Companys
retrospective insurance programs and  a change in estimate related to applicable
losses.

The
Company recorded as a reduction of other operating expense, a reimbursement of
defense costs related to the derivative and class action lawsuits in the amount of
$800 and $1,900 for the 2003 and 2002 fiscal years respectively. There were no such
recoveries for the 2004 fiscal year.

14.    
          COMMITMENTS AND CONTINGENCIES:

The
Company leases substantially all of its retail stores under non-cancelable agreements
generally for initial periods ranging from three to five years. The store leases
generally contain renewal options for one or more periods of three to five years.
Most leases require the payment of taxes, insurance, and maintenance costs by the
Company. The Company leases certain transportation, satellite and computer equipment
under capital leases and, to a lesser extent, operating leases, under arrangements
that expire over the next 5 years. At September 30, 2004, future minimum rental
payments under non-cancelable capital and operating leases are as follows:

|                                                       | Capital Leases | Operating Leases
|------------------------------------------------------ | -------------- | ----------------
|2005                                                   |                |                 
|2006                                                   |                |                 
|2007                                                   |                |                 
|2008                                                   |                |                 
|Thereafter                                             |                |                 
|                                                       |                |                 
|Total minimum payments required                        |                |                 
|Amount representing interest obligations under capital |                |                 
|lease                                                  |                |                 
|                                                       |                |                 
|                                                       |                |                 
|                                                       |                |                 

The
capital lease agreements have a minimum lease term of one year and permit monthly
renewal options and contain residual lease guarantees. The Company has retained the
leased vehicles an average of 50 months.

The
Companys investment in equipment under capital leases was as follows:

|                                  | Year Ended September 30,
|--------------------------------- | ------------------------
|
|Transportation equipment          |                         
|Satellite equipment               |                         
|Computer equipment                |                         
|Less accumulated amortization     |                         
|                                  |                         
|Net equipment under capital lease |                         
|                                  |                         

Rent
expense under operating leases for the years ended September 30, 2004, 2003, and 2002 was
$24,821, $23,973 and $33,970, respectively.

As
previously reported, the Company, its former independent accountants, and certain of its
current and former officers were 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 required 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 has been funded from available insurance proceeds; the remaining $10,000 was
funded into escrow and was classified as restricted cash on the consolidated balance sheet
at September 30, 2003. The settlement agreement provided for the release of the Company
and all other defendants except the Companys former controller and the
Companys former independent accountants. The settlement received court approval and
became final by virtue of an order dated December 22, 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 $5,559. However, all but
$108 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 determines health insurance liability based on funding factors determined by cost
plus rates for a fully insured plan and monthly headcount. The contracted rate is
determined based on experience, prior claims filed and an estimate of future claims. A
retrospective adjustment for over (under) funding of claims is recorded when determinable
and probable.

Starting
in 2001, the insurance liability for workers compensation, automobile and
general liability costs are determined 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 following policy inception and every 12 months thereafter.
Retrospective adjustments to loss estimates are recorded when determinable and
probable.

For
fiscal years 2000 and 1998, the Company was insured under deductible programs with
aggregate stop loss coverage on major claims. Claims within the insured deductible limits
that were less than stop loss aggregates, were funded as claims developed using AM Best
loss development factors and not exceeding policy aggregate. The fiscal 1999 workers
compensation insurance had no aggregate retention and was funded as claims developed using
AM Best loss development factors.

The
Company has approximately $707 and $466 recorded as deposits held for customers, recorded
in other liabilities at September 30, 2004 and 2003, respectively.

Also, see Note 16 for related party
commitments.

15.    
          INCOME TAXES:

The
Companys income tax expense (benefit) consists of the following components:

|                            | For The Year Ended September 30,
|--------------------------- | --------------------------------
|
|Current expense (benefit):  |                                 
|Federal                     |                                 
|State and local             |                                 
|                            |                                 
|Deferred expense (benefit): |                                 
|Federal                     |                                 
|State and local             |                                 
|                            |                                 
|                            |                                 
|                            |                                 
|Income tax expense          |                                 
|                            |                                 

A
reconciliation of the income tax expense (benefit) compared with the amount at the U.S.
statutory tax rate of 35% is shown below:

|                                                     | For The Year Ended September 30,
|---------------------------------------------------- | --------------------------------
|
|Tax provision at U.S. statutory rate                 |                                 
|State and local income taxes, net of federal benefit |                                 
|Deferred tax valuation allowance                     |                                 
|Other                                                |                                 
|                                                     |                                 
|Income tax expense                                   |                                 
|                                                     |                                 

At
September 30, 2004 and 2003, the components of the net deferred tax asset (liability) are
as follows:

|                                   | Year Ended September 30,
|---------------------------------- | ------------------------
|
|Rental merchandise                 |                         
|Property and equipment             |                         
|Operating loss carryforwards       |                         
|Intangibles                        |                         
|Goodwill                           |                         
|Accrued expenses                   |                         
|Other                              |                         
|Tax credits                        |                         
|Swap agreements                    |                         
|Deferred tax valuation allowance   |                         
|                                   |                         
|Net deferred tax asset (liability) |                         
|                                   |                         

As
of September 30, 2004, the Company has net operating loss carryforwards of $210,675
for income tax purposes, the majority of which expire in fiscal years 2018 through 2024.
Additionally, as of September 30, 2004, the Company has alternative minimum tax
credits of $147 and general business credits of $265.

At
September 30, 2003, the valuation allowance was $73,095. The valuation allowance increased
$147, of which $10 is the tax benefit of the transitional swap amount recorded to
equity in 2004. A portion of this increase was a result of a modification to the
operating loss carryforwards based on actual filed tax returns.  Approximately
$3,601 of the operating loss carryforwards will result in a credit to
shareholders equity when it is determined they can be utilized.

In
October 2004, the American Job Creation Act of 2004 was passed. Management is in the
process of evaluating its impact on the Company.

16.    
          RELATED PARTY TRANSACTIONS:

On
April 7, 2004, the Company purchased 100 shares of DPI Holdings, Inc. from the former
Chief Operating Officer of DPI for $350. DPI Holdings, Inc. owns 16.5% interest in DPI,
and the Company owns 83.5% interest in DPI after the acquisition of shares.

During
fiscal years ended September 30, 2004, 2003, and 2002, the Company leased one
location from a company controlled by a principal shareholder. Rent paid during these
years related to this lease was $49.

At
September 30, 2002 the Company held notes receivable from directors, which were due
within one year and unpaid interest thereon of $282. The notes were repaid during
2003. Interest income was $3 and $41for the years ended September 30, 2003 and
2002, respectively. The notes are reflected as a reduction to shareholders
equity in the Companys consolidated balance sheet.

The
Company has entered into an engagement agreement with a director of the Company that
provides for the payment of $100 per year for 10 years commencing October 1, 1999.

17.    
          STOCK OPTIONS:

In
March 2004, the Board of Directors of the Company adopted, and the shareholders approved,
the Rent-Way, Inc. 2004 Stock Option Plan (the 2004 Plan) which authorizes the
issuance of up to 1,700,000 shares of common stock pursuant to stock options granted to
officers, directors, key employees of the Company. The option exercise price will not be
less than the fair market value of the Companys common stock on the grant date. The
2004 Plan will expire in March 2014 unless terminated earlier by the Board of Directors.
The authorized number of shares, the exercise price of outstanding options, and the number
of shares under option are subject to appropriate adjustment for stock dividends, stock
splits, reverse stock splits, recapitalizations, and similar transactions. The 2004 Plan
is administered by the Compensation Committee of the Board of Directors who select the
optionees and determine the terms and provisions of each option grant within the
parameters set forth in the 2004 Plan.

In
March 1999, the Board of Directors of the Company adopted, and the shareholders
approved, the Rent-Way, Inc. 1999 Stock Option Plan (the 1999 Plan) which
authorizes the issuance of up to 2,500,000 shares of common stock pursuant to stock
options granted to officers, directors, key employees, consultants, and advisors of the
Company. The option exercise price will be at least equal to the fair market value of the
Companys common stock on the grant date. The 1999 Plan will expire in March
2009 unless terminated earlier by the Board of Directors. The authorized number of
shares, the exercise price of outstanding options, and the number of shares under
option are subject to appropriate adjustment for stock dividends, stock splits,
reverse stock splits, recapitalizations, and similar transactions. The 1999 Plan is
administered by the Compensation Committee of the Board of Directors who select the
optionees and determine the terms and provisions of each option grant within
the parameters set forth in the 1999 Plan.

The
Board of Directors of the Company also adopted, and the shareholders have approved
the Rent-Way, Inc. 1995 Stock Option Plan (the 1995 Plan),
which authorizes the issuance of up to 2,000,000 shares of common stock pursuant
to stock options granted to officers, directors, and key employees of the
Company. The 1995 Plan is administered by the Compensation Committee of the Board
of Directors and contains terms and provisions substantially identical to
those contained in the 1992 Plan.

In
June 1992, the Board of Directors of the Company adopted, and the shareholders have
approved, the Rent-Way, Inc. Stock Option Plan of 1992 (the "1992 Plan)
which authorizes the issuance of up to 600,000 shares of common stock pursuant to
stock options granted to officers, directors and key employees of the Company. The option
exercise price will be at least equal to the fair market value of the Companys
common stock on the grant date. No options may be granted under this Plan any time
following 10 years from the date of the Plans adoption, June 17, 2002. No option may
be exercised more than 10 years from its date of grant. The authorized number of shares,
the exercise price of outstanding options and the number of shares under option are
subject to appropriate adjustment for stock dividends, stock splits, reverse stock
splits, recapitalizations and similar transactions. The 1992 Plan is administered by
the Compensation Committee of the Board of Directors who select the optionees
and determine the terms and provisions of each option grant within the
parameters set forth in the 1992 Plan.

Pursuant
to the terms of the merger agreement between Rent-Way and Home Choice in fiscal 1999,
each Home Choice stock option which was outstanding and unexercised at the date of
the merger was converted into an option to purchase Rent-Ways common stock.
Home Choice options were converted into Rent-Way options from various plans on November
12, 1999. The number of shares subject to the Home Choice options was equal to the
product of the number of shares of Home Choice common stock subject to Home Choice
options and 0.588, the exchange ratio.

On
June 13, 2002, option holders of the Company (other than officers and directors) were
issued new options in replacement of options previously cancelled pursuant to the
Companys exchange offer. The new options were issuable on the date six months
and one day after the date of cancellation. The exercise price of the new options is
$11.67 per share, which was the closing price of the Companys common stock on
the New York Stock Exchange on June 13, 2002. On December 11, 2001 (the expiration
date of the Companys offer), 1,109,580 options to acquire common stock were
cancelled pursuant to the offer. On June 13, 2002, options covering 1,008,272 shares
were issued in replacement thereof.

The
following is a summary of activity of the Companys stock options during the
years ended September 30, 2004, 2003 and 2002:

|STOCK OPTIONS      | SHARES | WEIGHTED AVERAGE
PRICE PER SHARE
|------------------ | ------ | --------------------------------
|September 30, 2001 |        |                                 
|                   |        |                                 
|Granted            |        |                                 
|Exercised          |        |                                 
|Cancelled          |        |                                 
|                   |        |                                 
|September 30, 2002 |        |                                 
|                   |        |                                 
|Granted            |        |                                 
|Exercised          |        |                                 
|Cancelled          |        |                                 
|                   |        |                                 
|September 30, 2003 |        |                                 
|                   |        |                                 
|Granted            |        |                                 
|Exercised          |        |                                 
|Cancelled          |        |                                 
|                   |        |                                 
|September 30, 2004 |        |                                 
|                   |        |                                 

At
September 30, 2004, stock options representing 1,823,991 shares are exercisable at prices
ranging from $4.06 to $31.63 per share and grant dates ranging from July 15, 1995, to June
1, 2004. The weighted-average fair value of options granted was $5.84 in 2004, $3.71 in
2003 and $7.71 in 2002.

At
September 30, 2004, the Company has individual option award agreements outside of these
plans with two employees covering an aggregate of 40,000 options to acquire shares of
common stock. These options were granted on June 13, 2002. They are outstanding and
exercisable at $11.67 per share.

For
various price ranges, outstanding stock options at September 30, 2004 were as follows:

|Range of
Exercise Price | Shares of
Outstanding Options | Shares of
Exercisable Options
|----------------------- | ----------------------------- | -----------------------------
|$ 3.51         -        | $ 5.27                        | 142,700                      
|$ 5.28         -        | $ 7.92                        | 1,579,000                    
|$ 7.93         -        | $11.90                        | 981,648                      
|$ 11.91         -       | $ 17.87                       | 129,000                      
|$17.88         -        | $ 26.82                       | 109,146                      
|$26.83         -        | $33.63                        | 46,414                       
|                        |                               |                              
|                        |                               | 2,987,908                    
|                        |                               |                              

18.    
          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 had an exercise price of $9.35 per share, subject to adjustment. The
Company re-measured the value of the warrants because the agreement with Calm Waters
Partnership contained a clause that the warrants granted to Calm Waters Partnership would
be re-measured to any subsequent option grants in which the grant price was below the
original $9.35 exercise price of the warrants granted to Calm Waters Partnership. The
change in value was reclassified to common stock from warrants. The Company also agreed to
issue warrants to purchase additional shares of common stock to the investors if the
Company failed to achieve aggregate EBITDA of $80,000 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 for cash of $500 in June 2003.

19.    
          EMPLOYEE BENEFIT PLANS:

Effective
January 1, 1994, Rent-Way established the Rent-Way, Inc. 401(k) Retirement Savings
Plan (the RentWay Plan). Participation in the Plan is available to all
Company employees who meet the necessary service criteria as defined in the Plan
agreement. Company contributions to the Plan are based on a percentage of the
employees contributions, as determined by the Board of Directors. The
Companys contribution expense was $901, $1,364 and $1,159 for the years ended
September 30, 2004, 2003 and 2002, respectively.

As
a result of the significant price drop in Rent-Way stock following disclosure of the
accounting investigation, the Company made additional cash contributions of $7, $478
and, $255 to the Rent-Way Plan in order to restore a portion of the loss in value of
Rent-Way stock held in participant accounts under the plan for the years ended
September 30, 2004, 2003 and 2002, respectively.  The Company has also amended
the plan to prohibit a participants investment in Rent-Way common stock.

20.    
          EARNINGS (LOSS) PER SHARE:

Basic
earnings (loss) per common share is computed using income (losses) allocable to
common shareholders divided by the weighted average number of common
shares outstanding. Diluted earnings (loss) per common share is computed using income
(losses) allocable to common shareholders and the weighted average number of shares
outstanding adjusted for the potential impact of options, warrants, conversion of
convertible redeemable preferred stock, convertible preferred stock conversion derivative
dividends on convertible preferred stock and accretion on convertible preferred stock
discount where the effects are dilutive. Because operating results were at a loss for
the years ended September 30, 2003 and 2002, basic and diluted loss per common share
were the same.

The
following table discloses the reconciliation of numerators and denominators of the
basic and diluted loss per share computation:

|                                                                      | For The Year Ended September 30,
|--------------------------------------------------------------------- | --------------------------------
|
|
|BASIC                                                                 |                                 
|Income (loss) before cumulative effect of change in accounting        |                                 
|principle and discontinued operations                                 |                                 
|Cumulative effect of change in accounting principle                   |                                 
|Loss from discontinued operations                                     |                                 
|                                                                      |                                 
|Net income (loss)                                                     |                                 
|Dividend and accretion of preferred stock                             |                                 
|                                                                      |                                 
|Net income (loss) allocable 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                                 |                                 
|Cumulative effect of change in accounting principle                   |                                 
|Loss from discontinued operations                                     |                                 
|Dividend and accretion of preferred stock                             |                                 
|                                                                      |                                 
|Net income (loss) allocable to common shareholders                    |                                 
|                                                                      |                                 
|DILUTED                                                               |                                 
|Net income (loss) allocable to common shareholders for basic earnings |                                 
|(loss) per share                                                      |                                 
|Plus:  income impact of assumed conversion:                           |                                 
|Conversion derivative market value adjustment (1)                     |                                 
|Dividends on 8% convertible preferred stock (1)                       |                                 
|Accretion to preferred stock redemption amount (1)                    |                                 
|                                                                      |                                 
|Net income (loss) allocable 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 (2)                                                            |                                 
|Contingent shares issuable upon the exercise of warrants to purchase  |                                 
|8% convertible preferred stock (3)                                    |                                 
|Shares issuable upon conversion of 8% convertible preferred stock (1) |                                 
|                                                                      |                                 
|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                                 |                                 
|Cumulative effect of change in accounting principle                   |                                 
|Loss from discontinued operations                                     |                                 
|Dividend and accretion of preferred stock                             |                                 
|                                                                      |                                 
|Net income (loss) allocable to common shareholders                    |                                 
|                                                                      |                                 

|(1) |  | Including the effects of these items for the year ended September 30, 2003 would
               be anti-dilutive. Therefore, 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 year ended September 30, 2003.
               There were conversion derivative market value adjustments of $1,899, dividends
               on convertible preferred stock of $399 and accretion to preferred stock
               redemption in the amount of $114 which were not added back to net income (loss)
               allocable to common shareholders for basic earnings (loss) per share on the
               diluted earnings (loss) per share because including the effects of these items
               would be anti-dilutive.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Including the effects of these items for the years ended September 30, 2003 and
               2002, would be anti-dilutive. For the years ended September 30, 2003 and 2002,
               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 greater than the average market price of common stock was 2,817 and 7,843,
               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 three for the
               year ended September 30, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Including the effects of these items for the year ended September 30, 2003 would
               be anti-dilutive. Therefore, 752 contingent shares issuable upon exercise of
               option to purchase 8% convertible preferred stock are excluded from
               consideration in the calculation of diluted earnings (loss) per share for the
               year ended September 30, 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
were 4,186 contingent warrants not included in the computation of diluted earnings (loss)
per common share because they were anti-dilutive for the year ended September 30, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21.    
          SEGMENT INFORMATION:

Rent-Way
is a national rental-purchase chain, which provides a variety of services to its customers
including rental of household items and prepaid local telephone service. 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 either a weekly, biweekly, semimonthly or monthly 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).

|                                      | Household
Rental Segment | Prepaid Telephone
Service Segment | Total Segments
|------------------------------------- | ------------------------ | --------------------------------- | --------------
|
|For the year ended September 30, 2004 |                          |                                   |               
|Total revenues                        |                          |                                   | $             
|Operating income (loss)               |                          |                                   |               
|Net income (loss)                     |                          |                                   |               
|Total Assets                          |                          |                                   |               
|For the year ended September 30, 2003 |                          |                                  
|Total revenues                        |                          |                                   | $             
|Operating income                      |                          |                                   |               
|Net income (loss)                     |                          |                                   |               
|Total Assets                          |                          |                                   |               
|For the year ended September 30, 2002 |                          |                                  
|Total revenues                        |                          |                                   | $             
|Operating income                      |                          |                                   |               
|Net income (loss)                     |                          |                                   |               
|Total Assets                          |                          |                                   |               

22.    
          SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

Fiscal Year 2004:

|                                                    | For the Quarter Ended
|--------------------------------------------------- | ---------------------
|
|Total revenues                                      |                      
|Operating income                                    |                      
|Income (loss) before cumulative effect of change in |                      
|accounting principle and discontinued operations    |                      
|Net income (loss)                                   |                      
|Dividend and accretion of preferred stock           |                      
|Income (loss) allocable to common shareholders      |                      
|Basic:                                              |                      
|Income (loss) before cumulative effect of change in |                      
|accounting principle and discontinued operations    |                      
|Net income (loss)                                   |                      
|Net income (loss) available to common shareholders  |                      
|Diluted:                                            |                      
|Income (loss) before cumulative effect of change in |                      
|accounting principle and discontinued operations    |                      
|Net income (loss)                                   |                      
|Net income (loss) allocable to common shareholders  |                      
|Weighted average shares outstanding                 |                      
|Basic                                               |                      
|Diluted                                             |                      

(1)    
          There was a change in fair market value of the preferred stock conversion
          feature derivative of $7,235 income that when reversed for the assumed
          conversion results in a dilutive loss per share for the quarter ended September
          30, 2004.

Fiscal
Year 2003:

|                                                    | For the Quarter Ended
|--------------------------------------------------- | ---------------------
|
|Total revenues                                      |                      
|Operating income                                    |                      
|Income (loss) before cumulative effect of change in |                      
|accounting principle and discontinued operations    |                      
|Net income (loss)                                   |                      
|Dividend and accretion of preferred stock           |                      
|Income (loss) allocable to common shareholders      |                      
|Basic:                                              |                      
|Income (loss) before cumulative effect of change in |                      
|accounting principle and discontinued operations    |                      
|Net income (loss)                                   |                      
|Net income (loss) available to common shareholders  |                      
|Diluted:                                            |                      
|Income (loss) before cumulative effect of change in |                      
|accounting principle and discontinued operations    |                      
|Net income (loss)                                   |                      
|Net income (loss) allocable to common shareholders  |                      
|Weighted average shares outstanding                 |                      
|Basic                                               |                      
|Diluted                                             |                      

23.    
          GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:

The 11 7/8% senior secured notes
issued by Rent-Way, Inc. (Parent) have been guaranteed by each of its
restricted subsidiaries (Guarantor Subsidiaries). The Guarantor Subsidiaries
are 100% owned subsidiaries of the Parent. The guarantees of the Subsidiary Guarantors are
full, unconditional and joint and several. Separate financial statements of the Parent and
Guarantor Subsidiaries are not presented in accordance with the exception provided by Rule
3-10 of Regulation S-X.

The following schedules set forth the
condensed consolidating balance sheets as of September 30, 2004 and 2003 and condensed
consolidating statements of operations for the years ended September 30, 2004, 2003 and
2002, and condensed consolidating statements of cash flows for the years ended September
30, 2004, 2003 and 2002. In the following schedules, Parent refers to
Rent-Way, Inc., Guarantor Subsidiaries refers to Rent-Ways wholly owned
subsidiaries, and Non-Guarantor Subsidiaries refers to DPI, the Companys
83.5% owned subsidiary. Eliminations represent the adjustments necessary to
eliminate inter-company investment in subsidiaries.

---

RENT-WAY, INC.CONDENSED
CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2004 (all dollars in
thousands)

|                                            | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|ASSETS                                      |               |                        |                          |              |                      
|Cash and cash equivalents                   |               |                        | $                        | 2,603        |                      
|Prepaid expenses                            |               |                        |                          | 6,918        |                      
|Income tax receivable                       |               |                        |                          | 10           |                      
|Rental merchandise, net                     |               |                        |                          | 138,275      |                      
|Rental merchandise credits due from vendors |               |                        |                          | 2,592        |                      
|Property and equipment, net                 |               |                        |                          | 34,864       |                      
|Goodwill                                    |               |                        |                          | 124,807      |                      
|Deferred financing costs, net               |               |                        |                          | 7,420        |                      
|Intangible assets, net                      |               |                        |                          | 112          |                      
|Other assets                                |               |                        |                          | 2,331        |                      
|Investment in subsidiaries                  |               |                        |                          | 66,187       |                      
|                                            |               |                        |                          |              |                      
|Total assets                                |               |                        | $                        | 386,119      |                      
|                                            |               |                        |                          |              |                      
|LIABILITIES AND SHAREHOLDERS' EQUITY        |               |                       
|Liabilities:                                |               |                       
|Accounts payable                            |               |                        | $                        | 20,298       |                      
|Other liabilities                           |               |                        |                          | 43,871       |                      
|Inter-company                               |               |                        |                          | (27,350      | )                    
|Deferred tax liability                      |               |                        |                          | 10,496       |                      
|Debt                                        |               |                        |                          | 203,929      |                      
|                                            |               |                        |                          |              |                      
|Total liabilities                           |               |                        |                          | 251,244      |                      
|Convertible redeemable preferred stock      |               |                        |                          | 19,790       |                      
|SHAREHOLDERS' EQUITY:                       |               |                       
|Common stock                                |               |                        |                          | 304,395      |                      
|Accumulated other comprehensive income      |               |                        |                          | (93          | )                    
|Retained earnings (accumulated deficit)     |               |                        |                          | (189,217     | )                    
|                                            |               |                        |                          |              |                      
|Total shareholders' equity                  |               |                        |                          | 115,085      |                      
|                                            |               |                        |                          |              |                      
|Total liabilities and shareholders' equity  |               |                        | $                        | 386,119      |                      
|                                            |               |                        |                          |              |                      

---

RENT-WAY, INC.CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED SEPTEMBER 30,
2004 (all dollars in thousands)

|                                                              | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|------------------------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|REVENUES:                                                     |               |                        |                          |              |                      
|Rental revenues                                               |               |                        | $                        | 333,363      |                      
|Prepaid phone service                                         |               |                        |                          | --           |                      
|Other revenues                                                |               |                        |                          | 50,897       |                      
|                                                              |               |                        |                          |              |                      
|Total revenues                                                |               |                        |                          | 384,260      |                      
|COSTS AND OPERATING EXPENSES:                                 |               |                       
|Depreciation and amortization:                                |               |                       
|Rental merchandise                                            |               |                        |                          | 106,011      |                      
|Property and equipment                                        |               |                        |                          | 11,787       |                      
|Amortization of intangibles                                   |               |                        |                          | 294          |                      
|Cost of prepaid phone service                                 |               |                        |                          | --           |                      
|Salaries and wages                                            |               |                        |                          | 106,205      |                      
|Advertising, net                                              |               |                        |                          | 14,632       |                      
|Occupancy                                                     |               |                        |                          | 26,752       |                      
|Restructuring costs                                           |               |                        |                          | 36           |                      
|Other operating expenses                                      |               |                        |                          | 85,495       |                      
|                                                              |               |                        |                          |              |                      
|Total costs and operating expenses                            |               |                        |                          | 351,212      |                      
|                                                              |               |                        |                          |              |                      
|Operating income                                              |               |                        |                          | 33,048       |                      
|OTHER INCOME (EXPENSE):                                       |               |                       
|Interest expense                                              |               |                        |                          | (31,851      | )                    
|Interest income                                               |               |                        |                          | 793          |                      
|Amortization and write-off of deferred financing costs        |               |                        |                          | (1,025       | )                    
|Equity in losses of subsidiaries                              |               |                        |                          | 9,185        |                      
|Other income, net                                             |               |                        |                          | 6,244        |                      
|                                                              |               |                        |                          |              |                      
|Income (loss) before income taxes and discontinued operations |               |                        |                          | 16,394       |                      
|Income tax expense                                            |               |                        |                          | 5,580        |                      
|                                                              |               |                        |                          |              |                      
|Income (loss) before discontinued operations                  |               |                        |                          | 10,814       |                      
|Loss from discontinued operations                             |               |                        |                          | (1,566       | )                    
|                                                              |               |                        |                          |              |                      
|Net income (loss)                                             |               |                        | $                        | 9,248        |                      
|                                                              |               |                        |                          |              |                      

---

RENT-WAY, INC.CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED SEPTEMBER 30,
2004 (all dollars in thousands)

|                                                    | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|--------------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|OPERATING ACTIVITIES:                               |               |                        |                          |              |                      
|Net cash provided by (used in) operating activities |               |                        | $                        | 24,308       |                      
|INVESTING ACTIVITIES:                               |               |                       
|Investments in subsidiaries and other businesses,   |               |                        |                          |              |                      
|net of cash acquired                                |               |                        |                          | (275         | )                    
|Purchases of property and equipment                 |               |                        |                          | (7,872       | )                    
|                                                    |               |                        |                          |              |                      
|Net cash used in investing activities               |               |                        |                          | (8,147       | )                    
|FINANCING ACTIVITIES:                               |               |                       
|Proceeds from borrowings                            |               |                        |                          | 95,995       |                      
|Payments on borrowings                              |               |                        |                          | (109,014     | )                    
|Payments on capital leases                          |               |                        |                          | (6,432       | )                    
|Payments on note for settlement of class action     |               |                        |                          | (2,000       | )                    
|Cash overdraft                                      |               |                        |                          | 1,391        |                      
|Proceeds from convertible preferred stock           |               |                        |                          | 5,000        |                      
|Deferred financing costs                            |               |                        |                          | (35          | )                    
|Issuance of Common Stock                            |               |                        |                          | 1,019        |                      
|Dividends paid                                      |               |                        |                          | (1,285       | )                    
|                                                    |               |                        |                          |              |                      
|Net cash provided by (used in) financing activities |               |                        |                          | (15,361      | )                    
|                                                    |               |                        |                          |              |                      
|Increase (decrease) in cash and cash equivalents    |               |                        |                          | 800          |                      
|Cash and cash equivalents at beginning of year      |               |                        |                          | 1,803        |                      
|                                                    |               |                        |                          |              |                      
|Cash and cash equivalents at end of year            |               |                        | $                        | 2,603        |                      
|                                                    |               |                        |                          |              |                      

---

RENT-WAY, INC.CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2003 (all dollars in
thousands)

|                                               | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|---------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|ASSETS                                         |               |                        |                          |              |                      
|Cash and cash equivalents                      |               |                        | $                        | 1,803        |                      
|Restricted cash                                |               |                        |                          | 10,000       |                      
|Prepaid expenses                               |               |                        |                          | 6,476        |                      
|Income tax receivable                          |               |                        |                          | 3,461        |                      
|Rental merchandise, net                        |               |                        |                          | 136,797      |                      
|Rental merchandise credits due from vendors    |               |                        |                          | 3,507        |                      
|Property and equipment, net                    |               |                        |                          | 31,053       |                      
|Goodwill                                       |               |                        |                          | 124,457      |                      
|Deferred financing costs, net                  |               |                        |                          | 8,316        |                      
|Intangible assets, net                         |               |                        |                          | 503          |                      
|Other assets                                   |               |                        |                          | 17,970       |                      
|Investment in subsidiaries                     |               |                        |                          | 57,001       |                      
|                                               |               |                        |                          |              |                      
|Total assets                                   |               |                        | $                        | 401,344      |                      
|                                               |               |                        |                          |              |                      
|LIABILITIES AND SHAREHOLDERS' EQUITY           |               |                       
|Liabilities:                                   |               |                       
|                                               |               |                        |                          |              |                      
|Accounts payable                               |               |                        | $                        | 23,992       |                      
|Other liabilities                              |               |                        |                          | 69,507       |                      
|Inter-company                                  |               |                        |                          | (33,262      | )                    
|Deferred tax liability                         |               |                        |                          | 3,735        |                      
|Debt                                           |               |                        |                          | 214,592      |                      
|                                               |               |                        |                          |              |                      
|Total liabilities                              |               |                        |                          | 278,564      |                      
|Convertible redeemable preferred stock         |               |                        |                          | 15,991       |                      
|SHAREHOLDERS' EQUITY:                          |               |                       
|Common stock                                   |               |                        |                          | 303,220      |                      
|Common stock warrants                          |               |                        |                          | 156          |                      
|Option to purchase convertible preferred stock |               |                        |                          | 142          |                      
|Accumulated other comprehensive income         |               |                        |                          | (69          | )                    
|Retained earnings (accumulated deficit)        |               |                        |                          | (196,660     | )                    
|                                               |               |                        |                          |              |                      
|Total shareholders' equity                     |               |                        |                          | 106,789      |                      
|                                               |               |                        |                          |              |                      
|Total liabilities and shareholders' equity     |               |                        | $                        | 401,344      |                      
|                                               |               |                        |                          |              |                      

---

RENT-WAY, INC.CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED SEPTEMBER 30,
2003 (all dollars in thousands)

|                                                              | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|------------------------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|REVENUES:                                                     |               |                        |                          |              |                      
|Rental revenues                                               |               |                        | $                        | 301,942      |                      
|Prepaid phone service                                         |               |                        |                          | --           |                      
|Other revenues                                                |               |                        |                          | 45,546       |                      
|                                                              |               |                        |                          |              |                      
|Total revenues                                                |               |                        |                          | 347,488      |                      
|COSTS AND OPERATING EXPENSES:                                 |               |                       
|Depreciation and amortization:                                |               |                       
|Rental merchandise                                            |               |                        |                          | 92,261       |                      
|Property and equipment                                        |               |                        |                          | 16,827       |                      
|Amortization of intangibles                                   |               |                        |                          | 1,121        |                      
|Cost of prepaid phone service                                 |               |                        |                          | --           |                      
|Salaries and wages                                            |               |                        |                          | 96,744       |                      
|Advertising, net                                              |               |                        |                          | 15,161       |                      
|Occupancy                                                     |               |                        |                          | 23,253       |                      
|Restructuring costs                                           |               |                        |                          | 2,906        |                      
|Other operating expenses                                      |               |                        |                          | 68,888       |                      
|                                                              |               |                        |                          |              |                      
|Total costs and operating expenses                            |               |                        |                          | 317,161      |                      
|                                                              |               |                        |                          |              |                      
|Operating income                                              |               |                        |                          | 30,327       |                      
|OTHER INCOME (EXPENSE):                                       |               |                       
|Interest expense                                              |               |                        |                          | (32,856      | )                    
|Interest income                                               |               |                        |                          | 86           |                      
|Class action settlement                                       |               |                        |                          | (14,000      | )                    
|Amortization and write-off of deferred financing              |               |                        |                          |              |                      
|costs                                                         |               |                        |                          | (3,061       | )                    
|Equity in losses of subsidiaries                              |               |                        |                          | (872         | )                    
|Other income, net                                             |               |                        |                          | 3,931        |                      
|                                                              |               |                        |                          |              |                      
|Income (loss) before income taxes and discontinued operations |               |                        |                          | (16,445      | )                    
|Income tax expense                                            |               |                        |                          | 3,186        |                      
|                                                              |               |                        |                          |              |                      
|Income (loss) before discontinued operations                  |               |                        |                          | (19,631      | )                    
|Loss from discontinued operations                             |               |                        |                          | 9,746        |                      
|                                                              |               |                        |                          |              |                      
|Net income (loss)                                             |               |                        | $                        | (29,377      | )                    
|                                                              |               |                        |                          |              |                      

---

RENT-WAY, INC.CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED SEPTEMBER 30,
2003 (all dollars in thousands)

|                                                    | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|--------------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|OPERATING ACTIVITIES:                               |               |                        |                          |              |                      
|Net cash provided by (used in) operating activities |               |                        | $                        | (13,016      | )                    
|INVESTING ACTIVITIES:                               |               |                       
|Purchase of businesses, net of cash acquired        |               |                        |                          | (259         | )                    
|Purchases of property and equipment                 |               |                        |                          | (6,278       | )                    
|Proceeds from sale of stores and other assets       |               |                        |                          | 77,341       |                      
|                                                    |               |                        |                          |              |                      
|Net cash used in investing activities               |               |                        |                          | 70,804       |                      
|FINANCING ACTIVITIES:                               |               |                       
|Proceeds from borrowings                            |               |                        |                          | 667,423      |                      
|Payments on borrowings                              |               |                        |                          | (730,143     | )                    
|Payments on capital leases                          |               |                        |                          | (6,601       | )                    
|Cash overdraft                                      |               |                        |                          | 2,397        |                      
|Proceeds from convertible preferred stock           |               |                        |                          | 14,119       |                      
|Deferred financing costs                            |               |                        |                          | (8,579       | )                    
|Issuance of Common Stock                            |               |                        |                          | 514          |                      
|Dividends paid                                      |               |                        |                          | (99          | )                    
|Payment of loans by directors/shareholders          |               |                        |                          | 285          |                      
|Interest on shareholder loans                       |               |                        |                          | (3           | )                    
|                                                    |               |                        |                          |              |                      
|Net cash provided by (used in) financing activities |               |                        |                          | (60,687      | )                    
|                                                    |               |                        |                          |              |                      
|Increase (decrease) in cash and cash equivalents    |               |                        |                          | (2,899       | )                    
|Cash and cash equivalents at beginning of year      |               |                        |                          | 4,702        |                      
|                                                    |               |                        |                          |              |                      
|Cash and cash equivalents at end of year            |               |                        | $                        | 1,803        |                      
|                                                    |               |                        |                          |              |                      

---

RENT-WAY, INC.CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED SEPTEMBER 30,
2002 (all dollars in thousands)

|                                                              | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|------------------------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|REVENUES:                                                     |               |                        |                          |              |                      
|Rental revenues                                               |               |                        | $                        | 312,913      |                      
|Prepaid phone service                                         |               |                        |                          | --           |                      
|Other revenues                                                |               |                        |                          | 49,881       |                      
|                                                              |               |                        |                          |              |                      
|Total revenues                                                |               |                        |                          | 362,794      |                      
|COSTS AND OPERATING EXPENSES:                                 |               |                       
|Depreciation and amortization:                                |               |                       
|Rental merchandise                                            |               |                        |                          | 105,724      |                      
|Property and equipment                                        |               |                        |                          | 21,730       |                      
|Amortization of intangibles                                   |               |                        |                          | 1,953        |                      
|Cost of prepaid phone service                                 |               |                        |                          | --           |                      
|Salaries and wages                                            |               |                        |                          | 93,980       |                      
|Advertising, net                                              |               |                        |                          | 18,882       |                      
|Occupancy                                                     |               |                        |                          | 25,743       |                      
|Other operating expenses                                      |               |                        |                          | 80,468       |                      
|                                                              |               |                        |                          |              |                      
|Total costs and operating expenses                            |               |                        |                          | 348,480      |                      
|                                                              |               |                        |                          |              |                      
|Operating income                                              |               |                        |                          | 14,314       |                      
|OTHER INCOME (EXPENSE):                                       |               |                       
|Interest expense                                              |               |                        |                          | (39,317      | )                    
|Interest income                                               |               |                        |                          | 336          |                      
|Amortization and write-off of deferred financing              |               |                        |                          | l            |                      
|costs                                                         |               |                        |                          | (5,205       | )                    
|Equity in losses of subsidiaries                              |               |                        |                          | 8,036        |                      
|Other income, net                                             |               |                        |                          | 2,113        |                      
|                                                              |               |                        |                          |              |                      
|Income (loss) before income taxes and discontinued operations |               |                        |                          | (19,723      | )                    
|Income tax expense                                            |               |                        |                          | 12,077       |                      
|                                                              |               |                        |                          |              |                      
|Income (loss) before discontinued operations                  |               |                        |                          | (31,800      | )                    
|Cumulative effect of change in accounting principle           |               |                        |                          | (41,527      | )                    
|Loss from discontinued operations                             |               |                        |                          | (3,145       | )                    
|                                                              |               |                        |                          |              |                      
|Net income (loss)                                             |               |                        | $                        | (76,472      | )                    
|                                                              |               |                        |                          |              |                      

---

RENT-WAY, INC.CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED SEPTEMBER 30,
2002 (all dollars in thousands)

|                                                    | Parent
Issuer | Guarantor
Subsidiaries | Non-Guarantor
Subsidiary | Eliminations | Rent-Way
Consolidated
|--------------------------------------------------- | ------------- | ---------------------- | ------------------------ | ------------ | ---------------------
|OPERATING ACTIVITIES:                               |               |                        |                          |              |                      
|Net cash provided by (used in) operating activities |               |                        | $                        | 43,487       |                      
|INVESTING ACTIVITIES:                               |               |                       
|Purchase of businesses, net of cash acquired        |               |                        |                          | (885         | )                    
|Purchases of property and equipment                 |               |                        |                          | (8,592       | )                    
|Proceeds from sale of stores and other assets       |               |                        |                          | 1,583        |                      
|                                                    |               |                        |                          |              |                      
|Net cash used in investing activities               |               |                        |                          | (7,894       | )                    
|FINANCING ACTIVITIES:                               |               |                       
|Proceeds from borrowings                            |               |                        |                          | 664,000      |                      
|Payments on borrowings                              |               |                        |                          | (693,338     | )                    
|Payments on capital leases                          |               |                        |                          | (8,283       | )                    
|Cash overdraft                                      |               |                        |                          | (5,148       | )                    
|Proceeds from convertible preferred stock           |               |                        |                          | (2,940       | )                    
|Deferred financing costs                            |               |                        |                          | 7,252        |                      
|Issuance of Common Stock                            |               |                        |                          | (41          | )                    
|Payment of loans by directors/shareholders          |               |                        |                          | 683          |                      
|                                                    |               |                        |                          |              |                      
|Net cash provided by (used in) financing activities |               |                        |                          | (37,815      | )                    
|                                                    |               |                        |                          |              |                      
|Increase (decrease) in cash and cash equivalents    |               |                        |                          | (2,222       | )                    
|Cash and cash equivalents at beginning of year      |               |                        |                          | 6,924        |                      
|                                                    |               |                        |                          |              |                      
|Cash and cash equivalents at end of year            |               |                        | $                        | 4,702        |                      
|                                                    |               |                        |                          |              |                      

---

# ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND          FINANCIAL DISCLOSURES

None.

# ITEM 9A.  CONTROLS AND
PROCEDURES

|A. |  | Disclosure Controls and Procedures. 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, as of
          September 30, 2004, 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 Control over Financial Reporting. There has not been any
          change in the Companys internal control over financial reporting that
          occurred during the last fiscal quarter that has materially affected, or is
          reasonably likely to materially affect, the Companys internal control over
          financial reporting.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 9B. OTHER
INFORMATION

Effective
December 7, 2004, Rent-Way, Inc. and its subsidiaries entered into the Second Amendment to
Credit Agreement with the Lenders party thereto, Harris Trust and Savings Bank, as
administrative agent, Bank of Montreal as lead arranger and National City Bank as
syndication agent. This second amendment is attached hereto as Exhibit 10.21 and is
incorporated herein by reference. This amendment amends the Credit Agreement dated June 2,
2003, to increase advances and loans to DPI to $6,500 and modifies the Companys
leverage ratio and monthly minimum EBITDA financial covenants.

---

RENT-WAY, INC.

PART III

# ITEM 10.  DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY

Information
in response to this Part III is incorporated herein by reference to the
Companys definitive proxy statement for the 2004 Annual Meeting
of Shareholders. The Company intends to file the definitive Proxy Statement
not later than 120 days after September 30, 2004.

# ITEM 11.  EXECUTIVE
COMPENSATION

Information
in response to this Part III is incorporated herein by reference to the
Companys definitive proxy statement for the 2004 Annual Meeting
of Shareholders. The Company intends to file the definitive Proxy Statement
not later than 120 days after September 30, 2004.

# ITEM 12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information
in response to this Part III is incorporated herein by reference to the
Companys definitive proxy statement for the 2004 Annual Meeting
of Shareholders. The Company intends to file the definitive Proxy Statement
not later than 120 days after September 30, 2004.

# ITEM 13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

Information
in response to this Part III is incorporated herein by reference to the
Companys definitive proxy statement for the 2004 Annual Meeting
of Shareholders. The Company intends to file the definitive Proxy Statement
not later 120 days after September 30, 2004.

# ITEM 14.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES.

Information
in response to this Part III is incorporated herein by reference to the
Companys definitive proxy statement for the 2004 Annual Meeting
of Shareholders. The Company intends to file the definitive Proxy Statement
not later 120 days after September 30, 2004.

---

RENT-WAY, INC.

PART IV

# ITEM 15.  EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES

(a)(1)Financial
Statements.

See
Index to Financial Statements appearing at Item 8 of this Report.

(a)(2)
Financial Statement Schedules

| | Financial
Statement schedules have been omitted because they are inapplicable or the information is
included in the Companys financial statements and notes thereto.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

(a)(3)
Exhibits

See
Exhibit Index

---

RENT-WAY, INC.

SIGNATURES

Pursuant
to the requirements of Section 13 or 15 (d) 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.

By: /s/ William E. Morgenstern
------------------------------------------ Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)

Date: December 10, 2004

By: /s/ William A. McDonnell
------------------------------------------ Vice President and Chief Financial Officer
(Principal Financial Officer)

Date: December 10, 2004

By: /s/ John A. Lombardi
------------------------------------------ Vice President, Corporate Controller and Chief
Accounting Officer (Principal Accounting Officer)

Date: December 10, 2004

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|                           |          |                  
|-------------------------- | -------- | -----------------
|SIGNATURE                  | TITLE    | DATE             
|/s/ Gerald A. Ryan         | Director | December 10, 2004
|                           |          |                  
|Gerald A. Ryan            
|                           |          |                  
|/s/ William E. Morgenstern | Director | December 10, 2004
|                           |          |                  
|William E. Morgenstern    
|                           |          |                  
|/s/ John W. Higbee         | Director | December 10, 2004
|                           |          |                  
|John W. Higbee            
|                           |          |                  
|/s/ Robert B. Fagenson     | Director | December 10, 2004
|                           |          |                  
|Robert B. Fagenson        
|                           |          |                  
|/s/ Marc W. Joseffer       | Director | December 10, 2004
|                           |          |                  
|Marc W. Joseffer          
|                           |          |                  
|/s/ William Lerner         | Director | December 10, 2004
|                           |          |                  
|William Lerner            
|                           |          |                  
|/s/ Jacqueline E. Woods    | Director | December 10, 2004
|                           |          |                  
|Jacqueline E. Woods       

---

# EXHIBIT INDEX

|EXHIBIT |  | NO.
                                                              DESCRIPTION
|------- |  | -----------------------------------------------------------------------------

| | 2.1 |  | Agreement
and Plan of Merger dated September 1, 1998 between the Company and Home Choice
                  Holdings, Inc. (incorporated by reference to exhibit 2.1 to the
Company's Registration Statement                   on Form S-4 (No. 333-66955) filed on
November 6, 1998).
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.2 |  | Asset
Purchase Agreement between the Company, Rent-Way of Michigan, Inc., and Rent-Way of TTIG,
                  L.P., and Rent-A-Center, Inc., dated December 17, 2002 (incorporated by
reference to Exhibit 2.11                   to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2002 filed on                   December 30,
2002).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.3 |  | Amendment
No. 1 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan, Inc.,
                  and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated December 21,
2002 (incorporated by                   reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended                   December 21, 2003
filed on February 14, 2003).
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.4 |  | Amendment
No. 2 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan, Inc.,
                  and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated  January 7,
2003 (incorporated by                   reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended                   December 21, 2003
filed on February 14, 2003).
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.5 |  | Amendment
No. 3 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan, Inc.,
                  and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated  February 7,
2003 (incorporated by                   reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended                   December 21, 2003
filed on February 14, 2003)
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.6 |  | Amendment
No. 4 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan, Inc.,
                  and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated  February
10, 2003 (incorporated by                   reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended                   December 21, 2003
filed on February 14, 2003)
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.1 |  | Articles
of Incorporation of the Company, 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 on November                   6, 1997).
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 |  | Statement
with Respect to Shares of Series A Convertible Preferred Stock of the Company dated May
                  30, 2003 (incorporated by reference to exhibit 3.1 to Amendment No. 5
to the Company's                   registration statement on Form S-3, No. 333-102525
filed on June 25, 2003).
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 |  | By-Laws
of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company's
                  Annual Report on Form 10-K for the fiscal year ended September 20, 2002
filed on July 2, 2001).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.1 |  | Indenture
dated June 2, 2003 among the Company, the subsidiary guarantors (as defined therein)
                  and Manufacturers and Traders Trust Company, as trustee (incorporated
by reference to Exhibit 4.1                   to the Company's Current Report on Form 8-K
filed June 3, 2003).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 |  | Form
of 11 7/8% Senior Secured Note (incorporated by reference to Exhibit A to the Indenture
                  dated June 2, 2003 among the Company, the subsidiary guarantors (as
defined therein) and                   Manufacturers and Traders Trust Company, as
trustee, filed as Exhibit 4.1 to the Company's                   Current Report on Form
8-K on June 3, 2003).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 |  | Company's
1995 Stock Option Plan (incorporated by reference to an exhibit to the Company's
                  Registration Statement on Form SB-2 (No. 333-116) filed on January 5,
1996).
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 |  | Form
of Non-Plan Stock Option Agreement (incorporated by reference to an exhibit to the
Company's                   Registration Statement on  Form S-18 (No. 33-55562-NY) filed
on December 8, 1992).
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 |  | Company's
1999 Stock Option Plan (incorporated by reference to the Company's Proxy Statement on
                  Schedule 14A filed on February 12, 1999).
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 |  | 2004
Stock Option Plan (incorporated by reference to the Company's Proxy Statement on Schedule
                  14A filed on March 10, 2004)
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5* |  | Form
of Stock Option Agreement under 2004 Stock Option Plan
| | ----- |  | -----------------------------------------------------------

| | 10.6 |  | Form
of Stock Option Agreements under 1992, 1995 and 1999 Stock Option Plans (incorporated by
                  reference to exhibit (d)(4)   to the Company's Schedule TO filed on
November 1, 2001)
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 |  | Employment
Agreement between William E. Morgenstern and the Company, dated October 1, 2001
                  (incorporated by reference to exhibit 10.5 of the Company's Annual
Report on Form 10-K for the                   fiscal year ended September 30, 2001 filed
on December 28, 2001).
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 |  | Engagement
Agreement between Gerald A. Ryan and the Company, dated October 1, 1999 (incorporated
                  by reference to exhibit 10.6 of the Company's Annual Report on Form
10-K filed on December 22,                   1999).
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 |  | Employment
Agreement between William McDonnell and the Company dated February 1, 2000
                  (incorporated by reference to exhibit 10.29 to the Company's Annual
Report on Form 10-K for the                   fiscal year ended September 30, 2000 filed
on July 2, 2001).
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 |  | Employment
Agreement between William Short and the Company dated as of July 1, 2002 (incorporated
                  by reference to exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended                   December 31, 2002 filed on February 14,
2003).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11* |  | Employment
Agreement between Ronald DeMoss and the Company dated as of March 13, 2001.
| | ------ |  | --------------------------------------------------------------------------------------

| | 10.12* |  | Employment
Agreement between John Lombardi and the Company dated as of  April 23, 2001.
| | ------ |  | ---------------------------------------------------------------------------------------

| | 10.13 |  | Common
Stock and Warrant Purchase Agreement among the Company and Calm Waters Partnership,
Walter                   H. Morris and Charles A. Paquelet  (with form of warrant
attached) (incorporated by reference to                   exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
                  filed on May 14, 2003 ).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 |  | Registration
Rights Agreement between the Company and Calm Waters Partnership, Walter H. Morris
                  and Charles A. Paquelet (incorporated by reference to exhibit 10.2 to
the Company's Quarterly                   Report on Form 10-Q for the quarter ended March
31, 2002 filed on May 14, 2002)
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 |  | Credit
Agreement dated as of June 2, 2003 among the Company, the guarantors from time to time
                  parties thereto, the lenders from time to time parties thereto and
Harris Trust and Savings Bank,                   as administrative agent, National City
Bank of Pennsylvania, as syndication agent, and BMO Nesbit                   Burns, as
lead arranger (incorporated by reference to exhibit 10.2 to the Company's Current
                  Report on Form 8-K filed June 3, 2003).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 |  | Inter-creditor
Agreement dated as of June 2, 2003 among Harris Trust and Savings Bank, as senior
                  agent, Manufacturers and Traders Trust Company, as trustee and
collateral agent under the                   Indenture, and the Company (incorporated by
reference to exhibit 10.3 to the Company's Current                   Report on Form 8-K
filed June 3, 2003).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 |  | Registration
Rights Agreement dated May 23, 2003 among the Company, Citigroup Global Markets,
                  Inc., as the initial purchaser, and the subsidiary guarantors signatory
thereto (incorporated by                   reference to exhibit 10.1 to the Company's
Current Report on Form 8-K filed June 3, 2003).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 |  | Securities
Purchase Agreement dated June 2, 2003 among the Company and the investors listed on
                  the schedule of buyers attached thereto (incorporated by reference to
exhibit 10.1 to the                   Company's Current Report on Form 8-K filed June 3,
2003).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 |  | Registration
Rights Agreement dated June 2, 2003 among the Company and the buyers of the Series A
                  Convertible Preferred Stock (incorporated by reference to exhibit 10.2
to the Company's Current                   Report on Form 8-K filed June 3, 2003).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.20 |  | First
Omnibus Amendment to Credit and Security Agreement dated July 2, 2003 (incorporated by
                  reference to exhibit 10.1 of the Company's Quarterly Report on Form
10-Q for the quarter ended                   June 30, 2003 filed on August 14, 2003).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21* |  | Second
Amendment to Credit and Security Agreement dated December 7, 2004.
| | ------ |  | -------------------------------------------------------------------------

| | 12.1* |  | Ratio
of Earnings to Fixed Charges
| | ----- |  | ----------------------------------

| | 21.1 |  | Subsidiaries
of the Company (incorporated by reference to the exhibit 21.1 to the Company's
                  Annual Report on Form 10-K for the fiscal year ended September 30, 2001
filed on December 28,                   2001).
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 23.1* |  | Consent
of PricewaterhouseCoopers LLP.
| | ----- |  | --------------------------------------

| | 23.2* |  | Consent
of Ernst & Young LLP
| | ----- |  | ----------------------------

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

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

| | 32.1* |  | Certification
pursuant to Section 906 of Sarbanes-Oxley Action of 2002
| | ----- |  | ----------------------------------------------------------------------

* Filed herewith