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UNITED STATES
U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-K

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004

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:

         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

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:

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:

        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:

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:

        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:

        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:

        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:

         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:

        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. 

        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. 

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. 

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.

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:

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:

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:

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.

        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:

        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:

        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):

        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:

        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:

        Cash flows from 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):

        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:

        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:

        *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.

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

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, Ohio
November 19, 2003

RENT-WAY, INC.

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

        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)