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2000 RTO Report.indd - RTO Online

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					RTO C O R P O R AT E P R O F I L E


  RTO Enterprises Inc. (RTO) is Canada’s largest rental-purchase company, and the fourth-largest in
North America, offering top-quality, brand-name household furnishings, appliances, and home electronic
products to consumers under weekly or monthly rental agreements. These agreements may be cancelled
at any time without further cost or obligation to the customer and include an unconditional service
guarantee with an option to purchase.

  RTO currently operates 128 stores in 10 provinces across Canada, operating under the following
banners:




  RTO is a public company listed on the Toronto Stock Exchange under the trading symbol “RTO”




TA B L E O F C O N T E N T S


Chairman’s Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Message to the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The RTO Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Management’s Responsibility for Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
C H A I R M A N ’ S S TAT E M E N T



                                          2000 has been a year of dramatic change for your Company.
                                       The founder of RTO announced in May, 2000 that he was
                                       withdrawing his previously announced proposal to take the
                                       Company private. Bruce Reid, the former CEO of the Brick
                                       Warehouse and former Chairman of the Retail Council of Canada,
                                       assumed the position of President and CEO and I, as the
                                       Company’s largest shareholder, was elected Chairman of the
                                       Board in June, 2000. Bruce declared his interest in turning
                                       over the CEO’s responsibilities to a suitable successor once the
                                       restructuring of the Company had been completed and a suitable
                                       successor had been identified. The restructuring was largely
                                       completed by March 2001. Key actions included:
                                       - Strengthening our Board of Directors with the addition of Doug
                                       Anderson (former CEO, Rent-A-Centre U.S.), Joe Rotunda (former
Donald K. Johnson,                     COO, Rent-A-Centre U.S.), Robin Korthals (former President of
Chairman of RTO Enterprises Inc.       TD Bank) and Ron Gage (former Chairman & CEO, Ernst & Young
                                       Canada).
    - Harmonizing the Company’s accounting policies with U.S. publicly listed rent-to-own companies.
    - Initiating cost savings.
    - Introducing a disciplined budgeting process and a new management bonus program.
    - Re-negotiating the Company’s bank facility.
    - Re-negotiating terms of the Company’s royalty funding.
    - Raising $6.5 million of common equity through a rights issue and $4 million through subordinated
       debentures.

  David Ingram was hired as Chief Operating Officer on December 4, 2000. David has excellent
credentials, having been in charge of Rent-A-Centre Canada’s 29 store operation in 1996-97 and having
subsequently been in charge of a 380 store division for Rent-A-Centre in the U.S. On March 16, 2001,
the Board announced that Bruce Reid was planning on relinquishing his role as President and CEO at the
Company’s Annual General Meeting on May 24, 2001 and that David Ingram would be appointed as his
successor effective that date. With the financing in place and the restructuring plans largely completed,
the Company is now in a position to focus on growing revenues and restoring profitability.

  I would like to thank Bruce Reid for the excellent job he has done in restructuring the Company during
the past several months. I am delighted that he has agreed to continue as a Director and serve in an
advisory capacity on key strategic issues, each of which will be relevant to enhancing shareholder value
long term. At the same time, I would like to welcome David Ingram as our President and CEO elect,
effective at our AGM on May 24, 2001.
C H A I R M A N ’ S S T A T E M E N T (continued)



  I would also like to thank all of our employees for their commitment and loyalty during this very
difficult period. Your patience and loyalty will be rewarded. Our Board of Directors have also made
a significant contribution to the progress achieved by our Company during the past year. Our bankers,
CIBC, our legal counsel, Blake Cassels & Graydon LLP, our auditors Ernst & Young and our financial
advisors Newcrest Capital, have each played an important role in restructuring the Company.

  While much has been accomplished, much remains to be done. To achieve the potential, management
will need to be focused, employees will need to work hard and shareholders will need to be patient. I
look forward to the challenges and opportunities which lie ahead and am confident that RTO has an
excellent long term future.




Donald K. Johnson,
Chairman of RTO Enterprises Inc.
April 5, 2000




                                                 3           RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0
M E S S AG E TO O U R S H A R E H O L D E R S



                                          The year 2000 has been a very challenging one for
                                        our Company, however the restructuring and other one-
                                        time charges taken in the fourth quarter, associated with
                                        finalizing the refinancing of the Company, marks the
                                        completion of the restructuring that we began at mid
                                        year.

                                        Financial Review

                                           Total revenue for the fourth quarter was $16.3 million, down
                                        from $18.5 million for the comparable period last year but
                                        continuing the rapidly slowing rate of decline reported in the third
                                         quarter of this year. The Company incurred an operating loss
Bruce H. Reid,
President & CEO                          of $0.6 million in the fourth quarter before restructuring costs of
of RTO Enterprises Inc.                  $1.2 million, compared to an operating loss of $0.3 million in the
                                         fourth quarter last year. The Company’s after tax net loss for the
quarter was $2.6 million ($1.4 million before restructuring costs) compared with a net loss of $0.3 million
in 1999. The fully diluted loss per share for the quarter was $(0.11) compared with $(0.01) in 1999.


  For the fiscal year ended December 31, 2000, total revenue was $67.4 million compared with fiscal
1999 revenue of $75.1 million. Operating income decreased from $3.3 million in 1999 to a loss of $6.9
million in 2000 ($0.9 million before restructuring and other one-time costs). Net income decreased from
$0.9 million in 1999 to a loss of $6.4 million in 2000 ($2.2 million before tax-effected restructuring and
other one-time costs). The fully diluted loss per share was $(0.29) for fiscal 2000, compared with fully
diluted earnings per share of $0.03 for last year.


  While a great deal of time during the year was, by necessity, devoted to the realignment of the Board
of Directors and the financial restructuring of the Company, a lot of progress was also made within the
operations of the business. By year-end not only had 10 poorly performing stores been identified and
closed, but arrangements to close an additional 4 stores in early 2001 had also been completed. The new
accounting policies, announced at mid year, were implemented along with a new budgeting procedure,
improved financial reporting, and a new incentive program, all of which has helped to significantly
reduce the cost base of the company. This has not only produced savings in the second half of 2000 but
has established a significantly lower cost base from which to begin the new year.


  Two rounds of consumer research were completed aimed at improving our understanding of the
Canadian rental customer and helping to better position the Company to serve it’s customer base. This
information has not only contributed to the identification of the market potentials in given areas for
the store amalgamation program noted above, but also provides the basis for the marketing programs
being developed to expand the core store customer base, as well as identifying potential locations for
additional future stores.
M E S S A G E T O O U R S H A R E H O L D E R S (continued)



  An extensive effort was also undertaken in the important areas of human resources to ensure that we
have the proper people in place, with the required support tools, to properly serve our customers. This
has included a new hiring and screening program, the development of a regular salary review program
and the assembly and integration of all the relevant training materials so important in the development
of a smoothly run service focused organization.


  In December, David Ingram, who has rental industry experience in the UK, Canada and the US, joined
the company as Chief Operating Officer. He will be located in Toronto where we have opened an
office to have key operating and marketing people in closer proximity to both the supplier base and the
important eastern Canadian market, where the majority of our stores are located. The Edmonton office,
while being downsized, will continue to house all the other administrative and accounting functions of
the business.


Looking Forward

   While fourth quarter revenues of $16.3 million were below the previous year, they were only $235,000
below the third quarter and, we believe, represent the end of the declines in revenues, and customer
counts, experienced over the last several years. With the refinancing completed we are now in a position
to focus on restocking the stores with products which our customers have identified they want to rent
from us. We are therefore very confident that the stage is now set for growth in both revenues, and
customer counts, as well as, a return to profitability for our Company.


  The amount of change we have experienced as a Company is never easy and has been successful due
to the tremendous efforts of our many dedicated employees throughout the company and the support of
our vendors. We obviously also wish to thank our shareholders for their vote of confidence during the
recent rights issue which closed January 31, 2001. With the changes that have been effected throughout
the Company and the injection of this new capital into the business, we believe the Company is now in a
position to begin to deliver on the dominant position that RTO holds in the Canadian market place.




Bruce H. Reid,
President & CEO of RTO Enterprises Inc.
April 5, 2000




                                                  5            RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0
“We want to be the store
of first choice in Canada –
135+ locations.

We will become the
customers’ favourite store by
delivering the best selection
in home and family leisure”
H O W W I L L R TO E X E C U T E I T S S T R AT E G Y ?

    T H E R TO E N T E R P R I S E S I N C . - P R O P O S I T I O N P E N TAG O N

PLACE:                                                                                  PRODUCT:
• Size - tailored to each location                                                      • Range Construction – best rental
  ranging from 2-5,000 square feet                                                        purchase store for highly recog-
• Location – close to our customer                                                        nized brands such as Kenwood,
  profile pitch becoming increasingly                                                     Toshiba and RCA ensuring great
  important for higher revenues                                PLACE                      variety in all categories with the
• Layout – low cost no frills fit                                                         latest models introduced for up to
  with simple room based layout –                                                         the minute freshness
  conducive to browsing & product                                                       • Choice – ensuring depth of win-
  demonstration
                                            COMMUNICATION                    PRODUCT      ning products will be more critical
                                                                                          than breadth. Giving our Store
                                                                                          Managers autonomy to localize
COMMUNICATION:                                                                            ordering will keep us focused on
                                                                                          customers’ needs
• Promotion – heavy promotional
                                                                                        • Seasonality – by emphasizing
  offer focused
                                                                                          events & the changing seasons
• Seasonal events
                                                                                          we can anticipate demand &
• Quarterly open house
                                                                                          order product to optimize revenue
• Monthly promotional purchases
                                                                                          growth
• A place to be rewarded & have fun
                                                                                        • Previously Enjoyed Merchandise
• Status – an organization who places
                                                                                          – returned product will be recon-
  respect & integrity as a critical point
                                                                                          ditioned & termed at fair market
  of difference for our customers
                                                                                          value giving the customer an
                                                                                          added incentive to own the mer-
                                                                                          chandise quicker
PEOPLE:
• Service – the most critical strand of
  the pentagon
• Rent to own is a relationship business                                                VALUE:
  - our customers in the main are                                                       • Price – by working toward a low
  weekly visitors                                 PEOPLE                   VALUE          cost to operate philosophy, we
• We must attract employees who                                                           will be extracting savings and pro-
  first & foremost like to be with                                                        viding a platform for everyday
  people & train the technical skills                                                     low pricing making us the most
  as secondary                                                                            competitive rent to own operator
• Everyone in the organization is                                                         in Canada for total value
  focused on supporting our stores and                                                  • Quality – must be trusted by our
  providing our employees with the                                                        customers to provide real ben-
  resources and tools to put customers
  first in all that we do
                                               I N C R E A S I N G I M P O R TA N C E     efits to the communities we serve.
                                                                                          Efficient & responsive to servicing
• Our employees are the biggest                                                           products & delivering the benefits
  reason for a customer to stay longer                                                    of rent to own superior to any
  with our company                                                                        other competitor




                                                     1.     PEOPLE

                                         At RTO Enterprises Inc. our proposition only works at its
                                      full potential when the associates are aligned and motivated to
                                      provide world class service. While most retailers offering our
                                      range of products may only see a customer once every 18 months
                                      for what is a big ticket purchase – we are fortunate to see most
                                      of ours weekly. Therefore, the associate takes to the “Stage” on
                                      a frequent basis and is our most important tool in developing a
                                      great relationship with our customers. They are a reflection of
                                      management’s values, ambitions and personality. Easy words but
                                      extremely difficult to execute. In re-building RTO Enterprises Inc.
                                      there are a number of challenges that our team is focusing
                                      its resources behind. These are designed to address the short
David Ingram,                          term tactical needs to better guide our associates in their
Executive Vice-President and Chief of  efforts to be the best they can be by coaching, consistent
Operations of RTO Enterprises Inc.     follow-through, and re-enforce the basics that have made this a
                                       sucessful business. These changes of internal process will generate
improved productivity, better flow-through for operating profits and a shift in our associates from
“working to survive” to “working to succeed”.
  H O W W I L L R T O E X E C U T E I T S S T R A T E G Y ? (continued)



  1.    P E O P L E (continued)

    In order to provide a framework that encourages the right behaviour we have introduced a program
  that measures all the appropriate Key Performance Indicators. This focuses all of our associates’ attention
  on four areas that we believe to be most important.

  Balanced Score Card


                                   ECONOMIC                   CUSTOMER / BRAND


                                     PROCESS                          PEOPLE



     By using this monthly report, Regional Managers can discuss how effective the store teams are in
  performance. Stores are ranked against each other and a league table allows the whole organization to
  see who is operating the most effective. Through this tool we can define our standards and expectations
  allowing us to be much more consistent across the board. This program covers profit measures, revenue
  growth, customer satisfaction/retention, management of idle merchandise and associate training. The
  biggest benefit is the opportunity for management to address areas of weaker execution and develop the
  training and coaching needed to assist our associates in doing a better job.

  Recognition & Incentive Packages

    In January 2001, we introduced a combination of incentives to reward high performance. All of our
  Store Managers and support management were given a bonus program that provides excellent financial
  rewards for focus on profit growth. Above plan performance allows for higher payments to be made for
  the improved profits giving individuals the motivation to fully utilize their discretionary efforts. This also
  ensures our associates in support functions are better aligned to the Company’s objectives. We have also
  provided equity in the form of stock options to all management roles to reflect the importance of sharing
  in the Company’s future success.

  People & Development

     This is an industry that suffers from extremely high turnover with associates in particular at the store
  level. With a high importance attached to relationship building, it is critical to recruit and train associates
  who can build their careers at RTO Enterprises Inc. To this end, we are developing a program that will
  profile new candidates against a template based on our most successful performers. Once recruited, the
  first two weeks of their employment will be completed in a “host” store that has been certified to induct
  and train in the most important aspects of the rent-to-own transaction. Teaching them the right habits
  from day one will ensure they can complete the training modules to a higher standard and provide a
  bench mark for consistency countrywide. At the end of the training, each individual will certify with the
  original host store before assuming the role they are employed for. The instructional materials will range
  from mentoring, reading, video and practical one on one tutorage. While the Associate is encouraged




RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0         8
H O W W I L L R T O E X E C U T E I T S S T R A T E G Y ? (continued)



to learn at their own pace, a time limit is placed to create ownership and productivity. By making it part
of our score card and allowing ambitious individuals to learn faster it becomes developmentally oriented
and leads to greater retention.

2.    C O M M U N I C AT I O N

  With frequent visits to our stores, it is important that we communicate effectively to customers new
and old. For 2001, we have produced a marketing and merchandising calendar that lays out the plan
for all our monthly promotions. New to RTO Enterprises Inc. will be a best practice guideline that
informs our associates of the dates and special promotion activity that is upcoming for their store. This
will be fully integrated with point of sale, value-added offers, direct mail, marriage mail, manufacturer’s
special buys and timed each month for a four week duration. Quarterly open houses, the first of which
took place in March, generate huge interest and are designed to give current customers real savings and
rewards for their loyalty. With prizes to be won, refreshments served and incentives for our Associates,
these are fun events for the communities we serve.

  As seasons change, so will our range construction and marketing efforts. This will reflect in the use
of store space and appropriate messages in our promotions. To better prepare us for this, we are in the
process of organizing the merchandise function to a “category management” structure. Used in retail so
effectively by companies such as Loblaws and Wal-Mart, work on this will reflect the most efficient way
to make decisions. In its most simple format, it will function as follows:




     THINK / PLAN                            BUY / MOVE                                     SELL
      Role: Planner                             Role: Buyer                          Role: Marketing



   By moving from the strategy and research of the customers’ needs into buying against the plan
it can flow into marketing whose role is to promote and excite but most importantly, execute the
implementation. In time this will hone in on what services and products our customers’ desire
maximizing our knowledge of the cash and credit constrained consumer.

3.    PL ACE

  In reviewing our property portfolio, there has been an assessment of which stores require closing due
to drag on our profits and locations for new stores. While we have penciled in five new properties in
2001, it is still a market place that can carry many more store fronts. Our best estimate today is that
200 stores exist in Canada compared to approximately 8000 in the United States. We are therefore
working with a specialist in demographic data to better understand the full potential of Canada for future
expansion. The purpose of the store will be to create an environment where lifestyle merchandising
techniques are used based on plan-o-grams. All the products are displayed for demonstration with
features and benefits clearly accessible. This will create theatre and household solutions that will allow
the associates to be proud of their store.




                                                    9            RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  H O W W I L L R T O E X E C U T E I T S S T R A T E G Y ? (continued)



  4.    PRODUCT

    Range construction – we have now completed two rounds of customer research to help us better
  understand the needs and spending habits of rent-to-own consumers. This is helping the merchandise
  function to build category ranges based on future demand. It has also confirmed that while the
  household income group we are targeting is generally lower than the average population, it in no way
  reduces their expectation of the quality and brand of goods they require. In fact, our fastest growth
  products are computers and DVD players. We are therefore positioning the quality pricing architecture
  upward to reflect the taste of our customers.

  Purchasing

     We have fallen short in the past by not allowing our associates the autonomy to take charge of their
  inventory. To resolve this, we introduced in February an “Open to Buy” process that puts the Store
  Manager firmly in charge. In short, we have developed optimum stock levels by category and SKU. This
  is formulated using geography, size of store, demography type and current delivery trends. Within a
  framework of a company matrix, stores now order the products they need to replenish and meet future
  demand. They know how much they can afford and can track the book value for idle inventory on a
  weekly basis therefore maximizing sales potential and minimizing depreciation charge. This “thinking
  global, acting local” principle has encouraged our stores to take control and get closer to our customers’
  needs.

  5.    VA LU E

    We are committed to doing everything in our power to be a low cost operator. By driving down our
  cost of doing business, we are better positioned to pass savings and improving our value proposition. As
  the market leader in Canada, we also have benefit of scale which will help us in producing better offers
  to our customers. When you combine these advantages, we are able to start leveraging ourselves in the
  following ways:

    • Every day low pricing
    • Enhanced value added services
    • Unique monthly promotions
    • Segmentation of pricing (good/better/best)
    • Improved turn on inventory or sweating the assets

    Work has already begun on these opportunities and the full benefits of this should be seen in our
  second half of the year.

    Being the biggest rent-to-own operator in Canada also gives us the responsibility to inform our
  consumers about the advantages of rent-to-own. More work will be done to communicate benefits such
  as “No credit needed” and “No continuing obligation”. These are important messages that all go into the
  mix as to why consumers should try our rent-to-own stores.




RTO ENTERPRISES    A N N UA L R E P O RT 2 0 0 0      10
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L
C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S


  The following discussion and analysis should be read in conjunction with, and is qualified by, the
audited consolidated financial statements of the Company and the notes relating thereto included in this
Annual Report.

GENERAL

  The Company extends renewable month-to-month or week-to-week rental-purchase agreements that
can be cancelled without further cost or obligation at any time and which the customer can renew
for another week or month by making another payment in advance. As at December 31, 2000,
approximately 50.1% (December 31, 1999: 69%) of all agreements provided for monthly payments. As
at December 31, 2000, the average monthly payment under rental agreements was $63.72 (December
31, 1999: $70.48) and the average weekly payment was $20.80 (December 31, 1999: $19.19). The
customer’s obligations are to make rental payments in advance of the period for which the customer
chooses to rent the merchandise, to pay for loss or damage to the merchandise if not covered under
available loss/damage waivers, and to return the merchandise to the Company at the expiration of
the rental period if the customer elects not to renew the agreement. Each agreement automatically
expires at the end of the stated rental period unless a renewal payment is made. Expired accounts may
be renewed by payment of the delinquent rent and a nominal reinstatement fee. Ownership of the
merchandise generally transfers to the customer if the customer has continuously renewed the rental-
purchase agreement for a period of 12 to 24 months or exercises a specified early purchase option.
Approximately 30% of the Company’s monthly rental payments are collected by automatic bank debits
and point of sale debit cards.

  The Company currently operates 128 stores in 80 cities in all ten Canadian provinces and plans to
have approximately 135 stores by the end of 2001. The Company currently has no plans for any material
acquisitions and intends to open up new stores as circumstances and conditions warrant. All new stores
are now opened under either the Rentown or First Choice banners.

  From time to time, it is necessary to combine underperforming stores with other stores within the
RTO chain in order to eliminate the losses of those stores. RTO benefits from these store consolidations
in two ways. Firstly, the rental agreements of the underperforming stores are transferred to the other
store locations within the RTO chain so that a significant proportion of the rental revenue is maintained.
Secondly, the overhead expenses of the combined store are eliminated. The Company combined 15
underperforming stores with other stores within the RTO chain during 2000 (1999: 13) . However,
store consolidations have contributed to the decline in rental revenues and the Company’s customer base
which began in early 1998. See “Risks and Uncertainties”.

  In the spring of 1999, the Company initiated a new discount rental program designed to enhance the
rental of certain slower-moving used rental merchandise. The discount program involved a reduction
in both the rental rate (weekly or monthly payment) and the rental term (maturity) of many used rental
merchandise items. As a consequence of this program, gross rental margins decreased as a result of the
combination of reduced rental revenue from these items and the higher periodic rental merchandise
amortization resulting from a shorter rental term. An additional negative impact resulted from customers
electing early purchase options (at discounted prices) on inventory items with reduced term rentals.




                                                   11           RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L
  C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S (continued)


    The financial impact of this program was felt primarily in the fourth quarter of 1999 but affected the first
  quarter of 2000 as well as some of the rental merchandise remained out on rent. Beginning in October
  1999, the Company took steps to mitigate the future financial impact of this program and to increase
  gross rental margins on used rental merchandise. The three primary steps included:

      (i) the re-pricing of remaining idle rental merchandise (including returned rental merchandise)
          to traditional markups and rental rates;

      (ii) the reinstatement of longer rental terms (maturities) in line with historical levels; and

      (iii) the implementation of a highly restrictive collection program designed to return discounted
            rental merchandise to the Company, thereby allowing the Company to re-rent merchandise
            at conventional rates and terms.

    The Company is also taking additional steps to reverse the decline in revenues and customer base
  including but not limited to enhanced customer research, developing a buying plan to rebalance the
  inventory, and developing new pricing procedures.

    RTO requires capital on an ongoing basis primarily for the purchase of additional rental merchandise to
  assist stores to increase their rental base, for the replacement of rental merchandise which has been sold,
  written off, or is no longer suitable for rent, expenditures related to new-store openings, and working
  capital.

    The Company also believes that it will continue to have the opportunity to increase its number of stores
  and rental-purchase agreements through selective acquisitions. Although the Company is not currently
  considering any acquisitions, potential acquisitions may vary in size and the Company may consider
  larger acquisitions that could be material to the Company. To provide additional funds necessary
  for the continued pursuit of its growth strategies, the Company may use cash flow from operations,
  borrow additional amounts under its existing credit facility in consideration for acquisitions, seek to
  obtain additional debt or equity financing, the availability of which will depend upon market and other
  conditions. The Company may also issue equity securities as consideration for acquisitions.

    The Company’s results for the quarter ended March 31, 2000 were restated and the results for the
  quarters ended June 30, 2000 and December 31, 2000 were charged with costs related to its
  restructuring plan and adjustments to the carrying value of certain assets as discussed in note 9 to the
  audited consolidated financial statements, and accounting policy changes as described in note 1 to the
  audited consolidated financial statements. As a result of the restatement and the restructuring charges
  and changes in accounting policies, the Company was in breach of one of the covenants under its then
  existing credit agreement with its banker. In addition, as at October 17, 2000, the Company exceeded its
  operating line of credit by approximately $1 million. On October 17, 2000, the Bank delivered a letter to
  the Company waiving such breach and agreeing in principle to amend the Company’s credit facilities.
  On December 20, 2000 the Bank and the Company agreed to amendments to the Company’s then
  existing demand operating and capital loan facilities to replace them with a revolving secured demand
  credit facility bearing interest at prime plus 2.5% per annum, margined against the net book value of
  rental and held for rent assets ( the “borrowing base”). In addition, the terms of the Company’s amended




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C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S (continued)


credit agreement requires it to meet, beginning the first quarter of 2001, certain financial covenants and
ratios, including a minimum rental asset purchase amount ( equal to or greater than 65% of rental asset
amortization in the first quarter of 2001, 70% in the second quarter, and 80% thereafter ), a maximum
percentage of held for rent assets to total rental assets ( not to exceed 30% at the end of the
first and second quarters of 2001 and 25% thereafter ), and an interest coverage ratio ( defined as
the ratio of EBITDA plus cash operating expenses divided by interest plus cash operating expenses
which ratio is not to less than 1.5:1 measured quarterly ). In addition, the Company must meet certain
quarterly and year-end reporting requirements and certain non-financial covenants which restrict actions
of the Company with respect to acquisitions, capital expenditures, payment of dividends and changes in
corporate structure.


Quarterly Information
( in thousands of dollars except earnings per share amounts )

                                   31-Dec 30-Sep            30-Jun        31-Mar 31-Dec 30-Sep           30-Jun 31-Mar
                                     2000        2000           2000      2000      1999      1999       1999        1999
                                       $           $             $          $         $        $            $          $


Revenue                             16,344      16,534      16,810        17,680    18,480    18,487     19,323     18,783
Operating income ( loss )            (1,780)           6        (5,283)     190       (324)     604       1,668      1,381
Net income (loss)
 for the period                      (2,568)       (359)        (3,284)     (194)     (300)        (4)      670         487
 basic income (loss) per share (0.11)             (0.02)         (0.15)    (0.01)    (0.01)          –     0.03        0.02
 fully diluted income
 (loss) per share                      (0.11)     (0.02)         (0.15)    (0.01)    (0.01)          –     0.02        0.02


Note: The June 30 operating loss includes restructuring and other costs of $4,178, and a provision for rental
assets no longer considered suitable for rent of $500 included in amortization of rental assets. The June 30 net
loss includes restructuring costs (net of taxes) of $3,365. The December 31 operating loss includes additional
restructuring costs of $1,167 and the December 31 net loss includes restructuring costs (net of taxes) of $817.


L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S

  Cash generated from operating activities amounted to $3.1 million compared to $6.0 million in 1999,
a decrease of $2.9 million. The primary reason for the decrease is mainly the result of operating losses
incurred during the year.

  Cash used in investing activities was $0.5 million and was comparable to the amount used in investing
activities in 1999.

  Cash used in financing activities was $2.6 million compared to $5.6 million in 1999, a decrease of $3.0
million. The decrease was due to net demand term debt and demand operating line repayments of $19.2
million offset by proceeds from a revolving demand loan of $21.7 million and a decrease in the royalty
funding payments and loan financing costs of $0.5 million.




                                                                13              RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L
  C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S (continued)


     At December 31, 2000, the Company’s total liabilities were $34.9 million compared to $37.6 million at
  December 31, 1999, a decrease of $2.7 milli on. Demand term debt was NIL compared to $21.1 million
  at December 31, 1999, and the deferred royalty funding was $2.9 million compared to $3.5 million at
  December 31, 1999, for a total decrease of $21.7 million in demand term debt and the royalty funding.
  This decrease was offset by an increase in the bank revolving line of $19.6 million and a decrease in other
  liabilities of $0.6 million. The net decrease in other liabilities is mainly the result of restructuring accruals
  and the reduction of trade payables. At December 31, 2000, the Company had available a revolving
  line of credit of $22.5 million and had drawn $21.7 million against this line bearing interest at prime plus
  2.5% per annum.

    On December 15, 2000 the Company refinanced its royalty funding agreement with McCarvill
  Corporation by the issuance of a subordinated debenture in the amount of $2,906,107. The debenture
  carries a four year term, interest at 22% per annum and is repayable by the Company at any time without
  notice or bonus. However, if the debenture is not repaid by January 31, 2003 an additional amount
  of $1,000,000 will be payable, interest is reduced to 15% per annum and principal repayments begin
  at $73,000 per month for 23 months with a principal payment due on the fourth anniversary date of
  $2,227,107. A loss of $484,352 incurred on the transaction is recorded as a restructuring cost in 2000.
  McCarvill Corporation also received warrants to purchase 0.5 million common shares at $0.31 per share
  exercisable any time over five years, and warrants to purchase another 0.5 million common shares at
  $0.31 per share if the debenture is not repaid by January 31, 2003.

    On January 31, 2001, the Company completed a Rights Offering to subscribe for common shares at
  $0.30 per share. Net proceeds of $5,763,915 ( $6,564,151 less share issue costs of $800,236 ) were
  received for the issuance of 21,880,502 common shares. The share issue costs were incurred prior to the
  year-end and are included in prepaid expenses at December 31, 2000.

    On January 31, 2001 the Company borrowed $1.1 million from CIBC Mezzanine Finance to assist
  with the payment of certain restructuring costs. The loan is secured by a subordinated debenture
  which carries a four year term, interest at 22% per annum and is repayable by the Company at any
  time without notice or bonus. However, if the debenture is not repaid by January 31, 2003 interest is
  reduced to 15% per annum and principal repayments begin at $20,000 per month for 23 months with
  a principal payment due on the fourth anniversary date of $640,000. CIBC Mezzanine Finance also
  received warrants to purchase 190,000 common shares at $0.31 per share exercisable any time over five
  years, and warrants to purchase another 190,000 common shares at $0.31 per share if the debenture is
  not repaid by January 31, 2003.



  Y E A R E N D E D D E C E M B E R 31, 2 0 0 0
  C O M PA R E D TO Y E A R E N D E D D E C E M B E R 31, 19 9 9

  R E S U LT S O F O P E R AT I O N S

  Operating Income (Loss)

    The Company incurred an operating loss of $6.9 million for the year ended December 31, 2000,
  compared to operating income of $3.3 million for the year ended December 31, 1999, a decrease of



RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0         14
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L
C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S (continued)


$10.2 million. The contributing factors to this decrease in profitability were restructuring costs, other
costs related to provisions on land held for resale and litigation matters, and provisions for rental assets
that were no longer considered suitable for rent totalling $5.8 million, decreases in revenue offset by
decreases in amortization charges of $4.0 million, and increases in other expenses of $0.4 million.

Rental Revenue

Rental revenue for the year ended December 31, 2000 decreased 10.3% to $67.4 million compared to
$75.1 million for the same period in 1999. This decrease was the net result of a decrease in rental revenue
of 8.3 % and a decrease of 43.6 % in the proceeds from the sale of product under purchase options. The
rental revenue decrease was primarily due to the reduced number of active rental agreements during the
twelve months of 2000 compared with 1999. The decrease in sale proceeds was primarily due to the
decreased number of customers who exercised early purchase options.

Other Revenue

  Other revenue, which is realized from fees for ancillary services, such as the merchandise protection
plan, and processing, reinstatement and fees related to returned “NSF” cheques was $9.9 million for
the year ended December 31, 2000 and $10.1 million for the year ended December 31, 1999. As
a percentage of total revenues, fees increased 1.4 percentage points from 13.4% for the year ended
December 31, 1999 to 14.8% for the year ended December 31, 2000 primarily due to an increase
in customers electing to participate in the merchandise protection plan and better execution of the
collection of processing and reinstatement fees.

Operating Expenses

  Operating expenses rose to $49.2 million for the year 2000 compared to $43.4 million for 1999. As
a percentage of total revenue, operating expenses increased to 73.1% in 2000 from 57.8% in 1999. Of
this increase, $5.3 million was attributable to one-time restructuring costs ($4.5 million) and other costs
related to provisions on land held for resale and litigation matters ($0.8 million) incurred primarily as the
result of restructuring plans undertaken by new management in 2000. The remaining increase of $0.5
million resulted from increases in all operating expense categories as described below, except for salaries
and benefits which decreased $0.2 million over 1999.

Salaries and Benefits

  Salaries and benefits for the year 2000 decreased $0.2 million compared with 1999, and amounted to
31.2% of total revenue compared with 28.4% in 1999. The increase in percentage of total revenue was
primarily due to a guaranteed bonus paid to the Chief Operating Officer in March 2000 and an increase
in head office collections department personnel.

Selling, General and Administrative

  Selling, general and administrative expenses for the year 2000 increased $0.3 million compared with
1999. The increase was primarily due to the increased advertising costs incurred as more funds were
dedicated to in-store customer promotions and other marketing programs during the period.




                                                    15            RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L
  C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S (continued)


  Rent

    Rent for the year ended December 31, 2000 increased $0.1 million compared with the same period in
  1999, and amounted to 11.8% of total revenue compared with 10.6% in 1999. The increase was primarily
  due to costs incurred on store closures net of the rental savings achieved on the closures.

  Automotive and Travel

  Automotive and travel for the year 2000 increased $0.3 million compared with 1999, and amounted to
  5.3% of total revenue compared with 4.4% in 1999. The increase resulted from additional travel costs
  incurred by management to visit store locations in order to assess and evaluate operating performance
  and assist with the implementation of marketing programs, the costs related to excess vehicles and rising
  fuel costs.

  Amortization

    Amortization of rental assets for the year ended December 31, 2000 decreased $3.0 million compared
  with the year ended December 31, 1999, and amounted to 33.6% of total revenue compared with 34.2%
  for the year ended December 31,1999. The decrease was primarily attributable to lower rental revenues
  achieved in 2000. As a result of a review of its rental assets, amortization for the year ended December
  31, 2000 includes a $0.5 million writedown of rental assets taken in the second quarter for assets no
  longer considered suitable for rent.
    Amortization of capital assets and intangible assets for the year 2000 was consistent with 1999, and
  amounted to 3.5% of total revenue compared with 3.5% in 1999.

  Interest Expense

    Interest expense for the year ended December 31, 2000 was $0.2 million lower than 1999, primarily
  due to a decline in the average bank debt outstanding during the year.

  Income Tax Expense (Recovery)

    The income tax recovery for the year ended December 31, 2000 was $2.7 million compared with
  a recovery of $0.2 million for 1999, representing a recovery rate of 29.4% in 2000 as compared to a
  recovery rate of 21.9% in 1999. The primary reason for the variation in rates relates to the Company’s
  expected ability to recognize loss carry forwards in particular periods.




RTO ENTERPRISES    A N N UA L R E P O RT 2 0 0 0      16
R I S K S A N D U N C E R TA I N T I E S



Future Capital Needs

  If the Company intends in the future to significantly expand its operations, it may require substantial
funds. The Company may have to obtain additional funding through other debt or equity financings.
However, there can be no assurance that additional financings will be available when needed or will be
available on terms acceptable to the Company. If additional funds are raised by issuing equity securities,
shareholders may incur dilution.

Legal Proceedings

   A motion seeking the authorization to institute a class action was started against the Company in the
Province of Quebec (Montreal Superior Court) in November 1997. The plaintiffs were authorized by the
Court in August 1999 to proceed with a class action against the Company on behalf of all persons who
have leased or purchased personal property destined for personal use in their home from the Company
(the “class”). The plaintiffs allege that the Company’s rental contracts do not properly comply with
the requirements of the Consumer Protection Act (Quebec). They are seeking the cancellation of their
contracts, or the reduction of their obligations and the reimbursement of all or a portion of the amounts
paid by the members of the class to the Company, as well as exemplary damages in the amount of $200
per member of the class. If this class action proceeds to trial, the Company intends to defend it vigorously
and believes it has substantive defences to the plaintiffs’ allegations. The Company has taken a reserve
on its books in an amount it considers to be adequate to cover the amount of any currently reasonably
possible liability of the Company in relation to this matter.

Government Regulation

   Legislation in the principal provinces in which the Company operates specifies that, if the Company’s
business involves leasing (as defined in certain of such legislation), the sale of goods or the provision
of credit for the purchase of goods, the Company may be required to comply with various disclosure
requirements, including in some instances disclosure requirements concerning costs of purchase and
credit. Management of the Company is of the view that it conducts a rental business that does not
involve the sale of goods or the provision of credit for the purchase of goods, and is therefore not
subject to the disclosure requirements in legislation affecting those types of transactions. To the extent
that the Company’s business involves leasing (as defined in certain of such legislation), management
of the Company is of the view that the Company substantially complies with the related disclosure
requirements. Despite management’s view, the applicability of the provincial legislation to the Company
is uncertain, and there is a risk that regulatory bodies or consumers could assert that the Company is not
in compliance with such legislation. If it should be determined by a court of competent jurisdiction in
a jurisdiction in which the Company operates that aspects of the business of the Company are subject
to legislation affecting such transactions, the Company could be subject to either or both (1) civil actions
for nullification of contracts, rebate of some or all payments made by customers, and damages, and (2)
prosecution for violation of the legislation.

  Neither Canada, nor any of the provinces within Canada, has legislation that specifically regulates
rental-purchase transactions. The Committee of Internal Trade has the task of harmonizing provincial
and federal economic regulations and relevant legislation. One area that falls within their mandate is the
harmonization of Consumer Credit Disclosure (“CCD”) legislation at the federal and provincial level. This




                                                   17            RTO ENTERPRISES       A N N UA L R E P O RT 2 0 0 0
  R I S K S A N D U N C E R T A I N T I E S (continued)

  legislation could impact the rental-purchase industry and the enactment of this type of legislation may
  have a material effect on the Company’s results of operations.

  Competition

    The Company competes with other rental-purchase businesses and, to a lesser extent, with rental
  stores that do not offer a purchase option. Competition is based primarily on rental prices and terms,
  product selection and availability, and customer service. The Company also competes with discount
  stores and other retail outlets that offer an installment sales program or offer comparable products and
  prices. Furthermore, additional competitors may emerge since the cost of entering the rental-purchase
  business is relatively low.

  Declining Rental Revenues

     The Company has undergone a decline in rental revenues and its customer base since early 1998.
  Such declines resulted from a number of factors, including: the consolidation of certain underperforming
  stores for efficiency reasons; the introduction of a new discount rental program in the spring of 1999,
  which program has since been eliminated; and the reduced ability to purchase inventory resulting from
  financial constraints. The Company is taking steps to reverse these declines.

  Financial Leverage

    The Company has significant debt in relation to its operating cash flow. In the third quarter of 1999
  and the first, second and third quarters of 2000, the Company was in breach of a financial covenant
  to its Bank. The Company’s successful financial and operating performance is required in order for the
  Company to meet the covenants in its debt instruments. The Company’s amended loan facility with the
  Bank continues to be repayable on demand at any time.

  Certain Purchasing Limitations

    Certain suppliers to the Company have had limitations placed by their credit insurers on the volume
  of orders which such suppliers are permitted to have outstanding from the Company at any particular
  time. The Company believes that this is not uncommon in the computer and furniture industries. Such
  limitations have not to date materially affected the Company’s ability to purchase products or the price
  at which such products are purchased.

  Dependence on Key Personnel

    The Company believes that its future success will also depend in large part upon its ability to attract
  and retain highly-skilled managerial personnel. There is competition for such personnel and there can
  be no assurance that the Company will be successful in attracting and retaining such personnel as it may
  require. The Company, like many retail businesses, has a relatively high turnover of employees.

  Influence by Significant Shareholder

    Donald K. Johnson beneficially owns 30.9% of the Common Shares of the Company. Accordingly,
  Mr. Johnson will be able to exercise significant influence over all matters requiring shareholder approval,
  including the election of directors and approval of significant corporate transactions.



RTO ENTERPRISES    A N N UA L R E P O RT 2 0 0 0       18
M ANAGEMENT’S RESPONSIBILIT Y FOR
FINANCIAL REPORTING


   The accompanying consolidated financial statements and the information in this Annual Report are
the responsibility of management and have been approved by the Board of Directors. The consolidated
financial statements have been prepared by management in accordance with Canadian generally
accepted accounting principles and include some amounts based on management’s best estimates and
judgements. When alternative accounting methods exist, management has chosen those it considers
most appropriate in the circumstances. Management has prepared the financial information presented
elsewhere in the annual report and has ensured that it is consistent with the financial statements.


   RTO Enterprises Inc. maintains a system of internal controls to provide reasonable assurance that
transactions are properly authorized, financial records are accurate and reliable and the Company’s
assets are properly accounted for and adequately safeguarded.


  The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial
reporting and is ultimately responsible for reviewing and approving the financial statements. The Board
of Directors carries out its responsibility for the financial statements through its Audit Committee.
This Committee meets periodically with management and the external auditors to review the financial
statements and the annual report and to discuss audit, financial and internal control matters. The
Company’s external auditors have full and free access to the Audit Committee.


  The financial statements have been subject to an audit by the Company’s external auditors, Ernst &
Young LLP, in accordance with generally accepted auditing standards on behalf of the shareholders.




Bruce H. Reid,                                                   S.W. Johnson
President & CEO                                                  Executive Vice President
of RTO Enterprises Inc.                                          and Chief Financial Officer




                                                    19            RTO ENTERPRISES        A N N UA L R E P O RT 2 0 0 0
  AUDITOR S’ R E P ORT




  To the Shareholders of



  RTO Enterprises Inc.


    We have audited the consolidated balance sheets of RTO Enterprises Inc. as at December 31, 2000 and
  1999, and the consolidated statements of income (loss) and retained earnings (deficit) and cash flows for
  the years 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 audits.


    We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
  standards require that we plan and perform an audit to obtain reasonable assurance 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.


     In our opinion, these consolidated financial statements present fairly, in all material respects, the
  financial position of the company as at December 31, 2000 and 1999, and the results of its operations
  and its cash flows for the years then ended in accordance with Canadian generally accepted accounting
  principles.


  Edmonton, Canada
  February 23, 2001




  Ernst & Young LLP,
  Chartered Accountants




RTO ENTERPRISES    A N N UA L R E P O RT 2 0 0 0      20
RTO Enterpris e s Inc. (continued under the laws of Ontario)
C O N S O L I DAT E D BA L A N C E S H E E T S


                                                                    2000               1999
   As at December 31                                                  $                  $
                                                                                    (restated –
                                                                                    see note 1)
   ASSETS [note 5]

   Amounts receivable                                             1,032,128           1,627,579
   Prepaid expenses [note 15]                                     1,372,319             718,397
   Rental assets [note 2]                                        24,367,112          34,151,242
   Capital assets [note 3]                                        3,725,683            4,113,579
   Future tax assets [note 11]                                   15,267,389         12,565,218
   Intangible assets [note 4]                                     11,874,117          13,178,074
   Land held for resale                                             682,238           1,006,205
                                                                 58,320,986         67,360,294


   LIABILITIES AND SHAREHOLDERS’ EQUITY

   Liabilities
   Bank revolving demand loan [note 5]                           21,706,763           2,108,338
   Trade accounts payable                                          4,141,931           7,987,414
   Accrued liabilities [note 9]                                   4,315,739             833,540
   Accrued payables, bonuses and other employee costs             1,008,459             843,669
   Unearned revenue                                                 594,096             642,285
   Income taxes payable                                             254,210             529,135
   Bank demand term loan [note 5]                                                   21,083,332
   Deferred royalty funding [note 6]                              2,906,107           3,533,573
                                                                 34,927,305          37,561,286


   Commitments and contingencies [notes 7 and 14]

   Shareholders’ equity
   Share capital [note 8]                                        25,519,519          25,519,519
   Retained earnings (deficit)                                   (2,125,838)          4,279,489
                                                                 23,393,681         29,799,008
                                                                 58,320,986         67,360,294
   See accompanying notes

   On behalf of the Board:




    Bruce H. Reid, Director                             Donald K. Johnson, Director




                                                21         RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  C O N S O L I DAT E D S TAT E M E N T S O F I N C O M E ( L O S S )
  A N D R E TA I N E D E A R N I N G S ( D E F I C I T )

                                                               2000           1999
      For the year ended December 31                             $              $
                                                                           (restated –
                                                                           see note 1)
      REVENUE
      Rental                                                 57,417,002    64,986,533
      Other                                                   9,950,700    10,086,074
                                                             67,367,702    75,072,607


      EXPENSES
      Salaries and benefits                                  21,049,294    21,290,075
      Selling, general and administrative                    11,197,180    10,864,849
      Rent                                                    8,000,323     7,941,010
      Automotive and travel                                   3,598,093     3,314,743
      Restructuring costs [note 9]                            4,545,420
      Other costs [note 9]                                     800,000
                                                             49,190,310    43,410,677


      AMORTIZATION
      Amortization of rental assets                          22,672,546    25,704,436
      Amortization of capital assets and intangible assets    2,371,698     2,628,181
                                                             25,044,244    28,332,617
      Total operating expenses and amortization              74,234,554    71,743,294


      Operating income (loss)                                (6,866,852)    3,329,313
      Interest expense                                        2,210,582     2,400,713
      Write-down of note receivable [note 10]                                 228,443


      Income (loss) before income taxes                      (9,077,434)      700,157
      Income tax expense (recovery) [note 11]                (2,672,107)     (153,304)


      Net income (loss) for the year                         (6,405,327)      853,461
      Retained earnings, beginning of the year                4,279,489     3,426,028
      Retained earnings, end of the year                     (2,125,838)    4,279,489


      Earnings (loss) per share [note 12]:
      Basic                                                       (0.29)         0.04
      Fully diluted                                               (0.29)         0.03
      See accompanying notes




RTO ENTERPRISES       A N N UA L R E P O RT 2 0 0 0   22
RTO Enterpris e s Inc.
C O N S O L I DAT E D S TAT E M E N T S O F CA S H F L OW S
                                                                  2000                 1999
   For the year ended December 31                                   $                    $
                                                                                    (restated –
                                                                                    see note 1)


   OPERATING ACTIVITIES
   Net income (loss) for the year                               (6,405,327)           853,461
   Items not affecting cash:
    Amortization of rental assets                               22,672,546         25,704,436
    Amortization of capital assets and intangible assets         2,371,698           2,628,181
    Write-down of note receivable                                                      228,443
    Write-down of land held for resale                            150,000
   Restructuring of royalty funding agreement [note 6]            484,352
   Future income taxes [note 11]                                (2,702,173)           (209,688)
   Net change in non-cash working capital items -
    Rental assets                                              (12,888,414)        (19,972,796)
    Other [note 13]                                               (580,079)         (3,193,563)
   Cash flow from operating activities                           3,102,603           6,038,474


   INVESTING ACTIVITIES
   Purchase of capital assets                                   (1,016,323)            (519,913)
   Proceeds on disposition of capital assets                      336,478                47,958
   Proceeds on sale of land held for resale                        173,967
   Cash flow from investing activities                            (505,878)            (471,955)


   FINANCING ACTIVITIES
   Proceeds from bank revolving demand loan                      21,706,763         (2,712,361)
   Repayment of demand operating line of credit                 (2,108,338)
   Proceeds from bank demand term loan                                              4,620,000
   Repayment of bank demand term loan                          (21,083,332)         (5,888,668)
   Financing costs of bank demand term loan                                            (124,117)
   Repayment of principal portion of
    royalty funding [note 6]                                     (1,111,818)        (1,461,373)
   Cash flow from financing activities                          (2,596,725)         (5,566,519)


   Net change in cash                                                     –                    –
   See accompanying notes




                                                 23        RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  N O T E S TO F I N A N C I A L S TAT E M E N T S
  December 31, 2000 and 1999

  1. S IGNI FI C A NT ACCOUNTING P O LI CI E S
    The consolidated financial statements have been prepared by management in accordance with
  accounting principles generally accepted in Canada. The preparation of financial statements in
  conformity with such principles requires management to make estimates and assumptions that affect the
  reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
  statements and the reported amounts of revenue and expenses during the reporting periods. Actual
  results could differ from those estimates.

  Nature of operations

    RTO Enterprises Inc. (the “Company”) is in the business of renting, with or without an option to
  purchase, direct to the consumer, brand name home entertainment products, appliances and household
  furniture across Canada. As at December 31, 2000, the Company operated 128 stores in 10 provinces
  (1999 - 139 stores in 10 provinces).

  Principles of consolidation

    The consolidated financial statements include the accounts of the Company and its wholly-owned
  subsidiaries:

      - RTO Asset Management Inc.
      - RTO Distribution Inc.
      - RTO (Rentown) Inc.
      - RTO (Rentown) 2000 Inc.

  Business cycle

     The Company does not operate on a normal twelve month operating cycle. Acceptable industry
  practice for rental-purchase companies is not to make a distinction between current and non-current
  items. Accordingly, an unclassified balance sheet has been presented.

  Rental and other revenue

    Merchandise is rented to customers pursuant to agreements which provide for weekly or monthly
  rental payments collected in advance. The rental agreements may be terminated at any time by the
  customer without further obligation or cost upon return of the merchandise. Revenue from rental
  agreements is recognized when payment is received and the rental period has passed. At the end of
  each weekly or monthly rental period, the customer has the option of renewing the agreement for an
  additional period.

   Other revenue from various services and charges to rental customers include liability waiver fees,
  which are recognized as collected, and supplier incentives, which are recognized as earned.




RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0        24
RTO Enterpris e s Inc.
N O T E S TO F I N A N C I A L S TAT E M E N T S
December 31, 2000 and 1999

1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S (continued)
Rental and capital assets

  Rental and capital assets are recorded at cost, including freight.

  Assets on rent, excluding computers and related equipment and assets that were previously held for
rent assets that had not been out on rent for at least 90 consecutive days, are amortized using the units
of activity method. Under the units of activity method, assets on rent are amortized in the proportion of
rents received to total expected rents provided over the rental agreement term. Computers and related
equipment are amortized on a straight line basis over 24 months. Held for rent assets are not amortized
where such assets have not been out on rent for less than 90 consecutive days. Once held for rent assets
have not been out on rent for at least 90 consecutive days, such assets are amortized on a straight line
basis over 18 months regardless of future rental. Amortization includes the book value of assets sold,
and amounts which have been charged off as stolen, lost or no longer suitable for rent.

   In the event management determines that the future net cash flows to be derived from renting the assets
is less than the carrying value of the assets, the assets are written down to estimated net realizable value.
The estimated net realizable value of rental assets is subject to measurement uncertainty and the impact
on the financial statements for future periods could be material.

  Capital assets are amortized over their estimated useful lives using the following rates and methods:


                                                                  Rate
                                                                   %                     Method

    Building                                                       4%               Declining balance
    Office equipment and furniture                                20%               Declining balance
    Signage                                                       20%               Declining balance
    Automotive                                                    30%               Declining balance
    Leasehold improvements                                                          Straight-line over
                                                                                     the term of the
                                                                                      related lease

  Amortization is recorded at one-half of the above rates in the year of acquisition on all capital assets
except leasehold improvements.

Intangible assets

  Organization costs are amortized over 5 years using the straight-line method.

   The Company amortizes goodwill related to business acquisitions and start-up store acquisitions on a
straight-line basis over 20 years and 10 years respectively. The value of goodwill is regularly evaluated
by reviewing operating income projections and undiscounted cash flows of the related businesses, taking




                                                    25            RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  N O T E S TO F I N A N C I A L S TAT E M E N T S
  December 31, 2000 and 1999

  1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S (continued)
  into account the risk associated with the investment. Any permanent impairment in the value of goodwill
  is written off against earnings. Due to the long-term nature of assumptions made, it is possible that
  estimates of anticipated operating income and cash flows, and the estimated remaining life of goodwill,
  could be reduced and the impact on the financial statements for future periods could be material.

    Financing costs are amortized on a straight-line basis over the period of the related loan.

  Land held for resale

    Land held for resale is recorded at the lower of cost and net realizable value.

  Share issue costs

    Costs related to the issuance of shares are charged against share capital.

  Earnings per share

    Basic earnings per share are calculated using the weighted monthly average number of shares
  outstanding during the year. Fully diluted earnings per share reflect the dilutive effect, if any, which
  would have resulted if the employees’, directors’ and officers’ share purchase stock options and warrants
  had been exercised into common shares at the later of the beginning of the fiscal year and the option
  grant date.

    In calculating fully diluted earnings per share, interest on the funds which would have been received
  had the options been exercised, net of income tax, has been imputed at the year end bank deposit rate.

  Financial instruments

     The carrying value of the financial assets and financial liabilities approximate fair value unless otherwise
  disclosed. Approximately 34% of the amounts receivable at December 31, 2000 (1999 - 30%) is owing
  from one unrelated party.

  Income taxes

    The Company follows the liability method of tax allocation in accounting for income taxes. Under this
  method, future income tax assets and liabilities are determined based on differences between financial
  reporting and tax bases of assets and liabilities, and measured using the substantively enacted tax rates
  and laws that will be in effect when the differences are expected to reverse.

  Stock-based compensation plan

    The Company has one stock-based compensation plan, which is more fully described in note 8. No
  compensation expense is recognized when stock options are issued to directors, officers and employees.




RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0        26
RTO Enterpris e s Inc.
N O T E S TO F I N A N C I A L S TAT E M E N T S
December 31, 2000 and 1999

1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S (continued)
Any consideration paid on the exercise of stock options is credited to share capital. If stock or stock
options are repurchased the excess of the consideration paid over the carrying amount of the stock or
stock option canceled is charged to retained earnings.

Changes in accounting policies

  During the year, the Company adopted the new recommendations of the Canadian Institute of
Chartered Accountants with respect to accounting for income taxes. In addition, the Company changed
certain of its rental asset capitalization and amortization policies. The accounting changes outlined
below have been applied retroactively, and the Company’s consolidated financial statements for prior
years have been restated accordingly.

(a) Income taxes
    Under the new recommendations of the CICA effective January 1, 2000, the liability method
    of tax allocation is used in accounting for income taxes. Prior to the adoption of the new
    recommendations, income tax expense was determined using the deferral method of tax allocation.
    Deferred tax expense was based on items of income and expense that were reported in different
    years in the financial statements and tax returns and measured at the rate in effect in the year the
    differences originated.

(b) Rental asset capitalization and amortization
    At June 30, 2000, the Company changed its rental asset capitalization policy to include only freight
    and to expense all other costs. Prior to the adoption of this policy, capitalized cost included freight
    plus an estimate of handling costs related to preparing the product for rent.

    At June 30, 2000, the Company also changed its amortization policy to amortize computers and
    related equipment on a straight line basis over 24 months and to amortize held for rent assets on a
    straight line basis over 18 months once such assets have not been out on rent for 90 consecutive
    days. Prior to the adoption of this policy, all rental assets, including computers and related
    equipment, were amortized on the units of activity method, whereby assets held for rent were not
    amortized and assets on rent were amortized in the proportion of rents received to total expected
    rents over the rental agreement term.




                                                   27            RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  N O T E S TO F I N A N C I A L S TAT E M E N T S
  December 31, 2000 and 1999

  1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S (continued)
      The combined effect of adopting the new policies is summarized as follows:
                                                                       2000                1999
                                                                         $                   $
                                                                          Increase (decrease)
      Balance Sheets
      Rental assets                                                 (4,785,171)         (4,379,854)
      Future tax assets                                             2,453,256           2,270,864
      Retained earnings                                            (2,331,915)          (2,108,990)

      Statements of Income (Loss) and
        Retained Earnings (Deficit)
      Selling, general and administrative                                  1,036,046             2,385,682
      Amortization of rental assets                                         (630,728)           (1,866,772)
      Total operating expenses and amortization                               405,318               518,910
      Income (loss) before income taxes                                     (405,318)              (518,910)
      Future tax expense                                                     (182,393)              396,696
      Net income (loss) for the year                                        (222,925)              (915,606)
      Retained earnings, beginning of the year                            (2,108,990)            (1,193,384)
      Retained earnings, end of the year                                  (2,331,915)           (2,108,990)

      Earnings per share - basic                                                 (0.01)              (0.04)
      Earnings per share - fully diluted                                         (0.01)              (0.05)

  2 . R E N TA L A S S E T S
                                                                                2000              1999
                                                                                  $                 $

      Rental assets                                                       36,032,765            47,048,152
      Accumulated amortization                                            11,665,653            12,896,910
      Net book value                                                      24,367,112            34,151,242

  3 . C A P I TA L A S S E T S
                                                              2000                            1999
                                                                 Accumulated                  Accumulated
                                                      Cost       amortization          Cost    amortization
                                                       $              $                 $           $

      Land and building                                                              39,652          3,946
      Office equipment and furniture                3,546,194      1,720,772      3,359,816      1,399,167
      Signage                                         950,163        400,764        976,187        376,557
      Automotive                                    1,166,170        695,803      1,350,642        716,495
      Leasehold improvements                        2,524,511      1,644,016      2,336,740      1,453,293
                                                    8,187,038      4,461,355      8,063,037     3,949,458
      Net book value                                        3,725,683                     4,113,579



RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0            28
RTO Enterpris e s Inc.
N O T E S TO F I N A N C I A L S TAT E M E N T S
December 31, 2000 and 1999

4 . I N TA N G I B L E A S S E T S
                                                       2000                           1999
                                                          Accumulated                 Accumulated
                                             Cost         amortization       Cost      amortization
                                              $                $              $             $

    Organizational costs                  1,234,923       1,161,664       1,272,587         975,213
    Goodwill                             15,625,701       3,906,631      15,625,701      2,966,802
    Financing costs                         918,984         837,196         918,984         697,183
                                         17,779,608       5,905,491       17,817,272      4,639,198
    Net book value                                11,874,117                       13,178,074


5 . B A N K R E V O LV I N G D E M A N D L O A N A N D B A N K D E M A N D
    TER M LOAN

  The Company was in breach of a bank covenant for the quarters ended March 31, June 30 and
September 30, 2000 under its credit agreement with the Bank. In addition, as at October 17, 2000, the
Company exceeded its operating line of credit by approximately $1 million. On October 17, 2000, the
Bank delivered a letter to the Company waiving such breach for the quarters ended March 31, June 30
and September 30, 2000, and agreeing in principle to amend the Company’s credit facilities.

   On December 22, 2000 the Company entered into a revolving demand credit facility bearing interest
at prime plus 2.5% per annum, margined against the net book value of rental assets and future rental
revenue streams (the “borrowing base”). This new demand facility replaced the previously existing
demand operating and capital loan facilities. Covenants and conditions for the new facility include a
minimum equity requirement, an interest cover covenant, growth and capital expenditure and inventory
acquisition covenants in accordance with projections, annual approval of the Company’s business plan
and maximum permitted percentage of held for rent assets. The availability under the new credit facility
is the lesser of $22,500,000 and the borrowing base. The limit shall increase to $25,000,000 upon the
Company continuing to meet the financial covenants and the Bank syndicating a minimum amount of
$10,000,000 of the facility to a second lender.

                                                                           2000              1999
                                                                             $                 $

    Bank revolving demand loan                                           21,706,763

    Bank demand term loan – repayable in monthly installments
      of $479,167 beginning September 20, 1999, plus interest
      at prime plus 1% (7.5% at December 31, 1999) and a stand-
      by fee of 35 bps per annum, and due August 31, 2002.                               21,083,332
                                                                         21,706,763      21,083,332




                                                  29           RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  N O T E S TO F I N A N C I A L S TAT E M E N T S
  December 31, 2000 and 1999

  5 . B A N K R E V O LV I N G D E M A N D L O A N A N D B A N K
      D E M A N D T E R M L O A N (continued)

    Prior to December 22, 2000 the Company had a demand operating line of credit in the amount of
  $4,000,000 (1999 - $3,000,000) bearing interest at prime plus 1.0%. The weighted average interest
  rate on the operating line for the twelve month period ended December 31, 2000 was 8.3% (1999 -
  7.25%). The Company also had a demand term loan credit facility as described above, which provided
  for authorized borrowings in the aggregate of $23,000,000.

    All assets of the Company are pledged as collateral for the new revolving demand credit facility.

  6 . D E F E R R E D R OYA LT Y F U N D I N G

    In June 1997, the Company received $6,000,000 from McCarvill Corporation (“McCarvill”). In turn,
  the Company agreed to pay McCarvill a royalty based on revenues for approximately a 15-year period,
  as well as providing 400,000 warrants to purchase Common shares of the Company at $5.08 each. The
  warrants expired in June 2000. The payments were made monthly based on the actual revenues of
  the preceding month. The royalty payments net of the amortization of the royalty funding credit was
  included in interest expense, and amortization of the royalty funding credit was on a systematic basis
  over the term of the funding agreement. The royalty payments as a percentage of revenue were as
  follows:



                                                                                                    %

      Through June 1998                                                                           0.75
      Through June 1999                                                                           1.50
      Through June 2000 (or until $7,200,000 has been paid)                                       3.00
      Subsequent twelve year period                                                               0.45

    On December 15, 2000, the Company entered into an agreement with McCarvill for a subordinated
  debenture in the amount of $2,906,107, the funds of which will be used to provide full and final settle-
  ment of the royalty funding agreement. The term of the loan is four years and is repayable at any time by
  the Company without notice or bonus; however, if not repaid by January 31, 2003, an additional amount
  of $1,000,000 will be payable. Interest is payable at 22% per annum for the first two years and 15%
  per annum thereafter, with no principal payments required for the first two years. If not repaid after two
  years, 23 monthly principal payments of $73,000, plus interest, are required thereafter with a principal
  payment on the fourth anniversary date of $2,227,107. A fixed and floating charge over all assets of
  the Company is provided as collateral, subordinated to permitted encumbrances including the new
  bank facility described in note 5 but ranking pari passu with the mezzanine financing described in
  note 15. A loss of $484,352 incurred on the transaction is recorded as a restructuring cost in 2000.
  The Company also entered into a warrant agreement that provides warrants to McCarvill to purchase
  1,000,000 common shares at $0.31 per share. The warrants may be exercised at any time over five years,
  but warrants to purchase 500,000 of the shares vest only after the second anniversary date, and only if
  the debenture is not repaid at that time.




RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0     30
RTO Enterpris e s Inc.
N O T E S TO F I N A N C I A L S TAT E M E N T S
December 31, 2000 and 1999

7. C O M M I T M E N T S
  The Company is committed to long-term operating leases for building space, vehicles and signage.
The minimum annual lease payments required for the next five years and thereafter are approximately
as follows:

                                                                                           $

         2001                                                                    6,812,951
         2002                                                                    5,056,500
         2003                                                                    4,145,538
         2004                                                                    3,290,344
         2005                                                                    1,163,325
         Thereafter                                                                136,453
                                                                                20,605,111



8 . S H A R E C A P I TA L

Authorized
Unlimited preference shares
Unlimited common shares of no par value


    Issued and outstanding
                                                    2000                       1999
                                          Shares           Amount       Shares   Amounts
                                            #                $            #         $
    Balance, beginning and
      end of the year                  21,880,502      25,519,519    21,880,502      25,519,519



    Stock options and warrants
                                                                        2000            1999
                                                                          #               #

    Outstanding options and warrants
    Balance, beginning of the year                                   3,476,980      2,349,986
    Options granted                                                    129,000      1,265,200
    Warrants granted                                                 1,000,000
    Options and warrants canceled, terminated or expired            (2,304,000)       (138,206)
    Balance, end of the year                                         2,301,980       3,476,980




                                               31           RTO ENTERPRISES    A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  N O T E S TO F I N A N C I A L S TAT E M E N T S
  December 31, 2000 and 1999

  8 . S H A R E C A P I T A L (continued)
  Stock options

     Under the Company’s stock option plan, options to purchase common shares may be granted by the
  board of directors to directors, officers and employees. Options are granted at exercise prices equal
  to or greater than fair market value at the grant date, generally vest evenly over a five year period, and
  have exercise lives ranging from five to ten years. The aggregate number of common shares reserved for
  issuance and which may be purchased upon the exercise of options granted pursuant to the plan shall
  not exceed 10,000,000 common shares .

    The Company has granted stock options to directors, officers and employees to purchase 1,301,980
  shares. These options expire on dates between January 31, 2001 and July 31, 2005.

    The Company has issued options to directors, officers and employees as follows:
                                                                  2000                       1999
                                                                  Weight Average            Weight Average
                                                      Shares       Exercise Price     Share Exercise Price
                                                        #                $              #         $

      Stock options, beginning of
       the year                                      3,076,980         1.69         1,949,986       1.79
      Options granted                                  129,000         1.93         1,265,200       1.60
      Options canceled,
       terminated or expired                        (1,904,000)        1.74          (138,206)      1.96
      Stock options, end of the year                 1,301,980         1.65         3,076,980       1.69

                                                                     2000
                                  Options Outstanding                               Options Exercisable
                                       Weighted
                                       Average
                                      Remaining      Weighted                                    Weighted
         Range of                    Contractual      Average                                    Average
          Exercise                      Life in       Exercise                    Shares         Exercise
           Prices       Outstanding     Years          Price                    Exercisable       Price
             $               #                            $                          #               $
        1.35 – 2.00      1,301,980        2.6           1.65                     671,703           1.70

                                                           1999
                                  Options Outstanding                               Options Exercisable
                                       Weighted
                                       Average
                                      Remaining      Weighted                                    Weighted
         Range of                    Contractual      Average                                    Average
          Exercise                      Life in       Exercise                     Shares        Exercise
           Prices       Outstanding     Years          Price                    Exercisable       Price
             $               #                            $                          #               $
        1.35 – 2.00      3,076,980        2.3           1.69                     1,621,780         1.81




RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0              32
RTO Enterpris e s Inc.
N O T E S TO F I N A N C I A L S TAT E M E N T S
December 31, 2000 and 1999

8 . S H A R E C A P I T A L (continued)
Warrants

  In December 2000, the Company issued warrants to acquire 1,000,000 common shares at an exercise
price of $0.31 (see note 6). Subsequent to the year-end, the Company issued warrants to acquire
380,000 common shares (see note 15).

  At December 31, 1999, the Company had issued warrants to acquire 400,000 common shares at an
exercise price of $5.08. These warrants expired on June 10, 2000.



9. RESTRUCTURING AND OTHER COSTS

  During the year, and following changes to the executive management of the Company and a review
of business processes by new management and by a Special Committee of the Board of Directors, new
management committed the Company to restructure various aspects of its operations. Costs related to
the restructuring plan resulted in a charge of $4,545,420 to earnings for the year as follows:

                                                                                                  $
    Settlement agreement with former President, CEO and Chairman of the Board               1,375,000
    Other agreed payments to the former President, CEO and Chairman of the Board               86,634
    Costs of Special Committee, including related professional fees                           942,804
    Estimated store closure and severance costs                                               983,630
    Relocation and related costs                                                              273,000
    Deferred royalty funding settlement                                                       484,352
    Bank restructuring fees                                                                   400,000
                                                                                            4,545,420

 $1,959,479 of this amount was paid during the year and $2,585,941 remains in accrued liabilities at
December 31, 2000.

   $1,025,864 of the settlement agreement with the former President, CEO and Chairman of the Board
is represented by promissory notes. $322,132 was payable on June 30, 2000, $402,132 on September
30, 2000 and $301,600 on December 31, 2000. Interest at 10% per annum was payable monthly from
the date the principal amount was payable. The promissory note holder agreed not to demand payment
prior to January 31, 2001. Subsequent to the year-end, the entire balance owing, including interest, was
paid.

  The Company also accrued additional provisions of $800,000 in the year ended December 31, 2000
related to an acceleration of plans for the disposal of land held for resale and certain litigation matters
(see note 14).




                                                   33            RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  N O T E S TO F I N A N C I A L S TAT E M E N T S
  December 31, 2000 and 1999

  10 . W R I T E - D O W N O F N O T E R E C E I VA B L E
     The Company has a note receivable which is repayable in blended monthly installments of $3,500
  including principal and interest at 7% per year compounded monthly with a maturity date of October
  1, 2004. The Company holds a general security agreement in respect of all property of the borrower as
  collateral for the note receivable.

    During 1999, the debtor went into receivership. The Company fully provided for the possible non-
  collection of the note in 1999 but management is continuing to pursue the matter.

  11. I N C O M E TA X E S

    The Company’s provision for income taxes is comprised of the following:

                                                                         2000               1999
                                                                           $                  $
      Current income tax provision                                      30,066             56,384
      Future income tax recovery                                    (2,702,173)          (209,688)
                                                                    (2,672,107)          (153,304)

    The Company’s tax provision is determined as follows:

                                                                        2000               1999
                                                                          $                  $
      Combined basic federal and provincial income tax rates            44.2%              45.0%
      Combined basic federal and
       provincial income tax expense (recovery)                    (4,009,946)            315,071
      Unrecognized tax losses                                         531,232
      Impact of changes in tax rates                                  185,070
      Non-deductible goodwill amortization                            375,958             377,954
      Tax benefit of previously unrecognized tax losses                                  (966,916)
      Other                                                            245,579            120,587
                                                                    (2,672,107)          (153,304)

    Future income taxes reflect the tax effects of temporary differences between the carrying amounts
  of assets for financial reporting purposes and the amounts used for income tax purposes. Significant
  components of the Company’s future tax assets are as follows:

                                                                        2000               1999
                                                                          $                  $
      Future tax assets
      Loss carryforwards                                             2,411,279          2,995,195
      Tax cost of rental and capital assets in excess
       of net book value                                            11,203,065          8,092,142
      Accounts receivable                                              970,593          1,128,402
      Other                                                            682,452            349,479
                                                                    15,267,389         12,565,218


RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0       34
RTO Enterpris e s Inc.
N O T E S TO F I N A N C I A L S TAT E M E N T S
December 31, 2000 and 1999

1 1 . I N C O M E T A X E S (continued)
  At December 31, 2000, the Company and its subsidiaries had unused non-capital tax loss carry-
forwards available to reduce taxable income in future years as follows:

    Year of origin                               Year of expiry                                  $
    July 31, 1995                                    2001                                    2,497,484
    July 31, 1996                                    2002                                    1,544,719
    July 31, 1997                                    2003                                    6,355,186
    December 31, 1998                                2005                                       46,956
    December 31, 1999                                2006                                      188,962
    December 31, 2000                                2007                                    5,355,852
                                                                                            15,989,159

  At December 31, 2000, the potential future benefit associated with $5,591,770 of these losses has been
recorded in these financial statements.

12 . E A R N I N G S ( L O S S ) P E R S H A R E

  Earnings (loss) per share is calculated using the weighted average number of shares outstanding during
the year of 21,880,502 (1999 - 21,880,502). Fully diluted loss per share for 2000 is anti-dilutive and is
therefore presented as equal to the basic loss per share. Fully diluted earnings per share for 1999 reflects
the effect of 3,476,980 options and warrants outstanding at December 31, 1999.

13 . N E T C H A N G E I N N O N - C A S H W O R K I N G C A P I TA L I T E M S

  The net change in non-cash working capital items excluding rental assets is determined as follows:

                                                                          2000                  1999
                                                                            $                     $
    Amounts receivable                                                   595,451               261,222
    Prepaid expenses                                                    (653,922)                (3,126)
    Trade accounts payable                                            (3,845,483)           (3,625,761)
    Accrued liabilities                                                3,482,199               422,634
    Accrued payables, bonuses and
      other employee costs                                               164,790              (436,958)
    Unearned revenue                                                      (48,189)              (50,192)
    Income taxes payable                                                 (274,925)             238,618
                                                                        (580,079)           (3,193,563)

  Supplemental disclosures in respect of the consolidated statement of cash flows comprise the
following:

                                                                         2000                  1999
                                                                           $                     $
    Income taxes paid                                                    308,345               171,207
    Interest paid                                                      2,042,832             2,199,345


                                                   35             RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  RTO Enterpris e s Inc.
  N O T E S TO F I N A N C I A L S TAT E M E N T S
  December 31, 2000 and 1999

  14. CONTINGENCIES

     A motion seeking the authorization to institute a class action was started against the Company in the
  Province of Quebec (Montreal Superior Court) in November 1997. The plaintiffs were authorized by the
  Court in August 1999 to proceed with a class action against the Company on behalf of all persons who
  have leased or purchased personal property destined for personal use in their home from the Company
  (the “class”). The plaintiffs allege that the Company’s rental contracts do not properly comply with the
  requirements of the Consumer Protection Act (Quebec). They are seeking the cancellation of their con-
  tracts, or the reduction of their obligations and the reimbursement of all or a portion of the amounts paid
  by the members of the class to the Company, as well as exemplary damages in the amount of $200 per
  member of the class. If this class action proceeds to trial, the Company intends to defend it vigorously
  and believes it has substantive defences to the plaintiffs’ allegations. The Company has taken a reserve
  on its books in an amount it considers to be adequate to cover the amount of any currently reasonably
  possible liability of the Company in relation to this matter.


  15 . S U B S E Q U E N T E V E N T S

  Rights Offering and Mezzanine Financing


    On January 31, 2001, the Company completed a Rights Offering to subscribe for common shares at
  $0.30 per share. 21,880,502 common shares were issued for net proceeds of $5,763,915 ($6,564,151
  less share issue costs of $800,236). The share issue costs were incurred prior to the year-end and are
  included in prepaid expenses at December 31, 2000.


     On January 31, 2001, the Company also obtained mezzanine financing for $1,100,000 from the bank
  to assist with the payment of certain restructuring costs. The term of the financing is four years and is
  repayable at any time by the Company. Interest is payable at 22% per annum for the first two years
  and 15% per annum thereafter, with no principal payments required for the first two years. If not repaid
  after two years, 23 monthly principal payments of $20,000, plus interest, are required thereafter with
  a principal payment on the fourth anniversary date of $640,000. A fixed and floating charge over all
  assets of the Company is provided as collateral, subordinated to permitted encumbrances including the
  new bank facility described in note 5 but ranking pari passu with the subordinated debenture described
  in note 6. The Company also entered into a warrant agreement that provides warrants to the bank to
  purchase 380,000 common shares at $0.31 per share. The warrants may be exercised at any time over
  five years, but warrants to purchase 190,000 of the shares vest only after the second anniversary date,
  and only if the mezzanine financing is not repaid at that time.


    Had the Rights Offering and mezzanine financing been completed on December 31, 2000, the pro-
  forma balance sheet, as compared to the actual, would have been as follows:




RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0      36
RTO Enterpris e s Inc.
N O T E S TO F I N A N C I A L S TAT E M E N T S
December 31, 2000 and 1999

1 5 . S U B S E Q U E N T E V E N T S (continued)
                                                                  December 31,      December 31,
                                                                     2000               2000
                                                                       $                  $
                                                                    (Actual)         (Pro-forma)

    ASSETS                                                         58,320,986          57,520,750

    LIABILITIES AND SHAREHOLDERS’ EQUITY
    Liabilities
    Bank revolving demand loan                                     21,706,763         15,142,612
    Other liabilities                                              13,220,542         13,220,542
                                                                   34,927,305         28,363,154

    Shareholders’ equity
    Share capital                                                  25,519,519         31,283,434
    Deficit                                                        (2,125,838)        (2,125,838)
                                                                   23,393,681         29,157,596
    LIABILITIES AND SHAREHOLDERS’ EQUITY                           58,320,986         57,520,750

Stock options
a) Rights Offering
  In conjunction with the completion of the Rights Offering, stock options to purchase 5,143,420
common shares were issued to directors, officers and employees at an exercise price of $0.31, and
options outstanding at the year-end to acquire 511,980 common shares, with exercise prices ranging from
$1.65 to $2.00, were re-priced to $0.31, by the board of directors.

  Had these options been granted as above at December 31, 2000, options to purchase 6,445,400
common shares would have been issued to directors, officers and employees at the year-end as follows:
                                                          2000
                               Options Outstanding                      Options Exercisable
                                     Weighted
                                     Average
                                    Remaining          Weighted                      Weighted
       Range of                     Contractual        Average                       Average
        Exercise                      Life in          Exercise         Shares       Exercise
         Prices       Outstanding     Years             Price        Exercisable      Price
           $               #                               $              #              $
          0.31         5,655,400        7.8              0.31         3,017,052        0.31
      1.35 – 2.00        790,000        2.2              1.48          440,000         1.56
      0.31 – 2.00      6,445,400        7.7              0.49        3,457,052         0.47

b) Expiry of stock options
  On January 31, 2001, stock options to purchase 240,000 common shares, at an exercise price of $1.65,
expired.

16 . C O M PA R AT I V E F I G U R E S

  Certain comparative figures have been reclassified to conform with the presentation adopted for the
current year.


                                                  37          RTO ENTERPRISES      A N N UA L R E P O RT 2 0 0 0
  DIRECTOR S AND OFFICER S

  DIRECTOR S                               DIRECTOR S                    OFFICERS

  Donald K. Johnson                        Ronald G. Gage                Bruce H. Reid
  Chairman of                              Corporate Director            President & CEO
  RTO Enterprises Inc.
  and Vice-Chairman of                     Robert (Robin) Korthals       David Ingram
  BMO Nesbitt Burns Inc.                   Corporate Director            Executive Vice-President
                                                                         and Chief Operations Officer
  Bruce H. Reid                            David A. Lewis
  President & CEO,                         Corporate Director            S.W. Johnson
  RTO Enterprises Inc.                                                   Executive Vice President
                                           Gerald P. McCarvill           and Chief Financial Officer
  David Ingram                             President and
  Executive Vice-President                 Chief Executive Officer,      Paul Barry
  and Chief Operations Officer             McCarvill Corporation         Vice President,
  RTO Enterprises Inc.                                                   Development
                                           Joseph Rotunda
  Douglas Anderson                         President & CEO               Barry McGee
  Corporate Director                       EZCORP., INC.                 Corporate Secretary




  C O R P O R AT E I N F O R M AT I O N


  HEAD OFFICE                              INVESTOR                      BANKERS
  10239 - 178 Street                       R E L AT I O N S              Canadian Imperial Bank
  Edmonton, Alberta                        S. William Johnson            of Commerce
  T5S 1M3                                  Executive Vice President      Edmonton, Alberta
  Tel: (780) 930-3000                      and Chief Financial Officer
                                           Tel: (780) 930-3012
  Fax: (780) 481-7426                                                    TRANSFER
                                                                         AGENTS
                                           AUDITOR S
                                                                         Equity Transfer
  Toronto Office                           Ernst & Young LLP
                                           Edmonton, Alberta
                                                                         Services Inc.
  Suite # 201,
                                                                         Toronto, Ontario
  170 Robert Speck Parkway
  Mississauga, Ontario                     SOLICITOR S
  L4Z 3G1                                                                LISTED
                                           Blake Cassels &
  Tel: (905) 272-2788                                                    Toronto Stock Exchange
  Fax: (905) 272-9886                      Graydon LLP                   Trading Symbol: RTO
                                           Toronto, Ontario




  ANNUAL GENER AL M E E TING

  The Annual General Meeting of Shareholders will be held May 24, 2001 at 4:30 p.m.. The
  meeting will take place in the Library Room of the Royal York Hotel at 100 King Street
  West, Toronto, Ontario.



RTO ENTERPRISES     A N N UA L R E P O RT 2 0 0 0             38
RTO ENTERPRISES   A N N UA L R E P O RT 2 0 0 0
RTO ENTERPRISES   A N N UA L R E P O RT 2 0 0 0
A N N U A L   R E P O R T   2 0 0 1   R

                                      T

                                      O
     You can get the furniture, appliances, electronics and
  computers that you want and need right now for as long as
        you want...weekly, monthly, yearly or forever.

  We know that your home is important to you, that’s why we
   have the brand names, selection and convenient payment
             programs that are just right for you.


                      No Credit Needed

                   No Down Payment Plan

                 Customized Payment Plan

                     Same Day Delivery

                       Set- up Included

                        Full Warranty



Our friendly sales staff are always here to show you how you can
  get exactly what you want, delivered to your home...today.

    Our stores offer an easier and better way for you to get
                    exactly what you want.
RTO Enterprises Inc. (RTO) is
Canada’s largest rental-purchase
company, and the fourth-largest
in North America, offering top
quality, brand-name household
furnishings, appliances, and home
electronic products to consumers
under weekly or monthly rental
agreements. These agreements
may be cancelled at any time
without further cost or obligation
to the customer and include an
unconditional service guarantee
with an option to purchase.


RTO is a public company listed
on the Toronto Stock Exchange
under the trading symbol “RTO”
R                                 TA B L E      O F       C O N T E N T S




T
    Corporate Profile                                                        1

    Chairman’s Message                                                       3

O   Message to our Shareholders                                              5

      Operations Update                                                      7

      Real Estate and Facilities Overview                                    9

      Marketing and Merchandising                                           11

      Financial Objectives                                                  14

    Management’s Discussion and Analysis
      of Financial Condition and Results of Operations                      15

    Management’s Responsibility for Financial Reporting                     22

    Auditors’ Report                                                        23

    Consolidated Financial Statements

      Consolidated Balance Sheets                                           24

      Consolidated Statements of Loss and Deficit                           25

      Consolidated Statements of Cash Flows                                 26

      Notes to Financial Statements                                         27

    Directors and Officers                                                  40

    Corporate Information                                                   40




                                                      2
                                      C H A I R M A N ’ S                 M E S S A G E                                                  R

                                   T h e ye a r 2 0 0 1 w a s c l e a r l y a “ t u r n a r o u n d ” ye a r f o r o u r C o m p a ny.

                                   The key driver behind the turnaround was the new management team led by
                                                                                                                                         T
                                   David Ingram. David was hired as Chief Operating Officer on December 4, 2000
                                   and appointed President and Chief Executive Officer at our annual meeting on
                                   May 24, 2001. His prior experience in running Rent-A-Centre Canada’s 29 store
                                   operation in 1996-97 and a 380 store division for Rent-A-Centre in the U.S. has been
                                   very relevant to our Company’s performance. David has assembled an outstanding
                                                                                                                                         O
                                   management team, each of whom have many years of experience in the rent-to-own
                                   industry, the majority having previously worked with him at Rent-A-Centre, the US
                                   industry leader. The equity financing was completed, collections have been brought
                                   under control, many stores have been relocated or consolidated, new merchandise
                                   programs created and employee training programs initiated. I would like to thank
                                   and congratulate the new management team and all employees for their hard work
                                   and dedication which were crucial to the results achieved last year.


                                   We have an outstanding board of directors who have provided excellent advice
          Donald K. Johnson,       and support to our new management team during this very challenging period.
Chairman of RTO Enterprises Inc.
                                   Given the increased focus on corporate governance, transparency, accounting
                                   principles and audit procedures, we are very fortunate to have board members
                                   who are leaders in their field and highly respected in the business and financial
                                   community. Their qualifications and experience are very complementary and they
                                   have a keen interest in our Company’s success. Our Audit Committee is chaired by
                                   Robin Korthals, former President of TD Bank, our Corporate Governance Committee
                                   is chaired by Ron Gage, former Chairman and CEO of Ernst & Young Canada and
                                   Doug Anderson, former CEO of Rent-A-Centre U.S., chairs our Compensation
                                   Committee. I would like to thank each of our directors for their contribution to
                                   the Company’s success to date, in particular those directors who are members of our
                                   three board committees. I would also like to thank our legal counsel, Blake Cassels
                                   & Graydon LLP and our auditors, Ernst & Young LLP for their excellent service.

                                   It is important for shareholders to know that RTO’s accounting principles are
                                   basically the same as the U.S. peer group of publicly listed rent-to-own companies.
                                   The only material difference is that our amortization policy for idle merchandise
                                   is more conservative than our US counterparts, as we automatically amortize on
                                   a straight line basis any merchandise that has been idle for longer than 90 days.
                                   Our Company’s financial condition continues to be strengthened as operating
                                   performance improves and our cash flow is sheltered by significant tax loss carry
                                   forwards. The Company is operating comfortably within the covenants of our bank
                                   revolver facility and we can finance our expansion program from internally generated
                                   cash flow.




                                                                  3
R                C H A I R M A N ’ S            M E S S A G E




T   While RTO Enterprises is Canada’s leading rent-to-own chain, with 130 stores from coast to
    coast, the Canadian market is significantly under-served and our Company has great growth
    potential. During the past year, the new management team has positioned the Company to
    capitalize on this opportunity. Our policies are designed to attract and retain the most talented
    and hard working people. Our Executive Incentive Program, with a combination of performance

O   bonuses and stock options, ensures that our management team is incentivised to perform and
    that they will be rewarded for their performance. Their interests are clearly aligned with our
    shareholders. I continue to look forward to the opportunities and challenges which lie ahead.
    With an excellent board of directors, a strong management team and motivated employees,
    I am confident that RTO has an excellent future and that we are well positioned to enhance long
    term shareholder value.




    Donald K. Johnson,
    Chairman of RTO Enterprises Inc.
    April 10, 2002




                                         4
                                        M E S S A G E     T O     O U R      S H A R E H O L D E R S                                   R

                                              In 2001 we implemented our turnaround strategy to return our Company back to
                                              financial health. To this end, we implemented a 4-step strategy that was necessary       T
                                              for re-engineering RTO Enterprises:


                                                 1. Restructure the organization;
                                                 2. Implement the basics;
                                                 3. Execute flawlessly ; and
                                                 4. Leverage opportunities for the C3 (cash and credit constrained) consumer.
                                                                                                                                       O
                                              By the second quarter in 2001, after the successful completion of the rights offering,
                                              we were able to crystallize our senior management team. This was critical for
                                              building a platform for long-term success. Of particular note is the combined
                                              experience of 47 years in the rent-to-own industry between the 5 most senior
                                              executives. It is also worth observing that Randy Robertson – Senior Vice President
                                              of Operations, David Maries - Vice President Marketing & Merchandising, and
                                              Rick Atkinson – Vice President Development and I all acquired our education in
                                              rent-to-own from Rent-A-Centre, the most successful company in the industry, with
                     David Ingram,
                                              2,281 company-owned stores in 50 U.S. states and revenues of US $1.8 billion. They
President and Chief Executive Officer
                                              are also the most profitable.


                                              With our team appointed and energized, we focused on implementing the traditional
                                              rent-to-own business model. This meant taking a much more disciplined approach
                                              to collection activity and at the same time moving our rental agreement renewal
                                              frequency towards weekly payments rather than monthly. This helped our efforts to
                                              develop the relationship with our customers and showcase our product assortment
                                              as our ‘stock turns’ become faster. These efforts realized material operational
                                              improvements that contributed to our revenue and profit improvements in the second
                                              half of 2001.


                                              We enter 2002 with a monthly rental revenue portfolio (SMRR-Standard Monthly
                                              Rental Revenue) of $5.4 million which is $350,000 more than January 1, 2001, giving
                                              the Company its best growth performance in the last 3 years. With the restructuring
                                              behind us and the basics implemented, management’s focus will be following through
                                              the coaching we deliver in the field to raise the bar on our internal key performance
                                              indicators (KPIs). Our support offices have been built to ensure our field teams have
                                              the tools at their disposal to make timely business decisions to assist our customers.
                                              Once we have successfully improved our levels of productivity, then and only then
                                              will we look for opportunities to leverage our core competencies in the household
                                              income groups we serve.




                                                                        5
R                      M E S S A G E          T O     O U R      S H A R E H O L D E R S




T   Financial Review

    Total revenue for the fourth quarter was $17.7 million, a $1.4 million increase over revenue of $16.3 million for
    the comparable period in 2000. This increase of 8.4% was attributable to same store revenue growth of 7.3% and
    improvement in the average rental rate per agreement (APA) due to the concerted effort to re-stock with higher-end
    product. The Company generated an operating income of $958,000 in the quarter compared to an operating loss

O   of $1.8 million in the fourth quarter of 2000. Income before tax for the quarter was $430,000 compared with
    a loss before tax of $2.3 million for the comparable period in 2000. Net income was $389,000, an increase of
    $3.0 million over last year’s comparable period net loss of $2.6 million. This was the most profitable quarter since
    June 1999.

    For the fiscal year ended December 31, 2001, total revenue was $67.8 million compared with fiscal 2000 revenue
    of $67.4 million. This gain of $400,000 reinforces our confidence in the turnaround that was produced in the
    third quarter’s level year-over-year revenue following seven quarters of consecutive decline. Operating income was
    $3.3 million which improved from an operating loss of $6.9 million in fiscal 2000. Income before tax was
    $1.0 million compared to a loss before tax of $9.1 million in 2000. Net loss improved from a net loss of
    $6.4 million for fiscal 2000 to a net loss of $1.9 million in 2001. The 2001 loss included a future income tax
    charge of $2.6 million in the second quarter. This future tax charge included the effect of rate reductions
    and an additional valuation allowance against the future tax asset base. The diluted loss per share was <$0.04> for
    fiscal 2001 compared with <$0.29> for 2000.

    Looking Ahead

    We believe that the rent-to-own industry in Canada is significantly under-penetrated. Research using current
    customer psychographics indicates that if we were to use sustainable store-to-population ratios, we could increase
    our customer base by a factor of 4. As the only national rent-to-own company, we believe we are best positioned to
    capitalize on these growth opportunities. To this end, management presented a 3 year strategic plan to the Board
    of Directors providing clear direction of the Company’s vision and mission goals.

    In November 2001, with the support of the Board of Directors, we began preparing ourselves for executing this
    plan and sharing it with all Associates, to not only give them the line of sight, but to motivate them on being part
    of this winning team. It is our Associates in the field who are the real champions in changing the Company’s
    fortunes. Their execution of the basics, through a period of insecurity and change, has led us to the next stage.
    Our confidence is fuelled by increasing revenues, controlled expense management, reduced Associate turnover and
    individuals willing to do extraordinary things. The plan, over the next 3 years, is to open a minimum of 42 new
    stores and consolidate our 5 banners into one powerful brand.

    While this plan will require determination and dynamic individuals, our management depth is the strongest it’s
    ever been.

    We thank all our Associates for their contributions to RTO Enterprises, and all the stakeholders who continued to
    provide their support in 2001.




    David Ingram,
    President and Chief Executive Officer
    April 10, 2002


                                                             6
                                        O P E R AT I O N S              U P D AT E                                             R

                                    The year 2001 proved to be a ‘turnaround’ year for RTO Enterprises, with the
                                    implementation and execution of several important programs, paving the way                 T
                                    in strengthening the key fundamentals of any successful rent-to-own company.
                                    The following is a brief summary of several of the initiatives implemented during the
                                    past 12 months.


                                    REVIEW OF 2001
                                                                                                                               O
                                    Modus Operandi


                                    People are the most critical element of the RTO transaction – a customer relationship
                                    requires tight spans of control, therefore advanced planning became a priority of
                                    how the field focused its resources. Commencing in the third quarter of 2001, every
                                    store and regional manager was provided with a calendar of events for the upcoming
                                    quarter, which clearly mapped out company planned activities such as open houses,
                                    marketing campaigns, dates for company, divisional and regional meetings, and
                                    other key activities. The regional managers use this tool to schedule their respective
            Randy Robertson,
                                    activities including standards of operation reviews, financial audits, vacations, etc.
Senior Vice President, Operations
                                    Collectively, we feel this tool has provided us with a much greater ability to plan,
                                    prepare, implement and execute.


                                    Best Sales/Collections Practices


                                    In January 2001, we determined that the greatest challenge for the upcoming year was
                                    the execution of our basic fundamentals: Rent and Collect. As a result, we developed
                                    and implemented two very simple processes: ‘Best Collection Practices’ and ‘Best Sales
                                    Practices’. These programs contained very specific daily and weekly responsibilities for
                                    each key area while clearly defining accountability for each Associate.


                                    Audits/Standards Of Operation

                                    As previously mentioned in the Modus Operandi, during each quarter, every store
                                    in the Company is given a complete financial audit and is examined in accordance
                                    with the newly introduced Standards of Operation. The Standards of Operation
                                    is a program we introduced to provide consistency throughout the Company in all
                                    processes, programs, promotions, etc. Our goal is to meet and exceed our customers’
                                    expectations and deliver the ‘world-class service’ they deserve.


                                    Delinquency Management


                                    With the implementation of ‘Best Collection Practices’, our month-end number of
                                    delinquent accounts decreased an average of 32% for the twelve-month period.
                                    Rental amounts in arrears dropped 40% for the same period. Also, with the




                                                               7
R                                       O P E R AT I O N S             U P D AT E




T   improvements in collection results, charge-offs (product book value written off) were reduced by over $1.5 million
    and finished the year at 2.5% of store revenue versus 4.9% in the year 2000. This is also significantly lower than
    our industry peer group in the US with 100+ stores, which operate at 4.4% of revenue.


    Store Operational Performance


O   Labour costs for the year were managed to 22.3% of store revenue, which when compared to 24.6% for the same
    period in 2000, clearly showed a significant improvement. Overall store expenses were reduced to 47.9% of revenue
    in 2001, compared to 52.1% in 2000 representing a savings of $3 million.


    With the ‘flow through’ of profit at store level, store operating income (before regional expenses) increased to 19.2%
    of store revenue from 15.8% for the same period in 2000, representing an improvement of $3.2 million.


    P E O P L E U P D AT E

    People


    Our priority continues to be attracting and retaining key talent. While the labour market has loosened over the
    last few months, the underlying demographic fundamentals will result in an increasing labour shortage in Canada
    in the next several years. With this in mind, we have developed a number of specific initiatives designed to address
    this issue:
      • Implemented an ongoing recruitment campaign to support current and future people needs.

      • Introduced a Store Manager Trainee program to facilitate the recruitment of management candidates.

      • Developed associate training programs to provide consistent skills training.

      • Pro-A – Relaunched in October 2001 to standardize the induction of new associates to the Company.

      • Pro-M – Will be implemented in the first quarter of 2002 for potential store manager candidates to further
        develop management and financial skills.


    Recognition And Incentive Programs


    In January 2001 we introduced our annual bonus program which rewards store and regional managers as well as
    support management.


    This program rewards individuals for outstanding financial performances with increased payments for above-plan
    performances. We believe it is a ‘win-win’ for the individuals and the Company with budgets being built on a fair
    and equitable basis for both parties.


    With these initiatives introduced over the past year it is a pleasure to report that the Company turnover rate has
    dropped 26% in 2001 compared to 2000.


    Our long term challenge will be to continue to enhance our human resource strategies that effectively reward individual
    talent, effort and results, ultimately driving the Company’s results and contributing to its financial success.




                                                              8
                     R E A L   E S TAT E       A N D       FA C I L I T I E S          O V E R V I E W                       R

                                  At the end of 2001, RTO Enterprises owned and operated 130 stores with
                                  representation in all 10 provinces in Canada.                                              T
                                  2001 witnessed the closing of 5 unprofitable stores, their respective agreements being
                                  transferred to existing stores; the relocation of 7 stores; the opening of 7 new stores
                                  and the renovation of 6 stores. All of this activity reflects the Company’s strategy to
                                  maintain its leadership and domination in the rent-to-own business in Canada.
                                                                                                                             O
                                  Five of the new stores opened as ‘new concept’ stores under the Rentown banner
                                  incorporating new display fixtures, new in-store graphics, new colours and, what
                                  we believe to be, a much more attractive ‘retail’ environment for both our customers
                                  and associates.


                                  The decision to open new stores in selected markets across Canada was
                                  supported by considerable research and analysis provided by a statistical research
                                  company. This Company was able to identify both the number and location of our
                                  target households in all communities across Canada and to determine the extent of
            Rick Atkinson,
                                  the opportunity for RTO in Canada. Statistics Canada has determined that there
Vice President, Developement
                                  are currently over 11.3 million households in Canada, of which approximately
                                  4.3 million of those have been identified as RTO target households. As a result RTO
                                  has an opportunity to expand and quadruple its current customer base.


                                  Currently, the portfolio of stores includes many locations that are less than
                                  satisfactory and do not meet our current requirements relative to operating where
                                  our target customers live or shop. In addition, many stores are currently undersized
                                  (less than 2500 sq. ft.) or simply too large (in excess of 4500 sq. ft.). As a result,
                                  the plan for 2002 will be to improve the positioning of poorly located stores and to
                                  ensure that our stores more closely “fit” our preferred size of 3500 sq. ft. to 4000 sq.
                                  ft. which is comparable to the average store size of the rent-to-own stores in the U.S.

                                  This program of upgrading our real estate and ‘right-sizing’ our stores, while always
                                  subject to availability and affordability, will be a priority for 2002 and will be
                                  implemented in the most cost-effective manner possible, as leases expire. Therefore,
                                  the capital plan for 2002 includes a large number of store relocations (17) together
                                  with 25 remodels and the introduction of a minimum of 7 new stores. The overall
                                  capital plan for the 3 year period 2002 to 2004 is planned to be as follows:



                                                                             2002           2003             2004


                                       New Stores                              7              14              21
                                       Relocations                            17               7               4
                                       Remodels                               25               7              13
                                       TOTAL                                  49              28              38




                                                             9
R               R E A L       E S TAT E          A N D       FA C I L I T I E S           O V E R V I E W




T   Our goal is to establish a market position and dominance that distinguishes RTO from the competition and enables
    the Company to expand its customer base. Our current number and aggregate area of stores for the next 3 years
    is planned to be:




O                                                       2001             2002               2003               2004

         Number                                        130               137                151                172
         Sq. Ft.                                     475,000           500,000            550,000            625,000



    In addition to the ongoing program to upgrade our existing facilities and the execution of the Company’s growth
    strategy, considerable effort and progress has been made in identifying opportunities to reduce store operating costs
    such as the installation of electronic thermostats and fixing the utility rates for the next three years in our Ontario
    stores, reducing store communication costs and executing favourable term HVAC contracts.


    2001 also saw the completion of considerable research and analysis regarding the matter of expanding our customer
    base and, as a result, several ‘test’ stores will be introduced in the first quarter of 2002. This new concept store will
    include additional display fixtures to support growth categories such as computers and gaming. This will enhance
    the presentation of the product for our customer, heighten even further the ambience of the store, upgrade the
    in-store graphics and improve the messaging of the concept of rent-to-own to an expanded customer base.


    RTO is committed to maximizing the ‘value’ of its real estate through the acquisition of ‘A’ locations, the disposition
    of poor locations, the implementation of cost efficiencies associated with the operation of our stores, and providing
    superior building/premises management.


    Our performance in 2001 showed substantial improvement in operating results. With our renewed determination
    and vision and our emphasis on controlled growth, we are certain our results will show steady and continuous
    development in 2002 and in the years to come.




                                                               1 0
                             M A R K E T I N G           A N D        M E R C H A N D I S I N G                                  R

                                      Since inception of the newly created marketing and merchandising team, its mandate
                                      has been to support field operations with programs and products that will provide the      T
                                      momentum needed to deliver our growth targets.


                                      For 2002, a comprehensive marketing plan has been designed that integrates exciting
                                      seasonal traffic building ideas with eye-catching point of sale material, marriage mail,
                                      direct mail, and open house sales events. Further, we will introduce value-added
                                      promotions with product purchases that will offer our customers the very latest
                                                                                                                                 O
                                      technology and styles. In the second half of 2001, we worked diligently to put together
                                      strong promotions of this type, results from the third and fourth quarters of 2001
                                      provide evidence of the success achieved with this approach. During this period our
                                      potential monthly rental revenue portfolio (SMRR) grew $412,000, a positive swing of
                                      $528,000 over 2000, and an increase of $384,000 over 1999.




           David Maries,
           Vice President,
Marketing & Merchandising




                                                           SMRR          [Gain/Loss]
                                              T h i r d a n d Fo u r t h Q u a r te r ( 1 9 9 9 - 2 0 0 1 )



         SMRR ($)                                     1999           2000             2001

          350,000

          300,000                                                                                             315, 346

          250,000

          200,000

           150,000

           100,000
                                                           96,596
            50,000
                             48,627
                  —
                                                                                 (20,576)          (32,447)
          (50,000)
                                         (83,269)
          (100,000)

                                  THIRD QUARTER                                           FOURTH QUARTER




                                                                  1 1
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T   Our Gifts for all the Family Christmas campaign was instrumental in this success and was driven in part by the
    introduction of the Sony Playstation2® in October. We ended the year with over 1000 units on rent. As a result of this
    success, gaming will now be a permanent part of our product line-up with plans to introduce the Microsoft ® XBOX
    system to our range in March 2002.


    During 2001 we focused on increasing the average rental revenue of each agreement on rent (APA), improving by

O   $7.17 during the year, an 8.6% increase. This was driven in part by big screen TV rentals that grew by 74% and now
    produce 9.7% of our rental revenue. In addition, computers grew by 27% and now produce over 10% of our revenue.
    We anticipate further growth with these product-lines in 2002. Home theatre systems introduced in 2001 provide
    further opportunities for new product and APA growth.




                                        Avera ge Per Agreement                        [ A PA ]
                                                  Jan - Dec (2000 vs 2001)



    APA ($)                                          2000           2001

      $92

      $90

      $88

      $86

      $84

      $82

      $80

      $78

      $76

      $74

      $72
                 Jan     Feb      Mar      Apr      May      Jun      Jul     Aug      Sep       Oct     Nov      Dec




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                      P e r c e n t a g e o f To t a l R e v e n u e [ by C a t e g o r y]
                                                                                                                                 T
   Appliance/Other 1.9%                                                                          Other 3.0%




           Refrige 3.9 %
                                                                                                 Living Room 15.1%
                                                                                                                                 O
                                                                                                 Dining Room 2.8%

          Laundry 7.7%

                                                                                                 Bedroom 9.3%


       Computer 10.7%
                                                                                                 Furniture/Other 2.9%



          Vision 33.4%                                                                           Sound 9.3%




The recent introduction of the new Planning Manager will enable us to complete detailed assessments of each
product category. This, combined with improved inventory availability reporting, will provide the backbone of our
inventory management. Vendor partnerships will continually be assessed and improved to ensure that they are aligned
with the Company’s plans for continued growth. Trading variables with suppliers will be reviewed and negotiated to
ensure we optimize our purchasing spend.



As we look to the future, our strategy is to realize the many benefits of operating as a single brand. After in-depth customer
research, we now have a very defined vision of how best to position our business for long-term success and continued growth.
Positive progress is being made toward achieving this goal with ‘concept’ store testing now in place that will help
crystallize our single-brand positioning.

We have demonstrated our ability to reverse the negative trends of past years with strong marketing and merchandise
support, which will continue into 2002.




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T   2001 was a significant year in the Company’s history for a number of reasons.
    After the year 2000 in which the Company lost $6.4 million after incurring
    restructuring and other costs of $5.3 million, the net loss for the 2001 fiscal year
    was $1.9 million. This loss was after a deferred income tax charge of $2.6 million
    in the second quarter. After declines in revenue for seven quarters in a row, the
    third quarter of 2001 produced revenue equal to the same quarter in 2000, and the

O   fourth quarter showed a $1.4 million increase in revenue over the comparable quarter
    in 2000. Other significant advances in 2001 were:


       1. Arresting the erosion in the customer base,

       2. Decreasing rental receivables as a percentage of rental agreements
          outstanding to acceptable industry standards,

       3. Reducing charge-offs as a percentage of revenue to 2.5% from 4.9% in 2000,

       4. Improving the mix and quality of rental assets, and

       5. Achieving positive growth in same store revenues after a 9.5% decline
          the previous year.                                                                S. William Johnson,
                                                                                            Executive Vice President
                                                                                            and Chief Financial Officer
    The next few years will be challenging ones for the Company. We are anticipating
    same store revenue growth of not less than 5% in each year for the next three years
    coupled with a minimum 42 planned new store openings. We do not expect to
    close more than 3 stores in 2002 but will relocate 28 stores over the next 3 years to
    improved locations in order to increase customer traffic.


    One of the prime financial objectives this year will be to refinance the $4.0 million
    subordinated debt outstanding. This debt carries a coupon rate of 22% and therefore
    refinancing it with conventional debt will substantially reduce the Company’s
    interest expense.

    The management of the Company believes in the tremendous growth opportunity
    this business presents and we remain confident in our ability to capitalize on these
    internal growth opportunities which will enhance shareholder value over the medium
    to long term.




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The following discussion and analysis should be read in conjunction with, and
is qualifie d by, the au dite d consolidate d fina ncial statements of the Com pa ny
and the notes relating thereto included in this Annual Report.


Core business
                                                                                                                     T
RTO Enterprises Inc. (RTO) is in the business of renting, with or without an option to purchase, brand name
home entertainment products, appliances and household furniture across Canada. The rent-to-own business is not
seasonal and is generally immune to changes in economic conditions.
                                                                                                                     O
The Company’s program appeals to a wide variety of consumers who may not be able to purchase merchandise at
the time due to insufficient cash resources or a lack of credit or who simply want to try the merchandise, with no
long-term obligation, before they purchase.


RTO’s rental-purchase program provides an alternative to ownership for people who prefer the convenience of
full-service repairs without ownership obligations. The program does make it possible for customers to purchase
the product during the term of the rental agreement The rental agreement is generally a one week or one month
agreement which can be cancelled without further cost or obligation at any time and which the customer can renew
for another week or month by making another payment in advance. Each agreement automatically expires at the
end of the stated rental period unless a renewal payment is made.


The Company currently operates 130 stores in 80 cities and towns in all ten Canadian provinces. Our next largest
competitor operates 9 stores in western Canada. Even though the cost of entering the business is relatively low,
we do not view competition as a threat to our growth strategies.


RTO leases all its locations which are generally located in strip shopping centers or plazas in moderate to low
income neighbourhoods. The Company purchases all product directly from the manufacturers or distributors
and all product is delivered directly to the stores negating the necessity for the Company to maintain warehousing
facilities. The Company currently employs 661 people of which 604 are employed in the stores and the balance in
field and office support administration.


The location of the stores and the revenue earned during 2001 on a province-by-province basis is as follows:

                                                                   No. of stores      Total store revenue
                                                                                           $ (in 000’s)


    British Columbia                                                     9                      3,557
    Alberta                                                             17                      9,309
    Saskatchewan                                                         6                     3,477
    Manitoba                                                             5                      2,179
    Ontario                                                             72                    38,277
    Quebec                                                               5                      2,495
    New Brunswick                                                        5                      2,301
    Nova Scotia                                                          9                     4,051
    Prince Edward Island                                                  1                      355
    Newfoundland                                                          1                      525



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T   Vision and long - term business strategy

    The Company’s vision states that “Everyone should be given the opportunity to improve their home and lifestyle”
    and our mission is “To give our customers the means to access household goods and services to improve the quality
    of their lives.” To accomplish this we intend to maintain our dominant position in the Canadian rent-to-own
    market (130 stores out of an estimated 200) by:
O       1. Opening a minimum of 42 new stores over the course of the next three years;

        2. Increasing same store revenues by a minimum of 5% in each of the next three years; and

        3. Increasing our market penetration (our customer base is currently at 4% of prospects in markets where
           we have stores).

        We will accomplish this by:

        1. Recruiting and retaining the best available talent to manage our stores and build the skill levels of all
           our employees;

        2. Providing value to our customers through relationship management;

        3. Operating on an “every day, low cost to operate” philosophy;

        4. Leveraging our core competencies to provide complementary value-added services to our customers;

        5. Upgrading our existing locations where the real estate is a contributing factor in the poor performance
           of a store;

        6. Exploring the rational of consolidating our five operating store names into one “brand” in order to
           become the brand of choice in Canada;

        7. Improving our key customer acquisition and retention activities;

        8. Ensuring our new store locations are ‘A’ locations where possible and relocate poorly located stores to
           ‘A’ locations; and

        9. Developing, testing and introducing new product lines.


    Critical success factors

    In order to accomplish our goals we must hire and retain the best people available. Training is an ongoing necessity
    in employee retention. In the past, new store openings have been staffed with inadequately trained personnel which
    necessitated the closing of poorly performing stores and shrinking our store base from a peak of 156 to the current
    number of 130. We are gradually improving our employee hiring and retention competencies such that our retention
    rate improved 26% in 2001. However, hiring and retaining the right people is still a critical element in the Company
    achieving its goals.


    The Company must also be able to source and select the appropriate real estate sites in order to achieve its long-
    term goals of opening new stores and relocating poorly performing stores to better sites where the current site is
    a contributing factor to the store’s poor performance. We must have favorable results in site selection in order to
    achieve our goals.




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Customer growth and increased market penetration are necessary to achieve our revenue growth initiatives.
Introducing new product lines will increase our customers. We are not reliant on any single manufacturer for            T
product and do not envision product supply as inhibiting our growth opportunities. We have undertaken a
number of market research studies which allow us to better identify our customer and where they live and shop.
The research has shown that existing rent-to-own customers are pleased with the services provided under the
rent-to-own concept. Accordingly, the critical element in increasing customer growth is making sure potential
customers are aware of our business proposition which should result in the consequent increase in store traffic and
the executing of more rental contracts.
                                                                                                                        O
The Company can currently finance its new store openings, remodels and relocations out of internally generated
cash flow. Adequate financing is therefore not a limiting factor in achieving our goals. Store costs in relation to
revenue are approaching industry standards and will not be a factor in executing our strategies.


Revenue and store operating margin are the key metrics we use to measure the success of our strategic plan.
Customer growth and pricing drive revenue. Customer growth is dependant on our product offer, marketing
initiatives, and the execution of our business policies and procedures at the store level. Pricing is dependent
on our product offer. Most costs are variable with revenue other than property and vehicle leasing costs.
Our store margin for all stores in 2001 was 14.5%.


Capability to Deliver Results

Capital Resources

The Company currently operates 130 stores. The Company’s ability to grow its customer and revenue base is
contingent on the Company sourcing appropriate store sites in order to open new stores and to upgrade existing
poor locations. Revenue growth could be impacted significantly if the Company is not able to source these new sites
at an appropriate cost for the business model. The cost of new store openings and store relocations can be financed
from internally generated cash flow.


Attracting and retaining key field employees is critical in order to execute the Company’s strategy and deliver
results. Revised employee training programs have been introduced as well as performance measurement programs,
incentive driven compensation plans and other tools in order to increase the Company’s retention rate and to ensure
long-term success. We now have the tools in place to manage our human resources. Execution and availability of
the appropriate personnel is the on-going issue.


Certain suppliers of the Company have had limitations placed by their credit insurers on the volume of orders which
such suppliers are permitted to have outstanding from the Company at any particular time. The Company expects
these restrictions to ease as the Company’s results continue to improve. Such limitations have not to date materially
affected the Company’s ability to purchase product or the price at which such product is purchased.


Systems and Processes

The Company maintains an extensive information technology system to monitor all aspects of its operations and to
facilitate its store expansion program. Each store has an on-site customized computer system on which all inventory




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T   data, customer information and rental transactions are recorded. Daily transaction records and reports from each
    store are electronically transmitted overnight to RTO’s support office in Edmonton. In addition, RTO’s bankers
    verify to head office the cash deposits made by each store location on a daily basis. RTO’s extensive reporting system
    allows management to consistently monitor compliance with control systems. Management believes its systems will
    enhance its ability to meet its growth targets.


O   Results

    Quarterly Information
    ( in thousands of dollars except earnings per share amounts )



                                                 31 - Dec 30 -Sep 30 -Jun 31 - Mar                31 - Dec    30 -Sep 30 -Jun 31 - Mar
                                                  2001        2001         2001       2001        2000         2000        2000         2000
                                                    $           $               $        $           $            $           $           $


    Revenue                                       17,720      16,540       16,629     16,870      16,344       16,534      16,810 17,680

    Operating income ( loss )                        958            918         676       785      (1,780)            6    (5, 283)       190

    Net income (loss) for the period                 389            164    (2,520)           97   (2,568)        (359)     (3, 284)      (194)

       basic income (loss) per share                  0.01       0.00       (0.06)       0.00        (0.11)     (0.02)       (0.15)    ( 0.01)
       diluted income
       (loss) per share                               0.01       0.00       (0.06)       0.00        (0.11)     (0.02)       (0.15)     (0.01)


    Note: The June 30, 2000 operating loss includes restructuring and other costs of $4,178 and a provision for rental assets no longer
    considered suitable for rent of $500 included in amortization of rental assets. The June 30, 2000 net loss includes restructuring costs ( net
    of taxes) of $3,365. The December 31, 2000 operating loss includes additional restructuring costs of $1,167 and the December 31, 2000 net
    loss includes restructuring costs ( net of taxes ) of $817. The June 30, 2001 net loss includes a provision for income taxes of $2,600 which
    includes the effect of rate reductions of $1,400 and an additional valuation allowance against the future tax asset base of $1,200.




    Liquidity and Capital Resources

    Cash flow from operating activities amounted to $(1.6) million compared to $3.1 million in 2000, a decrease of
    $4.7 million. The primary reasons for the decrease is the result of increased purchases of rental assets of
    $9.4 million, reductions of amortization of $2.0 million and net increases in working capital items of $2.8 million;
    offset by improved profitability of $4.6 million and an increase in future tax provisions of $5.5 million.

    Cash flow from investing activities was $(0.7) million and was comparable to the amount used in investing
    activities in 2000.

    Cash flow from financing activities was $2.3 million compared to $(2.6) million in 2000, an increase of
    $4.9 million. The increase was due to proceeds from the issuance of subordinated debentures of $4.0 million and
    net proceeds from an equity financing of $5.8 million offset by net demand term debt and demand operating line
    repayments of $3.1 million and an increase in the royalty funding payments of $1.8 million.




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At December 31, 2001, the Company’s total liabilities were $28.2 million compared to $35.0 million at
December 31, 2000, a decrease of $6.8 million. The bank revolving demand loan was $17.2 million compared
to $21.7 million at December 31, 2000, the deferred royalty funding was NIL compared to $2.9 million at
                                                                                                                          T
December 31, 2000, and trade accounts payable and accrued liabilities totalled $4.2 million compared to $8.5 million
at December 31, 2000; for a total decrease of $11.7 million. This decrease was offset by an increase in subordinated
debentures of $4.0 million and other liabilities of $0.9 million. The decreases in the bank revolving demand loan,
the deferred royalty funding and trade accounts payable and accrued liabilities are mainly the result of the raising of
capital in the amount of $9.8 million. At December 31, 2001, the Company had available a revolving line of credit of      O
$22.5 million and had drawn $17.2 million against this line bearing interest at prime plus 2.5% per annum.

On December 15, 2000 the Company refinanced its royalty funding agreement with McCarvill Corporation by
the issuance of a subordinated debenture in the amount of $2,906,107. The debenture issuance was subject to the
Company closing its Rights Offering on January 31, 2001. The debenture carries a four year term, interest at 22%
per annum and is repayable by the Company at any time without notice or bonus. However, if the debenture is not
repaid by January 31, 2003 an additional amount of $1,000,000 will be payable, interest will be reduced to 15%
per annum and principal repayments will begin at $73,000 per month for 23 months with a principal payment
due on the fourth anniversary date of $2,227,107. McCarvill Corporation also received warrants to purchase
500,000 common shares at $0.31 per share exercisable any time over five years, and warrants to purchase another
500,000 common shares at $0.31 per share if the debenture is not repaid by January 31, 2003.

On January 31, 2001, the Company completed a Rights Offering to subscribe for common shares at $0.30 per
share. Net proceeds of $5,763,914 ( $6,564,150 less share issue costs of $800,236 ) were received for the issuance
of 21,880,500 common shares.

On January 31, 2001 the Company borrowed $1.1 million from CIBC Mezzanine Finance to assist with the payment
of certain restructuring costs. The loan is secured by a subordinated debenture which carries a four year term,
interest at 22% per annum and is repayable by the Company at any time without notice or bonus. However, if the
debenture is not repaid by January 31, 2003 interest is reduced to 15% per annum and principal repayments begin
at $20,000 per month for 23 months with a principal payment due on the fourth anniversary date of $640,000.
CIBC Mezzanine Finance also received warrants to purchase 190,000 common shares at $0.31 per share
exercisable any time over five years, and warrants to purchase another 190,000 common shares at $0.31 per
share if the debenture is not repaid by January 31, 2003. On August 1, 2001 CIBC transferred the debenture to
Mr. Donald K. Johnson, Chairman of the Board of the Company for consideration equal to $1.1 million.
CIBC retained 50,000 warrants.

The Company requires capital on an ongoing basis primarily for the purchase of rental merchandise to fuel growth
and replace product that has been sold or charged-off, expenditures required for new store openings, remodels, and
relocations and working capital. Management believes it can finance the above through working capital.

The Company’s credit facility with its banker requires it to meet certain financial covenants and ratios including
a minimum rental purchase amount (equal to or greater than 80% of rental asset amortization), a maximum
percentage of held for rent assets to total rental assets (not to exceed 30%), a minimum equity covenant and an
interest cover ratio defined as the ratio of EDITDA plus cash operating expenses divided by interest plus cash
operating expenses which ratio is not to be less than 1.5:1 measured quarterly.




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T   R e s u l t s o f O p e r a t i o n s f o r t h e Ye a r E n d e d D e c e m b e r 3 1 , 2 0 0 1
    C o m p a r e d t o t h e Ye a r E n d e d D e c e m b e r 3 1 , 2 0 0 0

    Operating Income (Loss)

    Operating income was $3.3 million for the year ended December 31, 2001, compared to an operating loss of $6.9

O   million for the year ended December 31, 2000, an increase of $10.2 million. The contributing factors to this
    increase in profitability were decreases in restructuring and other costs of $5.3 million, decreases in amortization
    costs of $2.0 million, decreases in operating costs of $2.4 million and an increase in revenue of $0.4 million.

    Rental Revenue

    Rental revenue was essentially unchanged for the fiscal years 2001 and 2000. However, on a cumulative quarterly
    basis, 2001 rental revenue trailed 2000 rental revenue until the fourth quarter when rental revenue exceeded the
    prior year by $1.4 million, reflecting strong growth in the rental agreement portfolio as a result of merchandising
    and other operating initiatives introduced earlier in 2001.

    Other Revenue

    Other revenue, which is realized from supplier rebates earned, fees for ancillary services such as damage
    waiver fees and processing, reinstatement and fees related to returned “NSF” cheques was $10.3 million for
    the year ended December 31, 2001 and $10.0 million for the year ended December 31, 2000. As a percentage
    of total revenue, fees increased from 14.8% for the year ended December 31, 2000 to 15.2% for the year ended
    December 31, 2001 primarily due to an increase in rebate revenue due to the significant increase in rental asset
    purchases during the year.

    Operating Expenses

    Operating expenses decreased to $41.4 million in 2001 compared to $49.2 million in 2000. As a percentage of
    total revenue, operating expenses decreased to 61.1% in 2001 from 73.1% in 2000. Of this decrease, $5.3 million
    was attributable to one-time restructuring costs ($4.5 million) and other costs related to provisions on land held
    for resale and litigation matters ($0.8 million) incurred primarily as the result of restructuring plans undertaken by
    new management in 2000. The remaining decrease of $2.5 million resulted from decreases in all operating expense
    categories as described below.

    Salaries and Benefits

    Salaries and benefits for 2001 and 2000 were consistent at 31% of total revenue.

    Selling, General and Administrative

    Selling, general and administrative expenses in 2001 decreased $1.4 million compared with 2000. The decrease was
    primarily due to a reduction in professional fees as professional fees were high in 2000 because of the restructuring
    activities, a reduction in the repairs and maintenance of rental units as the product line was upgraded throughout
    the year through new purchases, and a reduction in telephone and utility costs and other store variable costs as the
    Company, on average, operated with seven less stores than in 2000.




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Rent
                                                                                                                       T
Rent for the year ended December 31, 2001 decreased $0.6 million compared with the same period in 2000, and
amounted to 11.0% of total revenue compared with 11.9% in 2000. The decrease was primarily due to a net
reduction in stores since January 1, 2000 as a result of the consolidation of under-performing locations.

A u t o m o t i v e a n d Tr a v e l
                                                                                                                       O
Automotive and travel for the year 2001 decreased $0.4 million compared with 2000, and amounted to 4.7% of
total revenue compared with 5.3% in 2000. The decrease primarily resulted from the net reduction in stores since
January 1, 2000 as a result of the consolidation of under-performing locations.

Amortization

Amortization of rental assets for the year ended December 31, 2001 decreased $1.8 million compared with the
year ended December 31, 2000, and amounted to 30.9% of total revenue compared with 33.7% for the year ended
December 31,2000. The decrease was primarily attributable to the decrease in written-off accounts of $1.5 million
because of greatly improved collection practices and the absence of a $0.5 million write-down of rental assets taken
in the second quarter of 2000 for assets no longer considered suitable for rent.

Amortization of capital assets and intangible assets for the year 2001 was $0.3 million lower than 2000 due to
the average number of stores operated in 2001 being less than 2000 and certain intangible asset costs being fully
amortized partway through the year.

Interest Expense

Interest expense for the year ended December 31, 2001 was $0.1 million higher than 2000, primarily due to the
higher average interest rate being paid on the outstanding debt as the subordinated debentures carry an interest
rate of 22%.

I n c o m e Ta x E x p e n s e ( R e c o v e r y )

The income tax expense for the year ended December 31, 2001 was $2.9 million compared with a recovery of
$2.7 million for 2000. Current taxes are $39,000 which are comprised solely of capital taxes. The Company
does not expect to pay cash income taxes in the foreseeable future as it currently has loss carry forwards in the
approximate amount of $12.7 million and other tax timing differences of approximately $31.0 million which can
be used to offset taxable income in future years.

In the second quarter of 2001, the Company incurred a tax charge of $2.6 million which included the effect of
tax rate reductions and an additional valuation allowance against the future tax asset base. At the year-end,
the effect of the rate reductions and valuation allowance was $2.3 million as these amounts were offset by other
timing differences.




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                       MANAGEMENT’S RESPONSIBILITY                                               FOR

R                           FINANCIAL REPORTING




T
    The accompanying consolidated financial statements and the information in this Annual Report are the

O   responsibility of management and have been approved by the Board of Directors. The consolidated financial
    statements have been prepared by management in accordance with Canadian generally accepted accounting principles
    and include some amounts based on management’s best estimates and judgements. When alternative accounting
    methods exist, management has chosen those it considers most appropriate in the circumstances. Management has
    prepared the financial information presented elsewhere in the annual report and has ensured that it is consistent with
    the financial statements.


    RTO Enterprises Inc. maintains a system of internal controls to provide reasonable assurance that transactions are
    properly authorized, financial records are accurate and reliable and the Company’s assets are properly accounted for
    and adequately safeguarded.


    The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting
    and is ultimately responsible for reviewing and approving the financial statements. The Board of Directors carries
    out its responsibility for the financial statements through its Audit Committee. This Committee meets periodically
    with management and the external auditors to review the financial statements and the annual report and to
    discuss audit, financial and internal control matters. The Company’s external auditors have full and free access to the
    Audit Committee.


    The financial statements have been subject to an audit by the Company’s external auditors, Ernst & Young LLP,
    in accordance with generally accepted auditing standards on behalf of the shareholders.




    David Ingram,                                                  S.W. Johnson,
    President and                                                  Executive Vice President
    Chief Executive Officer                                        and Chief Financial Officer




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                                      A U D I T O R S ’           R E P O R T                                                 R

                                                                                                                              T
To t h e S h a r e h o l d e r s o f R T O E n t e r p r i s e s I n c .



We have audited the consolidated balance sheets of RTO Enterprises Inc. as at December 31, 2001 and 2000, and the
consolidated statements of loss and deficit and cash flows for the years then ended. These financial statements are the
                                                                                                                              O
responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.


We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we plan and perform an audit to obtain reasonable assurance 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.


In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of
the company as at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.




Edmonton, Canada
February 23, 2001




Ernst & Young LLP,
Chartered Accountants




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R                         C O N S O L I D AT E D              B A L A N C E                    S H E E T S



                                                                                                        2001                             2000
    As At December 31
    (in 000’s)                                                                                             $                               $

T
    ASSETS [note 5]
    Amounts receivable [note 14]                                                                         1,864                            1,032


O
    Prepaid expenses                                                                                        576                           1,373
    Rental assets [note 2]                                                                            25,712                            24,367
    Capital assets [note 3]                                                                              3,393                           3,726
    Future tax assets [note 9]                                                                         12,420                            15,267
    Intangible assets [note 4]                                                                         10,854                            11,874
    Land held for resale                                                                                   682                             682
                                                                                                      55,501                            58, 321


    LIABILITIES AND SHAREHOLDERS’ EQUITY
    Liabilities
    Bank revolving demand loan [note 5]                                                                 17,1 9 1                        21,707
    Trade accounts payable                                                                              3,022                            4,142
    Accrued liabilities                                                                                  1,184                           4,316
    Accrued payables, bonuses and other employee costs                                                  2,016                            1,009
    Unearned revenue                                                                                       525                             594
    Income taxes payable                                                                                   270                             254
    Subordinated debentures [note 6]                                                                    4,006                            2,906
                                                                                                      28,214                            34,928


    Commitments and contingencies [notes 7 and 13]
    Shareholders’ equity
    Share capital [note 8]                                                                             31,283                           25,519
    Deficit                                                                                            (3,996)                           (2,126)
                                                                                                       27,287                           23,393
                                                                                                      55,501                            58, 321
    See accompanying notes

    On behalf of the Board:




    David Ingram, Director                                                  Donald K. Johnson, Director




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C O N S O L I DAT E D                  S TAT E M E N T S         O F     L O S S     A N D    D E F I C I T       R
                                                                                   2001              2000
For The Year Ended December 31
                                                                                     $                  $

                                                                                                                  T
(in 000’s except earnings per share)




REVENUE
Rental                                                                             57,440            57,417


                                                                                                                  O
Other                                                                              10,319             9,951
                                                                                   67,759           67,368


EXPENSES
Salaries and benefits [note 14]                                                  20,990              21,049
Selling, general and administrative                                                 9,817            1 1 , 1 97
Rent                                                                                7,442             8,001
Automotive and travel                                                               3,162            3,598
Restructuring costs [note 10]                                                                        4,545
Other costs [note 10]                                                                                   800
                                                                                   41 , 411         49,19 0


AMORTIZATION
Amortization of rental assets                                                    20,916             22,673
Amortization of capital assets and intangible assets                                2,095            2,372
                                                                                 23,011             25,045
Total operating expenses and amortization                                          64,422           74,235


Operating income (loss)                                                             3,337           (6,867)
Interest expense [note 14]                                                          2,321            2,210
Income (loss) before income taxes                                                   1,016            (9,077)
Income tax expense (recovery) [note 9]
Current                                                                                  39               30
Future                                                                              2,847            (2,702)
                                                                                    2,886            (2,672)


Net loss for the year                                                              (1,870)          (6,405)
Retained earnings (deficit), beginning of the year                                 (2,126)           4,279
Deficit, end of the year                                                           (3,996)           (2,126)


Earnings (loss) per share [note 11]
Basic and diluted                                                                   (0.04)            (0.29)
See accompanying notes




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R         C O N S O L I D AT E D                S TAT E M E N T S          O F     C A S H     F L O W S



                                                                                     2001              2000
    For The Year Ended December 31
    (in 000’s)                                                                         $                   $

T
    OPERATING ACTIVITIES
    Net loss for the year                                                            (1,870)          (6,405)

O   Items not affecting cash:
      Amortization of rental assets                                                 20,916            22,673
      Amortization of capital assets and intangible assets                           2,095             2,372
      Write-down of land held for resale                                                                   150
      Restructuring of royalty funding agreement                                                           484
      Future income tax expense (recovery)                                           2,847            (2,702)
    Net change in non-cash working capital items -
      Rental assets                                                                 (22,261)          (12,889)
      Other [note 12]                                                                (3,334)            (580)
    Cash flow from operating activities                                              (1,607)           3,103


    INVESTING ACTIVITIES
    Purchase of capital assets                                                       (1,140)           (1,016)
    Proceeds on disposition of capital assets                                          399                 336
    Proceeds on sale of land held for resale                                                               174
    Cash flow from investing activities                                                (741)            (506)


    FINANCING ACTIVITIES
    Net repayment of bank revolving demand loan                                      (4,516)
    Proceeds from bank revolving demand loan                                                          21,707
    Repayment of demand operating line of credit                                                      (2,109)
    Repayment of bank demand term loan                                                                (21,083)
    Proceeds from subordinated debentures                                            4,006
    Proceeds from equity financing [note 8]                                           6,564
    Share issue costs [note 8]                                                        (800)
    Repayment of principal portion of royalty funding [note 6]                       (2,906)          (1 , 1 1 2 )
    Cash flow from financing activities                                              2,348            (2,597)


    Net change in cash                                                                  —                  —
    See accompanying notes




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                1 .   S I G N I F I C A N T               A C C O U N T I N G                   P O L I C I E S
                                                                                                                        T
The consolidated financial statements have been prepared by management in accordance with Canadian generally
accepted accounting principles. Because the precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily involves the use of estimates and


                                                                                                                        O
approximations which have been made using careful judgment. Actual results could differ from those estimates.
The financial statements have, in management’s opinion, been properly prepared within reasonable limits of
materiality and within the framework of the accounting policies summarized below.


Nature of operations


RTO Enterprises Inc. (the “Company”) is in the business of renting, with or without an option to purchase, direct
to the consumer, brand name home entertainment products, appliances and household furniture across Canada.
As at December 31, 2001, the Company operated 130 stores in 10 provinces (2000 – 129 stores in 10 provinces).


Basis of consolidation


The consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries:
     - RTO Asset Management Inc.
     - RTO Distribution Inc.
     - RTO (Rentown) Inc.
     - RTO (Rentown) 2000 Inc.


Business cycle


The Company does not operate on a normal twelve month operating cycle. Acceptable industry practice for rental -
purchase companies is not to make a distinction between current and non - current items. Accordingly, an unclassified
balance sheet has been presented.


Rental and other revenue


Merchandise is rented to customers pursuant to agreements which provide for weekly or monthly rental payments
collected in advance.   The rental agreements may be terminated at any time by the customer without further
obligation or cost upon return of the merchandise. Revenue from rental agreements is recognized when payment is
received and the rental period has passed. At the end of each weekly or monthly rental period, the customer has the
option of renewing the agreement for an additional period.


Other revenue from various services and charges to rental customers include liability waiver fees, which are
recognized as collected, and supplier incentives, which are recognized as earned.


Rental and capital assets


Rental and capital assets are recorded at cost, including freight.




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T          1 .   S I G N I F I C A N T          A C C O U N T I N G                       P O L I C I E S (continued)


    Assets on rent, excluding computers and related equipment and assets that were previously held for rent assets
    that had not been out on rent for at least 90 consecutive days, are amortized using the units of activity method.
    Under the units of activity method, assets on rent are amortized in the proportion of rents received to total expected


O
    rents provided over the rental agreement term. Computers and related equipment are amortized on a straight line
    basis over 24 months. Held for rent assets are not amortized where such assets have not been out on rent for less
    than 90 consecutive days. Once held for rent assets have not been out on rent for at least 90 consecutive days, such
    assets are amortized on a straight line basis over 18 months regardless of future rental. Amortization includes the
    book value of assets sold, and amounts which have been charged off as stolen, lost or no longer suitable for rent.


    In the event management determines that the future net cash flows to be derived from renting the assets is less than
    the carrying value of the assets, the assets are written down to estimated net realizable value. The estimated net
    realizable value of rental assets is subject to measurement uncertainty and the impact on the financial statements
    for future periods could be material.


    Capital assets are amortized over their estimated useful lives using the following rates and methods:


                                                                          Rate
                                                                           %                              Method


           Building                                                        4%                        Declining balance
           Office equipment and furniture                                20%                         Declining balance
           Signage                                                       20%                         Declining balance
           Automotive                                                    30%                         Declining balance
           Leasehold improvements                                                                    Straight- line over
                                                                                                      the term of the
                                                                                                       related lease


    Amortization is recorded at one - half of the above rates in the year of acquisition on all capital assets except
    leasehold improvements.


    Intangible assets


    Organization costs are amortized over 5 years using the straight- line method.


    The Company amortizes goodwill related to business acquisitions and start- up store acquisitions on a straight- line
    basis over 20 years and 10 years respectively. The value of goodwill is regularly evaluated by reviewing operating
    income projections and undiscounted cash flows of the related businesses, taking into account the risk associated
    with the investment. Any permanent impairment in the value of goodwill is written off against earnings. Due to the
    long -term nature of assumptions made, it is possible that estimates of anticipated operating income and cash flows,
    and the estimated remaining life of goodwill, could be reduced and the impact on the financial statements for future
    periods could be material.




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       1 .    S I G N I F I C A N T        A C C O U N T I N G                       P O L I C I E S (continued)
                                                                                                                           T
Effective January 1, 2002, the Company will cease to record the amortization on all goodwill pursuant to new
recommendations of the Canadian Institute of Chartered Accountants. The carrying value of goodwill will become
subject to periodic impairment tests, with write - downs required at the time any impairment is determined.


Financing costs are amortized on a straight- line basis over the period of the related loan.                               O
Land held for resale


Land held for resale is recorded at the lower of cost and net realizable value.


Share issue costs


Costs related to the issuance of shares are charged against share capital.


Earnings per share


Basic earnings per share is computed based on the weighted average number of common shares outstanding during
the year. Diluted earnings per share is computed using the treasury stock method, which assumes that the cash that
would be received on the exercise of options and warrants is applied to purchase shares at the average price during
the period and that the difference between the shares issued upon exercise of the options and warrants and the
number of shares obtainable under this computation, on a weighted average basis, is added to the number of shares
outstanding. Antidilutive options and warrants are not considered in computing diluted earnings per share.


Financial instruments


The carrying value of the financial assets and financial liabilities approximate fair value unless otherwise disclosed.
Approximately 19% of the amounts receivable at December 31, 2001 (2000 - 34%) is owing from one unrelated party
and approximately 18% is owing from one related party (2000 – Nil) (see note 14).


Income taxes


The Company uses the liability method to account for income taxes. Under this method, future income tax assets and
liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and
measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected
to reverse.


Stock- based compensation plan


The Company has one stock- based compensation plan, which is more fully described in note 8. No compensation
expense is recognized when stock options are issued to directors, officers and employees. Any consideration paid on
the exercise of stock options is credited to share capital. If stock or stock options are repurchased the excess of the
consideration paid over the carrying amount of the stock or stock option canceled is charged to retained earnings.




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T          1 .      S I G N I F I C A N T     A C C O U N T I N G                       P O L I C I E S (continued)


    Change in accounting policy


    The Company has adopted the new recommendations of the Canadian Institute of Chartered Accountants with


O
    respect to changing the method used in calculating earnings per share from the inputed earnings method to the
    treasury stock method. This change was applied retroactively but previously reported loss per share figures were
    not impacted by the change.


                                        2 .     R E N TA L                A S S E T S


                                                                                                   2001                         2000

    (in 000’s)                                                                                      $                            $



    Rental assets                                                                                 36,533                       36,033

    Accumulated amortization                                                                      10,821                       11,666

    Net book value                                                                                25,712                       24,367




                                       3 .    C A P I TA L                    A S S E T S


                                                                         2001                                      2000

                                                                               Accumulated                            Accumulated

                                                              Cost              amortization             Cost         amortization

    (in 000’s)                                                  $                       $                  $               $


    Office equipment and furniture                          3,745                       2,073           3,546               1 ,72 1

    Signage                                                  1,044                          486           950                  400

    Automotive                                                 894                          547          1,166                 696

    Leasehold improvements                                  2,665                       1,849           2,525               1,644

                                                            8,348                       4,955           8 ,1 8 7           4,461

    Net book value                                                      3,393                                      3,726




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                                   4 .    I N TA N G I B L E                     A S S E T S
                                                                                                                                         T
                                                                         2001                                      2000

                                                                              Accumulated                             Accumulated



                                                                                                                                         O
                                                              Cost             amortization                Cost       amortization

(in 000’s)                                                      $                      $                    $               $


Organizational costs                                         1,239                      1,189              1,235            1,162

Goodwill                                                    15,626                     4,846            15,626              3,907

Financing costs                                                 919                        895              919                 837

                                                            17,784                     6,930             17,780             5,906

Net book value                                                          10,854                                     11,874




                        5 .    B A N K     R E V O LV I N G                    D E M A N D         L O A N


The revolving demand credit facility bears interest at prime plus 2.5% per annum, and is margined against the net
book value of rental assets and future rental revenue streams (the “borrowing base”). Covenants and conditions
for the new facility include a minimum equity requirement, an interest cover covenant, growth and capital
expenditure and rental asset acquisition covenants in accordance with projections, annual approval of the Company’s
business plan and a maximum permitted percentage of held for rent assets.                        During the year and at the end
of the year, the Company was in compliance with these covenants. The availability under the new credit facility is
the lesser of $22,500,000 and the borrowing base. The limit shall increase to $25,000,000 upon the Company
continuing to meet the financial covenants and the Bank syndicating a minimum amount of $10,000,000 of the
facility to a second lender.


                                                                                                  2001                          2000
(in 000’s)                                                                                          $                             $


Bank revolving demand loan                                                                        17,191                        21,707




The weighted average interest rate on demand bank debt for the year ended December 31, 2001 was 8.3% (2000 - 8.3%).


All assets of the Company are pledged as collateral for the bank revolving demand loan.




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T                           6 .   S U B O R D I N AT E D                        D E B E N T U R E S


    In June 1997, the Company received $6,000,000 from McCarvill Corporation (“McCarvill”). In turn, the Company
    agreed to pay McCarvill a royalty based on revenues for approximately a 15 -year period, as well as providing
    400,000 warrants to purchase Common shares of the Company at $5.08 each. The warrants expired in June 2000.


O
    The payments were made monthly based on the actual revenues of the preceding month. The royalty payments
    net of the amortization of the royalty funding credit was included in interest expense, and amortization of the
    royalty funding credit was on a systematic basis over the term of the funding agreement. The royalty payments as
    a percentage of revenue were as follows:


                                                                                                               %


            Through June 1998                                                                                0.75
            Through June 1999                                                                                1.50
            Through June 2000 (or until $7, 200,000 has been paid)                                           3.00
            Subsequent twelve year period                                                                    0.45


    On December 15, 2000, the Company entered into an agreement with McCarvill for a subordinated debenture in
    the amount of $2,906,107, the funds of which were used to provide full and final settlement of the royalty funding
    agreement. The term of the loan is four years and is repayable at any time by the Company without notice or bonus;
    however, if not repaid by January 31, 2003, an additional amount of $1,000,000 will be payable. Interest is payable
    at 22% per annum for the first two years and 15% per annum thereafter, with no principal payments required for the
    first two years. If not repaid after two years, 23 monthly principal payments of $73,000, plus interest, are required
    thereafter with a principal payment on the fourth anniversary date of $2, 227,107. A fixed and floating charge over
    all assets of the Company is provided as collateral, subordinated to permitted encumbrances including the bank
    revolving demand loan described in note 5 but ranking pari passu with the mezzanine financing described below.
    The Company also entered into a warrant agreement that provides warrants to McCarvill to purchase 1,000,000
    common shares at $0. 31 per share. The warrants may be exercised at any time over five years, but warrants to
    purchase 500,000 of the shares vest only after the second anniversary date, and only if the debenture is not repaid
    at that time.


    On January 31, 2001, the Company also obtained mezzanine financing for $1,100,000 from the bank to assist with the
    payment of certain restructuring costs incurred in 2000. The term of the financing is four years and is repayable at
    any time by the Company. Interest is payable at 22% per annum for the first two years and 15% per annum thereafter,
    with no principal payments required for the first two years. If not repaid after two years, 23 monthly principal
    payments of $20,000, plus interest, are required thereafter with a principal payment on the fourth anniversary date
    of $640,000. A fixed and floating charge over all assets of the Company is provided as collateral, subordinated to
    permitted encumbrances including the bank revolving demand loan described in note 5 but ranking pari passu with
    the subordinated debenture described above. The Company also entered into a warrant agreement that provides
    warrants to the bank to purchase 380,000 common shares at $0. 31 per share. The warrants may be exercised at any
    time over five years, but warrants to purchase 190,000 of the shares vest only after the second anniversary date,
    and only if the mezzanine financing is not repaid at that time. During the year, the bank sold the mezzanine financing
    to the Chairman of the Board of the Company for consideration equal to $1,100,000. The Chairman also assumed
    ownership of the warrants, expect for warrants to purchase 50,000 common shares that were retained by the bank.




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                                          7.    C O M M I T M E N T S
                                                                                                                          T
The Company is committed to long -term operating leases for building space, vehicles and signage. The minimum
annual lease payments required for the next five years and thereafter are approximately as follows:




                                                                                                                          O
        (in 000’s)                                                                                $


                       2002                                                                     7,300
                       2003                                                                     6,354
                       2004                                                                     5,424
                       2005                                                                     3,205
                       2006                                                                     1,251
                       Thereafter                                                                  137
                                                                                               23, 67 1



                                     8 .       S H A R E            C A P I TA L


Authorized
Unlimited preference shares
Unlimited common shares of no par value


Common shares issued and outstanding


                                                                      2001                                2000
                                                         Shares                Amount            Shares          Amount
(in 000’s)                                                  #                        $                #            $


Balance, beginning of the year                           21,881                25, 519           21,881          25,519
Issued under rights offering                             21,880                     5,764
Balance, end of year                                 43,76 1                    31,283           21,881          25,519




On January 31, 2001, the Company completed a Rights Offering to subscribe for common shares at $0. 30 per share.
21,880,500 common shares were issued for net proceeds of $5,763,914 ($6,564,150 less share issue costs of $800,236).




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T                                    8 .   S H A R E           C A P I T A L (continued)


    Stock options and warrants

                                                                                                       2001                      2000


O
    (in 000’s)                                                                                          #                          #


    Outstanding options and warrants
    Balance, beginning of the year                                                                    2,302                      3,477
    Options granted                                                                                   8,322                        129
    Warrants granted                                                                                    380                      1,000
    Options and warrants canceled, terminated or expired                                               (652)                    (2, 304)
    Balance, end of the year                                                                          10,352                     2, 302




    Stock options


    Under the Company’s stock option plan, options to purchase common shares may be granted by the board of directors
    to directors, officers and employees. Options are granted at exercise prices equal to or greater than fair market
    value at the grant date, generally vest evenly over a five year period, and have exercise lives ranging from five to
    ten years. The aggregate number of common shares reserved for issuance and which may be purchased upon the
    exercise of options granted pursuant to the plan shall not exceed 10,000,000 common shares .


    The Company has granted stock options to directors, officers and employees to purchase 8,972, 200 shares at prices
    between $0. 31 and $1. 35 per share. Options outstanding at December 31, 2000 to acquire 511,980 common shares,
    with exercise prices ranging from $1.65 to $2.00, were re - priced to $0. 31 by the board of directors during the year.
    The options expire on dates between August 4, 2003 and July 31, 2005.




                                                                             2001                                 2000
                                                                                  Weighted Average                Weighted Average
                                                                Shares             Exercise Price       Shares     Exercise Price

    (# of shares in 000’s)                                          #                       $               #             $


    Stock options, beginning of the year                        1,302                       1.65        3,077            1.69

    Options granted                                             8,322                           .31         129          1.93

    Options canceled,

       terminated or expired                                     (652)                          .93     (1,904)          1.74

    Stock options, end of the year                              8,972                           .36      1,302           1.65




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                             8 .   S H A R E               C A P I T A L (continued)
                                                                                                                                            T
The Company has issued options to directors, officers and employees at December 31, 2001 as follows:
(# of shares in 000’s)
                                               Outstanding                                                Exercisable


                                                                                                                                            O
                                                Weighted
                                                 Average
                                                Remaining                      Weighted                            Weighted
        Range of                               Contractual                     Average                             Average
        Exercise                                  Life in                      Exercise                            Exercise
         Prices           Shares                  Years                          Price              Shares              Price
           $                 #                                                        $               #                  $


        .31 - .45          8,472                   5.89                           .31               3,953                .31
          1.35               500                  2.08                            1.35                333               1.35
     .31 – 1.35            8,972                  5.68                            .36               4,286               .39




Warrants


In December 2000, the Company issued warrants to acquire 1,000,000 common shares at an exercise price of $0. 31,
per share, and in January 2001, the Company issued warrants to acquire 380,000 common shares at an exercise
price of $0. 31 per share. The terms of these warrants are as described in note 6.




                                         9 .    I N C O M E                   TA X E S


The Company’s tax provision is determined as follows:


                                                                                                    2001                       2000
($ in 000’s)                                                                                          $                          $


Combined basic federal and provincial income tax rates                                              42.3%                    44. 2%


Expected income tax expense (recovery)                                                               430                     (4 , 0 1 0 )
Impact of changes in substantively enacted
   tax rates on recognized future tax assets                                                        1,509                         185
Non - deductible goodwill amortization                                                               357                         376
Valuation allowance adjustments                                                                      826
Unrecognized tax losses                                                                                                           531
Other                                                                                                (236)                       246
                                                                                                    2,886                 (2,672)




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T                                  9 .   I N C O M E            T A X E S (continued)


    Significant components of the Company’s future tax assets are as follows:


                                                                                                   2001                  2000


O
    (in 000’s)                                                                                       $                      $


    Future tax assets
    Loss carryforwards                                                                             4,171                 6 , 3 74
    Tax cost of rental and capital assets in excess
       of net book value                                                                           9,986               10, 322
    Accounts receivable                                                                              646                   897
    Other                                                                                             601                   764
                                                                                                   15,404              18 , 375
    Less valuation allowance                                                                       (2,984)             (3,090)
                                                                                                   12,420              15, 267




    A valuation allowance for the future tax assets is required due to the Company’s operating history and management’s
    assessment of various uncertainties related to their future realization. Since the realization of future tax assets is
    dependent upon generating sufficient taxable income in the Company and its subsidiaries which give rise to the
    future tax assets, the amount of the valuation allowance for future taxes will fluctuate based upon determinations of
    the magnitude and timing of positive taxable income that is sustainable in future periods.


    At December 31, 2001, the Company and its subsidiaries had unused non - capital tax loss carryforwards of
    approximately $12,714,000 available to reduce future years’ taxable income which expire as follows:


            (in 000’s)                                                                                             $


            2002                                                                                                686
            2003                                                                                             6,355
            2005                                                                                                  47
            2006                                                                                                 184
            2007                                                                                             5,356
            2008                                                                                                  86
                                                                                                             12 ,7 1 4




    At December 31, 2001, the potential future benefit associated with approximately $5,626,000 of these losses has
    been recorded in these financial statements.




                                                                  3 6
                                           R T O    E N T E R P R I S E S                I N C .


                     N O T E S        T O       F I N A N C I A L                       S TAT E M E N T S                            R
                                            D e c e m b e r   3 1 ,   2 0 0 1   a n d   2 0 0 0




                 1 0 .    R E S T R U C T U R I N G                       A N D          O T H E R      C O S T S
                                                                                                                                     T
During 2000, and following changes to the executive management of the Company and a review of business
processes by new management and by a Special Committee of the Board of Directors, new management committed
the Company to restructure various aspects of its operations. Costs related to the restructuring plan resulted in a


                                                                                                                                     O
charge of $4,545,420 to earnings for the year as follows:


        (in 000’s)                                                                                                    $


        Settlement agreement with former President, CEO and Chairman of the Board                                   1,375
        Other agreed payments to the former President, CEO and Chairman of the Board                                  87
        Costs of Special Committee, including related professional fees                                              943
        Estimated store closure and severance costs                                                                  983
        Relocation and related costs                                                                                 273
        Deferred royalty funding settlement                                                                          484
        Bank restructuring fees                                                                                      400
                                                                                                                    4,545


$2,470,058 (2000 - $1,959,479) of this amount was paid during the year and $115,883 (2000 - $2,585,941) remains
in accrued liabilities at the year- end.


The Company also accrued additional provisions of $800,000 in the year ended December 31, 2000 related to an
acceleration of plans for the disposal of land held for resale and certain litigation matters (see note 13).


                         1 1 .   E A R N I N G S               ( L O S S )              P E R      S H A R E

The number of basic and diluted common shares outstanding, as calculated on a weighted-average basis, is as follows:


                                                                                                         2001               2000
(in 000’s)                                                                                                 #                  #


Basic shares outstanding                                                                               41,843               21,881
Share options (dilutive effect of 8, 332, 200 options; 2000 – Nil)                                       1,076
Warrants (dilutive effect of 1, 380,000 warrants; 2000 – Nil)                                               189
Diluted shares outstanding                                                                             4 3 ,1 0 8           21,881




Stock options to acquire 640,000 common shares (2000 – 1, 301,980), and warrants to acquire 1,000,000 common
shares in 2000, were not included in the calculation of diluted shares as their exercise prices exceeded the average
market share price for the year.




                                                                  3 7
                                         R T O       E N T E R P R I S E S                I N C .


R                         N O T E S    T O       F I N A N C I A L                       S TAT E M E N T S
                                             D e c e m b e r   3 1 ,   2 0 0 1   a n d   2 0 0 0




T    12 .    NET          CHANGE        IN      NON - CASH                       WORKING            CAPITAL        ITEMS


    The net change in non - cash working capital items excluding rental assets is determined as follows:


                                                                                                     2001            2000


O
    (in 000’s)                                                                                          $               $


    Amounts receivable                                                                                (832)            595
    Prepaid expenses                                                                                   796            (654)
    Trade accounts payable                                                                          (1 , 1 2 0 )    (3,845)
    Accrued liabilities                                                                             (3 ,1 32 )       3 , 4 82
    Accrued payables, bonuses and
       other employee costs                                                                          1,007              165
    Unearned revenue                                                                                    (69)            (48)
    Income taxes payable                                                                                    16         (275)
                                                                                                    (3,334)           (580)




    Supplemental disclosures in respect of the consolidated statement of cash flows comprise the following:


                                                                                                     2001            2000
    (in 000’s)                                                                                          $               $


    Income taxes paid                                                                                   103            308
    Interest paid                                                                                   2 , 2 74         2,043




                                         1 3 .      C O N T I N G E N C I E S


    A motion seeking the authorization to institute a class action was started against the Company in the Province of
    Quebec (Montreal Superior Court) in November 1997. The plaintiffs were authorized by the Court in August 1999
    to proceed with a class action against the Company on behalf of all persons who have leased or purchased personal
    property destined for personal use in their home from the Company (the “class”). The plaintiffs allege that the
    Company’s rental contracts do not properly comply with the requirements of the Consumer Protection Act (Quebec).
    They are seeking the cancellation of their contracts, or the reduction of their obligations and the reimbursement of
    all or a portion of the amounts paid by the members of the class to the Company, as well as exemplary damages in
    the amount of $200 per member of the class. If this class action proceeds to trial, the Company intends to defend
    it vigorously and believes it has substantive defences to the plaintiffs’ allegations. The Company has recorded a
    reserve in an amount it considers to be adequate to cover its current reasonable expectation of probable liability.




                                                                   3 8
                                      R T O    E N T E R P R I S E S                I N C .


                  N O T E S          T O   F I N A N C I A L                       S TAT E M E N T S                    R
                                       D e c e m b e r   3 1 ,   2 0 0 1   a n d   2 0 0 0




                   1 4 .    R E L AT E D          PA R T Y                 T R A N S A C T I O N S
                                                                                                                        T
Amounts receivable include a $339,400 home purchase loan provided to an officer of the Company as a result of his
relocation during 2001. The loan is interest-free and is secured by a collateral mortgage on the officer’s residence.
The loan is repayable in installments of $1,000 per month plus 50% of any bonuses awarded to the officer.


                                                                                                                        O
The approximate fair value of the receivable at December 31, 2001 is $271,000.


During the year, the Company obtained financing from the Chairman of the Board as described in note 6. Interest of
$184,433 was paid to the Chairman in 2001.


During the year, the Company paid $63,728 (2000 – $nil) to a director for consulting services.


These transactions were recorded at their exchange amounts.


                             1 5 .    C O M PA R AT I V E                          F I G U R E S

Certain comparative figures have been reclassified to conform with the presentation adopted for the current year.




                                                             3 9
R                                 D I R E C T O R S        A N D      O F F I C E R S




T                                                D I R E C T O R S

    Donald K. Johnson                         Ronald G. Gage                          Gerald P. McCarvill
       Chairman of RTO Enterprises Inc.          Corporate Director                       President and Chief
       and Vice - Chairman of                                                             Executive Officer,
                                              Robert (Robin) Korthals
O
       BMO Nesbitt Burns Inc.                                                             McCarvill Corporation
                                                 Corporate Director
    David Ingram                                                                      Bruce H. Reid
       President and                          David A. Lewis                              Corporate Director
       Chief Executive Officer,                  Corporate Director                       and Consultant
       RTO Enterprises Inc.
                                                                                      Joseph Rotunda
    Douglas Anderson                                                                      President & CEO
       Corporate Director                                                                 EZCORP., INC.

                                                   O F F I C E R S

    David Ingram                              Dave Maries
       President & CEO                           Vice President,
                                                 Marketing & Merchandising
    S. William Johnson
       Executive Vice President               Randy Robertson
       and Chief Financial Officer               Senior Vice President, Operations




                                  C O R P O R AT E          I N F O R M AT I O N

    Edmonton Office                           Investor Relations                      Listed
       10239 - 178 Street                        S. William Johnson                       Toronto Stock Exchange
       Edmonton, Alberta                         Executive Vice President                 Trading Symbol: RTO
       T5S 1M3                                   and Chief Financial Officer
       Tel: (780) 930 -3000                      Tel: (780) 930 -3012                 Auditors
       Fax: ( 780) 481 -7426                                                              Ernst & Young LLP
                                              Bankers                                     Edmonton, Alberta
    Mississauga Office                           Canadian Imperial Bank
       Suite # 201,                              of Commerce                          Solicitors
       170 Robert Speck Parkway                  Edmonton, Alberta                        Blake Cassels &
       Mississauga, Ontario                                                               Graydon LLP
       L4Z 3G1                                Transfer Agents                             Toronto, Ontario
       Tel: (905) 272-2788                       Equity Transfer
       Fax: (905) 272- 9886                      Services Inc.                        Website
                                                 Toronto, Ontario                         www.rto.ca


                                  A N N U A L     G E N E R A L           M E E T I N G

    The Annual General Meeting of the Shareholders will be held on May 28, 2002 at 4:30 p.m. in the Library Room of
    the Royal York Hotel, 100 King Street West, Toronto, Ontario.




                                                           4 0
                                       A N N U A L                 R E P O R T        2 0 0 1                                                                       R

                                                                                                                                                                    T

                                                                                                                                                                    O

            B ritish
           Colu mb ia
               9
                         Alb er ta
                              17
                                                                                                                                        N ew fo u n d l a n d
                        Edmonton      Saskatchewa n                                                                                                1
                                                6
Victoria    Vancouver                                   Manitoba                                                                                       St. John's
                            Calgary                          5
                                            Saskatoon
                                                                                            Quebec
                                                                                                   5                        1
                                       Regina                               Ontario
                                                        Winnipeg                 72                                       P.E.I .         Sydney

                                                                   Thunder Bay
                                                                                                   Quebec   Fredericton
                                                                                                                                Halifax
                                                                                              Montreal                          Nova Scot i a
                                                                                                           New
                                                                                                        Brunswick                          9
                                                                                                   Ottawa   5
                                                                                         Toronto




                                                                                                                     No. of stores


           British Columbia                                                                                                         9
           Alberta                                                                                                                  17
           Saskatchewan                                                                                                             6
           Manitoba                                                                                                                 5
           Ontario                                                                                                               72
           Quebec                                                                                                                   5
           New Brunswick                                                                                                            5
           Nova Scotia                                                                                                              9
           Prince Edward Island                                                                                                     1
           Newfoundland                                                                                                             1
R   A N N U A L   R E P O R T   2 0 0 1




T

O
A n n u a l
R e p o r t

2 0 0 2
Corporate Profile


RTO Enterprises Inc. is Canada’s largest rental-purchase company, and the fourth-largest in
North America, offering top quality, brand-name furniture, appliances, and home electronic
products to consumers under weekly or monthly rental agreements. These agreements may
be cancelled at any time without further cost or obligation to the customer and include an
unconditional service guarantee with an option to purchase. The company’s shares trade on the
Toronto Stock Exchange under the symbol RTO.




Ta b l e o f C o n t e n t s



Corporate Profile                                                             Inside Cover
Highlights                                                                                 1
Chairman’s Message                                                                         3
Message to our Shareholders                                                                4
Introducing easyhome                                                                       8
Management’s Discussion and Analysis
  of Financial Condition and Results of Operations                                        12
Management’s Responsibility for Financial Reporting                                      20
Auditors’ Report                                                                          21
Consolidated Financial Statements
 Consolidated Balance Sheets                                                             22
 Consolidated Statements of Income [Loss] and Deficit                                    23
 Consolidated Statements of Cash Flows                                                   24
 Notes to Financial Statements                                                           25
Corporate Governance                                                                     40
Board of Directors                                                                       42
Officers and Corporate Information                                                       44
Highlights




Increased revenues 7% to $72.4 million



Achieved same-store sales growth of 5%



Improved funded debt to equity ratio from 0.8:1 to 0.5:1



Opened 10 new stores and merged 4 stores, for a net addition of 6



Achieved 15 consecutive months of comparable revenue growth



Recorded 8 consecutive quarters of improved comparable pre-tax profit



Reduced past due accounts by 15%



                                                            2002         2001
(in 000’s except earnings per share)                         $            $

Operating Results
Revenue                                                    72,437       67,759
Income before income taxes                                  3,735        1,016
Net income [loss]                                           2,618       (1,870)
Diluted earnings [loss] per share                            0.54        (0.45)

Selected Balance Sheet Data
Total assets                                               58,466       55,501
Rental assets                                              28,248       25,712
Shareholders’ equity                                       32,421       27,287

Key Indicators
Monthly Rental Agreement Portfolio                           5,974       5,516




                                         1
            British
           Columbia
                          Alberta
               7
                              16
                                                                                                                                        Newfoundland
                        Edmonton      Saskatchewan                                                                                                 2
                                                8
Victoria    Vancouver                                   Manitoba                                                                                       St. John's
                            Calgary                           4
                                            Saskatoon
                                                                                              Quebec
                                                                                                    5                         1
                                       Regina                               Ontario
                                                        Winnipeg                 72                                        P. E . I .    Sydney

                                                                   Thunder Bay
                                                                                                    Quebec   Fredericton
                                                                                                                                   Halifax
                                                                                                                                  Nova Scotia
Stores:                                                                                       Montreal
                                                                                                             New
                                                                                                          Brunswick                          9
easyhome                                                                                            Ottawa    7                                                     22
                                                                                          Toronto
First Choice Rent to Own                                                                                                                                            40
Louer Pour Acheter                                                                                                                                                   3
North American TV & Appliance Rental                                                                                                                                 9
RENTOWN                                                                                                                                                             46
RTO Centers                                                                                                                                                         11

TOTAL                                                                                                                                                          131

Geographic Diversification:
British Columbia                                                                                                                                                     7
Alberta                                                                                                                                                             16
Saskatchewan                                                                                                                                                         8
Manitoba                                                                                                                                                             4
Ontario                                                                                                                                                             72
Quebec                                                                                                                                                               5
New Brunswick                                                                                                                                                        7
Nova Scotia                                                                                                                                                          9
Prince Edward Island                                                                                                                                                 1
Newfoundland                                                                                                                                                         2


                        P e r c e n t a g e o f To t a l R e v e n u e ( by C ate gor y )

Sound 9%                                                                                                                   Appliance / Other 2%


Furniture / Other 3%
                                                                                                                                        Refrigerator 4%

Bedroom 10%
                                                                                                                                                 Laundr y 8%
Dining Room 3%

                                                                                                                                         Computer 12%
Living Room 14%


Other 1%                                                                                                                                         Vision 34%




                                                                                      2
                 Chairman’s Message


                 Donald K. Johnson,
                 Chairman of RTO Enterprises Inc.




The year 2002 positioned our company for future long-term growth.

The year 2002 was a landmark year for RTO Enterprises. The management team continued to
build on the success achieved in 2001 through further improvements in the Company’s operations,
including store consolidations and relocations and new innovative merchandising programs.
Profitability significantly increased and the balance sheet was strengthened. Equally important,
                                                                               easyhome”) for all
after extensive test marketing, the decision to implement a single brand name (“
131 stores across Canada is fundamental to the Company’s operating performance and future long
term growth strategy.

Corporate governance and investor confidence have been the subject of extensive coverage in the
financial press during the past year. Our Company actually addressed these issues in the year
2000 when dramatic changes were made to the composition of our management team and board
of directors. Since that time, integrity, transparency and profit performance have been the guiding
principles for our Company. The following facts will be of interest to our shareholders:

     - The Board and management believe that high corporate governance standards are
       fundamental to the Company’s success. Reflecting this commitment, this year’s
       annual report features an expanded section on corporate governance (see page 40).

     - Six of our eight directors are independent. These include a former CEO and a former
       COO of Rent-A-Center, the largest US rental-purchase company, as well as a former
       President of the TD Bank, a former President of the Continental Bank of Canada and
       a former Chairman of Ernst & Young Canada.

     - Our accounting principles are basically the same as the US peer group of publicly listed
       rental-purchase companies, except that our amortization policy for idle merchandise
       is more conservative than our US counterparts.

     - Our management team has extensive experience in both the Canadian and US rental
       purchase business and is highly motivated and incentivised through both share
       ownership and stock options.

I would like to take this opportunity to thank our management team and all employees for their
excellent performance, our directors for their outstanding contribution and our shareholders for
their patience and support. The best is yet to come!




Donald K. Johnson,
Chairman of RTO Enterprises Inc.
March 2003



                                                    3
              M e s s a g e To O u r S h a r e h o l d e r s


              David Ingram,
              President and Chief Executive Officer




Fiscal 2002 marked a year of tremendous achievement for RTO Enterprises Inc. I am pleased
to report that our focus on strengthening the fundamentals of the business led to solid results in
every area as we thoroughly improved the management of every aspect of our organization.

Our success in re-engineering the company during the past two years is unequivocally reflected
in our financial results for 2002. Net income for the year was $2.6 million compared with a loss
of $1.9 million a year earlier. On a per share basis, net income increased to $0.60 per share, up
from a loss of $0.45 per share. Diluted earnings per share were $0.54 compared with a loss of
$0.45 the previous year.

                                    Revenue           [In Millions]

   76
                 75.1
    74

   72                                                                               72.4

   70

   68
                                                                67.8
   66                                       67.4

   66

   64

   62
                1999                        2000                2001                2002



The increase in net income was primarily a result of improved revenues. We rented more
furniture, computers and electronics to more people and at better rates. Our rental revenue
portfolio increased 8.3%, with same-store sales growth meeting our target of 5%. This
drove total revenues to $72.4 million for the year compared with $67.8 million in fiscal 2001.
Operating income, or earnings before interest and taxes, was $5.7 million compared with $3.3
million in fiscal 2001.

With our focus on building a strong foundation based on best practices and the traditional rent-
to-own business model, we substantially improved our performance on all key measures during
the year. Contributing to our bottom line earnings growth was a 2.1% decrease in operating
expenses as a percentage of revenue, an 8.3% increase in the ending value of the monthly rental
agreement portfolio, a 15% reduction in past due accounts, and improved inventory utilization
with idle rental assets finishing 2002 at 21.8% of rental assets compared with 23.9% in 2001. We
also pushed forward with our expansion plans with 6 net additions to our store count in 2002.




                                                       4
M e s s a g e To O u r S h a r e h o l d e r s c o n t i n u e d



                                                E a r n i n g s B e f o r e Ta x   [EBT]


$      6,000,000

$      4,000,000
                                                                                                $3,735,000
$      2,000,000
                                      $700,000                                     $1,016,000
$                    0

$ (2,000,000 )

$ (4,000,000 )

$ (6,000,000 )

$ ( 8,000,000 )
                                                                   $(9,077,000 )
$ (10,000,000 )
                                          1999                        2000           2001         2002



One of our key financial objectives for the year was to refinance the company’s $4.0 million of
subordinated debt which was issued as part of RTO’s restructuring plan. The 22% debentures
were redeemed during the fourth quarter using proceeds from the private placement of 2.5
million 12% non-voting, non-convertible preferred shares redeemable at $1.00 per share, and
a $1.5 million draw on the company’s bank line of credit. The refinancing of this debt will
substantially lower our interest expense for 2003 and 2004, enhancing our financial flexibility.




Marketing

As with all retail enterprises, creative and targeted marketing plays a critical role in driving future
revenue growth. Fiscal 2002 was built on the successes of the previous year, integrating seasonal
traffic-building ideas with direct mail and eye-catching point of sale material. Quarterly open
house events continued to provide positive momentum, and are key contributors to growth.

With basic best practices firmly established, we turned our attention to increasing the
sophistication of our customer targeting. We partnered with a firm that is a recognized leader
in the development and implementation of advanced, next-generation customer relationship
management and market analysis technologies. As a result of this effort, we have identified
those consumers with the highest propensity to shop at our stores. We have plotted every postal
code in Canada, and ranked each area, so that our marketing dollars can be focused on our top
prospects. We put the results of this research into practice for the first time in September, and
we believe that it played an important role in substantial customer growth recorded in the fourth
quarter of the year.

In addition, we completely revamped our in-store marketing efforts, providing each store
with detailed instructions and best practices for driving customer growth using local proactive
measures. An example of this is our renewed approach to referral business, whereby existing
customers are rewarded for recommending friends and family. This activity drives over 16% of
our new deliveries, providing a cost-effective tool for growing new customers.




                                                                        5
M e s s a g e To O u r S h a r e h o l d e r s c o n t i n u e d




In addition to aggressively pursuing new customers, we also began to target former customers.
We became much more proficient at using our database of inactive customers – those who have
rented from our stores in the past. Each month, we provided a personalized direct mail piece
tailored to specific target groups of inactive customers.

In concert with our effort to reach inactive customers and enhance the value of our transactions,
we introduced a program called “Lifetime Reinstatement” in the third quarter. Simply put, this
means that if a customer has rented a product in the past and returned it, that customer can apply
the rental payments they had already accumulated to the new rental agreement whether they were
a customer two months ago, or two years ago.

Our specialized marketing programs, along with customer targeting, have already had a positive
effect on our results. We anticipate strong customer growth and growth in our monthly rental
agreement portfolio to continue as these efforts ramp up during the coming year.




                                        : Our New National Brand

The latest step in our strategy to grow the company and build shareholder value is the consolidation
of our five retail banners into a single national brand, easyhome. The introduction of easyhome
is a major initiative that will move our company forward on many levels. Most importantly, it
will help us shift from a local, fragmented business to a powerful national brand – one that offers
efficiency of scale, broader awareness and a single vision that removes the complexity of 5 retail
banners.


                    Ending Monthly Rental Agreement Portfolio


$ 6,200,000

$ 6,000,000
                                                                                                   $ 5,973,333
$ 5,800,000
                                $ 5,758,991
$ 5,600,000
                                                                                     $ 5,516,716
$ 5,400,000

$ 5,200,000
                                                                   $ 5,189,656
$ 5,000,000

$ 4,800,000

$ 4,600,000
                                     1999                             2000              2001          2002



Building brand equity is a long-term corporate objective that requires attention to every aspect of
our business, from the physical environment of our stores, to the service quality delivered by our
associates, to the products we offer. As we roll out the easyhome brand, no function will remain
untouched.



                                                                                 6
M e s s a g e To O u r S h a r e h o l d e r s c o n t i n u e d




After many years of undercapitalization, we are investing in the appearance of our stores to create
a more effective, contemporary shopping environment. Our associates will be given enhanced
training, together with sales and rental programs which will provide our associates with more
flexibility to meet the needs of our customers. We will continue to expand our product selection,
offering more key brands, and the most sought-after products.

In essence, the easyhome brand captures the values that are important to our customers.
It is about putting customers in control and meeting their needs through an expanded product
selection, superior customer service, and an improved shopping experience and environment.

We strongly believe that the strategy behind easyhome will position the company to significantly
grow its business, capitalizing on the under-penetration of the Canadian rent-to-own industry. For
a more detailed discussion of easyhome and the research behind it, please see page 9 of this report.




Looking Forward

When I reported to you last year, we had just completed implementing our strategy to restore the
company to financial health. Now I can tell you that we are going into 2003 in the best position
we’ve ever been in. Our financials are in solid shape, and our customer base is growing, ensuring
future revenue streams. And, we are about to embark on the biggest project ever undertaken by
this company. The first half of fiscal 2003 will be devoted to rolling out our new brand, and we
are excited and energized about our company’s prospects under the easyhome banner.

In the two years since I joined RTO, we have implemented many significant changes to transform
RTO from a player with a large number of stores, to a true market leader. At the close of fiscal
2002, we have made a great deal of progress, and we believe that the strategy and values behind
the easyhome initiative will accelerate our journey. It is not simply about being the biggest - it is
about being the best. The best at before- and after-sale customer service, the best at providing
appealing, quality products, and the best at providing a superior shopping and purchasing
experience. By achieving these things, we will remain a market leader, providing value for our
customers, and for our shareholders.

All this, of course, requires the skill and commitment of our management team and all RTO
Associates. I would like to extend my thanks to each and every employee for their contribution to
our strong performance in fiscal 2002. I expect the coming year will be even more exciting and
rewarding. I would also like to thank our Board of Directors. We have an exceptionally talented
Board whose industry and financial experience have proved invaluable. I extend a special thank
you to Gerald McCarvill, who retired from our Board of Directors in November after five years of
outstanding service. And finally, on behalf of the Board, I thank RTO’s shareholders. We have
made real progress, and will continue to work diligently to increase the value of your company.




David Ingram,
President and Chief Executive Officer
March 2003



                                                                   7
One Vision. One Brand.
One Vision. One Brand.




Introducing easyhome

In 2003, RTO will roll out its new national brand, easyhome. It is a new name, a new look, and
a new attitude. There are many reasons behind the single brand initiative, but only one ultimate
objective – to harness the tremendous growth potential of the business.

Canada’s rent-to-own industry is relatively small and fragmented. Populated by mom-and-pop
type stores, the industry has lacked a leader and champion to build awareness among consumers
of the rent and rent-to-own options. While RTO, with its 131 stores, leads the market in size and
revenues, its multiple brand names diminished the company’s visibility and impact. The decision
to operate under one dominant, powerful and national brand was a logical strategic move.

To develop the new brand name, and the attributes and values that would best reach its target
customers, RTO began with extensive market research.


The Research

To ensure that its re-branding efforts resulted in more than just a new name for the company’s
stores, RTO held focus group sessions with existing and potential customers to discuss the
strengths and weaknesses of the RTO experience. The research yielded important insights into
the values and purchasing patterns of its target customers.

First, it highlighted the importance of home, and the desire for contemporary, high-quality
products. Many customers would rather pay more rent per rental period, for the opportunity to
rent or rent-to-own prestige products.

Second, the company learned the importance of the complete shopping experience. Along with
a more mainstream shopping environment, customers want to feel accepted and in control
– something they often do not feel at traditional retail stores.

Third, research clearly indicated that the word “rent” was perceived negatively, and should not be
part of the company’s name.

RTO then probed different ways to present the business, before determining the best name and
positioning for its stores.




                                             9
One Vision. One Brand. continued




The easyhome Concept

The easyhome brand reflects the values that are important to customers - a comfortable home
environment, and an easy way to get the products that they want. It is designed to provide
customers with what they can’t get from anyone else – access to products and services through
financial programs and emotional support.

As part of the easyhome re-branding, stores will feature an expanded and updated product range
with higher quality merchandise, more emphasis on electronic and technology products, and
aspirational furnishings.

Products in growth categories, such as computers, gaming, and home theatre, will be presented
on new fixtures and display stands that will showcase the products, making it easier for customers
to appreciate them.

The stores will be redesigned to create an environment that is customer friendly, fresh, and bold.
The new core colours will be featured on interior and exterior signage, and on all advertising and
promotions. Staff will be attired in professional yet casual outfits that will complement the store
environment, and make them highly identifiable and approachable.


A Successful Test

RTO began a Canada-wide test of the easyhome concept in March 2002. The test was designed to
compare different formats of the brand positioning using three scenarios. In all scenarios, easyhome
tested very positively. Over a 10-month period, stores that were re-branded to easyhome :

  • Increased their monthly rental agreement portfolio 30% compared with 7.5% for
    non-rebranded stores.

  • Increased their average rental rate per agreement by an average of $3.02 compared with
    a decline of $0.68 in non re-branded stores.

  • Grew customers by 3.7 per store per month, compared to 1.4 in non re-branded stores.

In addition, increases were seen in customer retention rates ( the average length agreements
stayed on rent ) and the number of new deliveries that were generated from the easyhome referral
program.




                                                  10
          We Promise to:



• Provide the customer with what they
  can’t get from anyone else - financial
  programs and emotional support

• Raise the customers’ self esteem
  and sense of control

• Demonstrate a positive, friendly,
  supportive, and non-judgmental
  attitude toward the customer

• Reinforce the customers’ sense of
  ownership and pride of possession

• Recognize the importance of the home
  to the individual and the family

• Strengthen the personal relationship
  between the customer, the store
  personnel, and the easyhome brand




    Get exactly what you want,
     for as long as you want.



                 11
Management ’s Discussion And Analysis
Of Financial Condition And Results Of Operations



The following discussion and analysis should be read in conjunction with, and is qualified
by, the audited consolidated financial statements of the Company and the notes relating
thereto included in this Annual Report.

Core business

RTO Enterprises Inc. (RTO) is in the business of renting, with or without an option to purchase,
brand name home entertainment products, appliances and household furniture across Canada.
The rent-to-own business is not seasonal and is generally immune to changes in economic
conditions. All of the Company’s revenue is generated by its core business and related activities.

The Company’s program appeals to a wide variety of consumers who may not be able to purchase
merchandise at the time due to insufficient cash resources or a lack of credit, or who have a
temporary short-term need for the merchandise, or who simply want to try the merchandise, with
no long-term obligation, before they purchase.

RTO’s rental-purchase program provides an alternative to ownership for people who prefer
the convenience of full-service repairs at no extra charge and without ownership obligations.
The rental transaction provides for delivery, installation, and pick-up of the merchandise, and
temporary replacement of the merchandise while being repaired. All these services are provided
without additional charge.

The rental agreement is generally a one week or one month agreement which can be cancelled
without further cost or obligation at any time and which the customer can renew for another week
or month by making another payment in advance. Each agreement automatically expires at the
end of the stated rental period unless a renewal payment is made. The rental agreement also makes
it possible for customers to purchase the product during the term of the rental agreement.

The Company currently operates 131 stores in 82 cities and towns in all ten Canadian provinces.
Our next largest competitor operates 8 stores in western Canada. Even though the cost of entering
the business is relatively low, we do not view competition as a threat to our growth strategies.

RTO leases all its locations which are generally located in strip shopping centers, plazas, or stand
alone buildings in moderate to low income neighbourhoods. The terms of the leases are generally
five years and contain renewal options at fair market value rates. The Company is generally
required to pay real estate taxes, insurance and utilities. Management believes that suitable store
space is available for lease for both relocations and new store openings.

The Company purchases all product directly from the manufacturers or distributors and all
product is delivered directly to the stores negating the necessity for the Company to maintain
warehousing facilities. Generally, product mix is determined by senior management based on
historical rental patterns and the introduction of new products. Every store is required to carry a
pre-determined number of the Company’s core selection, but can “fill” to store optimum levels
with product they determine to be popular rental items in their particular area. The Company
maintains good relationships with its suppliers. It does not enter into contracts with its suppliers
and believes there are numerous sources of product such that reliance is not placed on any one
supplier.



                                                  12
Management ’s Discussion And Analysis Of Financial Condition And Results Of Operations continued




The Company currently employs 656 people of which 601 are employed in the stores and the
balance in field and office support administration.

The location of the 131 stores and the revenue earned during 2002 on a province-by-province
basis is as follows:

                                                        No. of stores              Total store revenue
                                                                                        $ (000’s)

     British Columbia                                          7                          3,819
     Alberta                                                  16                          9,828
     Saskatchewan                                              8                          3,749
     Manitoba                                                  4                          1,788
     Ontario                                                  72                         41,311
     Quebec                                                    5                          2,319
     New Brunswick                                             7                          2,780
     Nova Scotia                                               9                          4,805
     Prince Edward Island                                      1                            441
     Newfoundland                                              2                            560


During the year, four stores were merged and their operations combined with other stores
located in close proximity to them, and ten new stores were opened. During the first two months
of 2003, five stores were merged and their operations combined with other store locations. The
Company does not expect to close any more stores during the balance of 2003 and plans on
opening a minimum of five new locations towards the latter part of the year.


Vision and long-term business strategy

The Company’s vision states that “Everyone should be given the opportunity to enhance their
home and lifestyle. We are the leader in helping people get exactly what they want for as long as
they want…right now!” Our mission states “We are a relationship-driven business that thrives
on the opportunity to provide customers access to household goods and services that enhance the
quality of their lives.” The key element in both our vision and mission is the customer and his/her
relationship with our store personnel. To improve our customers’ shopping experience and our
staffs’ working environment, we opened and converted a number of stores to the name “easyhome”
which stores provided a completely different “look” ( enhanced display fixtures and softer colors )
and shopping experience to our customers. The test stores were very successful in attracting
and retaining new customers and increasing revenues. After the test stores were operated for a
number of months, management concluded that all stores should be converted to the new “look”
and name. This will position the Company with a single, national dominant brand name that
supports our promise of the shopping experience being easy and convenient, acknowledges the
importance of the home and communicates our product selection as being for the home. The
conversion to a single brand is expected to be completed by the end of the second quarter. The
Company believes that the conversion to the single brand will generate growth in existing store
revenues and increase market penetration.




                                                   13
Management ’s Discussion And Analysis Of Financial Condition And Results Of Operations continued




One of our prime financial objectives is to grow same store revenues by a minimum of 5% per
annum. In order to achieve this goal, in addition to the re-branding, the Company must:

     1.   Recruit and retain the best available talent to manage our stores and build the skill
          levels of all our employees;

     2.   Provide value to our customers through relationship management;

     3.   Operate on an “every day, low cost to operate” philosophy;

     4.   Upgrade our existing locations where the real estate is a contributing factor in the
          poor performance of a store;

     5.   Improve our key customer acquisition and retention activities; and

     6.   Develop, test and introduce new product lines.


Critical success factors

In order to accomplish our goals we must hire and retain the best people available. Training is
an ongoing necessity in employee retention. In the past, new store openings have been staffed
with inadequately trained personnel which necessitated the closing of poorly performing stores
and shrinking our store base from a peak of 156 to the current number of 131. We are gradually
improving our employee hiring and retention competencies such that our turnover rate improved
7% in 2002 and 30% over the last two years. However, hiring and retaining the right people is
still a critical element in the Company achieving its goals.

The Company must also be able to source and select the appropriate real estate sites in order to
achieve its long-term goals of opening new stores and relocating poorly performing stores to better
sites where the current site is a contributing factor to the store’s poor performance. We must have
favorable results in site selection in order to achieve our goals.

Customer growth and increased market penetration are necessary to achieve our revenue growth
initiatives. Management believes the conversion to a single “brand” will allow more efficient
methods of media distribution and increase name recognition in our markets which will help
drive customer and the consequent revenue growth. We believe the re-branded stores will create
an atmosphere that not only makes the shopping experience more pleasant, but also create a store
atmosphere that is conducive to customer loyalty.

The introduction of new product lines showcasing the latest in technology and style is expected
to increase our customers. We are not reliant on any single manufacturer for product and do not
envision product supply as inhibiting our growth opportunities.

We have undertaken a number of market research studies which allow us to better identify
our customer and where they live and shop. The research has shown that existing rent-to-own
customers are pleased with the services provided under the rent-to-own concept. Accordingly,
one critical element in increasing customer growth is making sure potential customers are aware
of our business proposition which should result in the consequent increase in store traffic and the
execution of more rental agreements.




                                                        14
Management ’s Discussion And Analysis Of Financial Condition And Results Of Operations continued




The Company can currently finance its new store openings, remodels and relocations out of
internally generated cash flow. Adequate financing is therefore not a limiting factor in achieving
our goals. Store costs in relation to revenue are at industry standards and will not be a factor in
executing our strategies.

Revenue and store operating margin are the key metrics we use to measure the success of our
strategic plan. Customer growth and pricing drive revenue. Customer growth is dependant on
awareness of our business proposition, solid customer relationship management at the store level,
our product offer, marketing initiatives, and the execution of our business policies and procedures
throughout the organization. Pricing is dependent on our product offer. Most costs are variable
with revenue other than property and vehicle leasing costs. Our store margin for all stores in 2002
was 14.9% (2001: 14.5%).




Capability to Deliver Results

Capital Resources

The Company currently operates 131 stores. One element of the Company’s ability to grow its
customer and revenue base is contingent on the Company sourcing appropriate store sites in order
to open new stores and to upgrade existing unsatisfactory locations. Revenue growth could be
impacted significantly if the Company is not able to source these new sites at an appropriate cost
for the business model. The cost of new store openings and store relocations can be financed from
internally generated cash flow.

Attracting and retaining key field employees is critical in order to execute the Company’s
strategy and deliver results. Revised employee training programs have been introduced as well
as performance measurement programs, incentive driven compensation plans and other tools in
order to increase the Company’s retention rate and to ensure long-term success. We now have
the tools in place to manage our human resources. Execution and availability of the appropriate
personnel is the on-going issue.

Certain suppliers of the Company have had limitations placed by their credit insurers on the
volume of orders which such suppliers are permitted to have outstanding from the Company at
any particular time. The Company expects these restrictions to ease as the Company’s results
continue to improve. Such limitations have not to date materially affected the Company’s ability
to purchase product or the price at which such product is purchased.

Systems and Processes

The Company maintains an extensive information technology system to monitor all aspects of
its operations and to facilitate its store expansion program. Each store has an on-site customized
computer system on which all inventory data, customer information and rental transactions are
recorded. Daily transaction records and reports from each store are electronically transmitted
overnight to RTO’s support office in Edmonton. In addition, RTO’s bankers verify to head office
the cash deposits made by each store location on a daily basis. RTO’s extensive reporting system
allows management to consistently monitor compliance with control systems. Management
believes its systems will enhance its ability to meet its growth targets.



                                                   15
Management ’s Discussion And Analysis Of Financial Condition And Results Of Operations continued




Results

Total revenue for the year was $72.4 million compared with $67.8 in 2001, an increase of $4.6
million. Operating income increased to $5.7 million from $3.3 million in 2001. Net income was
$2.6 million compared with a loss of $1.9 million in 2001, an increase of $4.5 million. Diluted
earnings per share were $0.54 in 2002 compared with a diluted loss per share of $0.45 in 2001.

Quarterly Information
( in thousands of dollars except earnings per share amounts )

                        Dec 31 Sept 30 June 30 Mar 31                Dec 31     Sept 30 June 30       Mar 31
                        2002    2002    2002   2002                   2001       2001    2001         2001
                          $       $       $      $                     $           $       $            $

Revenue                 18,914    17,703      18,002     17,818      17,720     16,540     16,629     16,870

Operating income        1,504      1,383        1,456     1,388         958         918        676      785

Net income (loss)
for the period             851        557        666        544         389         164     (2,520)      97

basic earnings (loss)
per share                 0.20       0.13        0.15       0.12       0.09        0.07      (0.63)     0.02

diluted earnings (loss)
per share               0.18         0.11        0.14       0.11       0.09        0.07      (0.63)     0.02


Note:
The June 30 2001 net loss includes a provision for income taxes of $2,600,000 which includes the effect
of rate reductions of $1,400,000 and an additional valuation allowance against the future tax asset base of
$1,200,000.



Liquidity and Capital Resources

Cash flow from operating activities amounted to $4.4 million in 2002 compared to $(1.6) million
in 2001, an increase of $6.0 million. The primary reasons for the increase are the improvement in
net income of $4.5 million and net increases in non-cash operating items of $5.1 million; offset
by an increase in rental asset purchases of $2.8 million.

Cash flow from investing activities was $(2.0) million compared to $(0.8) million in 2001, a
decrease of $1.2 million. The primary reasons for the decrease were a business acquisition using
cash consideration of $0.4 million and an increase in capital expenditures of $0.6 million.

Cash flow from financing activities was $(2.4) million compared to $2.3 million in 2001, a
decrease of $4.7 million. The primary reasons for the decrease were due to a net decrease in
proceeds from debt and equity financings of $7.3 million and the net repayment of $1.1 million
in subordinated debentures; offset by a decrease in the repayment of the bank loans of $4.2
million.




                                                        16
Management ’s Discussion And Analysis Of Financial Condition And Results Of Operations continued




At December 31, 2002, the Company’s total liabilities were $26.0 million compared to $28.2
million at December 31, 2001, a decrease of $2.2 million. Subordinated debentures decreased
$4.0 million and trade accounts payable increased $2.3 million which accounted for most of the
net decrease in total liabilities. At December 31, 2002, the Company had available a revolving
line of credit of $19.0 million and had drawn $16.9 million against this line which bears interest
at prime plus 2.5% per annum.

The Company requires capital on an ongoing basis primarily for the purchase of rental
merchandise to fuel growth and replace product that has been sold, or charged-off, expenditures
required for new store openings, remodels, and relocations and working capital. Management
believes it can finance the above through working capital.

On December 2, 2002, the Company redeemed its 22% subordinated debentures totalling $4.0
million which debt was issued on February 1, 2001 as part of the Company’s restructuring plan.
$2.5 million of the debentures were redeemed using proceeds of the issuance of 12% non-voting,
non-convertible preferred shares which are redeemable without bonus or penalty subject to certain
banking covenants being met. The remaining $1.5 million was provided by the Company’s
banker. The preferred shares were issued by way of a private placement to insiders of the Company,
one of which is Mr. Donald Johnson, the Chairman of the Company, who held $1.1 million of the
subordinated debentures and who reinvested the total proceeds from his debenture redemption in
the preferred share issue.

The Company’s credit facility was renewed on October 31, 2002. The credit limit under the 14
month term revolving facility is the lesser of $19.0 million or a borrowing base calculated using
certain percentages of the net book value of rental assets. The interest rate is prime plus 2.5%,
reducing by up to 100 basis points if a financial covenant is reduced. The limit is reduced to $17.0
million effective July 1, 2003. On a quarterly basis, the facility requires the Company to meet
certain financial covenants and ratios including a minimum tangible net worth ratio, a debt to
cash flow from operating activities ratio, a fixed charge cover ratio and a minimum rental asset
purchase amount. Management actively monitors the factors affecting the covenants to ensure
compliance on the measurement dates.




Results of Operations for the Year Ended December 31, 2002 Compared to the
Year Ended December 31, 2001

Operating Income (Loss)

Operating income was $5.7 million for the year ended December 31, 2002, compared to
$3.3 million for the year ended December 31, 2001, an increase of $2.4 million, or 72%. The
contributing factors to this increase in profitability were revenue increases of $4.7 million; offset by
increases in operating costs of $1.3 million and increases in amortization costs of $1.0 million.

Rental Revenue

Rental revenue was $61.6 million for the year, an increase of $4.2 million over 2001. The primary
reasons for the increase was the strong growth in the rental agreement portfolio throughout the
year and the increase in the average rental agreement payment due and collected. The rental of
higher priced product drove the increase in the average rental agreement payment due. Same store


                                                   17
Management ’s Discussion And Analysis Of Financial Condition And Results Of Operations continued




revenues were up 5% for the year.

Other Revenue

Other revenue, which is realized from supplier rebates earned, fees for ancillary services such as
the merchandise protection plan, and processing, reinstatement and other fees related to returned
“NSF” cheques was $10.8 million for the year ended December 31, 2002 and $10.3 million for
the year ended December 31, 2001. As a percentage of total revenue, other revenue remained
fairly consistent as a percentage of total revenue at 15.0% for the year ended December 31, 2002
compared to 15.2% for the year ended December 31, 2001.

Operating Expenses

Operating expenses increased to $42.7 million in 2002 compared to $41.4 million in 2001. As a
percentage of total revenue, operating expenses decreased to 59.0% in 2002 from 61.1% in 2001.
The increase of $1.3 million resulted from increases in all operating expense categories, except for
automotive and travel, as described below.

Salaries and Benefits

Salaries and benefits for 2002 decreased to 29.6% of revenue compared to 31.0% in 2001. The
dollar increase of $0.5 million was primarily due to staffing levels being aligned with store
optimums.

Selling, General and Administrative

Selling, general and administrative expenses in 2002 increased $0.5 million compared with 2001.
The increase was primarily due to increases in store office, repairs and maintenance and insurance
expenses.

Rent

Rent for the year ended December 31, 2002 increased $0.6 million compared with the same
period in 2001, and amounted to 11.2% of total revenue compared with 11.0% in 2001. The
increase was primarily due to rent increases on renewals and relocations.

Automotive and Travel

Automotive and travel for the year 2002 decreased $0.3 million compared with 2001, and
amounted to 3.9% of total revenue compared with 4.7% in 2001. The decrease primarily resulted
from the rationalization of the size of the delivery fleet.

Amortization

Amortization of rental assets for the year ended December 31, 2002 increased $1.8 million
compared with the year ended December 31, 2001, and amounted to 31.4% of total revenue
compared with 30.9% for the year ended December 31, 2001. Amortization increased in




                                                        18
Management ’s Discussion And Analysis Of Financial Condition And Results Of Operations continued




proportion to store revenues except for written-off accounts which were $0.5 million greater than
2001 because of the higher average value of rented product.

Amortization of capital assets and intangible assets for the year 2002 was $0.9 million lower than
2001 primarily due to the Company’s adoption of recommendations of the Canadian Institute
of Chartered Accountants whereby the Company ceased the recording of all goodwill effective
January 1, 2002.

Interest Expense

Interest expense for the year ended December 31, 2002 was $0.3 million lower than 2001,
primarily due to the lower average interest rate being charged on the outstanding bank debt as
this debt is prime-based.

Income Tax Expense

The income tax expense for the year ended December 31, 2002 was $1.1 million compared with
$2.9 million for 2001. Current taxes are $66,000 which are comprised primarily of capital taxes.
The Company does not expect to pay cash income taxes in the near future as it currently has loss
carry forwards in the approximate amount of $7.1 million and other tax timing differences of
approximately $33.4 million which can be used to offset taxable income in future years.

In the second quarter of 2001, the Company incurred a tax charge of $2.6 million which
included the effect of tax rate reductions and an additional valuation allowance against the
future tax asset base. At the 2001 year-end, the effect of the rate reductions and the valuation
allowance was $2.3 million as these amounts were offset by other timing differences.




                                                   19
Management ’s Responsibility For Financial Reporting




The accompanying consolidated financial statements and the information in this Annual
Report are the responsibility of management and have been approved by the Board of Directors.
The consolidated financial statements have been prepared by management in accordance
with Canadian generally accepted accounting principles and include some amounts based on
management’s best estimates and judgements. When alternative accounting methods exist,
management has chosen those it considers most appropriate in the circumstances. Management
has prepared the financial information presented elsewhere in the annual report and has ensured
that it is consistent with the financial statements.

RTO Enterprises Inc. maintains a system of internal controls to provide reasonable assurance that
transactions are properly authorized, financial records are accurate and reliable and the Company’s
assets are properly accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring that management fulfills its responsibility
for financial reporting and is ultimately responsible for reviewing and approving the financial
statements. The Board of Directors carries out its responsibility for the financial statements
through its Audit Committee. This Committee meets periodically with management and the
external auditors to review the financial statements and the annual report and to discuss audit,
financial and internal control matters. The Company’s external auditors have full and free access
to the Audit Committee.

The financial statements have been subject to an audit by the Company’s external auditors, Ernst
& Young LLP, in accordance with Canadian generally accepted auditing standards on behalf of
the shareholders.




David Ingram,                                        S.W. Johnson,
President and Chief Executive Officer                Executive Vice President and Chief Financial Officer




                                                  20
Auditors’ Report




To the Shareholders of RTO Enterprises Inc.



We have audited the consolidated balance sheets of RTO Enterprises Inc. as at December 31, 2002
and 2001 and the consolidated statements of income (loss) and deficit and cash flows for the years
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 audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable assurance
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.

In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the company as at December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended in accordance with Canadian generally
accepted accounting principles.




Edmonton, Canada
February 14, 2003




Ernst & Young LLP,
Chartered Accountants




                                            21
RTO ENTERPRISES INC .

Consolidated Balance Sheets




                                                        2002                        2001
For The Year Ended December 31
(in 000’s)                                               $                           $

ASSETS [note 5]

Amounts receivable [note 14]                            1,568                       1,864
Prepaid expenses                                          845                         576
Rental assets [note 2]                                 28,248                      25,712
Capital assets [note 3]                                 3,817                       3,393
Future tax assets [note 9]                             11,369                      12,420
Intangible assets [note 4]                              1,158                          75
Goodwill                                               10,779                      10,779
Land held for resale                                      682                         682
                                                       58,466                      55,501

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities
Bank revolving term loan [note 5]                      16,893
Bank revolving demand loan [note 5]                                                17,191
Trade accounts payable                                  5,354                      3,022
Accrued liabilities                                     1,173                       1,184
Accrued payables, bonuses and other employee costs      1,591                       2,016
Unearned revenue                                          430                         525
Income taxes payable                                      268                         270
Note payable [note 6]                                     336
Subordinated debentures [note 6]                                                    4,006
                                                       26,045                      28,214

Commitments and contingencies [notes 7 and 13]
Shareholders’ equity
Preferred shares [note 8]                                2,500
Common shares [note 8]                                 31,299                      31,283
Deficit                                                 (1,378)                    (3,996)
                                                       32,421                      27,287
                                                       58,466                      55,501

See accompanying notes

On behalf of the Board:




David Ingram, Director                               Donald K. Johnson, Director



                                              22
RTO ENTERPRISES INC .

Consolidated Statements Of Income ( Loss) And Deficit




                                                 2002     2001
For The Year Ended December 31
(in 000’s except earnings per share)              $        $

REVENUE

Rental                                          61,590    57,440
Other                                           10,847    10,319
                                                72,437    67,759

EXPENSES

Salaries and benefits [note 14]                 21,470    20,990
Selling, general and administrative             10,356     9,817
Rent                                             8,088     7,442
Automotive and travel                            2,830     3,162
                                                42,744    41,411

AMORTIZATION

Amortization of rental assets                   22,764    20,916
Amortization of capital assets,
 goodwill and intangible assets [note 1]         1,198     2,095
                                                23,962    23,011
Total operating expenses and amortization       66,706    64,422

Operating income                                 5,731     3,337
Interest expense [notes 12 and 14]               1,996     2,321
Income before income taxes                       3,735      1,016
Income tax expense [note 9]                      1,117     2,886
Net income (loss) for the year                   2,618    (1,870)
Deficit, beginning of the year                  (3,996)   (2,126)
Deficit, end of the year                        (1,378)   (3,996)


Earnings (loss) per share [note 11]
Basic                                             0.60     (0.45)
Diluted                                           0.54     (0.45)

See accompanying notes




                                           23
RTO ENTERPRISES INC .

Consolidated Statements Of Cash Flows




                                                          2002       2001
For The Year Ended December 31
(in 000’s)                                                 $          $

OPERATING ACTIVITIES

Net income (loss) for the year                            2,618     (1,870)
Items not affecting cash:
  Amortization of rental assets                         22,764      20,916
  Amortization of capital assets, goodwill and
    intangible assets [note 12]                           1,270      2,143
  Future income taxes [note 9]                            1,051      2,847
Net change in non-cash operating items -
  Rental assets                                         (25,059)   (22,261)
  Other [note 12]                                         1,803     (3,334)
Cash flow from operating activities                       4,447      (1,559)

INVESTING ACTIVITIES

Purchase of capital assets                              (1,788)     (1,188)
Proceeds on disposition of capital assets                  205         399
Business acquisition [note 10]                            (384)
Repayment of note payable related to acquisition           (28)
Other                                                       (14)
Cash flow from investing activities                     (2,009)       (789)

FINANCING ACTIVITIES

Repayment of bank revolving demand loan                 (17,191)    (4,516)
Advance of bank revolving term loan                      16,893
Issuance of preferred shares                              2,500
Issuance of common shares                                    16
Financing costs for bank revolving term loan               (650)
Proceeds from (repayment of) subordinated debentures    (4,006)      4,006
Proceeds from equity financing [note 8]                              6,564
Share issue costs [note 8]                                            (800)
Repayment of principal portion of royalty funding                   (2,906)
Cash flow from financing activities                     (2,438)      2,348

Net change in cash                                           —          —

See accompanying notes




                                                   24
RTO ENTERPRISES INC .

Notes to Financial Statements
December 31, 20 02 and 20 01




1. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared by management in accordance with
Canadian generally accepted accounting principles. Because the precise determination of many
assets and liabilities is dependent upon future events, the preparation of financial statements for a
period necessarily involves the use of estimates and approximations, which have been made using
careful judgment. Actual results could differ from those estimates. The financial statements
have, in management’s opinion, been properly prepared within reasonable limits of materiality
and within the framework of the accounting policies summarized below.

Nature of operations

RTO Enterprises Inc. (the “Company”) is in the business of renting, with or without an option
to purchase, direct to the consumer, brand name home entertainment products, appliances and
household furniture across Canada. As at December 31, 2002, the Company operated 136 stores
in 10 provinces (2001 – 130 stores in 10 provinces).

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries:

            - RTO Asset Management Inc.
            - RTO Distribution Inc.
            - RTO (Rentown) Inc.
            - RTO (Rentown) 2000 Inc.


Business cycle

The Company does not operate on a normal twelve month operating cycle. Acceptable
industry practice for rental-purchase companies is to make no distinction between current and
non-current assets and liabilities. Accordingly, an unclassified balance sheet has been presented.

Rental and other revenue

Merchandise is rented to customers pursuant to agreements that provide for weekly or monthly
rental payments collected in advance. The rental agreements may be terminated at any time by
the customer without further obligation or cost upon return of the merchandise. Revenue from
rental agreements is recognized when payment is received and the rental period has passed. At
the end of each weekly or monthly rental period, the customer has the option of renewing the
agreement for an additional period.




                                              25
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



1. SIGNIFICANT ACCOUNTING POLICIES continued

Other revenue from various services and charges to rental customers include liability waiver fees,
which are recognized as collected, and supplier incentives, which are recognized as earned.

Rental and capital assets

Rental and capital assets are recorded at cost, including freight.

Assets on rent, excluding computers and related equipment and assets that were previously held
for rent assets that had not been out on rent for at least 90 consecutive days, are amortized using
the units of activity method. Under the units of activity method, assets on rent are amortized in
the proportion of rents received to total expected rents provided over the rental agreement term.
Computers and related equipment are amortized on a straight-line basis over 24 months. Held
for rent assets are not amortized where such assets have not been out on rent for less than 90
consecutive days. Once held for rent assets have not been out on rent for at least 90 consecutive
days, such assets are amortized on a straight line basis over 18 months regardless of future rental.
Amortization includes the book value of assets sold, and amounts which have been charged off as
stolen, lost or no longer suitable for rent.

In the event management determines that the future net cash flows to be derived from renting
the assets is less than the carrying value of the assets, the assets are written down to estimated
net realizable value. The estimated net realizable value of rental assets is subject to measurement
uncertainty and the impact on the financial statements for future periods could be material.

Capital assets are amortized over their estimated useful lives using the following rates and
methods:


                                                                     Rate                 Method

Office equipment and furniture                                       20%        Declining balance
Signage                                                              20%        Declining balance
Automotive                                                           30%        Declining balance
Leasehold improvements                                                          Straight-line over
                                                                                   the term of the
                                                                                      related lease


Amortization is recorded at one-half of the above rates in the year of acquisition on all capital
assets except leasehold improvements.




                                                     26
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



1. SIGNIFICANT ACCOUNTING POLICIES continued

Intangible assets

Customer lists are amortized on a straight-line basis over 5 years.

Rental agreements are amortized on a straight-line basis over 4 months.

Financing costs are amortized on a straight-line basis over the period of the related loan.

Organizational costs are amortized over 5 years using the straight-line method.


Goodwill

The carrying value of goodwill is reviewed annually to ensure that the value reflected is not
impaired. An impairment loss would be recognized if the carrying amount of the goodwill
exceeds its estimated fair value. Due to the long-term nature of assumptions made, it is possible
that estimates could prove to be materially incorrect, and accordingly the impact on the financial
statements for future periods could be material.

Prior to 2002, the Company amortized goodwill related to business acquisitions and start-up
store acquisitions on a straight-line basis over 20 years and 10 years respectively. Effective
January 1, 2002, the Company ceased recording amortization on goodwill pursuant to new
recommendations of the Canadian Institute of Chartered Accountants. The Company performed
an impairment test as of January 1, 2002 and determined that no impairment provision was
required on adoption of the new standard. Reconciliations of reported net income and earnings
per share to amounts adjusted to exclude amortization of goodwill are as follows:




                                                                                              2001
(in 000’s except earnings (loss) per share figures)                                             $

Net loss for the year, as reported                                                            (1,870)
Goodwill amortization                                                                            908
Net loss for the year, as adjusted                                                              (962)

Earnings (loss) per share:
Basic, as reported                                                                            (0.45)
Goodwill amortization                                                                          0.22
Basic, as adjusted                                                                            (0.23)

Diluted, as reported                                                                           (0.45)
Goodwill amortization                                                                           0.22
Diluted, as adjusted                                                                           (0.23)




                                                      27
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



1. SIGNIFICANT ACCOUNTING POLICIES continued

Land held for resale

Land held for resale is recorded at the lower of cost and net realizable value.

Share issue costs

Costs related to the issuance of shares are charged against share capital.

Earnings per share

Basic earnings per share is computed based on the weighted average number of common
shares outstanding during the year. Diluted earnings per share is computed using the treasury
stock method, which assumes that the cash that would be received on the exercise of options
and warrants is applied to purchase shares at the average price during the period and that the
difference between the shares issued upon exercise of the options and warrants and the number of
shares obtainable under this computation, on a weighted average basis, is added to the number of
shares outstanding. Antidilutive options and warrants are not considered in computing diluted
earnings per share.

Financial instruments

The carrying value of the financial assets and financial liabilities approximate fair value unless
otherwise disclosed. Approximately 22% of the amounts receivable at December 31, 2002
(2001 - 19%) is owing from one unrelated party and approximately 21% is owing from one related
party (2001 – 18%) (see note 14).

Income taxes

The Company uses the liability method to account for income taxes. Under this method, future
income tax assets and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities, and measured using the substantively enacted tax rates and
laws that will be in effect when the differences are expected to reverse.




                                                     28
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



1. SIGNIFICANT ACCOUNTING POLICIES continued

Stock-based compensation

Effective January 1, 2002 the Company adopted the new CICA standard for stock-based
compensation and other stock-based payments. As permitted by this standard, the Company
has applied this change prospectively for new awards granted on or after January 1, 2002. The
Company has chosen to recognize no compensation expense when stock options are granted to
employees and directors under stock option plans with no cash or equity settlement features.
However, direct awards of shares to employees and non-employees, and stock option awards
granted to non-employees, are accounted for in accordance with the fair value method of
accounting for stock-based compensation. To date the Company has not; (i) granted options
with cash or equity settlement features; (ii) made direct awards of shares to employees or non-
employees; (iii) granted stock option awards to non-employees. In periods prior to January 1,
2002, the Company recognized no compensation when shares or stock options were issued.

The Company has one stock-based compensation plan, which is more fully described in note 8.




2. RENTAL ASSETS

                                                                   2002                    2001
(in 000’s)                                                           $                      $

Rental assets                                                     49,592                   43,493
Accumulated amortization                                          21,344                   17,781
Net book value                                                    28,248                   25,712




3. CAPITAL ASSETS

                                                     2002                          2001
                                                      Accumulated                   Accumulated
                                             Cost     amortization         Cost     amortization
(in 000’s)                                    $            $                $            $

Office equipment and furniture              4,011              2,062       3,745            2,073
Signage                                     1,153                507       1,044              486
Automotive                                    537                361         894              547
Leasehold improvements                      2,548              1,502       2,665            1,849
                                            8,249              4,432       8,348            4,955
Net book value                                      3,817                          3,393




                                                29
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



4. INTANGIBLE ASSETS

                                                     2002                          2001
                                                      Accumulated                   Accumulated
                                             Cost     amortization         Cost     amortization
(in 000’s)                                    $            $                $            $

Customer lists                                 470               9
Rental agreements                               60               4
Financing costs                                801             201          919               895
Organizational costs                           420             379          520               469
                                             1,751             593        1,439             1,364
Net book value                                    1,158                           75




5. BANK LOAN

The bank loan facility was renewed on October 31, 2002. The new revolving term facility bears
interest at prime plus 2.5%, reducing by up to a maximum of 100 basis points if a certain financial
covenant is reduced to a pre-defined ratio. The credit limit is the lesser of $19,000,000 or a
borrowing base calculated using certain percentages of the net book value of rental assets. This
limit is reduced to $17,000,000 on July 1, 2003.

Covenants and conditions for the new facility include a minimum equity requirement, a fixed
charge cover covenant, a funded debt to cash flow covenant, capital expenditure and rental asset
acquisition covenants in accordance with projections and annual approval of the Company’s
business plan. During the year and at the end of the year, the Company was in compliance with
these covenants.

                                                                 2002                      2001
(in 000’s)                                                         $                        $

Bank revolving term loan                                        16,893
Bank revolving demand loan                                                                17,191
                                                                16,893                    17,191

The weighted average interest rate on the bank loans for the year ended December 31, 2002 was
6.7% (2001 – 8.3%).

All assets of the Company are pledged as collateral for the bank revolving term loan.




                                                     30
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



6. OTHER DEBT

a)     Note payable

A note payable was issued as part of the purchase price consideration for the acquisition described
in note 10. The note bears interest at 10% per annum and is payable in equal blended monthly
interest and principal instalments of $16,765 for 24 months commencing November 2002.

b)     Subordinated debentures

On December 2, 2002, the Company redeemed its 22% subordinated debentures totaling
$4,006,000. $2,500,000 of the debentures were redeemed using proceeds of the issuance of
preferred shares (see note 8), and the remaining $1,506,000 was provided by the Company’s
banker.




7. COMMITMENTS

The Company is committed to long-term operating leases for building space, vehicles and
signage. The minimum annual lease payments plus estimated operating costs required for the
next five years and thereafter are approximately as follows:


(in 000’s)                                                                          $

             2003                                                                8,505
             2004                                                                7,458
             2005                                                                5,256
             2006                                                                3,217
             2007                                                                  971
             Thereafter                                                            588
                                                                                25,995




                                                31
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



8. SHARE CAPITAL


Authorized

Unlimited preferred shares
Unlimited common shares of no par value

Preferred shares issued and outstanding

On December 2, 2002, the Company issued 2,500,000 preferred shares for total proceeds of
$2,500,000. Dividends are cumulative, calculated at a rate of 12% per annum, and payable
monthly on the first business day of each following month.

The preferred shares are non-voting and non-convertible, and redeemable by the Company
without bonus or penalty subject to certain banking covenants being met. The preferred shares
were issued to insiders of the Company, one of whom is the Chairman of the Board who formerly
held $1,100,000 of the subordinated debentures (see note 6(b)) and reinvested the total proceeds
from his debenture redemption in the preferred share issue.

Common shares issued and outstanding

On July 30, 2002 the Company consolidated its common shares on a 1 for 10 basis. All references
to common shares, per share amounts, and stock-based compensation plans in these consolidated
financial statements have been restated to reflect the share consolidation on a retroactive basis.

                                                  2002                            2001
                                            Shares     Amount            Shares          Amount
(in 000’s)                                    #          $                 #               $

Balance, beginning of the year              4,376          31,283         2,188           25,519
Issued for cash to employees
   under stock option plan                        5            16
Issued under rights offering                                              2,188            5,764
Balance, end of the year                    4,381          31,299         4,376           31,283

In 2001, the Company completed a Rights Offering to subscribe for common shares at $3.00
per share. 2,188,074 common shares were issued for net proceeds of $5,763,914 ($6,564,150 less
share issue costs of $800,236).




                                                      32
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



8. SHARE CAPITAL continued


Stock options and warrants                                            2002                     2001
(in 000’s)                                                              #                       #

Outstanding options and warrants
Balance, beginning of the year                                        1,035                      230
Options granted                                                          55                      832
Warrants granted                                                                                  38
Options exercised                                                       (5)
Options and warrants canceled, terminated or expired                  (164)                       (65)
Balance, end of the year                                               921                      1,035

Stock options

Under the Company’s stock option plan, options to purchase common shares may be granted by
the board of directors to directors, officers and employees. Options are granted at exercise prices
equal to or greater than fair market value at the grant date, generally vest evenly over a five year
period, and have exercise lives ranging from five to ten years. The aggregate number of common
shares reserved for issuance and which may be purchased upon the exercise of options granted
pursuant to the plan shall not exceed 1,000,000 common shares.

The Company has granted stock options to directors, officers and employees to purchase 851,500
common shares at prices between $3.06 and $7.50 per share. These options expire on dates
between August 4, 2003 and November 4, 2011 .


                                                   2002                               2001
                                                  Weighted Average                   Weighted Average
                                            Shares Exercise Price             Shares    Exercise Price
(# of shares in 000’s)                        #           $                     #            $

Stock options, beginning of the year           897             3.60             130             16.50
Options granted                                 55             6.91             832              3.06
Options exercised                               (5)            3.06
Options canceled,
terminated or expired                          (95)            8.73             (65)             9.30
Stock options, end of the year                 852             3.30             897              3.60




                                                33
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



8. SHARE CAPITAL continued


The Company has issued options to directors, officers and employees at December 31, 2002 as
follows:

                                               Outstanding                       Exercisable

                                                Weighted
                                                Average         Weighted                  Weighted
     Range of                                  Remaining        Average                    Average
     Exercise                                  Contractual      Exercise                   Exercise
      Prices                Shares               Life in         Price       Shares          Price
        $                     #                  Years             $           #                  $
                           (in 000’s)                                        (in 000’s)
3.06 – 4.50                   802                 5.00            3.17         571             3.06
5.90 – 7.50                   50                  4.51            6.97          10             6.97
3.06 – 7.50                   852                 4.97            3.30         581             3.13

The fair value of direct awards of shares are determined by the quoted market price of the
Company’s shares at the date of grant and the fair value of stock options are determined, at the
date of grant, using the Black-Scholes option pricing model. The following table provides the
required pro-forma measures of net income and earnings per share had compensation expense
been recognized based on the fair value of the options granted in 2002, as at the date of the grant,
in accordance with the fair value method of accounting for stock-based compensation:

(in 000’s except earnings per share figures)                                                   $
Net income for the year                                                                      2,618
Compensation expense                                                                            46
Pro-forma net income for the year                                                            2,572

Earnings per share:
Reported basic earnings per share                                                             0.60
Compensation expense per share                                                               (0.01)
Pro-forma basic earnings per share                                                            0.59

Reported diluted earnings per share                                                           0.54
Compensation expense per share                                                               (0.01)
Pro-forma diluted earnings per share                                                          0.53




                                                         34
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



8. SHARE CAPITAL continued

The estimated fair value of these options was determined using the following weighted-average
assumptions, resulting in a weighted-average fair value of $4.46 per option:

             Risk-free interest rate (%)                                        4.32
             Expected hold period to exercise (years)                            4.0
             Volatility in the price of the corporation’s shares (%)            86.2
             Dividend yield (%)                                                 0.00

Warrants

In December 2000, the Company issued warrants to acquire 100,000 common shares at an
exercise price of $3.06 per share as part of the terms of the subordinated debenture financing.
In January 2001, the Company issued warrants to acquire 38,000 common shares at an exercise
price of $3.06 per share as part of the terms of the subordinated debenture financing. One-half
of the warrants, or 50,000 and 19,000 respectfully, vested on issuance and the remainder expired
on redemption of the subordinated debentures (see note 6(b)). The warrants may be exercised at
any time over a five year period from issuance.


9. INCOME TAXES

The Company’s provision for income taxes is comprised of the following:

                                                                   2002                   2001
(in 000’s)                                                          $                      $

Current income tax expense                                                66                39
Future income tax expense                                              1,051             2,847
                                                                       1,117             2,886

The Company’s tax provision is determined as follows:
                                                                   2002                   2001
(in 000’s)                                                          $                      $

Combined basic federal and provincial income tax rates            39.6%                 42.3%

Expected income tax expense                                            1,479               430
Impact of changes in substantively enacted tax rates on
recognized future tax assets                                           (229)             1,509
Non-deductible goodwill amortization                                                       357
Valuation allowance adjustments                                         (300)              826
Other                                                                    167             (236)
                                                                       1,117             2,886




                                                 35
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



9. INCOME TAXES continued

Significant components of the Company’s future tax assets are as follows:

                                                                2002                        2001
(in 000’s)                                                       $                           $

Future tax assets
Loss carryforwards                                              2,352                       4,171
Tax cost of rental and capital assets in excess
of net book value                                              10,662                      9,986
Accounts receivable                                               594                        646
Other                                                             289                        445
                                                               13,897                     15,248
Less valuation allowance                                       (2,528)                    (2,828)
                                                               11,369                     12,420

A valuation allowance for the future tax assets is required due to the Company’s operating history
and management’s assessment of various uncertainties related to their future realization. Since
the realization of future tax assets is dependent upon generating sufficient taxable income in the
Company and its subsidiaries which give rise to the future tax assets, the amount of the valuation
allowance for future taxes will fluctuate based upon determinations of the magnitude and timing
of positive taxable income that is sustainable in future periods.

At December 31, 2002, the Company and its subsidiaries had unused non-capital tax loss carry-
forwards of approximately $7,088,000 available to reduce future years’ taxable income which
expire as follows:

             (in 000’s)                                                             $

             2003                                                                   742
             2005                                                                    47
             2006                                                                   121
             2007                                                                 5,356
             2008                                                                    88
             2009                                                                   734
                                                                                  7,088

At December 31, 2002, the potential future tax benefit associated with all of these losses has been
recorded in these financial statements.




                                                     36
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



10. BUSINESS ACQUISITION

On October 15, 2002, the Company acquired certain rental assets and contractual and non-
contractual relations of Affordable Rentals Inc.’s Hamilton and Brantford stores.

This acquisition was accounted for under the purchase method of accounting, and the results of
earnings since the date of acquisition has been included in the consolidated statement of income.
Details of the aggregate consideration given and the fair values of assets acquired are as follows:

(in 000’s)                                                                                    $

Cash consideration                                                                            384
Note payable                                                                                  363
Accrued liabilities                                                                            23
Purchase price                                                                                770

Assets acquired at fair values:
Rental assets                                                                                 240
Customer lists                                                                                470
Rental agreements                                                                              60
Assets acquired                                                                               770


11. EARNINGS (LOSS) PER SHARE

The number of basic and diluted common shares outstanding, as calculated on a weighted-
average basis, is as follows:
                                                                    2002          2001
(in 000’s)                                                            #            #

Basic shares outstanding                                                     4,378          4,184
Share options (dilutive effect of 845,500 options; 2001 – 833,220)             415            108
Warrants (dilutive effect of 69,000 warrants; 2001 – 138,000)                   68             19
Diluted shares outstanding                                                   4,861          4,311

Stock options to acquire 6,000 common shares (2001 – 64,000) were not included in the
calculation of diluted shares as their exercise prices exceeded the average market share price for
the year.




                                                37
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



12. NET CHANGE IN NON-CASH OPERATING ITEMS

The net change in non-cash operating items excluding rental assets is determined as follows:

                                                               2002                         2001
(in 000’s)                                                      $                            $

Amounts receivable                                               296                       (832)
Prepaid expenses                                                (269)                        796
Trade accounts payable                                         2,332                      (1,120)
Accrued liabilities                                              (34)                     (3,132)
Accrued payables, bonuses and other employee costs              (425)                      1,007
Unearned revenue                                                 (95)                        (69)
Income taxes payable                                              (2)                         16
                                                               1,803                      (3,334)

Supplemental disclosures in respect of the consolidated statement of cash flows comprise the
following:

                                                               2002                         2001
(in 000’s)                                                      $                            $

Income taxes paid                                                224                         103
Interest paid                                                  1,924                       2,274

Interest expense of $1,996,271 (2001 - $2,321,328) presented on the statement of income includes
amortization of financing costs of $72,223 (2001 - $47,368).


13. CONTINGENCIES

A motion seeking the authorization to institute a class action was started against the Company
in the Province of Quebec (Montreal Superior Court) in November 1997. The plaintiffs were
authorized by the Court in August 1999 to proceed with a class action against the Company
on behalf of all persons who have leased or purchased personal property destined for personal
use in their home from the Company (the “class”). The plaintiffs allege that the Company’s
rental contracts do not properly comply with the requirements of the Consumer Protection
Act (Quebec). They are seeking the cancellation of their contracts, or the reduction of their
obligations and the reimbursement of all or a portion of the amounts paid by the members of
the class to the Company, as well as exemplary damages in the amount of $200 per member of
the class. If this class action proceeds to trial, the Company intends to defend it vigorously and
believes it has substantive defences to the plaintiffs’ allegations. The Company has recorded a
reserve in an amount it considers to be adequate to cover its current reasonable expectation of
probable liability.




                                                     38
RTO ENTERPRISES INC. Notes to Financial Statements continued
December 31, 2002 and 2001



14. RELATED PARTY TRANSACTIONS

Amounts receivable includes a $327,400 (2001 - $339,400) home purchase loan provided to an
officer of the Company as a result of his relocation during 2001. The loan is interest-free and is
secured by a collateral mortgage on the officer’s residence. The loan is repayable in installments
of $1,000 per month plus 50% of any net bonuses awarded to the officer. The approximate fair
value of the receivable at December 31, 2002 is $270,000.

On December 2, 2002, the Company issued 2,500,000 preferred shares to insiders of the
Company by way of private placement for $2,500,000 (see note 8). The Chairman of the
Company formerly held $1,100,000 of subordinated debentures, which were redeemed and
re-invested in the preferred shares. During 2002, subordinated debenture interest of $223,159
(2001 - $184,433) was paid to the Chairman.

During the year, the Company paid $nil (2001 - $63,728) to a director for consulting services.


15. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform with the presentation adopted for
the current year.




                                                39
Corporate Governance



RTO Enterprises Inc. recognizes the importance of its fiduciary responsibility to shareholders,
and believes that high corporate governance standards are fundamental to the Company’s success.
Accordingly, the Board of Directors has developed systems and procedures that are appropriate
and effective for the Company and its business. The Board reviews its governance practices on a
continuous basis.

The Company’s directors are experienced business leaders representing a breadth of background
and experience, including finance and rent-to-own retailing. On behalf of RTO’s shareholders,
the Board of Directors is responsible for the stewardship of the corporation, establishing overall
policies, reviewing strategic plans, and holding accountable the management to whom it delegates
the operation of the Company. Six of the eight directors are considered “unrelated” under the
guidelines of the Toronto Stock Exchange. The outside directors meet regularly in the absence
of management.

The Board has established three permanent Committees with written mandates for the continuous
review and monitoring of key areas critical to good corporate governance. The Audit Committee,
the Compensation Committee, and the Corporate Governance Committee each consist of three
directors, all of whom are independent of management.

Audit Committee

The Committee is responsible for reviewing and inquiring into matters affecting financial
reporting and risks inherent in the business. The Committee reviews the annual and interim
financial statements of the Corporation, as well as other public disclosure documents required
by regulatory authorities. The Audit Committee also makes recommendations to the Board
regarding the appointment of independent auditors, reviews the nature and scope of the annual
audit, and reviews the adequacy of the internal accounting control procedures and systems.

Compensation Committee

The Committee is responsible for reviewing the Corporation’s compensation strategy with a view
to aligning compensation with business objectives and performance, and aligning incentives
with the interests of shareholders. This includes reviewing and making recommendations on all
matters pertaining to bonus plans, salary policy, benefits, stock option and stock purchase plans.
It also includes reviewing the written objectives of the Chief Executive Officer and his direct
reports, annually assessing the performance of the Chief Executive Officer, and reviewing and
assessing a plan for succession.




                                                 40
Corporate Governance   continued




Corporate Governance Committee

The mandate of the Committee is to assist the Board of Directors in establishing and maintaining
a sound system of corporate governance through a process of continuing assessment and
enhancement. Its key responsibilities include examining the effectiveness of the Company’s
governance practices, and proposing procedures to ensure that the Board functions independently
of management and that management is accountable to the Board of Directors. The Committee
also reviews candidates for Directors, reviews the mandates of the Board’s Committees, and
develops policies of conduct to deal with the confidentiality of the Corporation’s information,
timely disclosure, and other public Company obligations.


RTO Enterprise Inc.’s system of governance is consistent with the Toronto Stock Exchange’s
guidelines for effective corporate governance. A detailed description of the Company’s approach
is outlined in the Management Information Circular issued in connection with the Annual
Meeting of Shareholders, a copy of which is available through Equity Transfer Services Inc.




                                            41
Board of Directors



Douglas Anderson, Director

Douglas Anderson is President & Chief Operating Officer of Friedmans’ Inc., a large U.S.
specialty retail chain. Previously, he was President and Chief Executive Officer of Rent-A-
Center, the largest U.S. rent-to-own chain, and prior to that, was in charge of the European
rental business of Thorn p.l.c., in London. Mr. Anderson joined the board of RTO in 2000 and
is Chairman of the Compensation Committee.

Ronald G. Gage, Director

Ronald Gage was formerly the Chairman and Chief Executive Officer of Ernst & Young Canada.
He serves as a Director of Toromont Industries, AIM Canada Fund, and AIM Global Fund.
Mr. Gage joined the board of RTO in 2000 and is Chairman of the Corporate Governance
Committee.

David Ingram, President & CEO

David Ingram joined RTO Enterprises in 2000, and was appointed President and Chief Executive
Officer in 2001. Prior to joining the Company, Mr. Ingram was Head of the Strategic Business
Units for Toys and Stationery, a $900 million division at Woolworths of Kingfisher p.l.c., the
second largest retailer in the U.K. Previously, he was responsible for Rent-A-Center’s Canadian
operations, following which he assumed responsibility for a 380 store division of Rent-A-Center
in the U.S.

Donald K. Johnson, Chairman

Donald Johnson is Vice Chairman of BMO Nesbitt Burns and a former President of Burns Fry
Ltd., a predecessor company. He is a former Chairman of the Investment Dealers Association of
Canada and a former Governor of the Toronto Stock Exchange. He has been a director of RTO
Enterprises since 1999 and was elected Chairman at the Annual Meeting in June, 2000.

Robin W. Korthals, Director

Robin Korthals is a former President of Toronto Dominion Bank and is currently Chairman
of the Ontario Teacher’s Pension Plan Board, and Chairman of Co-Steel Limited. He holds
directorships with a number of major Canadian corporations, including Rogers Communications,
Suncor, and Cognos. Mr. Korthals joined the board of RTO in 2000 and is Chairman of the
Audit Committee.

David Lewis, Director

David Lewis was formerly Chairman and Chief Executive Officer of Continental Bank of
Canada. He serves as Chairman of DSTI Ltd., Books for Business, and Deputy Chairman of
Key Publishers. He is also a director of a number of companies, including Brookfield Properties,
Caldwell Partners International, Consolidated Enfield Corporation, and Key Porter Books. Mr.
Lewis joined the board of RTO Enterprises in 1993.




                                                42
Board of Directors   continued




Bruce H. Reid, Director

Bruce Reid was Chief Executive Officer of the Brick Warehouse and previously CEO of WH
Smith in Canada and in the U.S. He is past Chairman of the Retail Council of Canada. Mr. Reid
joined the board of RTO Enterprises in 2000.

Joseph Rotunda, Director

Joe Rotunda is President and Chief Executive Officer of Texas based EZCorp., a major U.S.
consumer finance chain. Previously, he was Chief Operating Officer of Rent-A-Center, the
leading U.S. rent-to-own chain, after holding positions of increasing responsibility in the
company. Mr. Rotunda joined the board of RTO Enterprises in 2000.




                                          43
Officers



David Ingram                                           Dave Maries
President & Chief Executive Officer                    Vice President, Marketing & Merchandising

S. William Johnson                                     Randy Robertson
Executive Vice President                               Senior Vice President, Operations
and Chief Financial Officer




Corporate Information



Edmonton Office                       Investor Relations                   Listed
10239 – 178 Street                    S. William Johnson                   Toronto Stock Exchange
Edmonton, Alberta                     Executive Vice President             Trading Symbol: RTO
T5S 1M3                               and Chief Financial Officer
Tel: (780) 930-3000                   Tel: (780) 930-3012                  Auditors
Fax: (780) 481-7426                                                        Ernst & Young LLP
                                      Bankers                              Edmonton, Alberta
Mississauga Office                    Canadian Imperial Bank
Suite # 201                           of Commerce                          Solicitors
170 Robert Speck Parkway              Edmonton, Alberta                    Blake Cassels & Graydon LLP
Mississauga, Ontario                                                       Toronto, Ontario
L4Z 3G1                               Transfer Agents
Tel: (905) 272-2788                   Equity Transfer Services Inc.        Website
Fax: (905) 272-9886                   Toronto, Ontario                     www.rto.ca




Annual General Meeting



The Annual General Meeting of the Shareholders will be held on May 1, 2003 at 4:30 p.m. in the
Governor General Suite of the Hilton Toronto, 145 Richmond Street West, Toronto, Ontario.




                                                      44
Annual Report




 2 0 0 3




                Ltd.
                                    Ltd.


C o r p o ra te P rof il e




With 131 stores nationwide, easyhome Ltd. is Canada’s largest merchandise rental company and the fourth
largest in North America. It rents brand name furniture, appliances and home electronic products, computers
and video games to customers under weekly or monthly agreements. The common shares trade on the
Toronto Stock Exchange under the stock symbol EH.



Ta b l e of C o n te n t s




Corporate Profile                                                                              Inside Cover
2003 Highlights                                                                                     Page 1
Chairman’s Message                                                                                  Page 3
Message to our Shareholders                                                                         Page 4
Financial Highlights                                                                                Page 7
Canadian Merchandise Rental Industry                                                                Page 9
Management’s Discussion and Analysis
  of Financial Condition and Results of Operations                                                 Page 11
Management’s Responsibility for Financial Reporting                                                Page 21
Auditors’ Report                                                                                   Page 22
Consolidated Financial Statements
  Consolidated Balance Sheets                                                                      Page 23
  Consolidated Statements of Income and Retained Earnings [Deficit]                                 Page 24
  Consolidated Statements of Cash Flows                                                            Page 25
  Notes to Consolidated Financial Statements                                                       Page 26
Corporate Governance                                                                               Page 40
Board of Directors                                                                                 Page 42
Investor Information                                                                               Page 44




A n nu al G e n e ral M e e tin g




The Annual General Meeting of the Shareholders will be held at 4:30 p.m. on May 10, 2004 at the Hilton
Toronto, Governor General Suite, 145 Richmond Street West, Toronto, Ontario.
20 03 Hi g hli g h t s




Converted 126 of its stores to a new single, national brand, easyhome




Increased revenues 8.7% to $ 78.7 million




Achieved same-store sales growth of 5.9%




Attained customer growth of 5.1%




Added three new stores and expanded one location




Share price appreciated 34%




Completed public offering of 1,633,000 shares with gross proceeds of $13.9 million




                                                            2003               2002      Year over
                                                                                       year increase
(in 000s except per share amounts)                            $                 $

Operating Results
Revenue                                                    78,718            72, 437      8.7%
Income before income taxes                                  5,828              3,735     56.0%
Net Income for the year                                     4,118              2,618     57.3%
Earnings per share (diluted)                                 0.76               0.54     40.7%

Financial Position
Total assets                                               62,007             58,466      6.1%
Rental assets                                              32,975             28,248     16.7%
Shareholders’ equity                                       46,790             32,421     44.3%

Key Indicators
Ending Rental Agreement Portfolio                           6,286              5,974       5.2%


                                                       1
                                 easyhome
                              Ltd. is commit-
                           ted to creating long-
                       term shareholder va lue
                     and is now in a strong position
                  to build that va lue through carefully
               planned and well-executed prof itable grow th.


          The Company is the clear market leader in Canada’s mer-
       chandise rental industry as the only national chain and with
   more than half the stores in the country. This position was con-
solidated with the rebranding of its stores to the single easyhome banner.


                 From this leading position, easyhome can
                 raise consumer awareness of the merchandise
                 rental option and lead the industry to greater
                 penetration levels.

                 To begin with, working from its strongest
                 financial position ever, easyhome expects to
                 open 12 new stores this year, driving new
                 revenue and profits. It will also continue to
                 increase same-store sales through more – and
                 higher value – rental agreements by attracting
                 and retaining more customers and offering
                 the most attractive choices of products.

                 With prudent financial management, the
                 growth of the industry, the growth of
                 company outlets, and the growth of same-
                 store contribution will add up to growth in
                 shareholder value.




                                       2
C h air m a n’s M e s s a g e




Donald K. Johnson,
Chairman of the Board




A new national brand and equity financing have positioned easyhome for significant long-term growth

During the past three years, easyhome’s new management team has dramatically improved the Company’s
operations and restored our Company to solid and sustainable profitability. We are now positioned
for significant revenue and profit growth. The transition to a new single brand, easyhome, completes
the transformation that began in 2001 and creates the foundation for the next phase of the Company’s
development – strategic growth.

The equity financing that was completed in December 2003 substantially strengthened our Company’s
balance sheet. With our financial strength and strong national identity, easyhome now has a solid platform
to drive its growth and resume its store expansion program in 2004 and future years.

We are fortunate to have an experienced, motivated and disciplined Board of Directors. They have provided
solid advice to the easyhome management team throughout the Company’s turnaround, as well as during
the transition to the new national brand in 2003. The Board’s focus and strong working relationship with
management will continue to be a key factor in the success of our Company as it enters its new phase of
strategic growth. I would like to thank each of our directors for their strong guidance and their ongoing
commitment to easyhome’s success.

The Board and management of easyhome are firmly committed to strong corporate governance principles.
They have worked hard to ensure that our corporate governance policies meet or exceed the Toronto Stock
Exchange Guidelines for Effective Corporate Governance. Integrity, transparency and profit performance
continue to be the guiding principles for easyhome.

I would also personally like to thank each member of our management team and all easyhome employees for
their contribution to our success in 2003. We have made great strides in creating shareholder value during
the past three years. As well, of course, I thank our investors for their continued commitment to the
Company. We are confident that our strong management team and excellent Board of Directors, combined
with our strengthened balance sheet and our new national presence, have positioned easyhome for continued
profitable growth that will enhance value in 2004 and beyond.

easyhome has achieved a great deal, but I believe the best is yet to come.




Donald K. Johnson,
Chairman of the Board of easyhome Ltd.
March 2004


                                                        3
M e s s a g e to o u r S h a re h o l d e r s




David Ingram
President and Chief Executive Officer




For easyhome Ltd., 2003 was a record year. We achieved our best financial results to date through the
successful re-engineering of the Company and our effective transition from RTO Enterprises Inc.,
operating with 6 brand names, to a single national brand, easyhome.

easyhome Brand

When I reported to you last year we were preparing to roll out our new easyhome brand. I am pleased to
report that the transition, the biggest project ever undertaken by this Company, was an overwhelming
success. The changeover was completed on time and under budget, converting 126 stores to the easyhome
banner in 90 days.

Repositioning our multiple brands as a single, strong, nationwide network of stores has strengthened our
leading market position. The accelerated growth in revenue and operating income in the second half of 2003
confirms the solid business decision behind this initiative. I would like to extend my thanks to each and
every employee for their contribution to the transition to our new brand and our strong performance
in fiscal 2003.

                                                 Revenue:
     Year:                                                                                                $
                                                                                                  (in 000’s)



     2003:                                                                                        78,718

     2002:                                                                                        72,437

     2001:                                                                                        67,759

     2000:                                                                                        67,367

             62,000                                                                           80,000



Improving trends continue

We entered 2003 in the best position the Company had ever been in, with solid financials and a growing
customer base ensuring future revenue streams. Our revenue and profits have been improving since the
re-engineering of the Company and the installation of our new management team in 2001. The growth in
revenue continued in 2003 with increased total revenue of $78.7 million for the year compared with $72.4
million in 2002. In fact, year-over-year revenue has increased for 27 consecutive months and we expect that
trend to continue in 2004.




                                                      4
Message to our Shareholders continued




Operating income, pre-tax income and net income all increased for the year and we set records for the
Company for revenue and operating income in the third and fourth quarters. Operating income was $7.5
million for 2003, an increase of $1.8 million from the previous year, pre-tax income improved to $5.8
million, compared with $3.7 million in 2002 and net income increased 57.3% to $4.1 million.

                                                 Net Income:
     Year:                                                                                                   $
                                                                                                     (in 000’s)



     2003:                                                                                               4,118

     2002:                                                                                               2,618

     2001:                                                                                          (1,870)

     2000:                                                                                          (6,405)
           (6,500)                                          0                                    4,500



The higher income is the result of increased revenue and enhanced operations as we continued to improve
our performance on several key measures during the year. We successfully decreased operating expenses
as a percentage of revenue, increased the ending value of the rental agreement portfolio, reduced past due
accounts, and improved inventory utilization.

Marketing

Our key marketing initiative for 2003 was the conversion to the easyhome brand. The transition required
substantially all of our stores to be remodelled. Each store received new exterior signage, merchandise display
fixtures, point of sale material, standardized showroom planograms, sales aids and new associate uniforms.
The total cost for the transition and remodelling was $2.8 million. Approximately $1.3 million would have
been spent over time, in the normal course of business, leaving a net re-branding cost of $1.5 million.

As part of the re-branding, the Company launched the easyhome website (www.easyhome.ca). In addition to
company information, the site includes a full product showcase where customers are able to select products
and e-mail their order. We also introduced a new call centre, with a toll-free number, to process requests
generated from telephone orders.

As the leader in the Canadian merchandise rental industry, easyhome’s marketing efforts not only drive
the growth of the Company, but they are instrumental in the future growth of the industry. Our dedicated
marketing and merchandising team has developed a strong foundation for our marketing initiatives,
identifying our customers for targeted marketing and maximizing the value of our client database. In 2004,
we will build on this foundation, developing in-store programs to ensure that our customers remain loyal
to easyhome and branching into television advertising for the first time, with an English language campaign
commencing in April, designed to generate awareness of the merchandise rental option and increase the
relevance of the easyhome brand.




                                                       5
Message to our Shareholders continued




Financing for our future

In December of 2003 we raised gross proceeds of $13.9 million in an equity offering and the proceeds were
used to redeem all outstanding 12% preferred shares and the balance was applied to the Company’s bank
line of credit. As a result of the recapitalization, our debt is now $3.7 million, down from $25 million in
2000 and as a consequence we have significantly lowered our interest expense. We are now in our strongest
financial position ever, with a debt-to-equity ratio of .08 to 1.

Looking Forward

In three years the Company has undergone many significant changes, transforming RTO Enterprises Inc.
from an undercapitalized and under-performing company with many stores but little brand awareness,
to a true market leader under the easyhome banner.

In 2004 we will focus on the next step in the planned, profitable growth of the Company - strategic
expansion. We will build on the successful transition to our national brand to expand our store base
to capture more of the under-penetrated merchandise rental market.

We began our expansion with three net additions to our store count in the fourth quarter of 2003 and
we are on track to open 12 new stores in 2004.

Each of the past three years has been marked with success, with improved revenue and a focus on
operational efficiency leading to increased operating income. By focusing not just on being the biggest
but on being the best in the industry, we will remain a market leader, providing value for our customers,
and for our shareholders.

I would like to thank our Board of Directors for trusting us with the task of rebuilding this company
and supporting our aggressive investment in the brand transition to easyhome. We have an exceptionally
talented Board whose industry and financial experience have proved invaluable. On behalf of the Board
and management, I thank easyhome’s shareholders for your ongoing support during our restructuring and
transition years. And finally, I am personally grateful to our dedicated employees who have committed
themselves to exceeding previous results sequentially for the past three years. We are encouraged by the
impact of the changes we have made and we will work hard to grow your Company and to continue to
build value for shareholders.




David Ingram
President and Chief Executive Officer
March 2004




                                                       6
Rev i e w of 20 03




Financial Highlights

An increased customer base and a higher number of rental agreements outstanding per customer contributed
significantly to the Company achieving record results for 2003. Total revenues increased 8.7% to $78.7
million for the year compared with $72.4 million in fiscal 2002. Same store revenue increased 5.9%,
improving on the 5.0% increase for the previous year. Merchandise rental customers increased by 5.1%
and average monthly payments collected per customer increased by 5.6% resulting in an increase of 7.4% in
rental revenue.

Operating income, or earnings before interest and taxes, was $7.5 million compared with $5.7 million in fiscal
2002, an increase of 31.5%. Pre-tax income, notable because the Company does not currently pay cash taxes,
was $5.8 million compared with $3.7 million in fiscal 2002. Net income for the year increased 57.3% to $4.1
million, up from $2.6 million a year earlier. On a per share basis, net income increased to $0.85 per share, up
from $0.60 per share. Diluted earnings per share were $0.76 compared with $0.54 the previous year.

One of easyhome’s key financial objectives for the year was the completion of a public offering of common
shares. The total gross proceeds of $13.9 million from the sale of 1,633,000 common shares at $8.50 per share
was used to redeem all outstanding 12% preferred shares and the balance was applied against the Company’s
revolving line of credit. The recapitalization will substantially lower easyhome’s interest expense and enhance
its financial flexibility.

Contributing to easyhome’s bottom line earnings growth was the continued focus on operational efficiency.
Operating expenses were $45.5 million for the year. As a percentage of revenue, operating expenses decreased
to 57.8% from 59.0% a year ago. Additional customer growth and an increase in the average number of
agreements per customer led to a 5.2% increase in the ending value of the rental agreement portfolio.
Inventory utilization improved, finishing 2003 at 79.3% of rental assets compared with 78.2% in 2002.

easyhome maintained its financial discipline for collecting customer payments in a consistent manner and the
dollar value of outstanding customer accounts declined by 4.0% during the year and write-offs for missing
or unrentable merchandise was 2.5% of revenue, compared with 3.1% in 2002.

easyhome added three new stores to its store count in 2003. The Company is on target to open 12 new stores
in 2004, as part of its carefully planned growth strategy. The commitment for new store, relocation and re-
model capital expenditures for 2004 is $1.0 million and will be funded from internally generated cash flow.

Marketing and Merchandising Highlights

The key marketing initiative for 2003 was the transition to the easyhome brand. During the conversion, 87
stores were remodelled, six stores were relocated, three were expanded, and 121 received new fixturing. The
total cost for the transition and remodelling, including exterior signage and display fixtures was $2.8 million.
The Company estimates that $1.3 million would have been spent as routine capital expenditures, over a
longer period of time, and that the actual cost of the conversion was $1.5 million.

Employee retention is a key element of easyhome’s brand promise to strengthen the personal relationship
between the customer and store personnel. easyhome has successfully attracted and retained key talent and
improved employee turnover to 66.2%, down from 88.3% in 2002.



                                                       7
Review of 2003 continued




As part of the rebranding initiative, the Company launched the easyhome website (www.easyhome.ca). The site
features company information and a full product showcase where customers are able to select products and
e-mail their order. A call centre and toll-free number were launched to process requests generated from online
orders and generate new business from inbound callers. Results to date are encouraging and the Company
hopes to expand its customer base in the merchandise rental market by capitalizing on the expanding use of
the Internet and the trend to online shopping.

Additional marketing initiatives for the year included integrated promotional campaigns, the targeted
distribution of more than eight million flyers, and a monthly marketing to the Company’s inactive customers.

Marketing in 2004 will build on easyhome’s solid marketing foundation created over the past two years and
will include several new in-store initiatives designed to ensure customers remain loyal to the easyhome brand.
The Company’s first venture into television advertising will feature a national, English speaking campaign
designed to increase sales by generating awareness of easyhome and promoting the relevance of the merchandise
rental option.

The key to our marketing initiatives is the quality of our merchandise. easyhome continuously evaluates its
product lines to ensure it captures current market trends. In 2003, new products, enhanced pricing platforms
and improved merchandise displays were introduced to meet the needs of our existing and new customers.

                                  Percentage of Total Revenue      (by Categor y)

                                                               Electronics 42%

              Computers 14%
                                                                                    Furniture 30%




                 Appliances 13%
                                                             Other 1%

Electronics, furniture, computing and appliances are the four major categories of revenue contribution.
Highlights of these four categories for the year were:

• The electronics category had 8.8% unit growth, primarily as a result of unit growth of combination
  TV/VCR/DVD units (140%), digital cameras (58.2%), home theatre (51.5%) and video game systems
  (49.5%). New interactive merchandise displays for video game systems, digital cameras and home theatres
  were introduced as part of the rebranding. Wide screen and HDTV televisions are the focus for 2004.
• A completely revamped furniture line-up was introduced in 2003 and comprehensive product catalogues
  were put into all stores to compensate for limited showroom space. Unit growth for the furniture category
  was 9.3% and the category contributed 30% of overall revenue.
• The appliance category achieved a 21% unit gain on the strength of 1,224.0% growth in microwaves, a
  new line introduced for 2003. A revised pricing platform was introduced to improve affordability in the
  category. New front load laundry and stainless steel models will be introduced in 2004.
• Computers had the biggest unit gain at 49.6%. Growth was driven in hardware product, including
  laptop, rentals (27.4%) and by printer rentals (289.0%). Flat panel LCD monitors and aggressive entry
  price points are expected to drive growth in 2004. Technology centres – part of the easyhome rebranding
  – allowed professional, user-friendly displays of high tech products.

                                                      8
T h e C a n a dia n M e rc h a n di s e Re n t al I n d u s t r y




The merchandise rental industry occupies a specialized niche within the retail landscape. While there are
similarities between merchandise rental and traditional retail, there are also differences – in customers and
economics, as well as in market maturity and growth potential.

In part because its customer base is very targeted, and in part because the industry has not had a dominant
national player to raise awareness, the merchandise rental industry has traditionally held a low profile. It is,
however, a compelling option to many consumers.

Merchandise rental provides solutions for the cash and credit-constrained, and for those with short-term
needs. Research indicates that 30% of all consumers applying for credit from electronics, appliances and
home furnishing retailers are turned down. For those who do not have the cash and cannot obtain credit
to purchase large ticket items, merchandise rental is an alternative option available to them. These individuals
are the majority of the merchandise rental customer base. Other customers are those with temporary needs
such as furnishing housing for a short-term business stay, or renting a big-screen television for a
special event.

Because the merchandise rental business is based on customers renting for one week or one month, it
experiences far fewer fluctuations in revenues than traditional retail. The industry is less vulnerable to
economic cycles and to seasonal changes, generating more stable cash flows.


Market Size

In Canada, the merchandise rental industry is still in its infancy and the market is relatively untapped
compared with the United States. The most common profile of a merchandise rental customer is a single,
blue or grey collar worker between the age of 25 and 44, credit-constrained with an annual income of
around $35,000. Studies show that of the 4.6 million households that match these demographics, 900,000
households will be two to three times more likely to shop at a merchandise rental store and an additional
500,000 of these households will be at least three times more likely to shop at a merchandise rental store.




                                  Canadian Market Players           (by Market Share)

    Estimated Size of Industry:                                                                   200 Stores
    Estimated Revenues:                                                                         $110 million
    Estimated Market Share:

               easyhome:                                                                              65.0%
             Insta-Rent:                                                                                6.5%
         Rent A Center:                                                                                 3.5%
           Rent 2 Own:                                                                                 2.0%
        National Rental:                                                                                1.5%
                  Other:                                                                              21.5%




                                                         9
The Canadian Merchandise Rental Industry continued




Serviced by an estimated total of 200 stores nationwide, the large, potential merchandise rental market
is underserved, leaving considerable room for growth. easyhome dominates the industry, with 131 stores
and 42,000 customers. The next largest competitor has 13 retail outlets and there are no other national
competitors and few regional competitors with the rest of the market made up largely by ‘mom & pop’
type stores.

Growth Drivers

The merchandise rental industry has multiple growth drivers. Same store sales growth is driven by increasing
the number of rental agreements and by increasing the rental amount per agreement. Stores can increase
the total number of rental agreements by attracting new customers, by increasing the number of agreements
per customer, most often through the offering of a broad range of products, and by improving customer
retention. Higher quality merchandise can increase the rental amount per customer agreement.

Growth in the merchandise rental industry can also be achieved through the purchase of rental agreements,
opening new stores in underserved locations, and the acquisition of existing store locations.

Strategic Positioning

easyhome is well positioned to take advantage of Canada’s fragmented and relatively untapped merchandise
rental market. In the past, the industry has lacked a visible leader and been unable to build awareness among
consumers of the merchandise rental option. As the only national player, easyhome leads the market in size
and revenues. Now, operating as one dominant, powerful and national brand, it has the visibility to generate
awareness and promote the advantages of the merchandise rental option.

The easyhome brand not only reflects the values that are important to current customers, it appeals to target
customers who may not have considered renting in the past. It suggests an easy way to get the products that
they want to create a comfortable home environment. The brand philosophy is to provide customers with
what they can’t get from anyone else – access to products and services through rental programs and
emotional support.

easyhome stores feature a wide range of updated, higher quality merchandise, with more emphasis on
electronic and technology products, and aspirational furnishings. The expansion of product offerings in
growth categories, such as computers, video game systems, and home theatre is designed to increase the
range and number of customers as well as the average customer payment collected.

easyhome’s dominant position in the merchandise rental industry, with 131 of an estimated 200 total
stores nationwide, has been strengthened by its new national identity, the appeal of the easyhome brand to
customers and the high quality merchandise available in its stores. It is poised to expand its reach beyond
the current 42,000 customers it serves. It can capture more of the half a million households in the primary
potential market by serving more customers at its current locations as well as reaching new markets through
careful, controlled growth.




                                                      10
M a n a g e m e n t ’s Di s cu s s i o n a n d A n al y s i s
of Fin a n cial C o n di ti o n a n d Re s ul t s of O p e ra ti o n s




The following discussion and analysis should be read in conjunction with, and is qualified by, the
audited consolidated financial statements of the Company and the notes relating thereto included in
this Annual Report.

Date

March 15, 2004

Overall Performance

easyhome Ltd. ( the “Company”) is in the business of renting, with or without an option to purchase, brand
name home entertainment products, appliances and household furniture across Canada. The merchandise
rental business is not seasonal for revenue and income generation and is generally immune to changes in
economic conditions. All of the Company’s revenue is generated by its core business and related activities.

During the year, total revenue increased $6.3 million from $72.4 to $78.7 million, or 8.7%. The monthly
rental revenue portfolio increased from $6.0 million to $6.3 million, or 5.2%. An increased customer base
accounted for 28.1% of the revenue increase while an increase in the average number of rental agreements
held by each customer, and hence a corresponding increase in the average amount collected per customer,
accounted for the balance of the increase. The Company merged the operations of six stores with six other
store locations in the Company’s chain and opened three new stores, reducing the store count from 136 as at
December 31, 2002 to 133 as at December 31, 2003. Net income increased $1.5 million, or 57.3%, from
$2.6 million to $4.1 million and diluted earnings per share increased from $0.54 to $0.76, or 40.7%.

The upward trending in revenue and net income began in the first quarter and continued throughout the
year. In January, the Company began its re-branding initiative of consolidating its six retail brands into a
single brand-“easyhome” which the Company believed would offer efficiencies and greater name recognition.
The re-branding was completed in the second quarter. Net income in the second quarter was negatively
affected because of the re-branding initiative as $0.6 million in asset write-offs were taken as a result of the
change-over. However, each of the third and fourth quarters produced record results in both revenue and net
income, a large part of which the Company attributes to the change-over to a single national brand and name.

Same store revenue (revenue from stores open for the comparable periods) has continued to show positive
trending. The Company showed increases in same store revenue quarter over quarter and year over year,
from 4.7% in 2002 to 5.9% this year.

In December 2003, the Company completed an equity financing whereby gross proceeds of $13,881,000
(net after all costs: $12,488,000) were raised from the issuance of 1,633,000 common shares. $2,500,000
of the proceeds were used to redeem the Company’s 12% preferred shares and the balance of the proceeds
were applied against the Company’s revolving term loan.

The financing has strengthened the Company’s Balance Sheet considerably, reducing its debt/equity ratio
from 0.5:1 to 0.08:1. This strengthening will allow the Company to negotiate better terms with its vendors
and has already allowed the Company to improve the terms on its renewed bank credit facility by reducing the
interest rate to prime plus 1% from prime plus 2.5% and reducing the renewal fee from $600,000 to $90,000.




                                                           11
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




Also, with the Company’s cap on its renewed credit facility moving to $20.0 million, there will be adequate
funds available for the Company’s external growth aspirations.

Cash flow from operating activities increased $1.6 million to $6.0 million from $4.4 million, or 34.5%.
The increase was primarily driven by an increase in net income and the amortization of rental and capital
assets, and reduced by increased merchandise purchases which product was acquired to fuel the Company’s
growth.

The Company spent approximately $2.8 million on its re-branding initiative during the year. Approximately
$1.3 million of these capital costs would have been spent over time and in the normal course of business as
store interiors were up-graded, leaving a net re-branding capital cost of $1.5 million. In the second quarter,
the Company wrote-off $605,000 of capital assets in connection with the re-branding initiative and sold
its land held for resale for $826,000 resulting in a gain on sale of $143,000.

Selected Annual Information

Consolidated Income Statements
                                                                            2003                  2002      2001
(in 000’s except earnings per share)                                          $                    $         $

Revenue                                                                   78,718                  72,437   67,759
Net Income (Loss)                                                          4,118                   2,618   (1,870)

Earnings (loss) per share
  Basic                                                                      0.85                   0.60    (0.45)
  Diluted                                                                    0.76                   0.54    (0.45)

Consolidated Balance Sheets
(in 000’s)



Total assets                                                              62,007                  58,466   55,501
Total funded debt                                                          3,844                  17,229   21,197



The primary reason for the increase in the Company’s revenue and profitability was the Company’s return to
the basics of the business, that is, renting merchandise and collecting rental payments due. During 1999 and
2000, the Company lost focus of the basic business model and compromised profits by not having the capital
available in order to replenish rental assets, and by building the rental agreement portfolio without regard to
the customers’ ability to fulfill their obligations under the agreement. As a result, store personnel were forced
to spend an inordinate amount of time dealing with delinquent accounts, and merchandise rentals declined
and charge-offs increased. With the implementation of more stringent collection criteria and numerous other
operating efficiencies, growth in revenue and net income resulted as the Company’s customer base and the
average number of rental agreements outstanding per customer increased and charge-offs decreased.
The increases in revenue and profits were achieved at the same store level as the Company had a net
decrease of three stores during the year.




                                                                  12
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




The increase in total assets is primarily a result of the increase in rental asset purchases which were required
to meet the Company’s growth in its rental portfolio.

The reduction of the bank debt is a result of the equity financing completed in December of 2003.

Results of Operations

Year ended December 31, 2003 compared to the year ended December 31, 2002

Revenue

Revenue was $78.7 million for the year ended December 31, 2003 compared to $72.4 million in 2002,
an increase of $6.3 million or 8.7%. The primary factors for the increase in revenue were the increase in the
customer base coupled with the increase in the average number of rental agreements outstanding per customer.
Included in revenue for 2003 is a $143,000 gain on sale of land. The Company merged the operations of six
stores with six other stores in the Company’s chain and opened three new stores for a net decrease of three
stores during the year.

Rental Revenue

Rental revenue was $66.1 million for the year ended December 31, 2003 compared to $61.6 million in 2002,
an increase of $4.5 million or 7.4%. The primary reasons for the increase were the increase in the customer
base and the average number of rental agreements outstanding per customer. The Company expects no
significant changes to the terms and conditions of its rental agreements. Any changes will not materially
affect revenue.

Other Revenue

Other revenue, which is realized from supplier rebates earned, fees for ancillary services such as the
merchandise protection plan, and processing, reinstatement and other fees related to returned “NSF” cheques,
was $12.6 million for the year ended December 31, 2003 compared to $10.8 million in 2002, an increase of
$1.8 million or 16.7%. As a percentage of revenue, other revenue increased to 16.0% for 2003 from 15.0%
for 2002. The increase was attributable to increased participation in the merchandise protection plan and an
increase in supplier rebates earned.

Expenses

Expenses were $45.5 million for the year ended December 31, 2003 year compared to $42.7 million in 2002,
an increase of $2.8 million or 6.6 %. This increase was in the normal course of business as most costs are
variable with revenue. As a percentage of revenue, expenses decreased to 57.8% for 2003 from 59.0% for
the year 2002.

Salaries and Benefits

Salaries and benefits were $22.9 million for the year ended December 31, 2003 compared to $21.5 million
in 2002, an increase of $1.4 million or 6.5%. As a percentage of revenue, salaries and benefits decreased to
29.1% for 2003 from 29.7% for 2002. The percentage decrease resulted from the reduction of the per store
employee base.

                                                                  13
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




Selling, General and Administrative

Selling, general and administrative expenses were $8.7 million for the year ended December 31, 2003
compared to $8.1 million in 2002, an increase of $0.6 million or 7.4%. As a percentage of revenue, selling,
general and administrative expenses remained relatively consistent at 11.1% in 2003 and 11.2% in 2002.
In April 2004, the Company will begin a national English only television advertising campaign. The
Company believes this will increase the overall exposure of the business to the general public which,
over time, should increase the Company’s customer base.


Occupancy Costs

Occupancy costs were $10.9 million for the year ended December 31, 2003 compared to $10.3 million in
2002, an increase of $0.6 million or 5.8%. As a percentage of revenue, occupancy costs decreased to 13.8%
in 2003 from 14.2% last year. The percentage decrease was primarily due to rent declining as a percentage
of revenue as it is a fixed cost and revenues have been increasing.

Automotive and Travel

Automotive and travel expenses were $2.9 million for the year ended December 31, 2003 compared to
$2.8 million in 2002, an increase of $0.1 million or 4.2%. As a percentage of revenue, automotive and
travel decreased to 3.7% in 2003 compared to 3.9% last year. The percentage decrease was primarily due
to a relatively constant lease expense in dollar terms over the two years as the delivery fleet did not increase
significantly in size and consequently this fixed cost was absorbed by higher revenue in 2003.

Amortization

Amortization of rental assets was $23.8 million for the year ended December 31, 2003 compared to
$22.8 million in 2002, an increase of $1.0 million or 4.4%. As a percentage of revenue, amortization of
rental assets decreased to 30.3% for 2003 from 31.4% for 2002. The percentage decrease resulted from
improved utilization of rental assets and an improvement in collection activities which resulted in less
product being written-off.

Amortization of capital assets and intangible assets was $1.9 million for the year ended December 31,
2003 compared to $1.2 million in 2002, an increase of $0.7 million or 58.3%. As a percentage of revenue,
amortization of capital assets and intangible assets increased to 2.4% in 2003 from 1.7% in 2002. Included in
this expense line is $605,000 of asset write-offs associated with the re-branding of the stores to the easyhome
brand. Adjusting for these costs, amortization of capital and intangible assets would have been 1.6% of
revenue for 2003.

Operating Income ( Income before interest and income taxes )

Operating income was $7.5 million for the year ended December 31, 2003 compared to $5.7 million in 2002,
an increase of $1.8 million or 31.6%. As a percentage of revenue, operating income increased to 9.6% in 2003
from 7.9% in 2002. Lower amortization of rental assets, on a percentage of revenue basis, was the primary
reason for the improved operating margins.




                                                                  14
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




Interest Expense

Interest expense was $1.7 million for the year ended December 31, 2003 compared to $2.0 million in 2002,
a decrease of $0.3 million or 15.0%. The decrease was due primarily to the lower average loan balance
during the period. The amortization of the banking facility fees offset the interest savings achieved from
the redemption of subordinated debt in December 2002. The full effect of the interest savings on the
redemption of the subordinated debt began in December 2003.

Income Tax Expense

Income tax expense was $1.7 million for the year ended December 31, 2003 compared to $1.1 million
in 2002, an increase of $0.6 million or 54.5%. The income tax provision for 2003 was calculated at an
effective rate of approximately 30%, the same as 2002. The statutory income tax rate for the Company for
2003 was 37.2% (2002: 39.6%). However, due to changes in the Province of Ontario’s substantively enacted
tax rates in the fourth quarter of 2003, the value of the Company’s future tax assets increased, the result of
which was a reduction in the fourth quarter income tax provision and a reduction of the effective tax rate for
the year to 30%.

Financing

$2.5 million of the proceeds from the common share financing were used to redeem the 12% preferred shares
and the balance was applied against the Company’s bank credit facility. The Company can fund its ongoing
operations and new store opening program with internally generated cash flow. If opportunistic value-added
store acquisitions or customer account acquisitions present themselves to the Company, the Company will
draw upon its bank revolving line to fund these acquisitions. The balance of the bank revolving line was $3.7
million as at December 31, 2003 and is capped at an upper limit of $20 million.

Summary of Quarterly Results

The company’s rental business, because it is a portfolio business, is not seasonal as are most other types of
retail businesses which generate a significant portion of their sales and profits during the Christmas season.
Quarterly revenue generally does not vary more than 10%, assuming no portfolio growth, and no significant
new store openings or acquisitions.




                                                                  15
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




Consolidated Statements of Income
(in 000s, except earnings per share amounts)

$                                                         Three Months Ended
                       Dec 31,        Sept 30,      June 30, March 31, Dec 31,                    Sept 30,   June 30, March 31,
                        2003           2003           2003      2003     2002                      2002        2002    2002

Revenue                 20,664         19,473       19,309         19,272        18,914           17,703     18,002    17,818
Net income for
 the period               1,659         1,209           482            768           851             557        666      544


Earnings per share
  Basic                    0.34          0.26          0.09            0.16         0.20            0.13       0.15      0.12
  Diluted                  0.30          0.23          0.09            0.14         0.18            0.11       0.14      0.11

Net Income
 Margin                   8.0%          6.2%          2.5%          4.0%           4.5%            3.1%       3.7%      3.1%




Critical Accounting Measures and Accounting Policy Changes

Rental assets

Rental assets are recorded at cost, including freight.

Assets on rent, excluding game stations, computers and related equipment and assets that were previously held
for rent assets that had not been out on rent for at least 90 consecutive days, are amortized using the units of
activity method. Under the units of activity method, assets on rent are amortized in the proportion of rents
received to total expected rents provided over the rental agreement term. Game stations are amortized on a
straight-line basis over 18 months. Computers and related equipment are amortized on a straight-line basis
over 24 months. Held for rent assets are not amortized where such assets have not been out on rent for less
than 90 consecutive days. Once held for rent assets have not been out on rent for at least 90 consecutive days,
such assets are amortized on a straight line basis over 18 months regardless of future rental. Amortization
includes the book value of assets sold, and amounts which have been charged off as stolen, lost or no longer
suitable for rent. The amortization periods are subject to measurement uncertainty and the impact on the
financial statements for future periods could be material.

In the event the Company determines that the future net cash flows to be derived from renting the assets
is less than the carrying value of the assets, the assets are written down to estimated net realizable value.
The estimated net realizable value of rental assets is subject to measurement uncertainty and the impact
on the financial statements for future periods could be material.




                                                                  16
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




Goodwill and intangible assets

The Company reviews the carrying value of goodwill and intangible assets annually to ensure that the value
reflected is not impaired. An impairment loss would be recognized if the carrying amount of the goodwill
or intangible assets exceeded their estimated fair value. Due to the long-term nature of assumptions made,
it is possible that estimates could prove to be materially incorrect, and accordingly the impact on the financial
statements for future periods could be material.

Capital assets

Capital assets are amortized over their estimated useful lives. The amortization periods are subject to
measurement uncertainty and the impact on the financial statements for future periods could be material.

Whenever an event or change in circumstances indicate that the carrying value of capital assets may not be
recoverable, an impairment loss is recognized if the Company determines that the carrying amounts exceed
their fair value.

The Company expects no changes in accounting estimates that are likely to occur from period to period
which would have a material impact on the Company’s financial condition and results of operations.

Stock-based compensation

Effective January 1, 2003, the Company adopted the fair value method of accounting for stock options
granted to employees and directors. As permitted, the Company has applied this change prospectively for
new awards granted on or after January 1, 2003. As a result of this change, $8,000 has been recorded as
compensation expense in 2003 with a corresponding increase in contributed surplus.

Liquidity and Capital Resources

General

In December, 2003 the Company issued 1,633,000 common shares for gross proceeds of $13,881,000.
$2.5 million of the proceeds were used to redeem the 12% preferred shares and the balance was applied
against the bank credit facility, reducing the Company’s funded debt to equity ratio to 0.08:1. As at
December 31, 2003 the balance outstanding on the bank credit facility was $3.7 million. The net common
share financing proceeds, the redemption of the preferred shares and the reduction of the bank credit facility
were the primary reasons for the net use of cash flow for financing activities of $3.5 million. The Company
does not expect to raise equity capital in the near future and will fund working capital requirements and
capital requirements from internally generated cash flow and its bank credit facility.

The bank credit facility was renewed in December 2003. The facility is a one year term facility which expires
on December 31, 2004, bears interest at prime plus 1% and has a $20 million cap subject to a borrowing
base limit calculated as a percentage of the net book value of rental assets. Other banking covenants include
a fixed charge cover ratio, a funded debt to cash flow ratio, a minimum tangible net worth, a limit on capital
expenditures and a minimum rental asset purchase ratio. The Company was in compliance with all of its
banking covenants during the year and at its year-end.




                                                                  17
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




The Company completed the re-branding of its stores to the easyhome brand in May 2003. This conversion
required approximately $2.8 million in capital and was funded through internally generated cash flow.
Management believes that, of the $2.8 million spent on the re-branding initiative, $1.3 million would have
been spent as routine capital expenditures in any event, albeit over an extended period of time. On going
capital requirements, other than for the purchase of stores or customer accounts, are not expected to exceed
$1.0 million per year. This $1.0 million takes into account capital expenditures on new stores planned to be
opened at the rate of approximately 12 per year for the next few years. In 2003, the Company merged the
customer accounts of 6 stores with 6 other stores in the chain and opened 3 new stores. The Company
will also explore acquisition opportunities as they arise. These acquisitions will be funded from the
Company’s bank credit facility.

The Company has not entered into any off-balance sheet arrangements.

Year ended December 31, 2003 compared to the year ended December 31, 2002

Cash flow from operating activities for the year ended December 31, 2003 was $6.0 million compared to
$4.4 million in 2002, an increase of $1.6 million or 34.5%. Net income for the year and items not affecting
cash increased $4.2 million, or 15.2%. Rental asset purchases increased $3.5 million, or 14.0% and other
non-cash items increased $0.8 million, or 45.8%.

Management does not believe that the sourcing of rental asset merchandise is an inhibiting factor in its growth
plans. The Company purchases all product directly from the manufacturers or distributors and all product is
delivered directly to the stores negating the necessity for the Company to maintain warehousing facilities.
It does not generally enter into contracts with its suppliers and believes there are numerous sources
of product such that reliance is not placed on any one supplier.

Cash used in investing activities was $2.4 million for the year ended December 31, 2003 compared to
$2.0 million in 2002, an increase of $0.4 million or 20.0%. Capital asset purchases increased $1.5 million
primarily related to the re-branding initiative. The proceeds from the sale of land was $0.8 million compared
to nil for last year. Other miscellaneous items accounted for the balance of the change of $0.3 million.

Cash used in financing activities was $3.5 million for the year ended December 31, 2003 compared to $2.4
million in 2002, an increase of $1.1 million or 45.8%. Net proceeds of $12,488,000 were raised from the
issuance of 1,633,000 common shares in December 2003. The proceeds of this financing were used to redeem
the 12% redeemable preferred shares and the balance was applied to the Company’s revolving credit facility.
Compared to 2002, net common and preferred share financing proceeds increased $7.5 million in 2003 and
the revolving credit facility, including fees, was reduced by $12.3 million more in 2003 compared to 2002.
In 2002, $4.0 of subordinated debt was also repaid and in 2003, $0.3 million of preferred share dividends
were paid.

Contractual Obligations

The Company is committed to long-term operating leases for building space, vehicles and signage.
The minimum annual lease payments plus estimated operating costs required for the next five years
and thereafter are approximately as follows:




                                                                  18
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




(in 000’s)                                                                                          $

                      2004                                                                         9,853
                      2005                                                                         8,025
                      2006                                                                         6,076
                      2007                                                                         3,428
                      2008                                                                         1,160
                      Thereafter                                                                     574
                                                                                                  29,116

Outlook

The Company expects the positive trending in revenue, net income and same store revenue to continue.
In 2001, the Company outlined, as one of its prime financial objectives, same store revenue growth of 5% for
the 2002, 2003 and 2004 fiscal years. The Company has accomplished this for 2002 and 2003 and aims to
achieve similar results for 2004. Growth in revenue will also come from the Company’s new store opening
program and from opportunistic value-added store acquisitions. The Company’s strategy is to open stores
selectively and acquire new stores and customer accounts in existing and new geographic markets where stores
can be “clustered’ in order to realize the benefits of economies of scale in marketing and distribution and
other operating efficiencies. Twelve new stores are scheduled to be opened this year. Management believes that
suitable store space is available for lease for new store openings and therefore space is not a limiting factor in its
expansion goals. Also, with the national brand in place, the Company intends to expand its brand awareness
efforts to include a television campaign. This will support all other marketing initiatives and introduce the
service that easyhome offers to customers.

The Company’s positive trending in revenue and net income may be adversely affected by the entry of Aaron
Rents and Rent A Center DE, two large U.S. merchandise rental operators, into the Canadian market place.
Aaron Rents opened their first franchised store in Kitchener, Ontario in the fall of 2003. Rent A Center DE
acquired five stores in Calgary and Edmonton on March 5, 2004. Other factors that may adversely affect
the Company’s growth is competition from other merchandise rental businesses and, to a lesser extent, with
rental stores that do not offer a purchase option. The Company also competes with discount stores and other
retail outlets that offer an installment sales program or offer comparable products and prices. Furthermore,
additional competitors, both domestic and international, may emerge as barriers to entry are relatively low.
It is unclear what impact this increased competition will have on the Company’s operational results.

The biggest limiting factor in the Company’s expansion plans will be the hiring and retention of the best
people for the job. Over the last few years, the Company has improved its hiring competencies and its
training programs such that employee turnover has dropped 47% over the last three years.


Transactions with Related Parties

Amounts receivable includes a $298,900 (2002 - $327,400) home purchase loan provided to an officer of
the Company as a result of his relocation during 2001. The loan is interest-free and is secured by a collateral
mortgage on the officer’s residence. The loan is repayable in installments of $1,000 per month plus 50% of
any net bonuses awarded to the officer. The approximate fair value of the receivable at December 31, 2003
is $240,000.




                                                                  19
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




On December 2, 2002, the Company issued 2,500,000 preferred shares to insiders of the Company by
way of private placement for $2,500,000. The Chairman of the Company formerly held $1,100,000 of
subordinated debentures, which were redeemed and re-invested in the preferred shares. The preferred shares
were redeemed in December 2003. During 2003, subordinated debenture interest of nil (2002 - $223,159)
was paid to the Chairman and preferred share dividends of $307,617 were paid to insiders of the Company
(2002 – nil).

During 2003 the Company paid $170,009 (2002 - $430,038) to a director for consulting services.

Of the 1,633,000 common shares issued on the financing in December 2003, 120,200 shares were issued to
directors, officers and senior employees of the Company.

Fourth Quarter

The fourth quarter was a record quarter for total revenue and net income.

Total revenue for the quarter was $20.7 million compared to $18.9 million for the same period last year, an
increase of $1.8 million or 9.3%. Same store revenue for the quarter increased 7.7% compared to 3.2% for
the same period last year. 40% of the revenue growth was attributable to new customers and the balance
to an increase in the average number of rental agreements held per customer. Operating income was $2.4
million compared to $1.5 million for the same period last year, an increase of $0.9 million or 60.4%. Net
income was $1.7 million compared to $851,000 for the same period last year, an increase of $0.8 million or
94.9%. Diluted earnings per share increased to $0.30 from $0.18 for the same period last year. The impact
of a change in the Province of Ontario’s substantively enacted tax rates in the fourth quarter increased future
tax assets and reduced the fourth quarter tax provision, as a percentage of income before taxes, by 18% ,
adding $0.06 to diluted earnings per share.

Cash flow from operating activities was $1.8 million compared to $1.2 million for the same period last year,
an increase of $0.6 million or 50.0%. The primary reason for the increase was improved net income.

Future tax assets were increased and share issue costs reduced by $496,600 which represents the future tax
benefits related to the share issue costs.

Other

Additional information relating to the Company, including the Company’s Annual Information Form, is on
SEDAR at www.sedar.com.

As at March 15, 2004, there are 6,037,729 common shares outstanding.

Certain information included in this discussion may constitute forward-looking statements. Forward-
looking statements are based on current expectations and entail various risks and uncertainties. These
risks and uncertainties could cause or contribute to actual results that are materially different from those
expressed or implied. The Company disclaims any obligation or intention to update or revise any forward-
looking statement, whether as a result of new information, future events, or otherwise.




                                                                  20
M a n a g e m e n t ’s Re s p o n s ib ili t y F o r Fin a n cial Re p o r tin g




The accompanying consolidated financial statements and the information in this Annual Report are the
responsibility of management and have been approved by the Board of Directors.

The consolidated financial statements have been prepared by management in accordance with Canadian
generally accepted accounting principles and include some amounts based on management’s best estimates
and judgements. When alternative accounting methods exist, management has chosen those it considers
most appropriate in the circumstances. Management has prepared the financial information presented
elsewhere in the annual report and has ensured that it is consistent with the financial statements.

easyhome Ltd. maintains a system of internal controls to provide reasonable assurance that transactions
are properly authorized, financial records are accurate and reliable and the Company’s assets are properly
accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial
reporting and is ultimately responsible for reviewing and approving the financial statements. The Board
of Directors carries out its responsibility for the financial statements through its Audit Committee. This
Committee meets periodically with management and the external auditors to review the financial statements
and the annual report and to discuss audit, financial and internal control matters. The Company’s external
auditors have full and free access to the Audit Committee.

The financial statements have been subject to an audit by the Company’s external auditors, Ernst & Young
LLP, in accordance with Canadian generally accepted auditing standards on behalf of the shareholders.




David Ingram,                                         S.W. Johnson,
President and Chief Executive Officer                  Executive Vice President and Chief Financial Officer




                                                        21
Au di to r s ’ Re p o r t




To the Shareholders of
easyhome Ltd.

We have audited the consolidated balance sheets of easyhome Ltd. (formerly RTO Enterprises Inc.) as at
December 31, 2003 and 2002, and the consolidated statements of income and retained earnings (deficit)
and cash flows for the years 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 audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance 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.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial
position of the company as at December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted accounting principles.




Edmonton, Canada
February 20, 2004




Chartered Accountants




                                                       22
easyhome Ltd.
(Continued under the laws of Ontario)

C o n s o li d a te d Bala n ce S h e e t s




As at December 31

                                                                       2003           2002
(in 000’s)                                                               $             $

ASSETS [note 5]
Amounts receivable [note 14]                                          1,677          1,568
Prepaid expenses                                                        664            845
Rental assets [note 2]                                               32,975         28,248
Capital assets [note 3]                                               5,213          3,817
Future tax assets [note 9]                                           10,232         11,369
Intangible assets [note 4]                                              354            517
Deferred costs [note 4]                                                 113            641
Goodwill                                                             10,779         10,779
Land held for resale                                                     —             682
                                                                     62,007         58,466

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Bank revolving term loan [note 5]                                     3,684         16,893
Trade accounts payable                                                7,159          5,354
Accrued liabilities                                                   1,423          1,173
Accrued payables, bonuses and other employee costs                    2,153          1,591
Deferred lease inducements                                               52             —
Unearned revenue                                                        315            430
Income taxes payable                                                    271            268
Note payable [note 6]                                                   160            336
                                                                     15,217         26,045

Commitments and contingencies [notes 7 and 13]
Shareholders’ equity
Preferred shares [note 8]                                                —           2,500
Common shares [note 8]                                               44,350         31,299
Contributed surplus [note 1]                                              8             —
Retained earnings (deficit)                                            2,432         (1,378)
                                                                     46,790         32,421
                                                                     62,007         58,466
See accompanying notes


On behalf of the board:




David Ingram, Director                                Donald K. Johnson, Director



                                                 23
easyhome Ltd.

C o n s o li d a te d St a te m e n t s of I n co m e a n d Re t ain e d Ea r nin g s ( D e f i ci t )




For the year ended December 31

                                                                                 2003                      2002
(in 000’s except earnings per share)                                               $                        $

REVENUE
Rental                                                                         66,129                    61,590
Other                                                                          12,589                    10,847
                                                                               78,718                    72,437

EXPENSES
Salaries and benefits [note 14]                                                 22,913                    21,470
Selling, general and administrative                                             8,726                     8,145
Occupancy costs                                                                10,886                    10,299
Automotive and travel                                                           2,948                     2,830
                                                                               45,473                    42,744

AMORTIZATION
Amortization of rental assets                                                  23,836                    22,764
Amortization of capital assets, intangibles assets, and
 deferred costs [notes 3 and 4]                                                 1,873                     1,198
                                                                               25,709                    23,962

Total operating expenses and amortization                                      71,182                    66,706

Operating income                                                                7,536                     5,731
Interest expense [notes 12 and 14]                                              1,708                     1,996
Income before income taxes                                                      5,828                     3,735

Income taxes [note 9]
Current                                                                             77                       66
Future                                                                           1,633                    1,051
                                                                                 1,710                    1,117

Net income for the year                                                          4,118                    2,618
Deficit, beginning of the year                                                   (1,378)                  (3,996)
Preferred share dividends [notes 11 and 14]                                       (308)                      —
Retained earnings (deficit), end of the year                                     2,432                    (1,378)

Earnings per share [note 11]
Basic                                                                             0.85                     0.60
Diluted                                                                           0.76                     0.54
See accompanying notes




                                                          24
easyhome Ltd.

C o n s o li d a te d St a te m e n t s of C a s h Fl ow s




For the year ended December 31

                                                               2003         2002
(in 000’s)                                                       $           $

OPERATING ACTIVITIES

Net income for the year                                        4,118      2,618
Items not affecting cash:
   Amortization of rental assets                             23,836      22,764
   Amortization of capital assets, intangible assets,
    and deferred costs [notes 3 and 4]                         2,473      1,270
Future income taxes                                            1,633      1,051
Gain on sale of land held for resale                            (143)        —
Net change in non-cash operating items -
   Rental assets                                             (28,564)    (25,059)
   Other [note 12]                                             2,629       1,803
Cash flow from operating activities                             5,982       4,447

INVESTING ACTIVITIES

Purchase of capital assets                                    (3,248)    (1,788)
Proceeds on disposition of capital assets                        160        205
Proceeds on sale of land held for resale                         826          —
Business acquisition [note 10]                                    —        (384)
Repayment of note payable related to acquisition                (176)       (28)
Other                                                             —          (14)
Cash flow from investing activities                            (2,438)    (2,009)

FINANCING ACTIVITIES

Proceeds from (repayment of) bank revolving term loan        (13,209)    16,893
Repayment of bank revolving demand loan                            —     (17,191)
Financing costs for bank revolving term loan                      (90)     (650)
Proceeds from equity financing [note 8]                        13,881          —
Issuance of common shares on exercise of options                   67         16
Share issue costs [note 8]                                    (1,393)         —
Issuance (redemption) of preferred shares                     (2,500)     2,500
Preferred share dividend payments                               (308)         —
Recognition of stock based compensation                             8         —
Repayment of subordinated debentures                               —     (4,006)
Cash flow from financing activities                             (3,544)    (2,438)

Net change in cash                                                —          —
See accompanying notes




                                                        25
easyhome Ltd.

N o te s to C o n s o li d a te d Fin a n cial St a te m e n t s
December 31, 2003 and 2002




1. Significant Accounting Policies

The consolidated financial statements have been prepared by management in accordance with Canadian
generally accepted accounting principles. Because the precise determination of many assets and liabilities is
dependent upon future events, the preparation of financial statements for a period necessarily involves the
use of estimates and approximations, which have been made using careful judgment. Actual results could
differ from those estimates. The financial statements have, in management’s opinion, been properly prepared
within reasonable limits of materiality and within the framework of the accounting policies summarized
below.

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries:

     - RTO Asset Management Inc.
     - RTO Distribution Inc.
     - RTO (Rentown) Inc.
     - RTO (Rentown) 2000 Inc.

Business cycle

The Company does not operate on a normal twelve month operating cycle. Acceptable industry practice for
rental-purchase companies is to make no distinction between current and non-current assets and liabilities.
Accordingly, an unclassified balance sheet has been presented.

Rental and other revenue

Merchandise is rented to customers pursuant to agreements that provide for weekly or monthly rental
payments collected in advance. The rental agreements may be terminated at any time by the customer
without further obligation or cost upon return of the merchandise. Revenue from rental agreements is
recognized when payment is received and the rental period has passed. At the end of each weekly or
monthly rental period, the customer has the option of renewing the agreement for an additional period.

Other revenue from various services and charges to rental customers include liability waiver, processing and
reinstatement fees, which are recognized as collected, and supplier incentives, which are recognized as earned.

Rental and capital assets

Rental and capital assets are recorded at cost, including freight.

Assets on rent, excluding game stations, computers and related equipment and assets that were previously held
for rent assets that had not been out on rent for at least 90 consecutive days, are amortized using the units of
activity method. Under the units of activity method, assets on rent are amortized in the proportion of rents
received to total expected rents provided over the rental agreement term. Game stations are amortized on a
straight-line basis over 18 months. Computers and related equipment are amortized on a straight-line basis
over 24 months. Held for rent assets are not amortized where such assets have not been out on rent for less
than 90 consecutive days.


                                                        26
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



1. Significant Accounting Policies (continued)

Rental and capital assets (continued)

Once held for rent assets have not been out on rent for at least 90 consecutive days, such assets are amortized
on a straight line basis over 18 months regardless of future rental. Amortization includes the book value of
assets sold, and amounts which have been charged off as stolen, lost or no longer suitable for rent.

In the event management determines that the future net cash flows to be derived from renting the assets is
less than the carrying value of the assets, the assets are written down to estimated net realizable value.
The estimated net realizable value of rental assets is subject to measurement uncertainty and the impact
on the financial statements for future periods could be material.

Capital assets are amortized over their estimated useful lives using the following rates and methods:

                                                             Rate                             Method
Office equipment and furniture                                20%                   Declining balance
Signage                                                      20%                   Declining balance
Automotive                                                   30%                   Declining balance
Leasehold improvements                                                             Straight-line over the lesser
                                                                                   of the related lease term
                                                                                   including one renewal period,
                                                                                   to a maximum of five years

Amortization is recorded at one-half of the above rates in the year of acquisition on all capital assets except
leasehold improvements.

Lease inducements

Lease inducements are recognized as future obligations when received and are amortized on a straight-line
basis over the term of the related leases as an increase or reduction of current rent expense.

Intangible assets

Intangible assets are tested annually for impairment and an impairment loss would be recognized if the
carrying amount of the intangible asset exceeds its estimated fair value. The Company performed an
impairment test as at December 31, 2003 and determined that the carrying values of intangible assets
were not impaired.

Customer lists are amortized on a straight-line basis over 5 years.

Customer rental agreements are amortized on a straight-line basis over 4 months.

Deferred costs

Deferred costs are recorded at cost. Amortization is computed using the straight-line method over the
following periods:

Financing costs are amortized on a straight-line basis over the period of the related loan.

Organizational costs are amortized over 5 years.

                                                        27
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



1. Significant Accounting Policies (continued)

Goodwill

The carrying value of goodwill is reviewed annually to ensure that the value reflected is not impaired.
An impairment loss would be recognized if the carrying amount of the goodwill exceeds its estimated fair
value. Due to the long-term nature of assumptions made, it is possible that estimates could prove to be
materially incorrect, and accordingly the impact on the financial statements for future periods could be
material. The Company performed an impairment test as at December 31, 2003 and determined that the
carrying value of the goodwill was not impaired.

Land held for resale

Land held for resale is recorded at the lower of cost and net realizable value.

Share issue costs

Costs related to the issuance of shares are charged against share capital.

Earnings per share

Basic earnings per share is computed based on the weighted average number of common shares outstanding
during the year. Diluted earnings per share is computed using the treasury stock method, which assumes
that the cash that would be received on the exercise of options and warrants is applied to purchase shares at
the average price during the period and that the difference between the shares issued upon exercise of the
options and warrants and the number of shares obtainable under this computation, on a weighted average
basis, is added to the number of shares outstanding. Antidilutive options and warrants are not considered in
computing diluted earnings per share.

Income taxes

The Company uses the liability method to account for income taxes. Under this method, future income tax
assets and liabilities are determined based on differences between financial reporting and tax bases of assets
and liabilities, and measured using the substantively enacted tax rates and laws that will be in effect when
the differences are expected to reverse.

Stock-based compensation

Effective January 1, 2002, the Company adopted new recommendations of the Canadian Institute of
Chartered Accountants (CICA) with respect to the fair value method of accounting for stock-based
compensation. As permitted by this standard, the Company applied this change prospectively for new awards
granted on or after January 1, 2002. The Company chose to recognize no compensation expense when stock
options were granted to employees and directors under stock option plans with no cash or equity settlement
features. However, direct awards of shares to employees and non-employees, and stock option awards granted
to non-employees, were accounted for in accordance with the fair value method of accounting for stock-based
compensation. To date the Company has not; (i) granted options with cash or equity settlement features;
(ii) made direct awards of shares to employees or non-employees; (iii) granted stock option awards to non-
employees. In periods prior to January 1, 2002, the Company recognized no compensation expense when
shares or stock options were issued.

                                                        28
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



1. Significant Accounting Policies (continued)

Stock-based compensation (continued)

Effective January 1, 2003, the Company adopted the fair value method of accounting for stock options granted
to employees and directors. As permitted, the Company has applied this change prospectively for new awards
granted on or after January 1, 2003. As a result of this change, $8,000 has been recorded as compensation
expense in 2003 with a corresponding increase in contributed surplus. The Company continues to provide
pro forma disclosures with respect to options granted in 2002.

The Company has one stock-based compensation plan, which is more fully described in note 8.

Impairment of long-lived assets

Long-lived assets of the Company include capital assets, deferred start-up costs and intangible assets.
Effective January 1, 2003, the Company adopted the new recommendations of the Canadian Institute of
Chartered Accountants with respect to impairment of long-lived assets. Under these recommendations,
long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. An impairment loss is then recognized when the carrying amounts
exceed their fair value. As recommended, the change has been applied prospectively. Previously, the Company
regularly assessed the carrying value of rental, capital and other assets, and recognized a write-down in the
period in which a permanent impairment was identified.

During the year, the Company completed a corporate re-branding and recorded an impairment loss related to
certain capital assets (see note 3). There were no other events or changes in circumstances which indicated that
the carrying amounts of long-lived assets may not be recoverable, thereby requiring any further impairment
losses to be recognized.

2. Rental Assets
                                                                                   2003                  2002
(in 000’s)                                                                           $                    $

Rental assets                                                                     58,260                 49,592
Accumulated amortization                                                         (25,285)               (21,344)
Net book value                                                                    32,975                 28,248

3. Capital Assets
                                                               2003                          2002
                                                                  Accumulated                   Accumulated
                                                       Cost       amortization       Cost        amortization
(in 000’s)                                              $              $              $               $

Office equipment and furniture                          5,093           2,454         4,011           2,062
Signage                                                1,514             291         1,153             507
Automotive                                               146             108           537             361
Leasehold improvements                                 2,038             725         2,548           1,502
                                                       8,791           3,578         8,249           4,432
Net book value                                                 5,213                         3,817

Amortization of capital assets of $1,101,500 (2002 - $957,700), includes $605,000 (2002 – nil) for writedowns
related to the re-branding of the stores to the easyhome name.
                                                        29
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002




4. Other Assets

Intangible assets

                                                               2003                         2002
                                                                  Accumulated                  Accumulated
                                                       Cost       amortization     Cost         amortization
(in 000’s)                                              $              $            $                $

Customer lists                                         450             96          470                  9
Customer rental agreements                              60             60           60                  4
                                                       510            156          530                 13
Net book value                                                 354                           517

Amortization of $143,700 (2002 - $12,700) was recorded on the intangible assets during the year.

Deferred costs

                                                               2003                         2002
                                                                  Accumulated                  Accumulated
                                                       Cost       amortization     Cost         amortization
(in 000’s)                                              $              $            $                $

Financing costs                                          740           650          801              201
Organization costs                                       398           375          420              379
                                                       1,138         1,025        1,221              580
Net book value                                                 113                           641

An additional $90,000 (2002 - $650,000) in financing fees were incurred during the year due to the renewal
of the Company’s banking agreement [see note 5]. Amortization of $627,300 (2002 - $100,000) was recorded
on deferred financing and organizational costs during the year.

5. Bank Loan

The bank loan facility was renewed on December 11, 2003 and terminates December 31, 2004. The new
revolving term facility bears interest at prime plus 1.0%. The credit limit is the lesser of $20,000,000 or a
borrowing base calculated using certain percentages of the net book value of rental assets.

Covenants and conditions for the new facility include a minimum equity requirement, a fixed charge cover
covenant, a funded debt to EBITDA covenant, capital expenditure and rental asset acquisition covenants in
accordance with projections and annual approval of the Company’s business plan. During the year and at
the end of the year, the Company was in compliance with all bank loan covenants.

                                                                                 2003                       2002
(in 000’s)                                                                         $                         $

Bank revolving term loan                                                         3,684                   16,893



                                                               30
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



5. Bank Loan (continued)

The weighted average interest rate on the bank loans for the year ended December 31, 2003 was 7.2%
(2002 – 6.7%).

All assets of the Company are pledged as collateral for the bank revolving term loan.

6. Other Debt

a) Note payable

A note payable was issued as part of the purchase price consideration for the acquisition described in note 10.
The note bears interest at 10% per annum and is payable in equal blended monthly interest and principal
installments of $16,765 for 24 months commencing November 2002.

b) Subordinated debentures

On December 2, 2002, the Company redeemed its 22% subordinated debentures totalling $4,006,000.
$2,500,000 of the debentures were redeemed using proceeds of the issuance of preferred shares (see note 8),
and the remaining $1,506,000 was provided by the Company’s banker.

7. Commitments

The Company is committed to long-term operating leases for building space, vehicles and signage.
The minimum annual lease payments plus estimated operating costs required for the next five years and
thereafter are approximately as follows:

(in 000’s)                                                                                $

                      2004                                                               9,853
                      2005                                                               8,025
                      2006                                                               6,076
                      2007                                                               3,428
                      2008                                                               1,160
                      Thereafter                                                           574
                                                                                        29,116

8. Share Capital

Authorized
Unlimited preferred shares
Unlimited common shares of no par value

Preferred shares issued and outstanding

On December 2, 2002, the Company issued 2,500,000 preferred shares for total proceeds of $2,500,000.
Dividends are cumulative, calculated at a rate of 12% per annum, and payable monthly on the first business
day of each following month.


                                                       31
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



8. Share Capital (continued)

The preferred shares are non-voting and non-convertible, retractable by the holders under certain conditions,
and redeemable by the Company without bonus or penalty subject to certain banking covenants being met.
The preferred shares were issued to insiders of the Company, one of whom is the Chairman of the Board who
formerly held $1,100,000 of the subordinated debentures (see note 6(b)) and reinvested the total proceeds
from his debenture redemption in the preferred share issue. On December 10, 2003 the preferred shares were
redeemed by the Company for $2,500,000.

Common shares issued and outstanding

On July 30, 2002 the Company consolidated its common shares on a 1 for 10 basis. All references to
common shares, per share amounts, and stock-based compensation plans in these consolidated financial
statements have been restated to reflect the share consolidation on a retroactive basis.

                                                                2003                      2002
                                                       Shares          Amount    Shares          Amount
(in 000’s)                                               #               $         #               $

Balance, beginning of the year                         4,381           31,299    4,376            31,283
Issued for cash to employees
 under stock option plan                                  22               67        5                16
Issued under long-form prospectus                      1,633           12,984       —                 —
Balance, end of the year                               6,036           44,350    4,381            31,299

In 2003, the Company completed a long form prospectus to subscribe for common shares at $8.50 per share.
1,633,000 common shares were issued for net proceeds of $12,983,700 ($13,880,500 less share issue costs of
$1,393,400 plus future income tax benefits related to share issue costs of $496,600).

Stock options and warrants
                                                                                2003                    2002
(in 000’s)                                                                        #                      #

Outstanding options and warrants
Balance, beginning of the year                                                  921                     1,035
Options granted                                                                   14                       55
Options exercised                                                               (22)                       (5)
Options and warrants canceled, terminated or expired                             (14)                    (164)
Balance, end of the year                                                        899                       921

Stock options

Under the Company’s stock option plan, options to purchase common shares may be granted by the board
of directors to directors, officers and employees. Options are granted at exercise prices equal to or greater
than fair market value at the grant date, generally vest evenly over a five year period, and have exercise lives
ranging from five to ten years. The aggregate number of common shares reserved for issuance and which may
be purchased upon the exercise of options granted pursuant to the plan shall not exceed 1,000,000 common
shares.


                                                                32
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



8. Share Capital (continued)

The Company has granted stock options to directors, officers and employees to purchase 830,320 common
shares at prices between $3.06 and $7.86 per share. These options expire on dates between June 1, 2004 and
April 20, 2011.

                                                                2003                                 2002
                                                                 Weighted Average                     Weighted Average
                                                       Shares     Exercise Price     Shares             Exercise Price
(# of shares in 000’s)                                   #              $              #                      $

Stock options, beginning of the year                   852             3.30           897                   3.60
Options granted                                         14             7.01            55                   6.91
Options exercised                                      (22)            3.07            (5)                  3.06
Options canceled,
 terminated or expired                                 (14)            5.25           (95)                  8.73
Stock options, end of the year                         830             3.34           852                   3.30

The Company has issued options to directors, officers and employees at December 31, 2003 as follows:

                                                Outstanding                                       Exercisable
                                                 Weighted
                                                 Average             Weighted                            Weighted
       Range of                                 Remaining            Average                             Average
       Exercise                                 Contractual          Exercise                            Exercise
        Prices                     Shares         Life in             Price          Shares               Price
          $                          #            Years                 $              #                    $
                                   (in 000’s)                                        (in 000’s)
     3.06 – 4.50                     774               4.12            3.07           735                   3.07
     5.90 – 7.86                      56               3.78            7.03            20                   7.03
     3.06 – 7.86                     830               4.10            3.34           755                   3.17

The fair value of direct awards of shares are determined by the quoted market price of the Company’s shares
at the date of grant and the fair value of stock options are determined, at the date of grant, using the Black-
Scholes option pricing model. The following table provides the required pro-forma measures of net income
and earnings per share had compensation expense been recognized based on the fair value of the options
granted in 2002, as at the date of the grant, in accordance with the fair value method of accounting for stock-
based compensation:

                                                                                    2003                           2002
(in 000’s except earnings per share figures)                                           $                             $

Net income for the year                                                             4,118                          2,618
Compensation expense                                                                   26                             46
Pro-forma net income for the year                                                   4,092                          2,572




                                                                33
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002




8. Share Capital (continued)
                                                                             2003                     2002
(in 000’s except earnings per share figures)                                    $                       $

Earnings per share:
Reported basic earnings per share                                             0.85                     0.60
Compensation expense per share                                               (0.01)                   (0.01)
Pro-forma basic earnings per share                                            0.84                     0.59

Reported diluted earnings per share                                           0.76                     0.54
Compensation expense per share                                               (0.01)                   (0.01)
Pro-forma diluted earnings per share                                          0.75                     0.53

The estimated fair value of these options was determined using the following weighted-average assumptions,
resulting in a weighted-average fair value of $4.46 per option ($4.46 – 2002):

                                                                             2003                     2002

Risk-free interest rate (%)                                                  4.32                     4.32
Expected hold period to exercise (years)                                      4.0                      4.0
Volatility in the price of the corporation’s shares (%)                      86.2                     86.2
Dividend yield (%)                                                           0.00                     0.00

Warrants

In December 2000, the Company issued warrants to acquire 100,000 common shares at an exercise price of
$3.06 per share as part of the terms of the subordinated debenture financing. In January 2001, the Company
issued warrants to acquire 38,000 common shares at an exercise price of $3.06 per share as part of the terms
of the subordinated debenture financing. One-half of the warrants, or 50,000 and 19,000 respectfully,
vested on issuance and the remainder expired on redemption of the subordinated debentures (see note 6(b)).
The warrants may be exercised at any time over a five year period from issuance.

9. Income Taxes

The Company’s tax provision is determined as follows:
                                                                             2003                     2002
($ in 000’s)                                                                   $                       $

Combined basic federal and provincial income tax rates                     37.2%                    39.6%
Expected income tax expense                                                 2,168                    1,479
Impact of changes in substantively enacted tax rates on
 recognized future tax assets                                                (599)                     (229)
Valuation allowance adjustments                                                —                       (300)
Other                                                                         141                       167
                                                                            1,710                     1,117

A change in the Province of Ontario’s substantively enacted tax rates, as announced in November 2003, is the
primary reason for the $599,000 reduction in the 2003 tax provision.

                                                          34
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



9. Income Taxes (continued)

Significant components of the Company’s future tax assets are as follows:

                                                                              2003                      2002
(in 000’s)                                                                      $                        $

Future tax assets
Loss carryforwards                                                            2,215                     2,352
Tax cost of rental and capital assets in excess
 of net book value                                                            9,203                    10,662
Accounts receivable                                                             570                       594
Other                                                                           772                       289
                                                                             12,760                    13,897
Less valuation allowance                                                     (2,528)                   (2,528)
                                                                             10,232                    11,369

A valuation allowance for the future tax assets is required due to the Company’s operating history and
management’s assessment of various uncertainties related to their future realization. Since the realization of
future tax assets is dependent upon generating sufficient taxable income in the Company and its subsidiaries
which give rise to the future tax assets, the amount of the valuation allowance for future taxes will fluctuate
based upon determinations of the magnitude and timing of positive taxable income that is sustainable in
future periods.

At December 31, 2003, the Company and its subsidiaries had unused non-capital tax loss carry-forwards of
approximately $6,158,000 available to reduce future years’ taxable income which expire as follows:

(in 000’s)                                                                                $

                      2006                                                                67
                      2007                                                             5,356
                      2009                                                               735
                                                                                       6,158

At December 31, 2003, the potential future tax benefit associated with all of these losses has been recorded
in these consolidated financial statements.

10. Business Acquisition

On October 15, 2002, the Company acquired certain rental assets and contractual and non-contractual
relations of Affordable Rentals Inc.’s Hamilton and Brantford stores.




                                                       35
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



10. Business Acquisition (continued)

This acquisition was accounted for under the purchase method of accounting, and the results of earnings since
the date of acquisition has been included in the consolidated statement of income. Details of the aggregate
consideration given and the fair values of assets acquired are as follows:

(in 000’s)                                                                                             $

Cash consideration                                                                                     384
Note payable                                                                                           363
Accrued liabilities                                                                                     23
Purchase price                                                                                         770

Assets acquired at fair values:
Rental assets                                                                                          240
Customer lists                                                                                         470
Rental agreements                                                                                       60
Assets acquired                                                                                        770


11. Earnings Per Share

The reconciliation of net income to net income available to common shareholders is as follows:

                                                                            2003                     2002
(in 000’s)                                                                    $                        $
Net income for the year                                                     4,118                    2,618
Dividends paid on preferred shares                                            308                       —
Net income available to common shareholders                                 3,810                    2,618

The number of basic and diluted common shares outstanding, as calculated on a weighted-average basis, is as
follows:
                                                                          2003                     2002
(in 000’s)                                                                  #                         #
Basic shares outstanding                                                  4,478                    4,378
Share options (dilutive effect of 802,320 options; 2002 – 845,500)          463                       415
Warrants (dilutive effect of 69,000 warrants; 2002 – 69,000)                 40                        68
Diluted shares outstanding                                                4,981                    4,861


Stock options to acquire 28,000 common shares (2002 – 6,000) were not included in the calculation of
diluted shares as their exercise prices exceeded the average market share price for the year.




                                                       36
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



12. Net Change In Non-cash Operating Items

The net change in non-cash operating items excluding rental assets is determined as follows:

                                                                               2003                      2002
(in 000’s)                                                                       $                        $

Amounts receivable                                                             (109)                      296
Prepaid expenses                                                                181                      (269)
Trade accounts payable                                                        1,805                     2,332
Accrued liabilities                                                             250                       (34)
Accrued payables, bonuses and other employee costs                              562                      (425)
Deferred lease inducement                                                        52                        —
Unearned revenue                                                               (115)                      (95)
Income taxes payable                                                              3                        (2)
                                                                              2,629                     1,803

Supplemental disclosures in respect of the consolidated statement of cash flows comprise the following:

                                                                               2003                      2002
(in 000’s)                                                                       $                        $

Income taxes paid                                                                 74                       224
Interest paid                                                                  1,107                     1,924

Interest expense of $1,707,800 (2002 - $1,996,300) presented on the statement of income includes
amortization of financing costs of $600,000 (2002 - $72,200).

13. Contingencies

A motion seeking the authorization to institute a class action was started against the Company in the
Province of Quebec (Montreal Superior Court) in November 1997. The plaintiffs were authorized by the
Court in August 1999 to proceed with a class action against the Company on behalf of all persons who have
leased or purchased personal property destined for personal use in their home from the Company (the “class”).
The plaintiffs allege that the Company’s rental contracts do not properly comply with the requirements of the
Consumer Protection Act (Quebec). They are seeking the cancellation of their contracts, or the reduction of
their obligations and the reimbursement of all or a portion of the amounts paid by the members of the class to
the Company, as well as exemplary damages in the amount of $200 per contract. If this class action proceeds
to trial, the Company intends to defend it vigorously and believes it has substantive defences to the plaintiffs’
allegations. The Company has taken a reserve on its books in an amount it considers to be adequate to cover
the amount of any currently reasonably possible liability of the Company in relation to this matter.
The parties are currently in settlement discussions.

14. Related Party Transactions

Amounts receivable includes a $298,900 (2002 - $327,400) home purchase loan provided to an officer of
the Company as a result of his relocation during 2001. The loan is interest-free and is secured by a collateral
mortgage on the officer’s residence. The loan is repayable in installments of $1,000 per month plus 50% of
any net bonuses awarded to the officer. The approximate fair value of the receivable at December 31, 2003
is $240,000.
                                                     37
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002



14. Related Party Transactions (continued)

On December 2, 2002, the Company issued 2,500,000 preferred shares to insiders of the Company by way
of private placement for $2,500,000 (see note 8). The Chairman of the Company formerly held $1,100,000
of subordinated debentures, which were redeemed and re-invested in the preferred shares. During 2003,
subordinated debenture interest of nil (2002 - $223,200) was paid to the Chairman and preferred share
dividends of $307,600 were paid to insiders of the Company (2002 – nil).

During 2003 the Company paid $170,009 (2002 - $430,000) to a director for consulting services.

15. Financial Instruments And Risk Management

Financial instruments

The fair value of amounts receivable, trade accounts payable and income taxes payable approximate their
carrying values, due to expected relatively short periods to maturity of these instruments.

The fair value of the bank revolving term loan approximates its carrying value due to interest rates which
reflect market rates.

Interest rate risk management

The bank revolving term loan bears a floating rate of interest. The Company does not hedge interest rates and
future changes in interest rates will affect the amount of interest expense payable by the Company.

Credit risk management

The maximum exposures to credit risk are represented by the carrying amount of the amounts receivable
and assets on rent with customers under merchandise rental agreements. The credit risk related to amounts
receivable results from the possibility of default on payment. The Company deals with credible companies,
performs ongoing credit evaluations and allows for uncollectible amounts when determined. At December
31, 2003, 21% (2002 – 22%) of the amounts receivable are owing from one unrelated party and 18% (2002
– 21%) is owing from one related party (see note 14).

The Company rents products to a number of customers and has no concentration of revenue risk with any
particular individual, company or other entity. The credit risk related to assets on rent results from the
possibility of customer default of agreed payments. The Company has a standard collection process in place
in the event of payment default, which concludes with the recovery of the rental asset if satisfactory payment
terms cannot be worked out, as the Company maintains ownership of the rental assets until payment options
are exercised. Annual rental asset losses normally approximate 3% of rental revenues.

Indemnities

The Company indemnifies its directors and officers against any and all claims or losses reasonably incurred in
the performance of their service to the Company to the extent permitted by law. The Company has acquired
and maintains liability insurance for its directors and officers.




                                                       38
easyhome Ltd.
Notes to Consolidated Financial Statements continued
December 31, 2003 and 2002




16. Segmented Information

Operating segments are defined as components of the Company for which separate financial information
is available that is evaluated regularly by the chief operating decision maker in allocating resources and
assessing performance. The chief operating decision maker of the Company is the President & Chief
Executive Officer.

The Company operates in one reportable and geographic segment, which is the business of renting, with or
without an option to purchase, direct to the consumer, brand name entertainment products, appliances and
household furniture in Canada. As at December 31, 2003, the Company operated 133 (2002 – 136) stores
in 10 provinces. During the year, the Company changed its name from RTO Enterprises Inc. to easyhome
Ltd.

Information about products

Providing information relating to revenue from customers for each product, or group of similar products,
is impractical and accordingly, only rental revenue has been presented in the consolidated statements of
income and retained earnings (deficit).

17. Comparative Figures

Certain comparative figures have been reclassified to conform with the presentation adopted for the
current year.




                                                       39
C o r p o ra te G ove r n a n ce




The Board of Directors of easyhome Ltd. believes that high corporate governance standards are fundamental
to the Company’s success. Systems and procedures that are appropriate and effective for the Company and
its business have been put in place and are reviewed and evaluated on an annual basis.

The corporate governance policies of easyhome meet or exceed the Toronto Stock Exchange Guidelines for
Effective Corporate Governance.

The Company’s directors are experienced business leaders representing a breadth of background and
experience, including finance and merchandise rental. The Board of Directors assumes responsibility for
the stewardship of the Company and discharges this responsibility directly and through delegation
of specific responsibilities to committees of the Board and officers of the Company.

The Board has established three permanent committees for the continuous review and monitoring of key
areas critical to good corporate governance. The Audit Committee, the Compensation Committee, and
the Corporate Governance Committee each consist of three directors, all of whom are independent of
management.

Audit Committee

The mandate of the Audit Committee is to assist the Board of Directors in its oversight role with respect to:
• the quality and integrity of financial information;
• the effectiveness of the Company’s risk management and compliance practices;
• the independent auditor’s performance, qualifications and independence;
• the Company’s compliance with legal and regulatory requirements; and
• reviewing reports that may be required to be included in the proxy statement in accordance with
  applicable laws or the rules of security regulatory authorities.

Compensation Committee

The goals of the Compensation Committee of the Board of Directors are to enable the Company to
attract, retain and motivate the most qualified talent who will contribute to the long-term success of the
Company by:

• aligning compensation with the Company’s business objectives and performance;
• aligning incentives with the interests of stockholders to maximize shareholder value;
• developing compensation recommendations for the approval of the full Board for the Company’s
  executive officers’ and the Board of Directors. Compensation includes but is not limited to salary,
  bonuses, benefits, stock option grants, stock purchases and other compensation as appropriate.
  Additionally, the Committee reviews and makes recommendations to the full Board on all matters
  pertaining to bonus plans, salary policy, stock option and stock purchase plans for all other employees;
• recommending to the full Board the written objectives of the Chief Executive Officer and his direct
  reports. The Committee, with the Chairman of the Board, annually assess the performance of the Chief
  Executive Officer. The Committee also reviews and assesses a plan of succession for the Chief Executive
  Officer. The Committee also ensures there are appropriate training, development and benefit programs
  in place for management and staff; and
• overseeing adherence to the Company’s code of conduct.

                                                      40
Corporate Governance continued




Corporate Governance Committee

The Committee’s mandate is to assist the Board in establishing and maintaining a sound system of corporate
governance through a process of continuing assessment and enhancement. The Committee is responsible for:

     •   examining the effectiveness of the Company’s corporate governance practices and proposing
         such procedures and policies as the Committee believes are appropriate to ensure that:
            • the Board clearly functions independently of management;
            • management is clearly accountable to the Board of Directors of the Company; and
            • procedures are in place to monitor the effectiveness of the performance of the Board and
              individual directors;
     •   approving where appropriate the engagement of independent counsel or advisors by individual
         directors;
     •   identifying and recommending to the Board suitable candidates for nomination as new directors,
         and reviewing the credentials of directors standing for re-election;
     •   providing an orientation program for new directors;
     •   periodically reviewing the mandates of the Board and committees of the Board and determining
         what additional committees of the Board, if any, are required or appropriate;
     •   developing other policies as are appropriate to deal with the confidentiality of the Company’s
         information, insider trading and the Company’s timely disclosure and other public company
         obligations; and
     •   taking such other steps as the Committee decides are appropriate, in consultation with the Board,
         to ensure that proper corporate governance practices are in place for the Company, with reference
         to the Toronto Stock Exchange guidelines and other regulatory requirements on corporate
         governance.


A detailed description of the Company’s approach to corporate governance is outlined in the Management
Information Circular issued in connection with the Annual Meeting of Shareholders, a copy of which is
available through the Company.




                                                      41
Bo a r d of Dire c to r s




Douglas Anderson, Director

Douglas Anderson is President & Chief Operating Officer of Friedmans’ Inc., a large U.S. specialty
retail chain. Previously, he was President and Chief Executive Officer of Rent-A-Centre, the leading
U.S. merchandise rental company, and prior to that, was in charge of the European rental business of
Thorn p.l.c., in London. Mr. Anderson joined the board of easyhome in 2000 and is Chairman of the
Compensation Committee.

Ronald G. Gage, Director

Ronald Gage was formerly the Chairman and Chief Executive Officer of Ernst & Young Canada.
He serves as a director of Toromont Industries, AIM Canada Fund, and AIM Global Fund. Mr. Gage
joined the board of easyhome in 2000 and is Chairman of the Corporate Governance Committee.

David Ingram, President & CEO

David Ingram joined easyhome in 2000, and was appointed President and Chief Executive Officer in May
2001. Prior to joining the company, Mr. Ingram was Head of the Strategic Business Unit for Toys and
Stationery, a $900 million division of Kingfisher p.l.c., the second largest retailer in the U.K. Previously, he
was responsible for Rent-A-Centre’s Canadian operations, following which he assumed responsibility for a
380 store division of Rent-A-Centre in the U.S.

Donald K. Johnson, Chairman

Donald Johnson is Vice Chairman of BMO Nesbitt Burns and a former President of Burns Fry Ltd., a
predecessor company. He is a former Chairman of the Investment Dealers Association of Canada and a
former Governor of the Toronto Stock Exchange. He has been a director of easyhome since 1999 and was
elected Chairman at the Annual Meeting in June, 2000.

Robin W. Korthals, Director

Robin Korthals is a former President of Toronto Dominion Bank and is currently Chairman of the Ontario
Teacher’s Pension Plan Board, and Chairman of Co-Steel Limited. He holds directorships with a number
of major Canadian corporations, including Rogers Communications, Suncor, and Cognos. Mr. Korthals
joined the board of easyhome in 2000 and is Chairman of the Audit Committee.

David Lewis, Director

David Lewis was formerly Chairman and Chief Executive Officer of Continental Bank of Canada. He
serves as Chairman of DSTI Ltd., Books for Business, and Deputy Chairman of Key Publishers. He is
also a director of a number of companies, including Brookfield Properties, Caldwell Partners International,
Consolidated Enfield Corporation, and Key Porter Books. Mr. Lewis joined the board of easyhome in 1993.




                                                       42
Board of Directors continued




Bruce H. Reid, Director

Bruce Reid was Chief Executive Officer of the Brick Warehouse and previously CEO of WH Smith in
Canada and in the U.S. He is past Chairman of the Retail Council of Canada. Mr. Reid joined the
board of easyhome in 2000.


Joe Rotunda, Director

Joseph Rotunda is President and CEO of Texas based EZCorp., a major U.S. consumer finance chain.
Previously, he was Chief Operating Officer of Rent-A-Centre, the leading U.S. merchandise rental chain,
after holding positions of increasing responsibility in the company. Mr. Rotunda joined the board of
easyhome in 2000.




                                                    43
O f f i ce r s




David Ingram                              Dave Maries
President & Chief Executive Officer        Vice President, Marketing & Merchandising

S. William Johnson                        Randy Robertson
Executive Vice President                  Senior Vice President, Operations
and Chief Financial Officer
                                          Rick Atkinson
                                          Vice President, Development




C o r p o ra te I nfo r m a ti o n




 Edmonton Office                           Bankers
10239 – 178 Street                        Canadian Imperial Bank
Edmonton, Alberta                         of Commerce
T5S 1M3                                   Edmonton, Alberta
Tel: (780) 930-3000
Fax: (780) 481-7426                       Transfer Agents
                                          Equity Transfer Services Inc.
Mississauga Office                         Toronto, Ontario
Suite # 201
170 Robert Speck Parkway                  Listed
Mississauga, Ontario                      Toronto Stock Exchange
L4Z 3G1                                   Trading Symbol: EH
Tel: (905) 272-2788
Fax: (905) 272-9886                       Auditors
                                          Ernst & Young LLP
Investor Relations                        Edmonton, Alberta
S. William Johnson
Executive Vice President                  Solicitors
and Chief Financial Officer                Blake Cassels & Graydon LLP
Tel: (780) 930-3012                       Toronto, Ontario

                                          Website
                                          www.easyhome.ca




                                     44
                        04 annual report




Mike - Wide Screen TV    Lucy - Sofa/Loveseat     Kim - Computer



                        it starts at home




                                           Ltd.
                                                                                     Ltd.



                                               CO RP O R AT E PRO FILE




  easyhome Ltd. is Canada’s largest merchandise rental company, and the fourth largest in
North America, offering top-quality, brand name household furnishings, appliances and
home electronic products to consumers under weekly or monthly rental agreements. These
agreements may be cancelled at any time without further cost to the customer and include
an unconditional service guarantee with an option to purchase. easyhome currently operates
147 stores in all 10 provinces across Canada.                                                                                                     1




                                                TA BLE O F CO N T EN T S


               CH A I R M A N ’ S M E SS AG E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 3
               M E SS AG E TO O U R SH A R EH O L D ER S . . . . . . . . . . . . . . . . . . . . . . . PAGE 5
               D R I V I N G SUS TA I N A B L E GROW T H . . . . . . . . . . . . . . . . . . . . . . . . PAGE 13
               M A N AG EM EN T ’ S D I SCUSSI O N A N D A N A LYSI S . . . . . . . . . . . . . . . PAGE 18
               M A N AG EM EN T ’ S R E SP O N SI B I L I T Y F O R F I N A N CI A L R EP O R T I N G . . . PAGE 39
               AU D I TO R S’ R EP O R T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 4 0
               CO N S O L I DAT ED F I N A N CI A L S TAT EM EN T S . . . . . . . . . . . . . . . . . . PAGE 41
               CO R P O R AT E GOV ER N A N CE . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 6 6




                                                                                                                      easyhome annual report 04
                                        Provide                               Raise                         Demonstrate
                                   the customer with what                   the customers’                    a positive, friendly,
                                they can’t get from anyone else               self-esteem              supportive, and non-judgmental
                                     - financial programs                 and sense of control.          attitude toward the customer.
                                   and emotional support.



                                                                           Vision
                                   Everyone should be given the opportunity to enhance their home and lifestyle. We are the leader
                                         in helping people get exactly what they want for as long as they want... right now!
2

                                                                          Mission
                                      We are a relationship-driven business that thrives on the opportunity to provide customers
                                            access to household goods and services that enhance the quality of their lives.

                                                                           Va l u e s
                                                          Integrity, Respect, Quality, Pride and Enterprising



                                      Reinforce                           Recognize                             Strengthen
                                       the customers’                  the importance of the               the personal relationship
                                     sense of ownership                home to the individual               between the customer,
                                   and pride of possession.               and the family.                  the store personnel, and
                                                                                                             the easyhome brand.




    easyhome annual report 04
                                                                          Ltd.



                                           CHAIRMAN’S MESSAGE




Expansions creating long-term value for shareholders.
In five years, easyhome has progressed from a company that was underperforming, through a three-year turnaround
of its operations, to a dynamic national brand with a platform that is now in place for significant long-term growth.
During this time, easyhome has generated outstanding value for its shareholders and has laid the foundation for
increasing value in the years to come.

The Board of Directors of easyhome is accountable to you, our shareholders, and has worked hard to ensure that the
Company’s governance policies meet or exceed the TSX Guidelines. However, we believe that corporate governance
goes beyond compliance with guidelines. Good governance involves contributing to corporate performance, shaping
values and guiding management. Our Board of Directors has demonstrated its commitment to easyhome: all of our                                      3


directors have been on the board for at least five years, since the turnaround began in 2000. They bring a wealth of
experience, including finance, accounting and merchandise rental backgrounds to our Company. They have been
instrumental in shaping the direction of easyhome through this important period in our history.

I would like to sincerely thank the Management and all employees of easyhome for the successful execution of the
growth strategy in 2004. Their commitment has led the Company through an unprecedented year of growth while
maintaining focus on the long-term fundamentals of the business.

We are involved in a very exciting company, at an exciting time. I am confident that the best is yet to come!




Donald K. Johnson,
Chairman of the Board of easyhome Ltd.
March 2005



                                                                                                                       easyhome annual report 04
                                                                                   Ltd.



                                                             2004 HIGHLIGHTS




                                                  Increased revenue 13.3% to $88.5 million

                                                     Same store revenue growth of 9.4%

                                                   Increased units on rent 24% to 128,457

4                                           New customers accounted for 77.2% of revenue growth

                                                   Increased customer base 16.3% to 49,974

                                                            Opened 14 new stores

                                           Implemented quarterly dividend policy of $0.04 per share

                                                     Paid $485,417 in quarterly dividends

                                Achieved new store profitability in five months compared to 10 months historical




    easyhome annual report 04
                                                                      Ltd.



                                   MESSAGE TO OUR SHAREHOLDERS




To our Shareholders,                                      Excluding the contribution of the reversal of the
                                                          future tax asset valuation reserve to net income in the
If we had to describe 2004 in only one word,              third quarter of the year, net income would have been
that word would be growth. easyhome achieved              $6.5 million ($0.96 per share), a 60.8% increase.
significant growth in every key area – revenue,
income, customers, store count and shareholder
value. We not only achieved our goals, we reached         Measuring our Success
them more rapidly than projected.
                                                          Goals: 2004                       Results
Strength in Numbers
                                                          Strategic expansion               14 new stores
                                                                                                                                              5
easyhome delivered record financial results in 2004        5% same store sales growth     9.4% growth
through increased same store revenue as well as
                                                          Increase revenues and earnings revenues up 13.3%
revenues generated by additional locations.
                                                                                         earnings up 117%
Revenues grew 13.3% to $88.5 million compared with        Increase shareholder value        share price
$78.1 million a year earlier. Same store revenue growth                                     increased 117%
for the year was 9.4%, building on our growth of 5.9%                                       began paying
for 2003 and exceeding our original 5% target.                                              quarterly dividends
                                                                                            of $0.04 per share
We have now achieved 39 consecutive months of
comparable revenue growth and 13 consecutive
quarters of same store revenue growth.
                                                          easyhome’s financial performance is discussed in
Net income for the year increased 117% from               greater detail in Management’s Discussion and
$4.0 million to $8.8 million. On a diluted per share      Analysis of Financial Condition and Results
basis, earnings were $1.30 compared with $0.75.           of Operations beginning on page 18.




                                                                                                                  easyhome annual report 04
                                                                                                 Ltd.



                                                       MESSAGE TO OUR SHAREHOLDERS (continued)




                           Our story of strength in numbers is about more than        an even higher standard. We can negotiate more
                           revenues and earnings. It is also about easyhome’s         advantageous terms with our suppliers, and offer an
                           increased store count and our stronger-than-ever           increasing number of quality products and services
                           customer base.                                             to our customers.

                           We opened 14 new stores during the year, and merged        Creativity in Marketing
                           the operations of four stores with four other locations,
                           increasing the net store count from 133 to 143.            Innovative marketing programs build the easyhome
                           We have developed a proven and efficient process            brand and drive our growth. In 2004, we launched
                           for rolling out our new stores, with the average store     several new initiatives aimed at growing brand
6                          achieving profitability by the fifth month compared          awareness nationally and enhancing the in-store
                           with the expected 10 months. We have also proved           experience for our customers.
                           easyhome stores are viable in smaller markets, creating
                           another dimension for growth.                              To increase brand awareness at a national level, we
                                                                                      launched our first-ever English-language television
                           Our customer base is now nearly 50,000 strong, up          campaign in the second quarter of 2004. This was
                           nearly 7,000 from a year ago. In addition to reaching      followed by a second campaign in the fourth quarter.
                           new customers in new locations, we are drawing             The campaigns ran a combined 34,600 spots across
                           more customers into existing stores as a result of the     Canada in a targeted Direct Response strategy.
                           rebranding and redesigning of our stores and our           The measured response to both the spring and fall
                           careful selection of merchandise. This has resulted in     campaigns showed positive results in call centre
                           seven consecutive quarters of net customer growth.         volume, website traffic, and net customer growth.
                                                                                      Building on this experience, we will fine-tune our
                           The higher volume of business generated by more            advertising strategy and begin our second year on-air
                           stores and more customers enables us to perform at         in April 2005.




    easyhome annual report 04
                      SAME STORE REVENUE




% revenue growth per year


10.0%
                                      9.4%

 9.0%                                             SAME STORE
 8.0%                                         REVENUE GROW TH




                                              9.4%
 7.0%


                             5.9%
 6.0%



 5.0%
              4.7%


 4.0%



 3.0%


                                              13 consecutive quarters of same
 2.0%
                                                   store revenue growth
 1.0%



   0%
               2002          2003      2004
8




                                               This is my new wide screen TV.



                                                        Rent a wide screen TV for the big game or the playoffs.
                                                        easyhome rents TVs with the latest HD DLP technology,
                                                        not to mention full home theatre systems.
                                Mike - Wide Screen TV   Household electronics accounted for 39% of revenue in 2004.


    easyhome annual report 04
                                                                      Ltd.



                           MESSAGE TO OUR SHAREHOLDERS (continued)




We also introduced pre-paid wireless and long-distance     Opportunities in Action
airtime in the second quarter of 2004 through Rogers,
Telus, Bell, Fido and Gold Line Phone Cards. Sold          We have great optimism for the immediate and
using virtual technology that requires no inventory on-    long-term future of our Company. Our growth has
hand, this is a convenient service to our customers who    been faster and more than we anticipated. For 2005,
come into the store each week to make their payment.       our mandate is to continue easyhome’s expansion while
                                                           maintaining financial discipline: Growth tempered by
At the end of the third quarter of 2004, we successfully   prudence.
introduced prepaid cellular handsets with the Roger’s
Pay-Go program in a rent-to-own package. With              More than ever before, easyhome is positioned for
payments as low as $7 per week, we took a program          success. Financially, we are on solid ground and                                   9

that is designed for the cash-constrained customer and     we expect to be debt-free in 2005. Our marketing
made it more accessible. We had over 2,000 handsets        initiatives are effectively drawing in new customers
on rent by the end of the year. This new program also      while retaining current ones, and we dominate
provides a cross-selling opportunity with the pre-paid     the under-penetrated merchandise rental market.
wireless airtime program.
                                                           In 2005, we will continue to explore creative
Our strong marketing focus has received industry           opportunities, to add value to our customer
recognition. easyhome’s marketing team has won             relationships while growing revenues. We will also
several awards from the Association of Progressive         maintain our commitment to providing the most
Rental Organizations, the national trade association       sought-after technologies, including LCD, plasma and
in the United States devoted to the merchandise            DLP. In this regard, in the summer of 2005, we plan
rental industry.                                           to introduce Apple iPod MP3 players into our stores.




                                                                                                                  easyhome annual report 04
                                                                                                    Ltd.



                                                      MESSAGE TO OUR SHAREHOLDERS (continued)




                           Also in 2005, we will continue to invest in our store     To capitalize on this potential, we expect to open
                           infrastructure, developing a new purchase order system    20-30 new stores each year, for the next few years.
                           that will enable us to more effectively manage in-store
                           product availability. Improved accuracy, automation       As we look back at 2004, we are delighted with our
                           and speed will allow us to serve our customers better,    results, inspired by our opportunities, and motivated
                           while increasing our rental asset utilization rates.      by our potential. I would like to extend thanks to the
                                                                                     many people who have been instrumental in easyhome’s
                           This past year we completed the three-year strategic      success - the Board of Directors for their wisdom
                           plan that restored your Company to profitability and       and leadership, our employees for their dedication to
                           set the path for future growth. We are now pursuing       superior customer care, and our shareholders for their
10
                           our next three-year plan, which will see easyhome         continued and enthusiastic support. We look forward
                           through 2007. Our strategy is to be the leader in         to another successful year.
                           the Canadian merchandise rental industry. We will
                           be the best and the biggest at what we do. We will
                           leverage our size, expertise, and national presence to
                           expand the market and capture the lion’s share of the
                           merchandise rental industry in Canada.
                                                                                     David Ingram,
                           We strongly believe there is room for significant growth   President & Chief Executive Officer
                           in the Canadian merchandise rental marketplace.           March 2005




     easyhome annual report 04
                        REVENUE




$ (in 000’s)


90,000                             88,450


80,000                    78,090                    INCREASED
                                                REVENUE 13.3% TO
               71,919
70,000




                                            88.5
                                            $
60,000


                                                                                               11

50,000




40,000

                                                                                     MILLION
30,000




20,000                                            39 consecutive months of
                                                 comparable revenue growth
10,000




    0
                2002       2003     2004




                                                                   easyhome annual report 04
12




                                                        This is my new sofa.




                                                          Make a temporary living space your own with furniture
                                                          from easyhome.


                                 Lucy - Sofa/Loveseat     Home furnishings accounted for 32% of revenue in 2004.


     easyhome annual report 04
                                                                   Ltd.



                                    DRI V ING SUS TA IN A BLE GROW T H




Driving Sustainable Growth                              Marketing campaigns focus on the different
                                                        ways easyhome can meet customer needs, from
easyhome is focused on controlled, sustainable growth   traditional rent-to-own agreements, to supplying
to increase revenues and profits, build its brand, and   temporary solutions. By providing a big screen
enhance shareholder value. The Company will attain      television for a weekend, a high-end computer
this growth internally through improved same store      for a month, or a digital camera for a vacation,
revenues, and externally through the addition of new    easyhome is reaching new categories of customers
stores.                                                 – customers who previously may not have considered
                                                        shopping outside mainstream retail stores.
Growing Same Store Revenue
                                                        The Company is also increasing the number of                                      13

Same store growth is driven by increasing the number    agreements per customer by offering a wider variety
of rental agreements from established stores and by     of merchandise to meet more of its customers’ needs.
increasing the rental amount per agreement.             In addition to long-established product categories such
                                                        as furniture and appliances, easyhome features leading-
easyhome is growing the number of rental agreements     edge computers and electronics. easyhome increased
by attracting new customers through innovative          the number of units on rent 24% during the year.
marketing, including television advertising, direct
marketing, and in-store promotions. In 2004, the        As well as growing the number of rental agreements,
Company grew its customer base by 16.3%. Same store     easyhome is increasing the dollar amount of many of
customer growth accounted for 6.8% of this increase,    its agreements by offering higher priced products.
while customers from new stores contributed 9.5%.




                                                                                                              easyhome annual report 04
                                                                                               Ltd.



                                                       DRI V ING SUS TA IN A BLE GROW T H (continued)




                            While easyhome remains committed to offering           Expanding our Market Presence
                            merchandise at various price points to meet a wide
                            range of needs, the Company is also expanding its      New store openings are accelerating easyhome’s
                            high-end offerings in response to customer demand.     growth in the underpenetrated merchandise
                            As a result, average monthly payments collected per    rental market. In 2004, the Company opened 14
                            customer increased 3%, strengthening rental revenue    new locations, with all stores expected to achieve
                            by $1.7 million in 2004.                               profitability in half the expected time. This quick
                                                                                   rise to profitability is evidence of both market
                            Key growth categories:                                 need and the effectiveness of easyhome’s model.

14                          • Furniture was our highest growth category, second    During 2005, easyhome expects to launch 21 new
                              only to electronics in revenue contribution with     stores. This is our first year of our 3-year plan to
                              32%. Unit growth for 2004 was 33%.                   open new locations at a minimum rate of 15% of our
                                                                                   store base. Capacity exists in every market across the
                            • The electronics category had 13% unit growth,        country so our approach is by order of opportunity.
                              with home theatre systems capturing top
                              performance of 43% growth. Electronics               One of the Company’s key findings during its first
                              contributed 39% of overall revenue.                  expansion phase in 2004 was that its stores are viable
                                                                                   in much smaller markets than anticipated. Where
                            • Appliances experienced 26% growth, primarily due     research suggested a population of approximately
                              to the laundry category.                             40,000 was necessary for economic feasibility,
                                                                                   easyhome discovered that a community of 20,000
                            • Computer rentals continue to grow, with new          is well able to support a store. As a result, the
                              technology and user-friendly displays contributing   Company has expanded its estimate of the total
                              to their 33% increase in 2004.                       number of stores to reach market saturation to over
                                                                                   300, more than twice our current store count.




     easyhome annual report 04
                                  SHARE PRICE




                                                         117%
       Change (%)


                easyhome (EH-T)       TSX-I


300%




                                                                                                                    15
200%



                                                         SHARE PRICE INCREASED
                                                             (December 31, 2003 - December 31, 2004)
100%




                                                           began paying quarterly dividend of
                                                                    $ 0.04 per share
 0%


   MAR 02                                       MAR 05




                                                                                        easyhome annual report 04
16




                                                  This is my new computer.




                                                    Get the latest technology each year when you rent your
                                                    computer equipment from easyhome while away at school.

                                                    More than 12% of easyhome revenue was from computers
                                 Kim - Computer     and related products in 2004.


     easyhome annual report 04
                                                                           Ltd.



                             DRI V ING SUS TA IN A BLE GROW T H (continued)




In addition to opening new stores, easyhome can             easyhome has initiated a number of programs to
expand its retail network through acquisitions.             provide incentives to its associates, improve their
The Company may acquire stores to gain access               satisfaction, and enable them to provide superior
to particularly desirable locations. Alternatively,         customer service. As a result, employee turnover is
easyhome could simply acquire a portfolio of rental         52% lower than it was three years ago and 17%
agreements, allowing for growth in the Company’s            lower than the industry average.
customer base without the purchase of physical
capital assets.                                             The Company has also improved its hiring process to
                                                            attract associates who best fit its vision. easyhome now
Leading the Way                                             has strong, customer-focused staff, and a pipeline of
                                                            associates with management potential who can help                                     17

To be successful, a company requires support from           the Company achieve sustainable growth.
every member of its team. To grow at easyhome’s
pace, the recruitment and retention of staff is
particularly critical.



       Growing Same Store                       Expanding our
                                                                                        Leading the Way
            Revenue                             Market Presence
  “easyhome is growing the number         “During 2005, easyhome expects          “recruitment and retention of
  of rental agreements by attracting      to launch 21 new stores.”               staff is particularly critical...
  new customers through innovative                                                ...employee turnover is 52% lower
  marketing.”                                                                     than three years ago and 17%
                                                                                  lower than the industry average.”




                                                                                                                      easyhome annual report 04
                                                            M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                                    O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S




                                 The following discussion and analysis should be read in conjunction with, and is qualified by, the December
                                 31, 2004 audited consolidated financial statements of the Company and the notes relating thereto and the
                                 Report to Shareholders contained in the Company’s Annual Report.

                                 This management discussion and analysis refers to certain financial measures that are not determined in
                                 accordance with generally accepted accounting principles (“GAAP”) in Canada. These measures do not
                                 have standardized meanings and may not be comparable to similar measures presented by other companies.
                                 Although measures such as same-store revenue growth and operating income do not have standardized
                                 meanings prescribed by GAAP, these measures are defined herein or can be determined by reference to our
                                 financial statements. We discuss these measures because we believe that they facilitate the understanding of
                                 the results of our operations and financial position.

18
                                 Date

                                 March 7, 2005

                                 Overall Performance

                                 easyhome Ltd. (“easyhome” or the “Company”) is in the business of renting, with or without an option to purchase,
                                 brand name home entertainment products, appliances and household furniture across Canada. The merchandise
                                 rental business is not seasonal for revenue and income generation and is generally immune to changes in economic
                                 conditions. All of the Company’s revenue is generated by its core business and related activities.

                                 The Company had record revenues in 2004 totaling $88.5 million, an increase of $10.4 million over last year,
                                 or 13.3%. The monthly rental revenue portfolio, that is, the rental revenue available for collection each month,
                                 increased from $6.3 million as at December 31, 2003 to $7.2 million at the end of 2004, or 14.1%. An increase in
                                 the customer base of 6,934 from December 31, 2003 to December 31, 2004 (16.3%) accounted for 77.2% of the
                                 revenue increase while an increase in the average number of rental agreements held by each customer, and hence a
                                 corresponding increase in the average amount collected per customer, accounted for the balance of the increase.
                                 For the fourth quarter, revenue increased $3.5 million, from $20.4 million in 2003 to $23.9 million in 2004,
                                 or 17.1%. An increased customer base accounted for 89% of this increase.




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                             M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
           O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Expenses for the year, as a percentage of revenue, decreased from 58.2% in 2003 to 57.3% in 2004 and for the
fourth quarter from 57.4% in 2003 to 57.3% in 2004. Rental amortization for the year as a percentage of revenue
reduced from 29.9% in 2003 to 29.2% in 2004 with one-half of the reduction coming from a decrease in the
book value of rental assets written-off as a percentage of revenue. For the fourth quarter of 2004 and 2003,
rental asset amortization remained consistent at 29.3%.

Income before income taxes for the year increased $4.4 million, from $5.7 million in 2003 to $10.1 million in
2004, or 77.7%. As a percentage of revenue, pre-tax earnings reached 11.4% in 2004 compared with 7.3% in
2003. For the fourth quarter of 2004, earnings before tax increased from $2.0 million in 2003 to $2.7 million
in 2004, or 37.7%.

In the third quarter of 2004, a future tax asset valuation reserve in the amount of $2.3 million was reversed
through income tax expense as management is of the view that the magnitude, timing and sustainability of future
                                                                                                                                                   19
taxable incomes is sufficient to support the full value of the future tax assets. This reversal reduced the effective
income tax rate to 13.5% from an expected average reversal rate for future income taxes of approximately 36%.
The comparable ratio in 2003 was 29.3% which was the expected average reversal rate for future income taxes at
December 31, 2003.

Net income for the year 2004 increased $4.8 million from $4.0 million in 2003 to $8.8 million in 2004, or
117.3%. Removing the contribution of the reversal of the future tax asset valuation reserve to net income in the
third quarter, net income would have been $6.5 million in 2004 compared with $4.0 million in 2003, an increase
of $2.5 million, or 60.8%.

In the fourth quarter of 2004, revenue increased $3.5 million over 2003, from $20.4 million to $23.9 million.
Operating income increased $0.4 million, from $2.3 million to $2.7 million. Operating income did not increase
proportionately to the increase in revenue because of increased advertising costs of $0.5 million due to the
National TV advertising campaign, increased salaries and benefits expense and other store operating costs due
to the store count being a net 10 stores greater than 2003 and increased bonus accruals because of the record
profitability for the year.

Net income for the fourth quarter of 2004 increased $0.1 million from $1.6 million in 2003 to $1.7 million in
2004, or 8.0%. In the fourth quarter of 2003, tax expense was charged at an effective rate of 18.4% because a
reduction to the tax provision of $0.3 million was required to bring the annual effective tax rate down to 29.3%
from 35.0%, which was the income tax rate calculated for the first three quarters of 2003. The 29.3% rate as


                                                                                                                       easyhome annual report 04
                                                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 at December 31, 2003 was the expected average reversal rate for future income taxes at that time. Removing this
                                 reduction from income tax expense in the fourth quarter of 2003 would have reduced net income to $1.3 million
                                 compared with net income for the fourth quarter of 2004 of $1.7 million, an increase of $0.4 million, or 35.5%
                                 over the same period of 2003.

                                 Diluted earnings per share for the year ended December 31, 2004 were $1.30 ($0.96 before the third quarter tax
                                 expense recovery) compared with $0.75 in 2003. For the 2004 fourth quarter, diluted earnings per share were
                                 $0.25 compared with $0.30 in 2003 ($0.26 after adjusting for the income tax provision reduction discussed above).

                                 During 2004, the Company merged the operations of four stores with four other store locations in the Company’s
                                 chain and opened 14 new stores, increasing the store count from 133 as at December 31, 2003 to 143 as at
                                 December 31, 2004. We expect to continue our new store opening program at a rate of approximately 20-30
                                 stores each year for the next few years.
20


                                 Revenue has been trending upwards on a comparable quarterly basis since the third quarter of 2001. Sequentially,
                                 revenue has increased sequentially for nine quarters in a row. In addition, same store revenue growth (revenue from
                                 stores open for the comparable periods) has continued to show positive trending. Same store revenue has increased
                                 from 4.7% in 2002 to 9.4% in 2004. We expect same store revenue increases to continue at an annual pace of 7-9%.

                                 The Company’s balance sheet remains strong with a funded debt to equity ratio of less than 5%. The Company’s
                                 credit facility was renewed on December 20, 2004 at an interest rate of prime plus 1% with no added charges
                                 for financing fees compared with financing fees of $90,000 in 2003. The Company’s cap on its renewed credit
                                 facility moved to $10.0 million from $20.0 million at the Company’s request since the Company believes this
                                 credit line, when combined with the Company’s internally generated cash flow, will be adequate to fund the
                                 Company’s growth plans.

                                 Cash flow from operating activities decreased $2.5 million to $3.5 million in 2004 from $6.0 million in 2003.
                                 The decrease was primarily driven by an increase in rental asset purchases, from $27.9 million in 2003 to
                                 $34.8 million in 2004, to support the Company’s growth.

                                 The Company spent $1.7 million on capital expenditures in 2004 compared with $3.2 million in 2003 when
                                 re-branding costs of $2.8 million were incurred to consolidate the stores under one single brand-“easyhome”.




     easyhome annual report 04
                             M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
           O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Outlook

The Company expects the positive trending in revenue, net income and same store revenue growth to continue.
In 2001, the Company outlined, as one of its prime financial objectives, same store revenue growth of 5% for
the 2002, 2003 and 2004 fiscal years. The Company accomplished this for 2002 and 2003 and achieved 9.4%
same store revenue growth for 2004. Growth in revenue will also come from the Company’s new store opening
program and from opportunistic value-added store acquisitions. The Company’s strategy is to open stores
selectively and to acquire new stores and customer accounts in existing and new geographic markets where stores
can be “clustered” in order to realize the benefits of economies of scale in marketing and distribution and other
operating efficiencies. Twenty-one new stores are scheduled to be opened in 2005. Management believes that
suitable store space is available for lease for new store openings and therefore space is not a limiting factor in its
expansion goals. Also, with the national brand in place, the Company intends to continue its television campaign
to expand its brand awareness efforts. This will support all other marketing initiatives and introduce the service
                                                                                                                                                     21
that easyhome offers to customers.

The Company’s positive trending in revenue and net income may be adversely affected by the operations of
Insta-Rent, a Canadian rent-to-own chain with 53 stores in Canada as at December 31, 2004, and by the entry
of Aaron Rents and Rent-A-Center, two large U.S. merchandise rental operators, into the Canadian marketplace.
The majority of Insta-Rent’s locations are contained within Brick Warehouse and United Furniture Warehouse
stores and most of their business is derived from customers who are denied credit at the Brick and United
furniture stores. Aaron Rents opened their first franchised store in Kitchener, Ontario in the fall of 2003 and
now operates a total of two franchised stores. Rent-A-Center acquired five stores in Calgary and Edmonton on
March 5, 2004. Both have stated their intentions to expand in the Canadian marketplace.

Other factors that may adversely affect the Company’s growth are competition from other merchandise rental
businesses and, to a lesser extent, rental stores that do not offer a purchase option. The Company also competes
with discount stores and other retail outlets that offer an installment sales program or offer comparable products
and prices. Furthermore, additional competitors, both domestic and international, may emerge since barriers
to entry are relatively low. It is unclear what impact this increased competition will have on the Company’s
operational results.

The biggest limiting factor in the Company’s expansion plans will be the hiring and retention of the best people
for the job. Over the last few years, the Company has improved its hiring competencies and its training programs
such that employee turnover has dropped 52% over the last three years.


                                                                                                                         easyhome annual report 04
                                                                   M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                                 O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                                                                   SELEC T ED A NNUA L IN FO RM AT I O N

                                                                                 CO N SO LI DAT ED INCO ME S TAT EMEN T S

                                                                                                           2004              2003               2002
                                 (in 000’s, except earnings per share amounts)                               $                $                  $
                                                                                                                            (restated)         (restated)
                                 Revenue                                                                  88,450            78,090              71,919
                                 Net income                                                                8,752             4,027               2,509

                                 Dividends declared on common shares                                         730                  –                    –
                                 Dividends declared on preferred shares                                        –                308                    –
22
                                 Earnings per share
                                  Basic                                                                     1.44              0.83                0.57
                                  Diluted                                                                   1.30              0.75                0.52

                                                                                   CO N SO LI DAT ED BA L A NCE SHEE T S
                                 (in 000’s)

                                 Total assets                                                              69,286           61,665              58,215
                                 Total funded debt                                                          2,237            3,844              17,229

                                 Effective January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of
                                 Chartered Accountants with respect to the accounting for cash consideration received from a vendor. Under
                                 the new recommendations, the Company accrues vendor volume rebates when earned as a reduction to rental
                                 assets. Earned amounts are amortized on a straight-line basis over 20 months, representing the average life of the
                                 underlying rental assets, and recorded as a reduction of rental asset amortization expense. Prior to the adoption
                                 of the new recommendation, vendor volume rebates were accrued as earned and recorded as other revenue.

                                 This change has been applied retroactively and the Company’s 2003 consolidated financial statements have been
                                 restated accordingly. The effect of adopting the new recommendations decreased 2003 revenue by $628,000, net
                                 income by $91,000, basic earnings per share by $0.02, diluted earnings per share by $0.01 and total assets by
                                 $342,000.


     easyhome annual report 04
                             M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
           O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




The primary reason for the increase in the Company’s revenue and profitability since 2001 has been the Company’s
return to the basics of the business, that is, renting merchandise and collecting rental payments due. During 1999
and 2000, the Company lost focus on the basic business model and compromised profits by not having the capital
available in order to replenish rental assets, and by building the rental agreement portfolio without regard to the
customers’ ability to fulfill their obligations under the agreement. As a result, store personnel were forced to spend
an inordinate amount of time dealing with delinquent accounts, and merchandise rentals declined and charge-offs
increased. With the implementation of more stringent collection criteria and numerous other operating efficiencies,
growth in revenue and net income resulted as the Company’s customer base and the average customer transaction
value increased and charge-offs decreased. The increase in revenues was primarily at the same store level. Revenue
for newly opened stores in 2004 was $2.4 million out of total revenue of $88.5 million (2.7%).

The increase in total assets is primarily a result of the increase in rental asset purchases which were required to
support the Company’s growth in its rental portfolio.
                                                                                                                                                    23


Results of Operations

Year ended December 31, 2004 compared to the year ended December 31, 2003

Revenue

Revenue was $88.5 million for the year ended December 31, 2004 compared to $78.1 million in 2003, an
increase of $10.4 million or 13.3%. The primary factor for the increase in revenue was the 20% increase in the
rental agreement portfolio from 75,262 agreements outstanding as at December 31, 2003 to 90,226 agreements
outstanding as at December 31, 2004. The increase in the rental agreement portfolio was achieved primarily
through growth in the Company’s customer base of approximately 7,000 customers rather than an increase in
the number of agreements held by each customer.

During the year, the Company merged the operations of four stores with four other stores in the Company’s chain
and opened fourteen new stores for a net increase of ten stores during the year. New store revenue accounted for
$2.4 million of the $88.5 million total, or 2.7%, and 12.7% of the increase in rental agreements.




                                                                                                                        easyhome annual report 04
                                                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 Rental Revenue

                                 Rental revenue was $74.5 million for the year ended December 31, 2004 compared to $66.1 million in 2003, an
                                 increase of $8.4 million or 12.6%. The primary reason for the increase was the growth in the number of rental
                                 agreements outstanding year over year.

                                 Other Revenue

                                 Other revenue, which is realized from supplier advertising rebates earned, fees for ancillary services such as the
                                 merchandise protection plan, and processing, reinstatement and other fees related to returned “NSF” cheques, was
                                 $14.0 million for the year ended December 31, 2004 compared to $12.0 million in 2003, an increase of $2.0 million
                                 or 16.8%. As a percentage of revenue, other revenue increased to 15.8% in 2004 from 15.3% in 2003. The increase
                                 was attributable to increased participation in the merchandise protection plan and an increase in supplier advertising
24                               rebates earned.

                                 Expenses

                                 Expenses were $50.7 million for the year ended December 31, 2004 compared to $45.5 million in 2003, an increase
                                 of $5.2 million or 11.5%. This increase was in the normal course of business as fourteen new stores were opened and
                                 a significant portion of the costs vary with revenue. As a percentage of revenue, expenses decreased to 57.3% in 2004
                                 from 58.2% in 2003.

                                 Salaries and Benefits

                                 Salaries and benefits were $25.9 million for the year ended December 31, 2004 compared to $22.9 million in 2003,
                                 an increase of $3.0 million or 13.0%. The increase in salaries and benefits is primarily attributable to (1) merit
                                 increases effective April 1, 2004 (2) a net increase in the store count of ten, and (3) increased field and corporate
                                 office bonuses. As a percentage of revenue, salaries and benefits remained consistent at 29.3% for both years.

                                 Selling, General and Administrative

                                 Selling, general and administrative expenses (SG&A) were $9.7 million for the year ended December 31, 2004
                                 compared to $8.7 million in 2003, an increase of $1.0 million or 10.9%. As a percentage of revenue, selling, general
                                 and administrative expenses declined to 10.9% in 2004 from 11.2% in 2003. Certain costs included in SG&A are not
                                 variable with revenue and hence, as revenue increases SG&A should decline as a percentage of revenue.


     easyhome annual report 04
                             M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
           O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Advertising costs increased from $3.8 million in 2003 to $4.4 million in 2004, an increase of $0.6 million,
primarily as a result of a national English language television advertising campaign which started in April 2004
and ran for the April to June and the October to December months. As a percentage of revenue, advertising costs
remained consistent at 5% of revenue. The Company believes the TV campaign increased the overall exposure of the
business to the general public and was a significant factor in the growth of the Company’s customer base in 2004.

Insurance costs increased $0.3 million, from $0.6 million in 2003 to $0.9 million in 2004, as a result of a premium
increase of 35% for the policy period August 1, 2003 to July 31, 2004, the addition of 21 delivery vehicles to support
our revenue growth and store expansion, and the addition of property insurance on the 14 new stores opened in 2004.

Occupancy Costs

Occupancy costs were $11.6 million for the year ended December 31, 2004 compared to $10.9 million in 2003, an
                                                                                                                                                     25
increase of $0.7 million, or 6.1% primarily as a result of opening 14 new stores and increases in lease rates for some
of the leases that were renewed in 2004. As a percentage of revenue, occupancy costs decreased to 13.1 % in 2004
from 13.9% last year. The percentage decrease was primarily due to rent declining as a percentage of revenue as it is
a fixed cost and revenues have been increasing.

Automotive and Travel

Automotive and travel expenses were $3.6 million for the year ended December 31, 2004 compared to $3.0 million
in 2003, an increase of $0.6 million or 21.1%. As a percentage of revenue, automotive and travel increased to 4.0%
in 2004 compared to 3.8% last year. The percentage increase was primarily the result of the increase in vehicle lease
and operating costs resulting from the increase in the average number of delivery vehicles in 2004 compared to 2003
and the rise in fuel prices.

Amortization

Amortization of rental assets was $25.8 million for the year ended December 31, 2004 compared to $23.3 million
in 2003, an increase of $2.5 million or 10.5%. As a percentage of revenue, amortization of rental assets decreased to
29.2% in 2004 from 29.9% in 2003. The percentage decrease resulted from an overall average increase in assets on
rent (2004: 78.6%; 2003: 76.7%) and an improvement in collection activities which resulted in less product being
written-off (2004: 2.3% of revenue; 2003: 2.6% of revenue).



                                                                                                                         easyhome annual report 04
                                                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 Amortization of capital assets, intangible assets and deferred costs was $1.6 million for the year ended December
                                 31, 2004 compared to $1.9 million in 2003, a decrease of $0.3 million or 15.5%. As a percentage of revenue,
                                 amortization of capital assets, intangible assets and deferred costs decreased to 1.8% in 2004 from 2.4% in 2003.
                                 In 2003, amortization of capital assets, intangible assets and deferred costs included $605,000 of asset write-offs
                                 associated with the re-branding of the stores to the easyhome brand. Adjusting for these costs, amortization of
                                 capital assets, intangible assets and deferred costs would have been 1.6% of revenue for 2003 compared with
                                 1.8% in 2004. The higher amortization cost in 2004 is attributable to the amortization costs associated with
                                 the re-branding capital costs incurred in the second quarter of 2003 and the new stores added in 2004.

                                 Operating Income ( Income before interest and income taxes )

                                 Operating income was $10.4 million for the year ended December 31, 2004 compared to $7.4 million in 2003,
                                 an increase of $3.0 million or 40.3%. As a percentage of revenue, operating income increased to 11.7% in 2004
26
                                 from 9.5% in 2003. Lower operating expenses and amortization expense, on a percentage of revenue basis, were
                                 the primary reasons for the improved operating margins.

                                 Interest Expense

                                 Interest expense was $0.3 million for the year ended December 31, 2004 compared to $1.7 million in 2003, a
                                 decrease of $1.4 million. The decrease was due primarily to lower bank financing fees being expensed in 2004
                                 ($90,000) compared with 2003 ($600,000) and the lower average loan balance during the period.

                                 Income Tax Expense

                                 Income tax expense was $1.4 million, an effective rate of 13.5%, for the year ended December 31, 2004 compared
                                 to $1.7 million, an effective rate of 29.3%, in 2003, a decrease of $0.3 million or 18.0%. For the first two quarters
                                 in 2004, the income tax provision was calculated at the expected average reversal rate for future income taxes of
                                 36%. At the end of the third quarter, a future tax asset valuation reserve in the amount of $2.3 million was reversed
                                 through income tax expense as management is of the view that the magnitude, timing and sustainability of future
                                 taxable incomes is sufficient to support the value of the future tax assets. This reversal reduced the 2004 effective
                                 income tax rate from 36% to 13.5%.




     easyhome annual report 04
                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Financing

The Company can fund its ongoing operations and new store opening program with internally generated cash flow.
If opportunistic value-added store acquisitions or customer account acquisitions present themselves to the Company,
the Company will draw upon its bank revolving line to fund these acquisitions. The balance of the bank revolving
line was $2.2 million as at December 31, 2004 and is capped at an upper limit of $10 million.

Critical Accounting Measures

Management’s discussion and analysis of financial condition and results of operations is made with reference to the
2004 annual consolidated financial statements. The preparation of these financial statements requires estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
                                                                                                                                                      27


The Company believes the following are the most critical accounting estimates that affect its operating results and
that would have the most material effect on the financial statements should these policies change or be applied in a
different manner.

Rental Revenue

Merchandise is rented to customers pursuant to agreements that provide for weekly or monthly rental payments
collected in advance. Revenue from rental agreements is recognized when payment is received and the rental period
has passed.

Rental Assets

Rental assets are recorded at cost, including freight. Vendor volume rebates are recorded as a reduction of the cost of
rental assets.

Assets on rent, excluding game stations, computers and related equipment and assets that were previously held for
rent assets that had not been out on rent for at least 90 consecutive days, are amortized in the proportion of rents
received to total expected rents provided over the rental agreement term. Game stations are amortized on a straight-
line basis over 18 months. Computers and related equipment are amortized on a straight-line basis over 24 months.



                                                                                                                          easyhome annual report 04
                                                               M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                             O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 Held for rent assets are not amortized where such assets have not been out on rent for at least 90 consecutive days.
                                 Once held for rent assets have not been out on rent for at least 90 consecutive days, such assets are amortized on a
                                 straight-line basis over 18 months regardless of future rental.

                                 In the event management determines that the future net cash flows to be derived from renting the assets is less than
                                 the carrying value of the assets, the assets are written down to estimated net realizable value. The determination
                                 of future net cash flows involves considerable judgment and measurement uncertainty and the impact on the
                                 consolidated financial statements for future periods could be material. The amortization period for game stations
                                 and computers and related equipment is based on their estimated useful service lives. Because these estimates of
                                 useful lives involve considerable judgment, a shortening of the estimated life of these assets could result in higher
                                 amortization expense in future periods.

                                 Capital assets
28


                                 Capital assets are recorded at cost, including freight and are amortized over their estimated useful lives. Capital assets
                                 are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may
                                 not be recoverable. An impairment loss is then recognized when the carrying amount exceeds their fair value. The
                                 determination of fair value involves considerable management judgment and assumptions and any significant changes
                                 in assumptions could result in the impairment of capital assets.

                                 Factors that could trigger an impairment review include significant negative industry trends, significant under-
                                 performance relative to historical or projected future operating results and significant changes in the use of the assets.

                                 Goodwill

                                 The carrying value of goodwill is reviewed annually to ensure that the value reflected is not impaired. An impairment
                                 loss would be recognized if the carrying amount of the goodwill exceeds its estimated fair value. Fair value may be
                                 determined using alternative methods for market valuation including discounted cash flows and net realizable values.
                                 In estimating fair value, the Company chose a valuation method and made assumptions and estimates in a number of
                                 areas, including future cash flows and discount rates. Due to the long-term nature of assumptions made it is possible
                                 that estimates could prove to be materially incorrect, and accordingly the impact on the consolidated financial
                                 statements for future periods could be material.




     easyhome annual report 04
                             M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
           O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Accounting Policy Changes

Vendor Volume Rebates

Effective January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of
Chartered Accountants with respect to the accounting for cash consideration received from a vendor. Under
the new recommendations, the Company accrues vendor volume rebates when earned as a reduction to rental
assets. Earned amounts are amortized on a straight-line basis over 20 months, representing the average life of the
underlying rental assets, and recorded as a reduction of rental asset amortization expense. Prior to the adoption
of the new recommendation, vendor volume rebates were accrued as earned and recorded as other revenue.

This change has been applied retroactively and the Company’s 2003 consolidated financial statements have been
restated accordingly. The effect of adopting the new recommendations decreased net income by $122,000 and
                                                                                                                                                 29
$91,000 for the years ended December 31, 2004 and 2003 respectively.

Generally Accepted Accounting Principles

Effective January 1, 2004, the Company prospectively adopted the new CICA Handbook Section 1100, Generally
Accepted Accounting Principles. This standard establishes what constitutes Canadian generally accepted accounting
standards and provides guidance on the GAAP hierarchy. The adoption of this standard did not have a material
effect on the Company’s financial position, results of operations or cash flows.

Liquidity and Capital Resources

General

As at December 31, 2004, the balance outstanding on the bank credit facility was $2.2 million. In December 2003,
the Company issued 1,633,000 common shares for net proceeds of $12.5 million. $2.5 million of these proceeds
were used to redeem the 12% preferred shares and the balance was applied to the bank credit facility.

As at December 31, 2004, the Company’s debt to equity ratio was less than 5%. The Company does not expect to
raise equity capital in the near future and will fund working capital requirements and capital requirements from
internally generated cash flow and its bank credit facility.



                                                                                                                     easyhome annual report 04
                                                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 The bank credit facility was renewed in December 2004. The facility is a one-year term facility which expires on
                                 December 31, 2005, bears interest at prime plus 1% and has a $10 million cap subject to a borrowing base limit
                                 calculated as a percentage of the net book value of rental assets. Other banking covenants include a fixed charge
                                 cover ratio, a funded debt-to-cash flow ratio, a minimum tangible net worth, a limit on capital expenditures and
                                 a minimum rental asset purchase ratio. The Company was in compliance with all of its banking covenants during
                                 2004 and 2003 and at each of the year-ends.

                                 The Company incurred $1.7 million of capital expenditures during 2004. Of this amount, $0.8 million was spent
                                 on new store openings, $0.2 million on store relocations, $0.5 million on upgrading the stores’ computer hardware
                                 and installing an intranet system and the balance of $0.2 million on miscellaneous costs. In May 2003, the
                                 Company completed the re-branding of its stores to the easyhome brand. This conversion required approximately
                                 $2.8 million in capital and was funded through internally generated cash flow. On-going maintenance capital
                                 requirements, that is, capital required other than for the purchase of stores or customer accounts or for new store
30
                                 openings, are not expected to exceed $0.5 million per year. New store opening and relocation costs are expected
                                 to average approximately $1.5 million per year for the next three years. The Company will also explore acquisition
                                 opportunities as they arise. These acquisitions will be funded from the Company’s bank credit facility.

                                 The Company has not entered into any off-balance sheet arrangements.

                                 Year ended December 31, 2004 compared to the year ended December 31, 2003

                                 Cash flow from operating activities for the year ended December 31, 2004 was $3.5 million compared to
                                 $6.0 million in 2003, a decrease of $2.5 million. This decrease was largely the net result of net income for the
                                 year increasing $4.7 million while rental asset purchases increased $6.9 million. The increase in rental asset
                                 purchases was required to support the Company’s growth in its rental portfolio.

                                 Management does not believe that the sourcing of rental asset merchandise is an inhibiting factor in its growth
                                 plans. The Company purchases all product directly from the manufacturers or distributors and all product is
                                 delivered directly to the stores eliminating the necessity for the Company to maintain warehousing facilities.
                                 The Company does not generally enter into contracts with its suppliers and believes there are numerous sources
                                 of product so reliance is not placed on any one supplier.




     easyhome annual report 04
                             M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
           O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Cash used in investing activities was $1.9 million for the year ended December 31, 2004 compared to $2.4 million in
2003, a decrease of $0.5 million. Capital asset purchases decreased $1.5 million primarily due to the re-branding costs
incurred in 2003. Proceeds from the sale of land was nil compared to $0.8 million last year. Other miscellaneous
items accounted for the balance of the change of $0.1 million.

Cash used in financing activities was $1.7 million for the year ended December 31, 2004 compared to $3.6 million
in 2003, a decrease of $1.9 million. In 2004, $0.3 million was raised from the issuance of common shares compared
to $0.1 million in 2003, an increase of $0.2 million; common share dividends of $0.5 million were paid compared to
nil in 2003, an increase of $0.5 million; and the balance of $1.4 million was applied against the Company’s revolving
credit facility, a decrease of $11.8 million from last year. In December 2003, net proceeds of $12.5 million were
raised from the issuance of 1,633,000 common shares, of which $2.5 million was used to redeem the 12% redeemable
preferred shares (compared to nil in 2004), a decrease of $10.0 million. In 2003, $0.1 million was paid in financing
fees and $0.3 million in preferred share dividends compared with nil in 2004, a decrease of $0.4 million.
                                                                                                                                                      31


Contingent Liabilities

On April 26, 2004, a legal proceeding was commenced against the Company and its wholly-owned subsidiary, RTO
Asset Management Inc. by Lawrence William Nantais (the “Plaintiff ”), a customer of the Company. The Plaintiff
seeks an order pursuant to the Class Proceedings Act, 1992, S.O. 1992 c.6 (the “Act”), as amended, certifying the
action as a class proceeding and appointing him as the representative of the class. The Plaintiff asserts that, to the
extent a member of the class acquires ownership of merchandise offered by easyhome, the Company’s rental agreement
is an agreement or arrangement for credit advanced and the aggregate of all charges and expenses under the rental
agreement amounts to interest charged at rates in excess of those allowed by law and that the rental agreements are
void and unenforceable. The Statement of Claim states that the members of the class will seek to recover such charges
and expenses, as well as, damages, costs and interest.

As at December 31, 2004, it was not possible to reasonably estimate the loss, if any, that would arise from this claim.

On March 4, 2005 the Company settled the class action lawsuit in principle. The settlement is conditional upon the
lawsuit being certified by the Court as a class proceeding under the Class Proceedings Act and as part of that process,
the terms of settlement being approved by the Court. The settlement does not constitute any admission of liability by
the Company.




                                                                                                                          easyhome annual report 04
                                                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 Under the terms of the settlement in principle, the Company is to pay to the Class $7.384 million in coupons which
                                 may be used to purchase the Company’s merchandise, be applied to existing rental agreements or used after starting
                                 a new rental agreement. In addition, the Company is to pay the legal fees and costs of the Class, in an amount to be
                                 approved by the Court, but anticipated to be less than $1.0 million. At this time, the Company has not estimated the
                                 cost of the settlement as that is contingent upon how many coupons are redeemed and in what form-that is, whether
                                 they are used to acquire merchandise, applied against rent on existing rental agreements or applied against rent on
                                 newly activated rental agreements. However, the Company does expect the final cost of the settlement to be less than
                                 the full settlement amount, as rates of take-up and redemption of the coupons will likely be less than 100%.

                                 A motion seeking the authorization to institute a class action was started against the Company in the Province of
                                 Quebec (Montreal Superior Court) in November 1997. The plaintiffs were authorized by the Court in July 1999 to
                                 proceed with a class action against the Company on behalf of all persons who contracted with the Company in the
                                 Province of Quebec for the lease or purchase of one or more items destined for personal use in their home (the “class”).
32
                                 The plaintiffs allege that the Company’s rental contracts do not properly comply with the requirements of the Consumer
                                 Protection Act (Quebec). They are seeking the cancellation of their contracts, or the reduction of their obligations and
                                 the reimbursement of all or a portion of the amounts paid by the members of the class to the Company, as well as
                                 exemplary damages in the amount of $200 per contract. The Company has entered into a settlement agreement with
                                 the plaintiffs, which is expected to be authorized by the court in April 2005. Management recorded a reserve on its
                                 books in a prior year in an amount it considers to be adequate to cover any potential liability of the Company in
                                 relation to this matter.

                                 Summary of Quarterly Results

                                 The Company’s rental business, because it is a portfolio business, is not seasonal as are most other types of retail
                                 businesses which generate a significant portion of their sales and profits during the Christmas season. Quarterly
                                 revenue generally does not vary more than 10%, assuming no portfolio growth, and no significant new store
                                 openings or acquisitions.




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                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                        CO N SO LI DAT ED S TAT EMEN T S O F INCO ME
(in 000s, except earnings per share amounts)

$                                                         Three Months Ended (2003 restated)
                              Dec 31,      Sept 30,    June 30, March 31, Dec 31, Sept 30       June 30, March 31
                               2004         2004         2004     2004      2003       2003       2003    2003

Revenue                        23,914       22,036     21,618    20,882     20,432     19,335    19,114   19,209
Net income for
 the period                      1,728        4,116*     1,369    1,539      1,601**   1,198       434      794

Earnings per share
 Basic                           0.28          0.68      0.23     0.25       0.33      0.25       0.09      0.16
                                                                                                                                                33
 Diluted                         0.25          0.61      0.21     0.23       0.30      0.23       0.07      0.15

Net income
 margin***                        7.2%       18.7%       6.3%      7.4%       7.8%      6.2%      2.3%      4.1%

* includes an income tax expense recovery of $2,276
** includes an income tax expense recovery of $215
*** net income as a percentage of revenue

Fourth Quarter

Overall Performance

For the three months ended December 31, 2004, total revenue increased $3.5 million from $20.4 million to
$23.9 million, or 17.0%. The monthly rental revenue portfolio increased from $6.3 million at the end of 2003
to $7.2 million at the end of 2004. For the three months ended December 31, 2004, an increased customer base
accounted for 89% (2003-40%) of the rental revenue increase and an increase in the average payment collected
per customer, from $388 in 2003 to $395 in 2004, accounted for the balance of the revenue increase. The Company
merged the operations of one store with one other store location in the Company’s chain (2003-none) and opened
three stores during the quarter (2003-3) for a store count of 143 as at December 31, 2004.



                                                                                                                    easyhome annual report 04
                                                              M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                            O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 Net income increased by $0.1 million, from $1.6 million for the three months ended December 31, 2003 to
                                 $1.7 million in 2004. In the fourth quarter of 2003, income tax expense was calculated at an effective rate of
                                 18.4% to adjust for the effect of calculating income tax expense for the first three quarters of 2003 at 35% rather
                                 than 29.3%, the estimated average reversal rate of future tax assets determined as at December 31, 2003. At an
                                 effective tax rate of 29.3% for the fourth quarter of 2003, net income would have been $1.4 million compared
                                 with $1.7 million in 2004, an increase of $0.3 million or 24.7%. Diluted earnings per share decreased from
                                 $0.26, after adjusting for the income tax expense recovery, to $0.25. Same store revenue (revenue from stores
                                 open for the comparable periods) continued to show positive trending. Same store revenue growth increased
                                 from 7.7% in the fourth quarter of 2003 to 9.9% in the comparable period in 2004.

                                 For the three months ended December 31, 2004, cash used in operating activities was $0.2 million compared
                                 with cash flow from operating activities of $1.8 million for the comparable three month period, a decrease of
                                 $2.0 million. The primary reasons for the decrease were increased purchases of rental assets and a greater pay-
34
                                 down of trade accounts payable, partially off-set by increased net income and items not affecting cash.

                                 During the three months ended December 31, 2004 and 2003, the Company spent $0.4 million on capital asset
                                 additions in each period. The majority of the capital asset additions related to new store fixturing and leaseholds.

                                 Results of Operations for the Three Months Ended December 31, 2004 Compared to the Three Months
                                 Ended December 31, 2003

                                 Rental Revenue

                                 Rental revenue was $20.2 million for the three months ended December 31, 2004 compared with $17.2 million
                                 in 2003, an increase of $3.0 million, or 16.9%. The primary reason for the increase was the increase in the
                                 customer base.

                                 Other Revenue

                                 Other revenue, which is realized from fees for ancillary services such as the merchandise protection plan, and
                                 processing, reinstatement and other fees related to returned cheques, was $3.8 million for the three months
                                 ended December 31, 2004 compared with $3.2 million in 2003, an increase of $0.6 million, or 17.7%, primarily
                                 due to increased penetration of the liability damage waiver fees. As a percentage of rental revenue, other revenue
                                 remained consistent at 18.6% in both periods.


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           O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Expenses

Operating expenses increased to $13.7 million for the three months ended December 31, 2004 compared with
$11.7 million for the comparable period in 2003, an increase of $2.0 million, or 17.0%. This increase was in the
normal course of business as a significant portion of the operating costs are variable with revenue. Certain expenses
not variable with revenue did increase such as advertising, vehicle and property insurance, and rent due to the store
count being 10 stores greater at December 31, 2004 compared with December 31, 2003. However, as a percentage
of total revenue, operating expenses decreased marginally to 57.3% of revenue in 2004 from 57.4% in 2003.

Salaries and Benefits

Salaries and benefits were $6.9 million for the three months ended December 31, 2004 compared with $5.9 million
in 2003, an increase of $1.0 million, or 16.4%. A greater head count because of more stores, the annual merit
                                                                                                                                                    35
increases and higher incentive compensation accounted for the increase. As a percentage of revenue, salaries and
benefits decreased from 29.2% in 2003 to 29.0% in 2004.

Selling, General and Administrative

Selling, general and administrative expenses were $2.9 million in 2004 compared with $2.3 million in 2003,
an increase of $0.6 million, or 27.3%. As a percentage of revenue, selling, general and administrative expenses
increased to 12.0% of revenue in 2004 from 11.0% in 2003. The primary reason for the increase in selling,
general and administrative non-variable costs was an increase in advertising costs of $0.5 million because of the
English language television advertising campaign that began in April 2004 as a means of increasing awareness
of the merchandise rental option.

Occupancy Costs

Occupancy costs were $2.9 million for the three months ended December 31, 2004 compared with $2.7 million
in 2003, an increase of $0.2 million, or 7.4%. As a percentage of revenue, occupancy costs decreased to 12.3%
in 2004 from 13.4 % in 2003 primarily due to the leveraging of same store rent expense. Total rent did increase
$0.2 million primarily due to the store count being 10 stores higher in 2004 versus 2003.




                                                                                                                        easyhome annual report 04
                                                                  M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                                O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 Automotive and Travel

                                 Automotive and travel expenses were $1.0 million in 2004 compared with $0.8 million in 2003, an increase of
                                 $0.2 million, or 25.9%. This increase is attributable to higher lease costs because of the greater number of delivery
                                 vehicles in the fleet and higher operating costs because of the increase in the volume of business and rising fuel costs.
                                 As a percentage of revenue, automotive and travel costs increased from 3.7% in 2003 to 4.0% in 2004.

                                 Amortization

                                 Amortization of rental assets for the three months ended December 31, 2004 increased $1.0 million to $7.0 million
                                 from $6.0 million for the comparable period in 2003 primarily due to the increase in revenue, and was consistent at
                                 29.3% of revenue for both periods.
36
                                 Amortization of capital assets and intangible assets for the fourth quarter of 2004 was consistent with the fourth
                                 quarter of 2003 at 2.0% of revenue.

                                 Operating Income (Income before interest and taxes)

                                 Operating income was $2.7 million in 2004 compared with $2.3 million in 2003, an increase of $0.4 million,
                                 or 17.9%. As a percentage of revenue, operating income increased to 11.5% in 2004 from 11.4% in 2003.

                                 Interest Expense

                                 Interest expense for the fourth quarter of 2004 was $0.3 million lower than 2003 primarily due to the lower average
                                 bank balance outstanding during the period and the amortization of the bank credit facility fees, a reduction from
                                 $55,000 per month in 2003 to $7,500 per month in 2004.

                                 Income Tax Expense

                                 The income tax provision for the three months ended December 31, 2004 was calculated at an effective rate of 36%
                                 which reflects the expected average reversal rate for future income taxes.




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                               M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
             O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




Liquidity and Capital Resources

Three months ended December 31, 2004 compared to the three months ended December 31, 2003

Cash used in operating activities was $0.2 million for the fourth quarter of 2004 compared to cash flow from
operating activities in 2003 of $1.8 million, a decrease of $2.0 million. Net income for the period increased
$0.1 million and items not affecting cash increased $1.7 million for a total increase in operating cash flow from
these items of $1.8 million. Rental asset purchases increased $2.7 million and the change in non-cash operating
items decreased $1.1 million for a total decrease in operating cash flow from these items of $3.8 million.
Purchases of rental assets increased to support the growth in revenue and the reduction in the net change of
non-cash operating items was primarily a result of the reduction in trade payables and accrued liabilities.

Cash used in investing activities was $0.4 million in both the 2004 and 2003 fourth quarters.
                                                                                                                                                    37


Cash flow from financing activities was $0.6 million in 2004 and cash used in financing activities in 2003 was
$1.4 million, an increase of $2.0 million. In 2003, net proceeds from an equity financing of $12.5 million were
used to redeem $2.5 million of preferred shares compared with nil in 2004. The balance was used to reduce the
bank revolving credit facility.

Contractual Obligations

The Company is committed to long-term operating leases for building space, vehicles and signage. The minimum
annual lease payments plus estimated operating costs required for the next five years and thereafter are approximately
as follows:

(in 000’s)                                                                                            $

             2005                                                                                  9,879
             2006                                                                                  7,979
             2007                                                                                  5,184
             2008                                                                                  2,600
             2009                                                                                    950
             Thereafter                                                                              333
                                                                                                  26,925


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                                                                M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
                                              O F FI N A N C I A L CO N DI T I O N A N D RESU LT S O F O PER AT I O N S (continued )




                                 Transactions with Related Parties

                                 Amounts receivable includes a $265,400 (2003 - $298,900) home purchase loan provided to an officer of the Company
                                 as a result of his relocation during 2001. The loan is interest-free and is secured by a collateral mortgage on the officer’s
                                 residence. The loan is repayable in installments of $1,000 per month plus 50% of any net bonuses awarded to the
                                 officer. The approximate fair value of the receivable at December 31, 2004 is $232,900.

                                 Other

                                 Additional information relating to the Company, including the Company’s Annual Information Form, is on SEDAR
                                 at www.sedar.com.

38
                                 As at March 7, 2005, there are 6,136,629 common shares, 806,300 options and 61,000 warrants outstanding.

                                 Certain information included in this discussion may constitute forward-looking statements. Forward-looking statements
                                 are based on current expectations and entail various risks and uncertainties. These risks and uncertainties could cause
                                 or contribute to actual results that are materially different from those expressed or implied. The Company disclaims
                                 any obligation or intention to update or revise any forward-looking statement, whether as a result of new information,
                                 future events, or otherwise.




     easyhome annual report 04
                    MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING




The accompanying consolidated financial statements and the information in this Annual Report are the
responsibility of management and have been approved by the Board of Directors.

The consolidated financial statements have been prepared by management in accordance with Canadian generally
accepted accounting principles and include some amounts based on management’s best estimates and judgments.
When alternative accounting methods exist, management has chosen those it considers most appropriate in the
circumstances. Management has prepared the financial information presented elsewhere in the annual report
and has ensured that it is consistent with the financial statements.

easyhome Ltd. maintains a system of internal controls to provide reasonable assurance that transactions are properly
authorized, financial records are accurate and reliable, and the Company’s assets are properly accounted for and
adequately safeguarded.
                                                                                                                                                   39

The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting
and is ultimately responsible for reviewing and approving the financial statements. The Board of Directors carries
out its responsibility for the financial statements through its Audit Committee. This Committee meets periodically
with management and the external auditors to review the financial statements and the annual report and to discuss
audit, financial and internal control matters. The Company’s external auditors have full and free access to the
Audit Committee.

The financial statements have been subject to an audit by the Company’s external auditors, Ernst & Young LLP,
in accordance with Canadian generally accepted auditing standards on behalf of the shareholders.




David Ingram,                                                 S.W. J ohns on,
President & Chief Executive Officer                            Executive Vice President & Chief Financial Officer




                                                                                                                       easyhome annual report 04
                                                                                        AUDITORS’ REPORT




                                 To the Shareholders of
                                 easyhome Ltd.

                                 We have audited the consolidated balance sheets of easyhome Ltd. as at December 31, 2004 and 2003, and the
                                 consolidated statements of income and retained earnings and cash flows for the years 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 audits.

                                 We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
                                 require that we plan and perform an audit to obtain reasonable assurance 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
40                               significant estimates made by management, as well as evaluating the overall financial statement presentation.

                                 In our opinion, these consolidated financial statements present fairly, in all material respects, the financial
                                 position of the Company as at December 31, 2004 and 2003, and the results of its operations and its cash
                                 flows for the years then ended in accordance with Canadian generally accepted accounting principles.



                                 Edmonton, Canada
                                 February 18, 2005
                                 (except for note 13(a) which is as of March 4, 2005)             Chartered Accountants




     easyhome annual report 04
                                                         easyhome Ltd.
                                              (Continued under the laws of Ontario)

                                       CO N SO LI DAT ED BA L A NCE SHEE T S


                                                                                               As at December 31
                                                                                       2004                              2003
(in 000’s)                                                                               $                                 $
                                                                                                          (restated – see note 2)
ASSETS [note 6]
Amounts receivable [notes 14 and 15]                                                   1,454                           1,677
Prepaid expenses                                                                         796                             664
Rental assets [note 3]                                                                41,485                          32,440
Capital assets [note 4]                                                                5,435                           5,213
Future tax assets [note 10]                                                            9,058                          10,425
Intangible assets [note 5]                                                               267                             354
Deferred costs [note 5]                                                                   12                             113
Goodwill                                                                              10,779                          10,779
                                                                                      69,286                          61,665

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
                                                                                                                                                                41
Bank revolving term loan [note 6]                                                      2,237                            3,684
Trade accounts payable                                                                 6,776                             7,159
Accrued liabilities                                                                    1,053                            1,416
Accrued payables, bonuses and other employee costs                                     3,105                            2,153
Dividends payable [note 9]                                                               245                                —
Deferred lease inducements                                                               279                                52
Unearned revenue                                                                         363                               315
Income taxes payable                                                                     244                               278
Note payable [note 7]                                                                     —                                160
                                                                                      14,302                           15,217

Commitments and contingencies [notes 8 and 13]
Shareholders’ equity
Common shares [note 9]                                                                44,632                          44,350
Contributed surplus [note 9]                                                             240                               8
Retained earnings                                                                     10,112                           2,090
                                                                                      54,984                          46,448
                                                                                      69,286                          61,665
See accompanying notes


On behalf of the Board:                   David Ingram, Director                               Donald K. Johnson, Director


                                                                                                                                    easyhome annual report 04
                                                                                          easyhome Ltd.

                                                      CO N SO LI DAT ED S TAT EMEN T S O F INCO ME A N D RE TA INED E A RNINGS

                                                                                                            For the year ended December 31,
                                                                                                            2004                         2003
                                 (in 000’s except earnings per share)                                         $                            $
                                                                                                                         (restated – see note 2)
                                 REVENUE
                                 Rental                                                                    74,479                      66,129
                                 Other                                                                     13,971                      11,961
                                                                                                           88,450                      78,090

                                 EXPENSES
                                 Salaries and benefits [note 14]                                            25,888                      22,913
                                 Selling, general and administrative                                        9,681                       8,726
                                 Occupancy costs                                                           11,550                      10,886
                                 Automotive and travel                                                      3,571                       2,948
                                                                                                           50,690                      45,473

                                 AMORTIZATION
                                 Amortization of rental assets                                              25,789                     23,341
42
                                 Amortization of capital assets, intangible assets, and
                                  deferred costs [notes 4 and 5]                                            1,583                       1,873
                                                                                                           27,372                      25,214
                                 Total operating expenses and amortization                                 78,062                      70,687
                                 Operating income                                                          10,388                       7,403
                                 Interest expense [note 12]                                                   269                       1,708
                                 Income before income taxes                                                10,119                       5,695
                                 Income taxes [note 10]
                                 Current                                                                        —                           77
                                 Future                                                                      1,367                       1,591
                                                                                                             1,367                       1,668
                                 Net income for the year                                                     8,752                       4,027
                                 Retained earnings (deficit), beginning of the year                           2,090                      (1,629)
                                 Preferred share dividends [note 9]                                             —                         (308)
                                 Common share dividends [note 9]                                              (730)                         —
                                 Retained earnings, end of the year                                         10,112                      2,090

                                 Earnings per share [note 11]
                                 Basic                                                                        1.44                       0.83
                                 Diluted                                                                      1.30                       0.75
                                 See accompanying notes



     easyhome annual report 04
                                                        easyhome Ltd.

                              CO N SO LI DAT ED S TAT EMEN T S O F C A SH FLOW S

                                                                          For the year ended December 31,
                                                                          2004                         2003
(in 000’s)                                                                  $                            $
                                                                                       (restated – see note 2)
OPERATING ACTIVITIES
Net income for the year                                                    8,752                      4,027
Items not affecting cash:
   Recognition of stock based compensation [note 9]                          232                          8
   Amortization of rental assets                                          25,789                     23,341
   Amortization of capital assets, intangible assets,
    and deferred costs [notes 4 and 5]                                     1,673                      2,473
   Future income taxes [note 10]                                           1,367                      1,591
   Gain on sale of land held for resale                                       —                        (143)
Net change in non-cash operating items -
   Rental assets                                                         (34,834)                   (27,936)
   Other [note 12]                                                           538                      2,629
Cash flow from operating activities                                         3,517                      5,990
                                                                                                                                             43
INVESTING ACTIVITIES
Purchase of capital assets                                                (1,746)                    (3,248)
Proceeds on disposition of capital assets                                     39                        160
Proceeds on sale of land held for resale                                      —                         826
Repayment of note payable related to acquisition                            (160)                      (176)
Cash flow from investing activities                                        (1,867)                    (2,438)

FINANCING ACTIVITIES
Repayment of bank revolving term loan                                     (1,447)                   (13,209)
Financing costs for bank revolving term loan                                  —                          (90)
Proceeds from equity financing [note 9]                                        —                      13,881
Issuance of common shares on exercise of options and warrants                282                          67
Share issue costs [note 9]                                                    —                       (1,393)
Redemption of preferred shares                                                —                      (2,500)
Preferred share dividend payments [note 9]                                    —                         (308)
Common share dividend payments [note 9]                                     (485)                         —
Cash flow from financing activities                                         (1,650)                     (3,552)

Net change in cash                                                              —                         —
See accompanying notes




                                                                                                                 easyhome annual report 04
                                                                                           easyhome Ltd.
                                                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                     December 31, 2004 and 2003




                                 1. SIGNIFIC ANT ACCOUNTING POLICIES


                                 easyhome Ltd. (the “Company”) is in the business of renting, with or without an option to purchase, brand name home
                                 entertainment products, appliances and household furniture across Canada.

                                 The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted
                                 accounting principles. Because the precise determination of many assets and liabilities is dependent upon future events, the
                                 preparation of financial statements for a period necessarily involves the use of estimates and approximations, which have been
                                 made using careful judgment. Actual results could differ from those estimates. The consolidated financial statements have,
                                 in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the
                                 accounting policies summarized below.

                                 Basis of consolidation

                                 The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries:
44
                                           - RTO Asset Management Inc.
                                           - RTO Distribution Inc.
                                           - RTO (Rentown) Inc.
                                           - RTO (Rentown) 2000 Inc.

                                 Business cycle

                                 Rental agreements for new product are written for an initial period of one week or one month, with successive renewal terms
                                 ranging from 24 to 36 months, and rental agreements for previously enjoyed product are similarly written, with successive
                                 renewal terms ranging from 4 to 35 months. Fewer than 5% of the Company’s rental agreements carry terms of less than
                                 12 months. Accordingly, an unclassified balance sheet has been presented.

                                 Rental and other revenue

                                 Merchandise is rented to customers pursuant to agreements that provide for weekly or monthly rental payments collected in
                                 advance. The rental agreements terminate at the end of the weekly or monthly rental period without any further obligation
                                 or cost to the customer. The customer may renew the agreement for another week or month, although there is no obligation
                                 to do so. Revenue from rental agreements is recognized when payment is received and the rental period has passed.




     easyhome annual report 04
                                                             easyhome Ltd.
                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                     December 31, 2004 and 2003




1. SIGNIFIC ANT ACCOUNTING POLICIES (continued)


Rental and other revenue (continued)

Other revenue from various services and charges to rental customers include liability waiver, processing and reinstatement fees,
which are recognized as collected, and supplier incentives (excluding vendor volume rebates), which are recognized as earned.

Rental and capital assets

Rental and capital assets are recorded at cost, including freight. Vendor volume rebates are recorded as a reduction of the cost of
rental assets.

Assets on rent, excluding game stations, computers and related equipment and assets that were previously held for rent assets that
had not been out on rent for at least 90 consecutive days, are amortized using the units of activity method. Under the units of
activity method, assets on rent are amortized in the proportion of rents received to total expected rents provided over the rental
agreement term. Game stations are amortized on a straight-line basis over 18 months. Computers and related equipment are                                          45
amortized on a straight-line basis over 24 months. Held for rent assets are not amortized where such assets have not been out on
rent for less than 90 consecutive days. Once held for rent assets have not been out on rent for at least 90 consecutive days, such
assets are amortized on a straight line basis over 18 months regardless of future rental. Amortization includes amounts which
have been charged off as stolen, lost or no longer suitable for rent.

In the event management determines that the future net cash flows to be derived from renting the assets is less than the carrying
value of the assets, the assets are written down to estimated net realizable value. The estimated net realizable value of rental
assets is subject to measurement uncertainty and the impact on the consolidated financial statements for future periods could
be material.

Capital assets are amortized over their estimated useful lives using the following rates and methods:

                                                      Rate                                                Method

Office equipment and furniture                       20-30%                               Declining balance
Signage                                                20%                               Declining balance
Automotive                                             30%                               Declining balance
Leasehold improvements                                                                   Straight-line over the related lease term




                                                                                                                                      easyhome annual report 04
                                                                                             easyhome Ltd.
                                                           NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                       December 31, 2004 and 2003




                                 1. SIGNIFIC ANT ACCOUNTING POLICIES (continued)

                                 Rental and capital assets (continued)

                                 Amortization is recorded at one-half of the above rates in the year of acquisition on all capital assets except leasehold
                                 improvements, software and display units.

                                 Lease inducements

                                 Lease inducements are recognized as future obligations when received and are amortized on a straight-line basis over the term of
                                 the related leases as an increase or reduction of current rent expense.

                                 Intangible assets

                                 Intangible assets are tested annually for impairment and an impairment loss would be recognized if the carrying amount of the
                                 intangible asset exceeds its estimated fair value. The Company performed an impairment test as at December 31, 2004 and
46
                                 determined that the carrying values of intangible assets were not impaired.

                                 Customer lists are amortized on a straight-line basis over 5 years.

                                 Customer rental agreements are amortized on a straight-line basis over 4 months.

                                 Deferred costs

                                 Deferred costs are recorded at cost. Amortization is computed using the straight-line method over the following periods:

                                 Financing costs are amortized on a straight-line basis over the period of the related loan.

                                 Organization costs are amortized over 5 years.

                                 Goodwill

                                 The carrying value of goodwill is reviewed annually to ensure that the value reflected is not impaired. An impairment loss
                                 would be recognized if the carrying amount of the goodwill exceeds its estimated fair value. Due to the long-term nature
                                 of assumptions made, it is possible that estimates could prove to be materially incorrect, and accordingly the impact on the
                                 consolidated financial statements for future periods could be material. The Company performed an impairment test as at
                                 December 31, 2004 and determined that the carrying value of the goodwill was not impaired.




     easyhome annual report 04
                                                            easyhome Ltd.
                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                      December 31, 2004 and 2003




1. SIGNIFIC ANT ACCOUNTING POLICIES (continued)


Share issue costs

Costs related to the issuance of shares are charged against share capital.

Earnings per share

Basic earnings per share is computed based on the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed using the treasury stock method, which assumes that the cash that would be received
on the exercise of options and warrants is applied to purchase shares at the average price during the period and that the
difference between the shares issued upon exercise of the options and warrants and the number of shares obtainable under this
computation, on a weighted average basis, is added to the number of shares outstanding. Antidilutive options and warrants are
not considered in computing diluted earnings per share.

Income taxes                                                                                                                                                 47


The Company uses the liability method to account for income taxes. Under this method, future income tax assets and liabilities
are determined based on differences between financial reporting and tax bases of assets and liabilities, and measured using the
substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Stock-based compensation

In periods prior to January 1, 2002, the Company recognized no compensation expense when shares or stock options were
issued. Effective January 1, 2002, the Company adopted new recommendations of the Canadian Institute of Chartered
Accountants (CICA) with respect to the fair value method of accounting for stock-based compensation. As permitted by this
standard, the Company applied this change prospectively for new awards granted on or after January 1, 2002. The Company
chose to recognize no compensation expense when stock options were granted to employees and directors under stock option
plans with no cash or equity settlement features. However, direct awards of shares to employees, directors and non-employees,
and stock option awards granted to non-employees, were accounted for in accordance with the fair value method of accounting
for stock-based compensation.

To date the Company has not granted options with cash or equity settlement features, or granted stock option awards to non-
employees. In 2004, the shareholders approved the implementation of a restricted share unit plan, which permits the direct
awarding of units to senior management entitling the respective employees to receive shares of the Company.




                                                                                                                                 easyhome annual report 04
                                                                                            easyhome Ltd.
                                                           NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                      December 31, 2004 and 2003




                                 1. SIGNIFIC ANT ACCOUNTING POLICIES (continued)

                                 Stock-based compensation (continued)

                                 Effective January 1, 2003, the Company adopted the fair value method of accounting for stock options granted to employees and
                                 directors. As permitted, the Company applied this change prospectively for new awards granted on or after January 1, 2003.
                                 The Company continues to provide pro forma disclosures with respect to options granted in 2002.

                                 The Company’s stock-based compensation plans, consisting of a stock option plan and a restricted share unit plan, are more fully
                                 described in note 9.

                                 Impairment of long-lived assets

                                 Long-lived assets of the Company include capital assets, deferred start-up costs and intangible assets. These assets are tested
                                 for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
48                               An impairment loss is then recognized when the carrying amount exceeds their fair value.

                                 During 2003, the Company completed a corporate re-branding and recorded an impairment loss related to certain capital assets
                                 (see note 4). There were no other events or changes in circumstances, which indicated that the carrying amounts of long-lived
                                 assets may not be recoverable, thereby requiring any further impairment losses to be recognized.

                                 Foreign currency translation

                                 The Company purchases rental assets from suppliers in the United States. Transactions denominated in US dollars are translated
                                 as follows: monetary items at the rate of exchange at the balance sheet date, and non-monetary items at historical exchange rates.
                                 Any resulting gains or losses are included in income.




     easyhome annual report 04
                                                          easyhome Ltd.
                                   NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                    December 31, 2004 and 2003




2. CHANGE IN ACCOUNTING POLICY


Vendor volume rebates

Effective January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants
with respect to the accounting for cash consideration received from a vendor. Under the new recommendations, the Company
accrues vendor volume rebates when earned as a reduction to rental assets. Earned amounts are amortized on a straight line
basis over 20 months, representing the average life of the underlying rental assets, and recorded as a reduction of rental asset
amortization expense. Prior to the adoption of the new recommendation, vendor volume rebates were accrued as earned and
recorded as other revenue.

This change has been applied retroactively and the Company’s 2003 consolidated financial statements have been restated
accordingly. The effect of adopting the new recommendations is summarized as follows:

                                                                                             2004                       2003
(in 000’s, except earnings per share)                                                          $                         $                                     49



Balance Sheets
Rental assets                                                                                (725)                     (535)
Future tax assets                                                                             261                       193
Retained earnings                                                                            (464)                     (342)

Statements of Income and Retained Earnings
Other revenue                                                                                (825)                     (628)
Amortization of rental assets                                                                (635)                     (495)
Total operating expenses and amortization                                                    (635)                     (495)
Operating income                                                                             (190)                     (133)
Income before income taxes                                                                   (190)                     (133)
Income tax expense                                                                            (68)                      (42)
Net income for the year                                                                      (122)                       (91)

Earnings per share:
Basic                                                                                        (0.02)                    (0.02)
Diluted                                                                                      (0.01)                    (0.01)




                                                                                                                                   easyhome annual report 04
                                                                                          easyhome Ltd.
                                                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                    December 31, 2004 and 2003




                                 3. REN TA L A SSE T S

                                                                                                                             2004                        2003
                                 (in 000’s)                                                                                     $                            $
                                                                                                                                          (restated – see note 2)

                                 Rental assets                                                                              70,953                      57,725
                                 Accumulated amortization                                                                  (29,468)                    (25,285)
                                 Net book value                                                                             41,485                      32,440

                                 4 . C A PI TA L A SSE T S
                                                                                                                                        2004

                                                                                                                                    Accumulated       Net book
                                                                                                                        Cost        amortization       value
50                               (in 000’s)                                                                              $               $                $

                                 Office equipment and furniture                                                          5,792          2,953            2,839
                                 Signage                                                                                1,669            528            1,141
                                 Automotive                                                                                74             45               29
                                 Leasehold improvements                                                                 2,458          1,032            1,426
                                                                                                                        9,993          4,558            5,435

                                                                                                                                        2003
                                                                                                                                    Accumulated       Net book
                                                                                                                        Cost        amortization       value
                                 (in 000’s)                                                                              $               $                $

                                 Office equipment and furniture                                                          5,093           2,454           2,639
                                 Signage                                                                                1,514             291           1,223
                                 Automotive                                                                               146             108              38
                                 Leasehold improvements                                                                 2,038             725           1,313
                                                                                                                        8,791           3,578           5,213

                                 Amortization of capital assets of $1,485,200 (2003 - $1,701,500), including nil (2003 – $605,000) for writedowns related to
                                 the re-branding of the stores to the easyhome name, was recorded during the year.



     easyhome annual report 04
                                                         easyhome Ltd.
                         NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                   December 31, 2004 and 2003




5. OTHER ASSETS

Intangible assets
                                                                                                      2004
                                                                                                   Accumulated    Net book
                                                                                      Cost         amortization    value
(in 000’s)                                                                             $                $             $

Customer lists                                                                         450             183          267
Customer rental agreement                                                               60              60           —
                                                                                       510             243          267

                                                                                                       2003
                                                                                                   Accumulated    Net book
                                                                                      Cost         amortization    value
                                                                                                                                                         51
(in 000’s)                                                                             $                $             $

Customer lists                                                                         450              96          354
Customer rental agreement                                                               60              60           —
                                                                                       510             156          354

Amortization of $86,600 (2003 - $143,700) was recorded on the intangible assets during the year.

Deferred costs

                                                                                                      2004
                                                                                                   Accumulated    Net book
                                                                                      Cost         amortization    value
(in 000’s)                                                                             $                $             $

Organization costs                                                                     398             386           12
Financing costs                                                                         90              90           —
                                                                                       488             476           12




                                                                                                                             easyhome annual report 04
                                                                                              easyhome Ltd.
                                                            NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                        December 31, 2004 and 2003




                                 5. OTHER ASSETS (continued)
                                                                                                                                             2003
                                                                                                                                         Accumulated    Net book
                                                                                                                          Cost           amortization    value
                                 (in 000’s)                                                                                $                  $             $

                                 Organization costs                                                                        398               375            23
                                 Financing costs                                                                           740               650            90
                                                                                                                         1,138             1,025           113

                                 Amortization of $101,200 (2003 - $627,300) was recorded on deferred organization and financing costs during the year.

                                 6. BANK LOAN

                                 The bank loan facility was renewed on December 20, 2004 and terminates December 31, 2005. The facility bears interest at
52                               prime plus 1.0% and at December 31, 2004, the credit limit was $10,000,000.

                                 Covenants and conditions for the facility include a minimum equity requirement, a fixed charge cover covenant, a funded debt
                                 to EBITDA covenant, capital expenditure and rental asset acquisition covenants in accordance with projections and annual
                                 approval of the Company’s business plan. During 2003 and 2004, and at the end of each year, the Company was in compliance
                                 with all bank loan covenants.

                                                                                                                                 2004                        2003
                                 (in 000’s)                                                                                       $                              $

                                 Bank revolving term loan                                                                        2,237                      3,684

                                 The weighted average interest rate on the bank loan for the year ended December 31, 2004 was 5.0% (2003 – 7.2%).

                                 All assets of the Company are pledged as collateral for the facility.

                                 7. N O T E PAYA B L E

                                 A note payable was issued as part of the purchase price consideration for the acquisition of 2 stores in October 2002. The note
                                 bore interest at 10% per annum and was payable in equal blended monthly interest and principal installments of $16,765 for
                                 24 months commencing November 2002.




     easyhome annual report 04
                                                         easyhome Ltd.
                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                   December 31, 2004 and 2003




8. COMMITMENTS


The Company is committed to long-term operating leases for building space, vehicles and signage. The minimum annual lease
payments plus estimated operating costs required for the next five years and thereafter are approximately as follows:

(in 000’s)                                                                                                 $

             2005                                                                                        9,879
             2006                                                                                        7,979
             2007                                                                                        5,184
             2008                                                                                        2,600
             2009                                                                                          950
             Thereafter                                                                                    333
                                                                                                        26,925
                                                                                                                                                        53
9. SH A RE C A PI TA L


Authorized
Unlimited preferred shares
Unlimited common shares of no par value

Preferred shares issued and outstanding

On December 2, 2002, the Company issued 2,500,000 preferred shares for total proceeds of $2,500,000. During 2003,
the Company paid preferred share dividends of $307,600, and on December 10, 2003, redeemed the preferred shares for
$2,500,000.

Dividends were cumulative, calculated at a rate of 12% per annum, and payable monthly on the first business day of each
following month. The preferred shares were non-voting and non-convertible, retractable by the holders under certain
conditions, and redeemable by the Company without bonus or penalty subject to certain banking covenants being met.
The preferred shares were issued to insiders of the Company, one of whom is the Chairman of the Board.




                                                                                                                            easyhome annual report 04
                                                                                         easyhome Ltd.
                                                           NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                   December 31, 2004 and 2003




                                 9. SH A RE C A PI TA L (continued)


                                 Common shares issued and outstanding

                                                                                                                2004                            2003
                                                                                                    Shares             Amount          Shares          Amount
                                 (in 000’s)                                                           #                  $               #               $

                                 Balance, beginning of the year                                     6,036              44,350          4,381           31,299
                                 Issued for cash for exercised stock
                                      options and warrants                                             89                 282             22               67
                                 Issued for cash                                                       —                   —           1,633           12,984
                                 Balance, end of the year                                           6,125              44,632          6,036           44,350

                                 In 2003, the Company issued 1,633,000 common shares, at $8.50 per share, for net cash proceeds of $12,983,700 ($13,880,500
54
                                 less share issue costs of $1,393,400 plus future income tax benefits related to share issue costs of $496,600).

                                 Common share dividends

                                 In 2004, the Company commenced paying dividends on common shares. Dividends in the amount of $485,000 were paid
                                 to common shareholders during 2004 (2003 - nil). The Company declared a dividend of $0.04 per share ($245,000) to
                                 shareholders on record on November 30, 2004, which was paid on January 4, 2005.

                                 Stock options and warrants

                                                                                                                                2004                     2003
                                 (in 000’s)                                                                                       #                       #

                                 Outstanding options and warrants
                                 Balance, beginning of the year                                                                 899                      921
                                 Options granted                                                                                 76                       14
                                 Options exercised                                                                              (81)                     (22)
                                 Warrants exercised                                                                              (8)                      —
                                 Options and warrants cancelled, terminated or expired                                           (7)                     (14)
                                 Balance, end of the year                                                                       879                      899




     easyhome annual report 04
                                                           easyhome Ltd.
                         NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                     December 31, 2004 and 2003




9. SH A RE C A PI TA L (continued)


Stock options

Under the Company’s stock option plan, options to purchase common shares may be granted by the Board of Directors to
directors, officers and employees. Options are granted at exercise prices equal to or greater than fair market value at the grant
date, generally vest evenly over a five year period, and have exercise lives ranging from five to ten years. The aggregate number
of common shares reserved for issuance and which may be purchased upon the exercise of options granted pursuant to the plan
shall not exceed 1,000,000 common shares.

The Company has granted stock options to directors, officers and employees to purchase 818,140 common shares at prices
between $3.06 and $15.00 per share. These options expire on dates between February 1, 2006 and April 20, 2011.

                                                                           2004                              2003
                                                                           Weighted Average                   Weighted Average                                 55
                                                            Shares           Exercise Price        Shares      Exercise Price
(# of shares in 000’s)                                        #                    $                 #               $

Stock options, beginning of the year                         830                   3.34              852              3.30
Options granted                                               76                  12.05               14              7.01
Options exercised                                            (81)                  3.18              (22)             3.07
Options canceled,
  terminated or expired                                       (7)                  6.79              (14)             5.25
Stock options, end of the year                               818                   4.14              830              3.34




                                                                                                                                   easyhome annual report 04
                                                                                             easyhome Ltd.
                                                           NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                       December 31, 2004 and 2003




                                 9. SH A RE C A PI TA L (continued)

                                 The Company has issued options to directors, officers and employees at December 31, 2004 as follows:

                                                                                Outstanding                                             Exercisable
                                                                                 Weighted
                                                                                  Average                    Weighted                                 Weighted
                                      Range of                                   Remaining                   Average                                  Average
                                      Exercise                                  Contractual                  Exercise                                 Exercise
                                       Prices                  Shares              Life in                    Price             Shares                 Price
                                         $                       #                 Years                        $                 #                      $
                                                              (in 000’s)                                                        (in 000’s)

                                 3.06 – 4.50                     693                  3.35                    3.07                  676                3.07
                                 5.90 – 7.86                      50                  2.72                    7.06                   28                7.06
56
                                 12.00 – 15.00                    75                  4.21                   12.06                   21               12.04
                                 3.06 – 15.00                    818                  3.39                    4.14                  725                3.49

                                 Stock-based compensation

                                 The Company uses the fair value method of accounting for stock options granted to employees and directors on or after January
                                 1, 2003. During the year ended December 31, 2004, the Company granted 76,200 options (2003 – 14,500). Compensation
                                 (salaries and benefits) expense of $106,000 (2003 - $8,000), with a corresponding increase in contributed surplus, was recorded
                                 in respect of stock options during the year.

                                 The estimated fair value of these options was determined using the Black-Scholes options pricing model with the following
                                 assumptions, resulting in a weighted-average fair value of $6.13 per option (2003 – $4.09):

                                                                                                                             2004                            2003



                                 Risk-free interest rate (%)                                                                 3.36                         3.99
                                 Expected hold period to exercise (years)                                                    4.0                          4.0
                                 Volatility in the price of the corporation’s shares (%)                                    66.96                        75.38
                                 Dividend yield (%)                                                                          0.07                         0.00




     easyhome annual report 04
                                                            easyhome Ltd.
                                  NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                      December 31, 2004 and 2003




9. SH A RE C A PI TA L (continued)


The following table provides the required pro-forma measures of net income and earnings per share had compensation expense
been recognized based on the fair value of the options granted in 2002, as at the date of the grant, in accordance with the fair
value method of accounting for stock-based compensation:

                                                                                                 2004                       2003
(in 000’s except earnings per share figures)                                                        $                         $

Net income for the year                                                                          8,752                      4,027
Compensation expense                                                                                20                         26
Pro-forma net income for the year                                                                8,732                      4,001

Earnings per share:
Reported basic earnings per share                                                                1.44                       0.83
                                                                                                                                                                57
Compensation expense per share                                                                  (0.00)                     (0.01)
Pro-forma basic earnings per share                                                               1.44                       0.82

Reported diluted earnings per share                                                              1.30                       0.75
Compensation expense per share                                                                  (0.00)                     (0.01)
Pro-forma diluted earnings per share                                                             1.30                       0.74

The estimated fair value of these options was determined using the following weighted-average assumptions, resulting in a
weighted-average fair value of $4.58 per option (2003 – $4.54):

                                                                                                  2004                      2003



Risk-free interest rate (%)                                                                        4.56                      4.47
Expected hold period to exercise (years)                                                           4.0                       4.0
Volatility in the price of the corporation’s shares (%)                                           85.18                     85.49
Dividend yield (%)                                                                                 0.00                      0.00




                                                                                                                                    easyhome annual report 04
                                                                                           easyhome Ltd.
                                                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                     December 31, 2004 and 2003




                                 9. SH A RE C A PI TA L (continued)


                                 Warrants

                                 In December 2000, the Company issued warrants to acquire 100,000 common shares at an exercise price of $3.06 per share
                                 as part of the terms of a subordinated debenture financing. The warrants may be exercised at any time over a five year period
                                 from issuance. At December 31, 2004, 61,000 warrants (2003 – 69,000) were outstanding.

                                 Restricted Share Unit Plan

                                 On May 10, 2004, the shareholders approved the implementation of a restricted share unit plan (the “Plan”) which permits
                                 the awarding of restricted share units to senior management of easyhome Ltd., its subsidiaries and its designated affiliates
                                 (collectively the “Company”). Each unit entitles the employee to receive one common share of the Company. The units vest
                                 on the third anniversary of the date of the grant provided certain performance criteria are met. 150,000 common shares are
58
                                 reserved for issuance under the Plan. The purpose of the Plan is to (i) provide long-term incentives to senior executives of
                                 the Company so as to encourage the long-term retention of senior executives for the success of the Company; (ii) support the
                                 objectives of employee share ownership; (iii) foster a responsible balance between short-term and long-term results; and
                                 (iv) build and maintain a strong spirit of performance and entrepreneurship.

                                 On May 11, 2004, 71,000 units were granted to senior executives of the Company and, during the year, an additional 606
                                 units were granted as a result of the declaration of common share dividends. Compensation expense is recognized over the
                                 three-year vesting period. During the year ended December 31, 2004, $126,000 was recorded as compensation (salaries and
                                 benefits) expense, with a corresponding increase in contributed surplus, under the Plan.




     easyhome annual report 04
                                                          easyhome Ltd.
                           NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                    December 31, 2004 and 2003




10. INCO ME TA X ES


The Company’s tax provision is determined as follows:

                                                                                             2004                      2003
($ in 000’s)                                                                                  $                          $
                                                                                                         (restated – see note 2)

Combined basic federal and provincial income tax rates                                      35.98%                      37.2%
Expected income tax expense                                                                  3,641                       2,126
Impact of changes in substantively enacted tax rates on
     recognized future tax assets                                                               31                       (599)
Valuation allowance adjustments                                                             (2,276)                         —
Other                                                                                          (29)                        141
                                                                                             1,367                       1,668                                 59



A change in the Province of Ontario’s substantively enacted tax rates, as announced in November 2003, is the primary reason for
the $599,000 reduction in the 2003 tax provision.

Significant components of the Company’s future tax assets are as follows:

                                                                                             2004                      2003
(in 000’s)                                                                                    $                          $
                                                                                                         (restated – see note 2)

Future tax assets
Loss carryforwards                                                                             838                       2,215
Tax cost of rental and capital assets in excess
  of net book value                                                                          7,332                       9,396
Accounts receivable                                                                            580                         570
Other                                                                                          308                         520
                                                                                             9,058                      12,701
Less valuation allowance                                                                        —                       (2,276)
                                                                                             9,058                      10,425



                                                                                                                                   easyhome annual report 04
                                                                                            easyhome Ltd.
                                                           NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                      December 31, 2004 and 2003




                                 10. INCO ME TA X ES (continued)


                                 At December 31, 2003, a valuation allowance of $2,276,000 against future tax assets was required due to the Company’s
                                 operating history and management’s assessment of various uncertainties as to their future realization. During 2004,
                                 management revised its assessment of the magnitude and timing of positive taxable income that is sustainable in future
                                 periods and accordingly, reversed this valuation allowance.

                                 At December 31, 2004, the Company and its subsidiaries had unused non-capital tax loss carry-forwards of approximately
                                 $2,355,000 available to reduce future years’ taxable income which expire as follows:

                                 (in 000’s)                                                                                                   $

                                              2006                                                                                         59,000
                                              2007                                                                                      1,266,000
60                                            2009                                                                                        759,000
                                              2011                                                                                        271,000
                                                                                                                                        2,355,000

                                 At December 31, 2004, the potential future tax benefit associated with all of these losses has been recorded in these consolidated
                                 financial statements.




     easyhome annual report 04
                                                          easyhome Ltd.
                         NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                    December 31, 2004 and 2003




11. E A R N I N G S P E R S H A R E


The reconciliation of net income to net income available to common shareholders is as follows:

                                                                                                 2004                     2003
(in 000’s)                                                                                         $                       $
                                                                                                         (restated – see note 2)

Net income for the year                                                                          8,752                   4,027
Dividends paid on preferred shares                                                                  —                     (308)
Net income available to common shareholders                                                      8,752                   3,719

The number of basic and diluted common shares outstanding, as calculated on a weighted-average basis, is as follows:

                                                                                                 2004                    2003                                  61
(in 000’s)                                                                                         #                      #
Basic shares outstanding                                                                         6,066                   4,478
Share options (dilutive effect of 816,540 options; 2003 – 802,320)                                 602                     463
Warrants (dilutive effect of 61,000 warrants; 2003 – 69,000)                                        47                      40
Diluted shares outstanding                                                                       6,715                   4,981

Stock options to acquire 1,600 common shares (2003 – 28,000) were not included in the calculation of diluted shares as their
exercise prices exceeded the average market share price for the year.




                                                                                                                                   easyhome annual report 04
                                                                                            easyhome Ltd.
                                                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                      December 31, 2004 and 2003




                                 12 . NE T CH A NGE IN NO N - C A SH O PER AT ING I T EM S


                                 The net change in non-cash operating items excluding rental assets is determined as follows:

                                                                                                                                2004                    2003
                                 (in 000’s)                                                                                       $                      $

                                 Amounts receivable                                                                              223                     (109)
                                 Prepaid expenses                                                                               (132)                     181
                                 Trade accounts payable                                                                         (383)                   1,805
                                 Accrued liabilities                                                                            (370)                     250
                                 Accrued payables, bonuses and other employee costs                                              952                      562
                                 Deferred lease inducement                                                                       227                       52
                                 Unearned revenue                                                                                 48                     (115)
62                               Income taxes payable                                                                            (27)                       3
                                                                                                                                 538                    2,629


                                 Supplemental disclosures in respect of the consolidated statement of cash flows comprise the following:

                                                                                                                                2004                    2003
                                 (in 000’s)                                                                                       $                      $

                                 Income taxes paid                                                                               87                        74
                                 Interest paid                                                                                  179                     1,107

                                 Interest expense of $268,900 (2003 - $1,707,800) presented on the statement of income includes amortization of financing costs
                                 of $90,000 (2003 - $600,000).




     easyhome annual report 04
                                                           easyhome Ltd.
                          NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                     December 31, 2004 and 2003




13. CON TINGENCIES

(a) On April 26, 2004 a legal proceeding was commenced against the Company and its wholly-owned subsidiary, RTO Asset
    Management Inc. by Lawrence William Nantais (the “Plaintiff ”), a customer of the Company. The Plaintiff seeks an order
    pursuant to the Class Proceedings Act, 1992, S.O. 1992 c6 (the “Act”), as amended, certifying the action as a class proceeding
    and appointing him as the representative of the class. The Plaintiff asserts that, to the extent a member of the class acquires
    ownership of merchandise offered by easyhome, the Company’s rental agreement is an agreement or arrangement for credit
    advanced and the aggregate of all charges and expenses under the rental agreement amounts to interest charged at rates in
    excess of those allowed by law and that the rental agreements are void and unenforceable. The Statement of Claim states
    that the members of the class will seek to recover such charges and expenses, as well as damages, costs and interest.

   As at December 31, 2004, it was not possible to reasonably estimate the loss, if any, that would result from this claim.

   On March 4, 2005 the Company settled the class action lawsuit in principle. The settlement is conditional upon the lawsuit
   being certified by the Court as a class proceeding under the Class Proceedings Act and as part of that process, the terms of
   settlement being approved by the Court. The settlement does not constitute any admission of liability by the Company.                                             63




   Under the terms of the settlement in principle, the Company is to pay to the Class $7.384 million in coupons which may
   be used to purchase the Company’s merchandise, be applied to existing rental agreements or used after starting a new rental
   agreement. In addition, the Company is to pay the legal fees and costs of the Class, in an amount to be approved by the Court,
   but anticipated to be less than $1.0 million. At this time, the Company has not estimated the cost of the settlement as that is
   contingent upon how many coupons are redeemed and in what form, that is, whether they are used to acquire merchandise,
   applied against rent on existing rental agreements or applied against rent on newly activated rental agreements. However,
   the Company does expect the final cost of the settlement to be less than the full settlement amount, as rates of take-up and
   redemption of the coupons will likely be less than 100%.

(b) A motion seeking the authorization to institute a class action was started against the Company in the Province of Quebec
   (Montreal Superior Court) in November 1997. The plaintiffs were authorized by the Court in July 1999 to proceed with a
   class action against the Company on behalf of all persons who contracted with the Company in the Province of Quebec for
   the lease or purchase of one or more items destined for personal use in their home (the “class”). The plaintiffs allege that the
   Company’s rental contracts do not properly comply with the requirements of the Consumer Protection Act (Quebec). They are
   seeking the cancellation of their contracts, or the reduction of their obligations and the reimbursement of all or a portion of the
   amounts paid by the members of the class to the Company, as well as exemplary damages in the amount of $200 per contract.
   The Company has entered into a settlement agreement with the plaintiffs, which is expected to be authorized by the court in
   April 2005. Management recorded a reserve on its books in a prior year in an amount it considers to be adequate to cover any
   potential liability of the Company in relation to this matter.



                                                                                                                                         easyhome annual report 04
                                                                                            easyhome Ltd.
                                                           NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                                                      December 31, 2004 and 2003




                                 14 . REL AT ED PA RT Y T R A N SAC T I O N S


                                 Amounts receivable includes a $265,400 (2003 - $298,900) home purchase loan provided to an officer of the Company as a
                                 result of his relocation during 2001. The loan is interest-free and is secured by a collateral mortgage on the officer’s residence.
                                 The loan is repayable in installments of $1,000 per month plus 50% of any net bonuses awarded to the officer. The approximate
                                 fair value of the receivable at December 31, 2004 is $232,900.

                                 During 2003 the Company paid $170,000 to a former director for consulting services. No such payments were made in 2004.

                                 15. FINANCIAL INSTRUMENT S AND RISK MANAGEMENT


                                 Financial instruments

                                 The fair value of amounts receivable, trade accounts payable and income taxes payable approximate their carrying values,
                                 due to expected relatively short periods to maturity of these instruments.
64


                                 The fair value of the bank revolving term loan approximates its carrying value due to interest rates which reflect market rates.

                                 Interest rate risk management

                                 The bank revolving term loan bears a floating rate of interest. The Company does not hedge interest rates and future changes
                                 in interest rates will affect the amount of interest expense payable by the Company.

                                 Credit risk management

                                 The maximum exposures to credit risk are represented by the carrying amount of the amounts receivable and assets on rent with
                                 customers under merchandise rental agreements.

                                 The credit risk related to amounts receivable results from the possibility of default on rebate payments. The Company deals
                                 with credible companies, performs ongoing credit evaluations and allows for uncollectible rebate amounts when determined.




     easyhome annual report 04
                                                          easyhome Ltd.
                         NOTES TO CONSOLIDATED FIN A NCI A L S TATEMEN T S
                                                    December 31, 2004 and 2003




15. FINANCIAL INSTRUMENT S AND RISK MANAGEMENT (continued)


The credit risk related to assets on rent results from the possibility of customer default of agreed payments. The Company
rents products to thousands of customers and has no concentration of revenue risk with any particular individual, company or
other entity. The Company has a standard collection process in place in the event of payment default, which concludes with
the recovery of the rental asset if satisfactory payment terms cannot be worked out, as the Company maintains ownership of
the rental assets until payment options are exercised. Annual rental asset losses normally approximate 3% of rental revenues.

Indemnities

The Company indemnifies its directors and officers against any and all claims or losses reasonably incurred in the performance
of their service to the Company to the extent permitted by law. The Company has acquired and maintains liability insurance
for its directors and officers.

16 . SEGMEN T ED IN FO RM AT I O N
                                                                                                                                                            65


Operating segments are defined as components of the Company for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in allocating resources and assessing performance. The chief
operating decision maker of the Company is the President & Chief Executive Officer.

The Company operates in one reportable and geographic segment, which is the business of renting, with or without an option
to purchase, direct to the consumer, brand name entertainment products, appliances and household furniture in Canada.
As at December 31, 2004, the Company operated 143 (2003 – 133) stores in 10 provinces.

Information about products

Providing information relating to revenue from customers for each product, or group of similar products, is impractical and
accordingly, only rental revenue has been presented in the consolidated statements of income and retained earnings.

17. C O M PA R AT I V E F I G U R E S


Certain comparative figures have been reclassified to conform with the presentation adopted for the current year.




                                                                                                                                easyhome annual report 04
                                                                                                 Ltd.



                                                                     CO RP O R AT E GOV ERN A NCE




                            easyhome Ltd. recognizes the importance of its          Committee, the Compensation Committee, and the
                            fiduciary responsibility to shareholders, and believes   Corporate Governance and Nominating Committee
                            that high corporate governance standards are            each consist of three Directors, all of whom are
                            fundamental to the Company’s success. Accordingly,      independent of management.
                            the Board of Directors has developed systems and
                            procedures that are appropriate and effective for the   COMMITTEE STRUCTURE
                            Company and its business. easyhome’s corporate
                            governance policies and practices meet or exceed the    Audit Committee
                            Toronto Stock Exchange Guidelines and are reviewed
                            on a continuous basis.                                  The mandate of the Audit Committee is to assist the
                                                                                    Board of Directors in its oversight role with respect to
66
                            The Company’s Directors are experienced business        the quality and integrity of financial information, the
                            leaders representing a breadth of background and        effectiveness of the Corporation’s risk management
                            experience, including finance and merchandise            and compliance practices, the independent auditor’s
                            rental. On behalf of easyhome’s shareholders, the       performance, qualifications and independence,
                            Board of Directors is responsible for the stewardship   and the Corporation’s compliance with legal and
                            of the Corporation, establishing overall policies,      regulatory requirements. The Committee reviews
                            reviewing strategic plans, and holding accountable      the annual and interim financial statements of the
                            the management to whom it delegates the operation       Corporation, as well as other public disclosure
                            of the Company.                                         documents required by regulatory authorities. The
                                                                                    Audit Committee also makes recommendations to
                            The Board has established three permanent               the Board regarding the appointment of independent
                            Committees with written mandates for the                auditors, reviews the nature and scope of the annual
                            continuous review and monitoring of key areas           audit, and reviews the adequacy of the internal
                            critical to good corporate governance. The Audit        accounting controls, management store audits,
                                                                                    operating procedures and systems.




     easyhome annual report 04
                                                                  Ltd.



                                CO RP O R AT E GOV ERN A NCE (continued)




Compensation Committee                                of Directors in establishing and maintaining a
                                                      sound system of corporate governance through a
The Compensation Committee’s mandate is to            process of continuing assessment and enhancement.
review the Corporation’s compensation strategy        The Committee is responsible for examining
with a view to aligning compensation with business    the effectiveness of the Corporation’s corporate
objectives and performance, and aligning incentives   governance practices and proposing such procedures
with the interests of shareholders to maximize        and policies as the Committee believes are
shareholder value. This includes developing           appropriate to ensure that the Board clearly functions
compensation recommendations for the approval         independently of management, management is
of the full Board for the Corporation’s Executive     clearly accountable to the Board of Directors of the
Officers, Directors of the Corporation and all other   Corporation, and procedures are in place to monitor                               67
employees. Compensation includes salary, bonuses,     the effectiveness of performance of the Board and
benefits, stock option grants, stock purchases and     individual Directors. In addition, the Committee
other compensation as appropriate. It also includes   shall be responsible for identifying and recommending
reviewing the written objectives of the Chief         to the Board suitable candidates for nomination
Executive Officer and his direct reports, annually     as new Directors, and reviewing the credentials of
assessing the performance of the Chief Executive      Directors standing for re-election.
Officer, and reviewing and assessing a plan for
succession. The Committee also ensures there          A detailed description of the Company’s approach is
are appropriate training, development and benefit      outlined in the Management Information Circular
programs in place for management and staff.           issued in connection with the Annual Meeting of
                                                      Shareholders, a copy of which is available through
Corporate Governance and Nominating Committee         Equity Transfer Services Inc.

The mandate of the Corporate Governance and
Nominating Committee is to assist the Board




                                                                                                            easyhome annual report 04
                                                                                    Ltd.




                                                              YOUR EXECUTIVE TEAM!




68




             Rick Atkinson       S. William Johnson             David Ingram        Randy Robertson          Dave Maries
             Vice President,     Executive Vice President &     President & Chief   Senior Vice President,   Vice President, Marketing
             Development         Chief Financial Officer         Executive Officer    Operations               & Merchandising




     easyhome annual report 04
                                                               Ltd.



                                         BOARD OF DIRECTORS




Donald K. Johnson                                              Ronald G. Gage
Chairman                                                       Corporate Director
easyhome Ltd.
                                                               Robert (Robin) Korthals
David Ingram                                                   Corporate Director
President & Chief Executive Officer
easyhome Ltd.                                                  David A. Lewis
                                                               Corporate Director
Douglas Anderson
Corporate Director                                             Joseph Rotunda
                                                               President & Chief Executive Officer
                                                                                                                                       69
                                                               EZCorp., Inc.




                                                    OFFICERS




David Ingram                                                   Rick Atkinson
President & Chief Executive Officer                             Vice President, Development


S. William Johnson                                             Dave Maries
Executive Vice President & Chief Financial Officer              Vice President, Marketing & Merchandising


                                                               Randy Robertson
                                                               Senior Vice President, Operations




                                                                                                           easyhome annual report 04
                                                                                                   Ltd.



                                                                   CO RP O R AT E IN FO RM AT I O N




                                      Edmonton Office                                                Bankers
                                      10239 – 178 Street                                            Canadian Imperial Bank
                                      Edmonton, Alberta                                             of Commerce
                                      T5S 1M3                                                       Edmonton, Alberta
                                      Tel: (780) 930-3000
                                      Fax: (780) 481-7426                                           Transfer Agents
                                                                                                    Equity Transfer Services Inc.
                                      Mississauga Office                                             Toronto, Ontario
                                      Suite # 201
                                      170 Robert Speck Parkway                                      Listed
70
                                      Mississauga, Ontario                                          Toronto Stock Exchange
                                      L4Z 3G1                                                       Trading Symbol: EH
                                      Tel: (905) 272-2788
                                      Fax: (905) 272-9886                                           Auditors
                                                                                                    Ernst & Young LLP
                                      Investor Relations                                            Edmonton, Alberta
                                      S. William Johnson
                                      Executive Vice President                                      Solicitors
                                      and Chief Financial Officer                                    Blake Cassels & Graydon LLP
                                      Tel: (780) 930-3012                                           Toronto, Ontario

                                                                                                    Website
                                                                                                    www.easyhome.ca

                           ANNUAL GENERAL MEETING


                           The Annual General Meeting of the Shareholders will be held at 4:30 p.m. on May 10, 2005 at the InterContinental
                           Toronto Centre, Calendon Room, 225 Front Street West, Toronto, Ontario.




     easyhome annual report 04
w w w.e as yhome.ca




                Ltd.
A N N U A L   R E P O R T




05
04
03
02
01

                        Ltd.
                                                                                     Ltd.

                                         C O R P O R A T E              P R O F I L E




easyhome Ltd. is Canada’s largest merchandise leasing company by store count and
revenues, and the fourth largest in North America. easyhome offers top-quality, brand
name household furnishings, appliances and home electronic products to consumers
under weekly or monthly lease agreements. At the end of 2005, the Company operated
170 locations in all provinces and the Yukon Territory. Shares of easyhome are listed
on the Toronto Stock Exchange under the symbol EH.




                                                TABLE OF CONTENTS


          CH A I R M A N ’S M E SS AGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 5

          M E SS AGE TO O U R SH A R EH O L D ER S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 6

          O P ER AT I O NS A N D S T R AT EGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 10

          M A N AGEM EN T ’S D ISCUSSI O N A N D A N A LYSIS . . . . . . . . . . . . . . . . . . . . . . PAGE 16

          M A N AGEM EN T ’S R E SP O NSI B I L I T Y F O R FI N A NCI A L R EP O RT I N G . . . . . . . . . . . PAGE 30

          AU D I TO R S’ R EP O RT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 31

          CO NS O L I DAT ED FI N A NCI A L S TAT EM EN T S . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 32

          CO R P O R AT E GOV ER N A NCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .PAG E 4 8




                                                                                                                                                 1


                                                                                                                             easyhome annual report 05
                                        O U R   M I S S I O N


       Ltd.




                                          Vision:

              Everyone should be given the opportunity to enhance their home

              and lifestyle. We are the leader in helping people get exactly what

                       they want for as long as they want... right now!



 BIGGER.                                 Mission:
 BET TER.          We are a relationship-driven business that thrives on the
STRONGER.     opportunity to provide customers access to household goods and

                        services that enhance the quality of their lives.



                                          Values:

                      Integrity, Respect, Quality, Pride and Enterprising
                                                                            2 0 0 5   H I G H L I G H T S


                                                                                                                                                                                                                          Ltd.


                                                                                         growth
                                                                                                                                                                                         C H A I R M A N ’ S    M E S S A G E

                            Achieved highest organic & revenue                                                   rate in the industry



                                                                 Increased revenue        16.5%
                                                                                                                                                A Year of Significant Achievement

                                             Met same store revenue growth target of                    7-9%                                    2005 was a year of significant achievement for the management team, employees, and Board of Directors of easyhome.
                                                                                                                                                Management continued to execute our Company’s strategic expansion plan in a focused and disciplined manner, with
                                                                                                                                                significant growth in gross revenues, same store revenues and customers. While profits in the short term are impacted


                                                                                              16%
                                                                                                                                                by the rate of new store openings, the long term outlook for profit growth is positive. Importantly, the management
                                                                                                                                                team, the strategic plan, the brand and the national platform are now in place to capitilize on the significant growth
                                                                     Grew customer base                                                         opportunity in the Canadian merchandise leasing business. Execution of our strategic plan will further strengthen our
                                                                                                                                                Company’s leadership position in the Canadian industry.



                                                                            Opened    24     new stores
                                                                                                                                                Another major achievement by our management team in 2005 was the settlement of the class action lawsuits which
                                                                                                                                                were launched in Ontario in 2004 and in Quebec in 1997. Not only were these suits settled on reasonable terms
                                                                                                                                                for both customers and our Company, easyhome’s revised customer leasing agreements are in compliance with both
                                                                                                                                                federal and provincial regulations. Management can now focus all of its energy on the execution of the strategic plan.

                                                         Successfully entered smaller         rural            markets
                                                                                                                                                In addition, they will explore other services which we can provide to our customer base, such as the introduction of
                                                                                                                                                financial services kiosks, located within easyhome stores.

                                                                                                                                                Our Board of Directors has also contributed to our Company’s continued success in 2005. Our Board members have


                                                                     Effected    1.5:1            stock split
                                                                                                                                                provided management with excellent counsel and advice, as well as sharing with our executives their knowledge and
                                                                                                                                                experience in areas that are relevant to easyhome’s core business.

                                                                                                                                                On behalf of the Board of Directors and the shareholders, I would like to thank the management and employees of
                                                                                                                                                easyhome for their outstanding performance during the past year and how they have positioned the Company for
                                                                                                                                                future growth in revenues, profits and dividends in the years ahead. As Chairman of the Board, I would also like to
                (In thousands of dollars except per share amounts and key metrics)                            2005               2004
                                                                                                                                                thank my fellow directors for their excellent contribution at both board meetings and meetings of the audit, corporate
                                                                                                                                                governance and compensation committees. Collectively, our management team, employees and directors have
               INCOME STATEMENT - Year Ended December 31
                                                                                                                                                delivered significant value to our shareholders over the past five years. I am confident that the best is yet to come!
               Revenue                                                                                      $103,112             $88,450
               Income before income taxes                                                                     12,423 (1)           10,119
               Net earnings                                                                                    7,578 (1)            6,476 (2)
               Earnings per share (diluted)                                                                    $0.74 (1)           $0.64 (2)
               BALANCE SHEET - As at December 31
               Total assets                                                                                 $77,907              $69,286        Donald K. Johnson,
               Leasing assets                                                                                50,946               41,485        Chairman of the Board of easyhome Ltd.
                                                                                                                                                March 2006
               Shareholders equity                                                                           61,101               54,984
               KEY METRICS
               Same store revenue growth (%)                                                                7.5%                    9.4%
               Units on lease (3)                                                                         154,951                 128,475
               Customers (3)                                                                               57,455                  49,473
               Standard monthly leasing revenue (3)                                                    $8,258,180              $7,172,967

               (1) excludes class action settlement costs of $3.1 million
               (2) excludes tax credit of $2.3 million
               (3) as at December 31
   4                                                                                                                                                                                                                                                                           5


easyhome annual report 05                                                                                                                                                                                                                                  easyhome annual report 05
                                                                                                                                103.1
                                                                                                                                                                   INCREASED
                                                                                                                                                              REVENUE 16.5% TO

                                                                                     Ltd.

                                               MESSAGE TO OUR SHAREHOLDERS




                              Bigger. Better. Stronger.
            To our Shareholders,
                                      Each year, easyhome strives to achieve these goals.



            In fiscal 2005 we achieved our objectives in many ways, generating record revenues, opening 24 new stores,
                                                                                                                                $
            growing our customer base, and further consolidating our position as the leader in our industry in Canada.
            Having laid a solid foundation in previous years, 2005 was marked by our determination to follow through on
            our carefully mapped strategic plan. Our number one priority was to increase our store count. We pursued
            steady expansion into new regions, first meeting, then exceeding, our target for store openings during the year.
                                                                                                                                                            51 consecutive months of
            We ensured that we offered the right products at the right value. By doing this, we achieved same store revenue                                comparable revenue growth
            growth of 7.5%, meeting our target of seven to nine percent growth. We continued to build the easyhome brand
            with creative in-store displays and targeted marketing. Our customer base grew 16% to nearly 58,000.
            We became bigger, better, and stronger.

            We have now delivered 51 consecutive months of comparable revenue growth and 17 consecutive quarters of
            same store revenue growth. Revenues for the year grew more than 16% to $103.1 million, compared with
            $88.5 million a year earlier. Operating income before the class action settlement provision was up 20% to
            $12.5 million compared with $10.4 million in fiscal 2004. However, after recording a one-time pre-tax
            provision of $3.1 million to settle the class action lawsuit, earnings were $5.7 million compared with
            $8.8 million a year ago. On a per share basis, fully diluted earnings were $0.55 compared with $0.87.

            We are pleased with our operating results. Although the settlement of the class action depressed earnings for
            the year, we have taken action to prevent such disputes in the future. More importantly, our revenues are
            growing on both same stores sales and our expanded store base. This growth is based on sound strategies
            that are executed carefully and well.
                                                                                                                                     $ (in 000’s)
                                                                                                                                                                                                    million
                                                                                                                                    110,000
            In addition to our strong financial and operating performance, fiscal 2005 was notable because it marked                                                                        103,112
            five years since the Company began its turnaround. I’d like to reflect, if only briefly, on the changes and                100,000
            accomplishments in that time.
                                                                                                                                    90,000                                       88,450
            In five short and very active years, we re-branded our stores and our Company, increased revenues 52%, added
            50 stores, strengthened our balance sheet, improved staff retention 49%, and grew the customer base 32%.                 80,000                             78,090
            We implemented a quarterly dividend and have seen our stock performance improve dramatically. The changes                                          72,437
            we made were profound and they have certainly proven to be rewarding. Having reached this milestone, we                  70,000     67,759
            have now included a five-year total shareholder return in this report, which you can find on page 15.
                                                                                                                                     60,000

            As rewarding as it is to have such concrete evidence that our strategies are successful, we are even more excited
                                                                                                                                     50,000
                     by the opportunities that lie ahead. We continue to believe that the Canadian merchandise lease
                         market is underserved. We estimate that there is potential for a minimum of 300 easyhome
                                                                                                                                    40,000
                          stores across Canada, in both large markets and smaller regional areas. We have now opened 43
                           stores in what we consider to be smaller markets – communities of about 20,000 – and they are             30,000
                               performing very well. We have not yet opened a store in a market that is too small to support
                                     an easyhome store.                                                                              20,000



                                           All our new stores are continuing to reach profitability earlier than we originally        10,000

                                           anticipated, with most stores turning a profit by the sixth month of operation
                                                                                                                                         0
                                           compared with the projected 10 months. Of the 24 stores opened in 2005, nine                             2001        2002    2003     2004      2005
                                           are now profitable. We expect the remainder to begin contributing to earnings
   6                                                                                                                                                                                                                     7


easyhome annual report 05                                                                                                                                                                            easyhome annual report 05
                                                                                                                                             Ltd.

                                                                                                       MESSAGE TO OUR SHAREHOLDERS               (continued)



                                                                 in the first and second quarters of 2006. We also established four new kiosks within Leon’s Furniture stores during
                                                                 the year, developing a new sales channel. In addition to growing our store count, we are committed to building
                                                                 same store revenues by attracting new customers and increasing the number and value of lease agreements.
                                                                 Our marketing plans are detailed on page 10.

                                                                 As we look forward to 2006 and beyond, we will continue to grow easyhome in a way that both adheres to our
                                                                 corporate values and rewards investors. We see enormous opportunities in our core business and in logical
                                                                 extensions of our abilities. We believe strongly that there is a right way to build our business, and this is reflected
                                                                 in our corporate values. At every step we conduct ourselves with integrity, and with respect for our customers and
            In five short and very active years, we re-branded
                                                                 employees. We take pride in what we do and how we do it. Our approach contributes to our success in ways that
            our stores and our Company, increased revenues
                                                                 may be immeasurable, but are clearly valuable.
            53%, added 50 stores, strengthened our balance
            sheet, improved staff retention 49%, and grew        We have a proven and profitable method for expanding quickly and profitably to meet the potential for many more
            the customer base 32%.                               easyhome stores. For 2006, we expect to open 30 new stores. Building awareness of our brand also remains a top
                                                                 priority. Through brand-building and other marketing efforts, we are targeting same-store growth of five to seven
                                                                 percent for 2006.



BIGGER.
                                                                 We also believe there are other opportunities for easyhome. Our core business is leasing, but our core competencies
                                                                 include relationship building, identifying customer needs, and collections. Already we have extended our services
                                                                 through kiosks at select Leon’s locations.

BET TER.                                                         Another way we will be broadening our service offerings is through the introduction of financial services kiosks


STRONGER.
                                                                 located within easyhome stores. We will offer personal loans under $5,000 to existing and new clients, as well
                                                                 as other value-added financial services such as cheque cashing, pre-paid credit cards, bill payments and money
                                                                 transfers. We believe this business will leverage our strengths and provide a valuable service to our customers.
                                                                 With its low cost base and potentially high revenues, financial services offers an exciting new platform for growth
                                                                 for your Company. We opened one test location in Edmonton in January 2006 and expect to open two to three
                                                                 more locations within the next 6 months.

                                                                 In summary, we are pleased with our accomplishments, both in fiscal 2005 and in the five years that current
                                                                 management has been at the helm of this remarkable business. Our success in building the easyhome brand has
                                                                 translated into solid financial achievements. But what really drives all of us at easyhome is the potential for more
                                                                 – to be bigger, better, and stronger. We are proud to be the industry leader, but we are not complacent. We believe
                                                                 there is enormous potential for easyhome, and we have the vision, the financial capacity, and the team to capitalize
                                                                 on every opportunity.

                                                                 On behalf of the easyhome team, I would like to thank the Board of Directors for their support and careful
                                                                 stewardship of your Company. Their experience and dedication continue to prove invaluable. I would also like to
                                                                 thank all our employees for their commitment to meeting and exceeding our goals. And to our investors, I give my
                                                                 promise that building shareholder value will always be at the core of our efforts to manage and grow the thriving
                                                                 enterprise that is easyhome.




                                                                 David Ingram,
                                                                 President & Chief Executive Officer
                                                                 March 2006



                                                                                                                                                                                                  9


                                                                                                                                                                              easyhome annual report 05
                                                                                                                                   7.5
                                                                                                                                                           SAME STORE
                                                                                                                                                         REVENUE GROWTH

                                                                                     Ltd.

                                                   OPER ATIONS AND STR ATEGY




             easyhome generates value for its shareholders through sustainable growth initiatives. These initiatives concentrate
             on five key areas that we believe drive our success.


             Building Relationships
             easyhome, more than traditional retailers, builds relationships with customers. Our interactions are long-term,
             with customers coming into our stores to make weekly payments throughout the life of the lease agreement.
             We are also an important source of support, providing a friendly and non-judgmental environment when
             customers come into our stores after having been unsuccessful in attaining credit from other retailers.                            17 consecutive quarters of same
             Our ability to establish relationships helps us better meet our customers’ needs, sell additional products
             and services, and to generate referrals.                                                                                                store revenue growth
             To create a positive environment and nurture these relationships, easyhome needs a committed and satisfied
             staff. We place a very high priority on attracting, retaining and developing a workforce that will support our
             customer-centered values and help us achieve our growth objectives.

             easyhome has a number of initiatives in place to heighten workplace satisfaction including incentive plans,
             training programs and clear paths to advancement. In 2006 we will roll out a new training platform for our




                                                                                                                                                                                          %
             employees. We believe that continuously motivating and training our people will ensure that they are happier
             and better able to serve our customers.


             Reaching our Customers
             Our communication strategies are targeted at increasing the customer base, growing the revenue portfolio and
             building the easyhome brand. Our tactics include focused direct mail campaigns, flyer distribution in key areas
             and national television advertising as well as a number of in-store events. In this way, we believe we achieve        % same store revenue
             maximum performance from our marketing investment.                                                                      growth per year
                                                                                                                                        10.0%
                                                                                                                                                                            9.4%
             One of the most important ways we are achieving our national brand objectives is through our television
                                                                                                                                         9.0%
             strategy. In our second year of television advertising, we ran two campaigns. Following the fall campaign,
             call volume and web traffic, our most immediate measures of effectiveness, each increased more than 100%
                                                                                                                                         8.0%
             compared with the previous year.
                                                                                                                                                                                   7.5%
                                                                                                                                         7.0%
             As a result of achieving increased brand awareness from the television ads, we are receiving a higher rate of
             response from our flyer distributions. In 2006, our objectives are to reduce costs and increase penetration by                                         5.9%
                                                                                                                                         6.0%
             targeting our flyer distribution more precisely.

             Also in 2006 we will be introducing a French-language version of our website, easyhome.ca. The website allows               5.0%               4.7%
             customers to view merchandise and order online, and provides corporate and investor information. In addition,
             programming changes made during the year will allow easyhome’s site to rank higher in searches.                             4.0%



                                                                                                                                         3.0%



                                                                                                                                         2.0%



                                                                                                                                         1.0%
                                                                                                                                                  0.5%

                                                                                                                                          0%
   10                                                                                                                                             2001      2002   2003     2004   2005                      11


easyhome annual report 05                                                                                                                                                                 easyhome annual report 05
                                                                                                                                                  Ltd.

                                                                                                       OPER ATIONS AND STR ATEGY                   (continued)




                                                                    Better Stores in More Locations
                                                                    easyhome has made a number of changes to its store locations in the past several years. Most of our stores are now in
                                                                    prime locations in key markets. As we continue on our expansion plan, we will acquire the best possible locations
                                                                    to support the long-term growth of each store.

            As we look forward to 2006 and beyond, we will          In 2005, we opened 24 new stores. We also relocated eight stores, remodeled two and expanded four. For 2006
            continue to grow easyhome in a way that both adheres    easyhome is primarily focused on rural markets where we currently have fewer stores. We expect to open 30 new
            to our corporate values and rewards investors. We see   stores during the year, as well as relocate 10-12 stores, and remodel up to 26 stores as leases expire and are renewed.
            enormous opportunities in our core business and in
            logical extensions of our abilities.                    One of the Company’s more exciting initiatives during the year was the creation of “the store of the future”.
                                                                    This is a new store design that uses space more efficiently while enhancing the customers’ shopping experience.
                                                                    It is designed to maximize revenue based on high performing categories and the level of showroom representation
                                                                    allotted. Many of these concepts will be introduced in selected new, relocated, and remodeled stores during 2006.


BIGGER.                                                             The Right Products for Customers
BET TER.                                                            Product mix and selection are critical to easyhome’s ability to attract and retain customers. Our strategy is aimed at


STRONGER.
                                                                    improving the availability of products, identifying geographical differences and needs, identifying and maximizing
                                                                    growth opportunities, and identifying and introducing new products and services.

                                                                    In 2005, our highest unit growth category was computers, at 36.5% overall, followed by furniture at 28%,
                                                                    appliances at 20%, and electronics at 9% growth. Growth in the computer segment was fueled by laptops, with
                                                                    a 145% increase in the number of units on lease. Large gains were also made by front load laundry, with a 200%
                                                                    increase in the number of units on lease, and digital cameras, which grew 154%.


                                                                                              P E R C E N T A G E O F T O T A L U N I T S O N L E A S E (by Category)

                                                                                                                                           Electronics 36%

                                                                            Computers & Gaming 11%
                                                                                                                                                                   Furniture 37%




                                                                                      Appliances 16%


                                                                    The Company plans to implement an automated replenishment inventory management system in 2006. It is
                                                                    expected to improve availability and allow stores to manage their inventory to achieve an optimal mix of national
                                                                    and local best-selling items, and current promotional merchandise.

                                                                    To help our sales associates serve customers better, the Company is implementing an intranet-based knowledge
                                                                    centre that will feature specification sheets and selling features for each item offered by easyhome.



                                                                                                                                                                                                      13


                                                                                                                                                                                   easyhome annual report 05
                                                                                                                                   765
                                                                                                                                                    SHARE PRICE INCREASED


                                                                                     Ltd.

                                              OPER ATIONS AND STR ATEGY               (continued)




            Improving Value
            Value – for customers and for investors – is at the center of the easyhome experience.

            Our customers need to know that they are receiving the best value possible. easyhome’s size is a distinct advantage,
            allowing us to negotiate attractive deals for price and quality of product. We also create value through unique
            promotions that attract new customers and generate additional agreements from existing customers. Programs
            such as our referral plan and lifetime reinstatement program also provide value to customers.                                        5 year total shareholder return
            In 2006 we will be introducing a new initiative that will provide additional benefits to customers. The easyhome                         exceeds industry and TSX
            loyalty card will recognize our best customers by offering them added value incentives.

            Generating value for investors is, and always will be, our primary goal. By ensuring that we have the right people,
            communications, locations, products and customer value, we will continue to enhance shareholder value.




                                                                                                                                                                                                                            %
                                                                                                                                                 Cumulative total returns for the past five fiscal years on
                                                                                                                                         $   $100 investment from December 31, 2000 to December 31, 2005
                                                                                                                                   900
                                                                                                                                                             easyhome Common Shares             TSX Composite Index
                                                                                                                                   800


                                                                                                                                   700


                                                                                                                                   600


                                                                                                                                   500


                                                                                                                                   400


                                                                                                                                   300


                                                                                                                                   200


                                                                                                                                   100


                                                                                                                                     0
                                                                                                                                     2000        2001            2002            2003            2004           2005

   14                                                                                                                                                                                                                                     15


easyhome annual report 05                                                                                                                                                                                              easyhome annual report 05
                                       M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS                                                                                         M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS
                                 OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                                                                   OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                           (continued)


         The following discussion and analysis should be read in conjunction with, and is qualified by, the December 31, 2005
         audited consolidated financial statements of the Company and the notes relating thereto and the Report to                                 Net income for the year 2005 decreased $3.1 million from $8.8 million in 2004 to $5.7 million in 2005 due principally to the above
         Shareholders contained in the Company’s Annual Report.                                                                                   noted class action settlement costs. In the third quarter of 2004, a future tax asset valuation allowance in the amount of $2.3 million
                                                                                                                                                  was reversed through income tax expense. Eliminating this credit from income tax expense for 2004 and the class action settlement
         This management discussion and analysis refers to certain financial measures that are not determined in accordance                        costs in 2005 ($1.9 million after income taxes), net income for 2005 would have been $7.6 million compared with $6.5 million in 2004,
         with generally accepted accounting principles (“GAAP”) in Canada. These measures do not have standardized                                an increase of $1.1 million, or 17%.
         meanings and may not be comparable to similar measures presented by other companies. Although measures such
         as same-store revenue growth and operating income do not have standardized meanings prescribed by GAAP, these                            Net income for the fourth quarter of 2005 remained consistent at $1.7 million.
         measures are defined herein or can be determined by reference to our financial statements. We discuss these measures
         because we believe that they facilitate the understanding of the results of our operations and financial position.                        Diluted earnings per share for the year ended December 31, 2005 were $0.55 ($0.74 before the class action settlement costs) compared
                                                                                                                                                  with $0.87 in 2004 ($0.64 before the reversal of the future tax asset valuation allowance). For the 2005 fourth quarter, diluted earnings
         Date                                                                                                                                     per share were $0.17, the same as 2004.


         March 7, 2006                                                                                                                            During 2005, the Company merged the operations of one store with one other store location in the Company’s chain and opened 23
                                                                                                                                                  new stores, increasing the store count from 143 as at December 31, 2004 to 165 as at December 31, 2005. The Company also opened
         Overall Performance                                                                                                                      kiosks in four Leon’s stores, one in April and three in November and entered into one licensing arrangement in November. None of these
                                                                                                                                                  activities contributed materially to the operations of the Company in 2005. The kiosks and licensing arrangement are still in their testing
         easyhome Ltd. ( “easyhome” or the “Company”) is in the business of leasing, with or without an option to purchase, brand name home       stage and will be assessed further before any decisions are reached on a roll-out. We expect to continue our new store opening program
         entertainment products, appliances and household furniture across Canada. The leasing business is not seasonal for revenue and income    at a rate of approximately 25-35 stores each year for the next few years.
         generation and is generally immune to changes in economic conditions. All of the Company’s revenue is generated by its core business
         and related activities.                                                                                                                  Revenue has been trending upwards on a comparable quarterly basis since the third quarter of 2001. Same store revenue growth (revenue
                                                                                                                                                  from stores open for the entirety of the comparable periods) has continued to show positive trending. Same store revenue increases have
         The Company had record revenues in 2005 totaling $103.1 million, an increase of $14.6 million over last year, or 16.5%. Stores open      improved from 4.7% in 2002 to 7.5% in 2005. We expect same store revenue increases to continue at an annual pace of 5-7% for the
         for less than 12 months accounted for $3.2 million of this increase. The balance of the increase came from same store, fee and vendor    medium term.
         advertising rebate revenue increases. The monthly lease portfolio, that is, the lease revenue available for collection each month,
         increased $1.1 million, from $7.2 million as at December 31, 2004 to $8.3 million at the end of 2005, or 15.3%. The increase in the      The Company’s funded debt to equity ratio is less than 5%. The Company’s credit facility was renewed on December 15, 2005 at an
         customer base of 7,982 from December 31, 2004 to December 31, 2005 (16.1 %) was consistent with the revenue increase. For the            interest rate of prime plus 0.25% with no added charges for financing fees. The Company’s cap on its renewed credit facility remains
         fourth quarter, revenue increased $3.7 million, from $23.9 million in 2004 to $27.6 million in 2005, or 15.4%. The increase in the       at $10.0 million and all existing covenants remain with the exception of the removal of the minimum tangible net worth covenant.
         customer base was consistent with the increase with $1.8 million of the increase generated by stores open for less than 12 months.       The Company believes this credit line, when combined with the Company’s internally generated cash flow, will be adequate to fund
                                                                                                                                                  the Company’s growth plans.
         Expenses for the year, as a percentage of revenue, decreased from 57.3% in 2004 to 56.3% in 2005 primarily due to the leveraging of
         fixed costs. For the fourth quarter, expenses increased from 57.3% in 2004 to 57.5% in 2005 due to severance costs and the impact        Cash flow from operating activities for the year decreased $0.3 million to $3.2 million in 2005 from $3.5 million in 2004. Even though
         of unusually high professional fees. Lease asset amortization for the year as a percentage of revenue increased from 29.2 % in 2004 to   lease asset purchases increased from $34.8 million in 2004 to $40.3 million in 2005, this increase was mostly offset by increases in
         29.9% in 2005 with approximately 50% of the increase resulting from an increase in both the average number and the average book          items not affecting cash.
         value of units written-off and the balance from the increase in computer leases which generate lower gross margins. For the fourth
         quarter of 2005 and 2004, lease asset amortization was 30.0% and 29.3% respectively, an increase of 0.7% attributed to the reasons       The Company spent $2.6 million on capital expenditures in 2005 compared with $1.7 million in 2004. The increase is primarily
         cited above.                                                                                                                             attributable to the increase in new store openings during 2005.


         Income before income taxes for the year decreased $0.8 million, from $10.1 million in 2004 to $9.3 million in 2005, or 7.9%. As a        During the year, $1.6 million was received on the exercise of stock options for common shares of the Company (2004 - $0.3 million) and
         percentage of revenue, income before income taxes was 9% in 2005 compared with 11.4% in 2004. For the fourth quarter of 2005,            $1.4 million in common share dividends were paid (2004 - $0.5 million), representing $0.147 per share (2004 - $0.5).
         income before income taxes increased from $2.7 million in 2004 to $3 million in 2005, or 10.5%.
                                                                                                                                                  On May 10, 2005 the shareholders of easyhome Ltd. approved a stock split of easyhome’s common shares on a one and a half for one
         During 2005, the Company settled class action litigation for a total cost of $3.1 million. All requirements under the Court ordered      basis.
         settlement have been completed. Before these costs, income before income taxes for the year would have been $12.4 million compared
         with $10.1 million in 2004, an increase of $2.3 million, or 22.8%. As a percentage of revenue, income before income taxes would have     The Toronto Stock Exchange (“TSX”) has accepted a notice of intention filed by the Company to make a normal course issuer bid
         been 12% in 2005 compared to 11.4% in 2004.                                                                                              (“NCIB”). During the period commencing March 22, 2005, and ending March 21, 2006, the Company may purchase on the TSX a
                                                                                                                                                  maximum of 648,854 common shares, being approximately 10% of the post-share split public float as of March 9, 2005. The Company
         Operating losses from stores open less than 12 months were $1.2 million for the year ended December 31, 2005 (2004 - $0.3 million).      will not purchase in any given 30 day period, in the aggregate more than 2% of the common shares outstanding on March 15, 2005.
         These losses had a negative impact on the income before income tax margin of 1.2% (2004 – 0.4%).



   16                                                                                                                                                                                                                                                                                              17


easyhome annual report 05                                                                                                                                                                                                                                                       easyhome annual report 05
                                            M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS                                                                                                  M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS
                            OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                            (continued)                                       OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                               (continued)


         The price for any such shares will be the prevailing market price at the time of purchase and all shares purchased will be cancelled.         Selected Annual Information
         The actual number of shares and the timing of any purchases will be determined by the Board of Directors of the Company. The Board
         of Directors believes the permitted purchase of up to 648,854 common shares is in the best interests of the Company from time to time         Consolidated Income Statements
         when the trading price of its common shares is such that purchases constitute a desirable use of the Company’s funds.                                                                                                           2005                    2004                        2003
                                                                                                                                                       (in 000’s)                                                                          $                       $                           $
         During the period from March 22, 2005 to December 31, 2005, the Company purchased for cancellation 10,100 shares for total
         consideration of $152,000.                                                                                                                                                                                                                                                        (restated) (l)
                                                                                                                                                       Revenue                                                                        103,112                   88,450                     78,090
         The Company intends to file its intention to make a normal course issuer bid commencing on March 22, 2006 and terminating on                  Net income                                                                        5,678                   8,752                       4,027
         March 21, 2007.
                                                                                                                                                       Dividends declared on common shares                                               1,581                     730                             0
         Outlook                                                                                                                                       Dividends declared on preferred shares                                                  0                       0                       308
                                                                                                                                                       Cash dividends declared per share                                                  0.16                      0.8                            0
         The Company expects the positive trending in revenue, net income and same store revenue growth to continue. Revenue growth will
         come from same stores and new stores and is expected to be in the range of 15-20% for the next few years.                                     Earnings per share
                                                                                                                                                         Basic                                                                            0.59                    0.96                         0.55
         In 2001, the Company outlined, as one of its prime financial objectives, same store revenue growth of 5% for the 2002, 2003 and 2004            Diluted                                                                          0.55                    0.87                        0.50
         fiscal years. The Company accomplished this for 2002 and 2003 and achieved 9.4% same store revenue growth for 2004 and 7.5% for
         2005. For the next three years, same store revenue growth is expected to be in the 5-7% range and 25 to 35 new stores are scheduled           Consolidated Balance Sheets
         to be opened each year. Management believes that suitable store space is available for lease for new store openings, however, with the
         retail space market across Canada tightening, rent costs are likely to escalate on a per store average basis. As well, with the national      (in 000’s)
         brand in place, the Company intends to continue its television campaign to expand its brand awareness efforts. This will support all other    Total assets                                                                    77,907                   69,286                      61,665
         marketing initiatives and introduce the service that easyhome offers to customers.                                                            Total funded debt                                                                 1,115                   2,237                       3,844


         In January, 2006 the Company opened a financial services centre in one of its stores in Edmonton. The centre provides short-term
         loans (12 months or less), debit and credit card and cheque-cashing services to consumers who generally cannot obtain credit through          (l) Effective January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants with
         conventional means. As at March 7, 2006, loans totaling in excess of $100,000, bearing interest at an average annual rate of 59.9%,           respect to the accounting for cash consideration received from a vendor. Under the new recommendations, the Company accrues vendor
         were outstanding. Two or three other centres will be opened in 2006 and tested to determine whether the financial services proposition        volume rebates when earned as a reduction to lease assets. Earned amounts are amortized on a straight-line basis over 20 months,
         is viable.                                                                                                                                    representing the average life of the underlying lease assets, and recorded as a reduction of lease asset amortization expense. Prior to the
                                                                                                                                                       adoption of the new recommendation, vendor volume rebates were accrued as earned and recorded as other revenue.
         The Company’s positive trending in revenue and net income may be adversely affected by the operations of Insta-Rent, a Canadian
         rent-to-own chain with 94 stores in Canada as at December 31, 2005, and by the entry of Aaron Rents and Rent-A-Center, two large              The primary reason for the increase in the Company’s revenue and profitability since 2001 has been the Company’s return to the basics
         U.S. merchandise rental operators, into the Canadian marketplace. The majority of Insta-Rent’s locations are contained within Brick           of the business, that is, leasing merchandise and collecting lease payments due. During 1999 and 2000, the Company lost focus on the
         Warehouse and United Furniture Warehouse stores and most of their business is derived from customers who are denied credit at the             basic business model and compromised profits by not having the capital available in order to replenish lease assets, and by building
         Brick and United Furniture stores. Aaron Rents opened their first franchised store in Kitchener, Ontario in the fall of 2003 and now          the lease agreement portfolio without sufficient regard to the customers’ ability to fulfill their obligations under the agreement. As a
         operates a total of 5 franchised stores. Rent-A-Center acquired five stores in Calgary and Edmonton on March 5, 2004 and has                  result, store personnel were forced to spend an inordinate amount of time dealing with delinquent accounts, and leases declined and
         recently opened 1 more store in Alberta. Both have stated their intentions to expand in the Canadian marketplace.                             charge-offs increased. With the implementation of more stringent collection criteria and numerous other operating efficiencies, growth
                                                                                                                                                       in revenue and net income resulted as the Company’s customer base increased and charge-offs decreased. The increase in revenues was
         Other factors that may adversely affect the Company’s growth are competition from merchandise rental businesses and, to a lesser              primarily at the same store level. For 2005, revenue for stores open less than 12 months was $3.2 million out of total revenue of
         extent, rental stores that do not offer a purchase option. The Company also competes with discount stores and other retail outlets that       $103.1 million (3.1%).
         offer an installment sales program or offer comparable products and prices. Furthermore, additional competitors, both domestic and
         international, may emerge since barriers to entry are relatively low. It is unclear what impact this increased competition will have on the   The increase in total assets is primarily a result of the increase in lease asset purchases which were required to support the Company’s
         Company’s operational results.                                                                                                                growth in its lease portfolio.


         The biggest limiting factor in the Company’s expansion plans will be the hiring and retention of the best people for the job. Over the last
         few years, the Company has improved its hiring competencies and its training programs such that employee turnover has dropped from
         126% in 2000 to 64% in 2005.




   18                                                                                                                                                                                                                                                                                                       19


easyhome annual report 05                                                                                                                                                                                                                                                                easyhome annual report 05
                                    M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS                                                                                                M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS
                            OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                             (continued)                                    OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                           (continued)


         Results of Operations                                                                                                                        Advertising costs increased from $4.4 million in 2004 to $4.5 million in 2005, an increase of $0.1 million. As a percentage of revenue,
                                                                                                                                                      advertising costs decreased from 5% of revenue in 2004 to 4.4% in 2005. Ongoing advertising costs are expected to average 4% of
         Year ended December 31, 2005 compared to the year ended December 31, 2004                                                                    revenue.

         Revenue                                                                                                                                      Insurance costs decreased $0.1 million, from $0.9 million in 2004 to $0.8 million in 2005 primarily as a result of premium decreases for
                                                                                                                                                      the policy period August 1, 2004 to July 31, 2005. These premium decreases were partially offset by the increase in the store count which
         Revenue was $103.1 million for the year ended December 31, 2005 compared to $88.5 million in 2004, an increase of $14.6 million
                                                                                                                                                      increased the overall insurance cost for property and delivery vehicles.
         or 16.5%. The primary factor for the increase in revenue was the 18% increase in the lease agreement portfolio from 128,475 units
         outstanding as at December 31, 2004 to 154,951 units outstanding as at December 31, 2005. The increase in the lease agreement
                                                                                                                                                      Professional fees increased $0.6 million as discussed above.
         portfolio was achieved primarily through growth in the Company’s customer base of approximately 8,000 customers rather than an
         increase in the number of agreements held by each customer.                                                                                  Occupancy Costs

         During the year, the Company merged the operations of one store with one other store in the Company’s chain and opened 23 new                Occupancy costs were $12.8 million for the year ended December 31, 2005 compared to $11.5 million in 2004, an increase of $1.3
         stores for a net increase of 22 stores during the year. Revenue from stores open less than 12 months accounted for $3.2 million of the       million, or 11.2% primarily as a result of opening 23 new stores and increases in lease rates for some of the leases that were renewed
         $103.1 million total or, 3.1%.                                                                                                               in 2005. As a percentage of revenue, occupancy costs decreased to 12.5 % in 2005 from 13.1% last year. The percentage decrease was
                                                                                                                                                      primarily due to rent declining as a percentage of revenue as it is a fixed cost and revenues have been increasing.
         Lease Revenue
                                                                                                                                                      Automotive and Travel
         Lease revenue was $86 million for the year ended December 31, 2005 compared to $74.5 million in 2004, an increase of $11.5 million
         or 15.5%. The primary reason for the increase was the growth in the number of lease agreements outstanding year over year.                   Automotive and travel expenses were $4.5 million for the year ended December 31, 2005 compared to $3.6 million in 2004, an increase
                                                                                                                                                      of $0.9 million or 24.3%. As a percentage of revenue, automotive and travel increased to 4.3% in 2005 compared to 4% last year. The
         Other Revenue                                                                                                                                percentage increase was primarily the result of the increase in the average vehicle operating costs due to the rise in fuel prices in 2005
                                                                                                                                                      compared to 2004.
         Other revenue, which is realized from supplier advertising rebates earned, fees for ancillary services such as the merchandise protection
         plan, and processing, reinstatement and other fees related to returned “NSF” cheques, was $17.1 million for the year ended December          Amortization
         31, 2005 compared to $14.0 million in 2004, an increase of $3.1 million or 22.5%. As a percentage of revenue, other revenue increased
         to 16.6% in 2005 from 15.8 % in 2004. The increase was attributable to increased participation in the merchandise protection plan, an        Amortization of lease assets was $30.9 million for the year ended December 31, 2005 compared to $25.8 million in 2004, an increase of
         increase in the lease agreement processing fee from $15.00 to $20.00 instituted in November and an increase in supplier advertising          $5.1 million or 19.7%. As a percentage of revenue, amortization of lease assets increased to 29.9% in 2005 from 29.2% in 2004. The
         rebates earned.                                                                                                                              decrease in margins primarily resulted from (a) an increase in the per store average number and net book value of units being written-off
                                                                                                                                                      (2005 - 2.6% of revenue; 2004 - 2.3% of revenue); and (b) the increase in the number of computer leases year over year which generate
         Expenses                                                                                                                                     a lower gross margin than most other new products.

         Expenses were $58.1 million for the year ended December 31, 2005 compared to $50.7 million in 2004, an increase of $7.4 million
                                                                                                                                                      Amortization of capital assets, intangible assets and deferred costs was $1.7 million for the year ended December 31, 2005 compared to
         or 14.6 %. This increase was in the normal course of business, except for professional fees and severance costs incurred in the fourth
                                                                                                                                                      $1.6 million in 2004, a increase of $0.1. As a percentage of revenue, amortization of capital assets, intangible assets and deferred costs
         quarter, as 23 new stores were opened and a significant portion of the costs vary with revenue. Professional fees were $0.6 million
                                                                                                                                                      decreased to 1.6% in 2005 from 1.8% in 2004 as store revenues have been increasing while these costs remain relatively fixed.
         higher than a year ago primarily due to legal costs related to the class action settlement, recruiting costs and professional fees related
         to employee training programs. As a percentage of revenue, expenses decreased to 56.3% in 2005 from 57.3% in 2004.                           Operating Income before the Class Action Settlement Expenses ( Income before Interest and Income Taxes and the Class Action
                                                                                                                                                      Settlement Expenses )
         Salaries and Benefits
                                                                                                                                                      Operating income before the class action settlement provision was $12.5 million for the year ended December 31, 2005 compared to
         Salaries and benefits were $29.6 million for the year ended December 31, 2005 compared to $25.9 million in 2004, an increase of              $10.4 million in 2004, an increase of $2.1 million or 20.4%. As a percentage of revenue, operating income before the class action
         $3.7 million or 14.4%. The increase in salaries and benefits is primarily attributable to (1) merit increases which were effective           settlement provision increased to 12.1% in 2005 from 11.7% in 2004. Lower operating expenses, as a percentage of revenue, was the
         April 1, 2005; and (2) an increased number of employees due to the number of stores increasing by 22. As a percentage of revenue,            primary reason for the improvement.
         salaries and benefits reduced to 28.7 % in 2005 from 29.3% in 2004.
                                                                                                                                                      Class Action Settlement Provision
         Selling, General and Administrative
                                                                                                                                                      On June 16, 2005, the Ontario Superior Court of Justice certified a class action (which was commenced against the Company in April,
         Selling, general and administrative expenses (SG&A) were $11.2 million for the year ended December 31, 2005 compared to $9.7 million         2004), as a class proceeding under the Class Proceedings Act, and, at the same time, granted approval of a settlement that had been
         in 2004, an increase of $1.5 million or 15.5%. As a percentage of revenue, SG&A declined to 10.8% in 2005 from 10.9% in 2004.                agreed to between the Company and the representative plaintiff on behalf of the Class. Accordingly, the Company accrued a provision
         Certain costs included in SG&A are controllable and do not vary with revenue, hence, as revenue increases SG&A should decline as a           of $3.6 million for the estimated costs of the class action settlement, including legal fees awarded under the settlement. Because of
         percentage of revenue. As a percentage of revenue, the variable costs included in SG&A remained relatively consistent year over year.        the continuing decline in the rate of redemption of the credit vouchers during the third quarter, management reduced the provision
                                                                                                                                                      by $500,000 as they were of the view that the balance remaining would cover any remaining costs and credit voucher redemptions to
                                                                                                                                                      December 31, 2005.
   20                                                                                                                                                                                                                                                                                                  21


easyhome annual report 05                                                                                                                                                                                                                                                           easyhome annual report 05
                                    M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS                                                                                                M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS
                            OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                           (continued)                                      OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                           (continued)


         As at December 31, 2005, the expiry date of the credit vouchers, legal and other costs of $1,066,000 and $1,944,000 in redeemed              In the event management determines that the future net cash flows to be derived from leasing the assets is less than the carrying
         vouchers were charged to the provision reducing the provision to $90,000 as at December 31, 2005. On January 27, 2006 a Court Order          value of the assets, the assets are written down to estimated net realizable value. The determination of future net cash flows involves
         was issued discharging the Court appointed Supervisor and concluding the settlement process.                                                 considerable judgment and measurement uncertainty and the impact on the consolidated financial statements for future periods could
                                                                                                                                                      be material. The amortization period for game stations and computers and related equipment is based on their estimated useful service
         Operating Income (Income before Interest and Income Taxes)                                                                                   lives. Because these estimates of useful lives involve considerable judgment, a shortening of the estimated life of these assets would
                                                                                                                                                      result in higher amortization expense in future periods.
         Operating income was $9.4 million for the year ended December 31, 2005 compared to $10.4 million in 2004, a decrease of $1 million.
         As a percentage of revenue, operating income decreased to 9.1% in 2005 from 11.7% in 2004. The class action settlement expenses of           Capital Assets
         $3.1 million was the primary reason for the decrease, offset by lower operating expenses as a percentage of revenue.
                                                                                                                                                      Capital assets are recorded at cost, including freight and are amortized over their estimated useful lives. Capital assets are tested for
         Operating losses from stores open less than 12 months were $1.2 million for the year ended December 31, 2005 (2004 - $0.3 million).          recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment
         These losses had a negative impact on the operating income margin (operating income as a percentage of revenue), reducing it by 1.2%         loss is then recognized when the carrying amount exceeds their fair value. The determination of fair value involves considerable
         (2004 – 0.4%).                                                                                                                               management judgment and assumptions and any significant changes in assumptions could result in the impairment of capital assets.


         Interest Expense                                                                                                                             Factors that could trigger an impairment review include significant negative industry trends, significant under-performance relative to
                                                                                                                                                      historical or projected future operating results and significant changes in the use of the assets.
         Interest expense was $0.1 million for the year ended December 31, 2005 compared to $0.3 million in 2004, a decrease of $0.2 million.
         The decrease was due primarily to the lower average bank revolving term loan balance outstanding during the period.                          Goodwill

         Income Tax Expense                                                                                                                           The carrying value of goodwill is reviewed annually to ensure that the value reflected is not impaired. An impairment loss would be
                                                                                                                                                      recognized if the carrying amount of the goodwill exceeds its estimated fair value. Fair value may be determined using alternative
         Income tax expense was $3.6 million, an effective rate of 39%, for the year ended December 31, 2005 compared to $1.4 million, an             methods for market valuation including discounted cash flows and net realizable values. In estimating fair value, the Company chose a
         effective rate of 13.5%, in 2004. Of the $3.7 million in expense, $1.5 million represents current taxes due and the balance represents       valuation method and made assumptions and estimates in a number of areas, including future cash flows and discount rates. Due to the
         future taxes. The Company has used the balance of its tax loss carry-forwards this year.                                                     long-term nature of assumptions made, it is possible that estimates could prove to be materially incorrect, and accordingly the impact
                                                                                                                                                      on the consolidated financial statements for future periods could be material.
         At the end of the third quarter in 2004, a future tax asset valuation allowance in the amount of $2.3 million was drawn-down through
         income tax expense. Without this draw-down, 2004’s effective tax rate would have been 36%.                                                   Income Tax Estimates and Future Income Taxes

         Financing                                                                                                                                    As part of the determination of the Company’s income tax provision, management is required to estimate the taxable income earned
                                                                                                                                                      in each of the jurisdictions in which it operates and to estimate the income taxes payable to that jurisdiction. This process involves
         The Company can fund its ongoing operations and new store opening program with internally generated cash flow. If opportunistic value-       estimating the Company’s actual current tax exposure together with assessing differences between the treatment of items for
         added store acquisitions or customer account acquisitions present themselves to the Company, the Company will draw upon its bank             accounting and tax purposes. These differences result in future tax assets or liabilities and are included on the Company’s balance
         revolving line to fund these acquisitions. The balance of the bank revolving line was $1.1 million as at December 31, 2005 and is capped     sheet. The Company must then assess the likelihood that any future tax assets will be recovered from future taxable income. If recovery
         at an upper limit of $10 million.                                                                                                            is not likely, a valuation allowance must be established. Management judgment is required in determining the Company’s provision for
                                                                                                                                                      income taxes, future tax assets or liabilities and any valuation allowance that may be judged necessary.
         Critical Accounting Measures
                                                                                                                                                      Liquidity and Capital Resources
         Lease Revenue
                                                                                                                                                      General
         Merchandise is leased to customers pursuant to agreements that provide for weekly or monthly lease payments collected in advance.
         Revenue from lease agreements is recognized when payment is received and the lease period has passed.                                        As at December 31, 2005, the balance outstanding on the bank revolving term facility was $1.1 million (2004 - $2.2 million).

         Lease Assets                                                                                                                                 As at December 31, 2005, the Company’s debt to equity ratio was less than 0.05 to 1, the same as 2004. The Company does not expect
                                                                                                                                                      to raise equity capital in the near future and will fund working capital requirements and capital requirements from internally generated
         Lease assets are recorded at cost, including freight. Vendor volume rebates are recorded as a reduction of the cost of lease assets.         cash flow and its bank revolving term facility.

         Assets on lease, excluding game stations, computers and related equipment and assets that were previously held for lease assets that had     The bank revolving term facility was renewed in December 2005. The facility is a one-year term facility which expires on December 31,
         not been out on lease for at least 90 consecutive days, are amortized in the proportion of lease payments received to total expected lease   2006, bears interest at prime plus 0.25% and has a $10 million cap subject to a borrowing base limit calculated as a percentage of the
         payments provided over the lease agreement term. Game stations are amortized on a straight-line basis over 18 months. Computers and          net book value of lease assets. Other banking covenants include a fixed charge cover ratio, a funded debt-to-cash flow ratio, a limit
         related equipment are amortized on a straight-line basis over 24 months. Held for lease assets are not amortized where such assets have      on capital expenditures and a minimum lease asset purchase ratio. The Company was in compliance with all of its banking covenants
         not been out on lease for less than 90 consecutive days. Once held for lease assets have not been out on lease for at least 90 consecutive   during 2005 and 2004 and at each of the year-ends.
         days, such assets are amortized on a straight-line basis over 18 months regardless of future leasing.

   22                                                                                                                                                                                                                                                                                                  23


easyhome annual report 05                                                                                                                                                                                                                                                           easyhome annual report 05
                                            M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS                                                                                                      M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS
                            OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                             (continued)                                        OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                                  (continued)


         The Company incurred $2.6 million of capital expenditures during 2005 compared with $1.7 million in 2004. The majority of these              used to purchase Company merchandise, be applied to existing Company agreements or used after starting a new agreement. Unused
         costs in both years related to the costs incurred for new store openings, store relocations and store remodels. On-going maintenance         credit vouchers expired on December 31, 2005 except in certain limited circumstances. In addition, the Company paid the legal fees
         capital requirements, that is, capital required other than for the purchase of stores or customer accounts or for new store openings, are    and costs of the Class in the proceeding, and the costs associated with administering the settlement process. Based on the Company’s
         not expected to exceed $0.8 million per year for the next three years. New store opening and relocation costs are expected to average        estimate of the rate of take-up and redemption of the credit vouchers, the Company recorded a pre-tax provision in its second quarter
         approximately $4.1 million per year for the next three years. The Company will also explore acquisition opportunities as they arise.         of $3,600,000 to cover the costs of the settlement, including legal fees awarded under the settlement. Because of the continuing
                                                                                                                                                      decline in credit voucher redemptions during the third quarter, management reduced the provision by $500,000 on September 30, 2005.
         The Company has not entered into any off-balance sheet arrangements.                                                                         As at December 31, 2005, the date of expiration of the unused credit vouchers, legal and other costs of $1,066,000 and $1,944,000 in
                                                                                                                                                      redeemed vouchers were charged to the provision reducing the provision to $90,000 as at December 31, 2005.
         Year ended December 31, 2005 compared to the year ended December 31, 2004
                                                                                                                                                      A motion seeking the authorization to institute a class action was started against the Company in the Province of Quebec (Montreal
         Cash flow from operating activities for the year ended December 31, 2005 was $3.2 million compared to $3.5 million in 2004, a decrease       Superior Court) in November 1997. The plaintiffs were authorized by the Court in August 1999 to proceed with a class action against the
         of $0.3 million. This decrease was the net result of (a) an increase in lease asset purchases of $5.5 million; (b) an increase in non cash   Company on behalf of all persons who have leased or purchased personal property destined for personal use in their home (the “Quebec
         items of $8.3 million; and (c) a decrease in net income of $3.1 million. The increase in lease asset purchases was required to support the   Class”). The plaintiffs alleged that the Company’s contracts did not properly comply with the requirements of the Consumer Protection
         Company’s growth in its lease portfolio.                                                                                                     Act (Quebec).


         Management does not believe that the sourcing of lease asset merchandise is an inhibiting factor in its growth plans. The Company            They were seeking the cancellation of their contracts, or the reduction of their obligations and the reimbursement of all or a portion
         purchases all product directly from the manufacturers or distributors and all product is delivered directly to the stores eliminating the    of the amounts paid by the members of the Quebec Class to the Company, as well as exemplary damages in the amount of $200 per
         necessity for the Company to maintain warehousing facilities. The Company does not generally enter into contracts with its suppliers and     contract.
         believes there are numerous sources of product so reliance is not placed on any one supplier.
                                                                                                                                                      The Company entered into a settlement agreement with the plaintiffs, which was approved by the Court. Management recorded a
         Cash used in investing activities was $2.2 million for the year ended December 31, 2005 compared to $1.9 million in 2004, an increase        provision of $500,000 in a prior year, which is adequate to cover the liability of the Company in relation to this matter. During the second
         of $0.3 million. Capital asset purchases, before landlord cash contributions of $0.2 million (2004 - $0.3 million) increased $0.8 million    quarter of 2005, the Company distributed $299,000 to Quebec Class members and paid $184,000 in legal fees and disbursements.
         primarily due to 9 more stores opening in 2005. Proceeds from the disposition of capital assets increased $0.3 million over 2004 and
         other miscellaneous items accounted for the balance of the change of $0.2 million.                                                           Summary of Quarterly Results


         Cash used in financing activities was $1.1 million for the year ended December 31, 2005 compared to $1.7 million in 2004, a decrease         The Company’s lease business, because it is a portfolio business, is not seasonal as are most other types of retail businesses which
         of $0.6 million. In 2005, $1.6 million was raised from the issuance of common shares compared to $0.3 million in 2004, an increase of        generate a significant portion of their sales and profits during the Christmas season. Quarterly revenue generally does not vary more than
         $1.3 million; common share dividends of $1.4 million were paid compared to $0.5 million in 2004, an increase of $0.9 million; and shares     10%, assuming no portfolio growth, and no significant new store openings or acquisitions.
         purchased for cancellation totaled $0.2 million in 2005 compared to nil in 2004. The balance of $1.1 million was applied against the
         Company’s revolving term facility, a decrease of $0.3 million from last year.                                                                Consolidated Statements of Income
                                                                                                                                                      $                                                                                                  Three Months Ended
         Contingent Liabilities
                                                                                                                                                                                                                Dec 31, Sept 30, June 30, March 31, Dec 31,                   Sept 30,    June 30 March 31
         On April 26, 2004 a legal proceeding was commenced against the Company and its wholly-owned subsidiary, RTO Asset Management                 (in 000s, except earnings per share amounts)                2005           2005          2005      2005     2004         2004           2004     2004
         Inc., by Lawrence William Nantais (the “Plaintiff”), a customer of the Company. The Plaintiff obtained an order pursuant to the Class
         Proceedings Act, 1992, S.O. 1992 c.6 (the “Act”), as amended, certifying the action as a class proceeding and appointing him as the          Revenue                                                   27,639       25,656        25,826       23,991   23,914        22,036         21,618   20,882
         representative of the Class. The Plaintiff asserted that, to the extent a member of the Class acquires ownership of merchandise offered by   Net income for
         easyhome, the Company’s agreement is an agreement or arrangement for credit advanced and the aggregate of all charges and expenses               the period                                             1,748       2,337*        (96)**        1,689     1,728   4,116***            1,369     1,539
         under the agreement amounts to interest charged at rates in excess of those allowed by law and that the agreements are void and
         unenforceable. The Statement of Claim stated that the members of the Class would seek to recover such charges and expenses, as well          Earnings per share
         as damages, costs and interest.                                                                                                                  Basic                                                    0.18          0.24          (0.01)     0.18      0.19         0.45           0.15      0.17
                                                                                                                                                          Diluted                                                  0.17          0.23          (0.01)     0.16      0.17         0.41           0.14      0.15
         On March 4, 2005 the Company settled the class action lawsuit in principle and on June 16, 2005, the Ontario Superior Court of Justice
         certified the class action lawsuit as a class proceeding under the Class Proceedings Act, and granted approval of the settlement that had    Net income
         been agreed to between the Company and the representative plaintiff on behalf of the Class.                                                      margin****                                              6.3%           9.1%      (0.4)%        7.0%      7.2%        18.7%           6.3%      7.4%


         Under the terms of the settlement, the Company was to pay to Class members a credit voucher for every agreement under which the
                                                                                                                                                      *      includes an after-tax recovery of the class action settlement provision of $310
         Class member acquired Company merchandise during the class period. The total value of the credit vouchers that could be claimed, on
                                                                                                                                                      **     includes an after-tax class action settlement provision of $2,232
         the basis of known eligible agreements, was $7,813,135. The credit vouchers issued to Class members were transferable, and could be          *** includes an income tax expense recovery of $2,276
                                                                                                                                                      **** net income as a percentage of revenue


   24                                                                                                                                                                                                                                                                                                               25


easyhome annual report 05                                                                                                                                                                                                                                                                        easyhome annual report 05
                                    M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS                                                                                              M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS
                            OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                           (continued)                                    OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                           (continued)


         Fourth Quarter                                                                                                                             Selling, General and Administrative

         Overall Performance                                                                                                                        Selling, general and administrative expenses were $3.3 million in 2005 compared with $2.9 million in 2004, an increase of
                                                                                                                                                    $0.4 million, or 15%. As a percentage of revenue, selling, general and administrative expenses decreased to 11.9% of revenue in
         For the three months ended December 31, 2005 total revenue increased $3.7 million from $23.9 million in 2004 to $27.6 million in 2005,     2005 from 12% in 2004.
         or 15.4%. For the three months ended December 31, 2005, an increased customer base accounted for all of the lease revenue increase.
         The Company opened 7 stores during the quarter (2004 - 5), 3 kiosk locations (2004 - 0), and 1 licensed store (2004 - 0).                  Occupancy Costs

         Net income was $1.7 million for the three months ended December 31, 2005, the same as 2004. Diluted earnings per share was                 Occupancy costs were $3.4 million for the three months ended December 31, 2005 compared with $3.0 million in 2004, an increase
         $0.17 for both quarters. Same store revenue growth (revenue from stores open for the entirety of the comparable periods) was 6.9%          of $0.4 million, or 14.2%. As a percentage of revenue, occupancy costs decreased to 12.2% in 2005 from 12.3% in 2004 primarily
         (2004 - 9.9%).                                                                                                                             due to the leveraging of same store rent expense. Total rent did increase $0.3 million primarily due to the store count being 22 stores
                                                                                                                                                    higher in 2005 versus 2004.
         For the three months ended December 31, 2005, cash flow from operating activities was $1.6 million compared with cash used in
         operating activities of $0.2 million for the comparable three month period, a decrease of $1.8 million. The primary reasons for the        Automotive and Travel
         decrease were increased purchases of lease assets.
                                                                                                                                                    Automotive and travel expenses were $1.2 million in 2005 compared with $0.9 million in 2003, an increase of $0.3 million, or 28%.
         During the three months ended December 31, 2005 the Company spent $0.8 million on capital asset additions compared with                    This increase is attributable to higher lease costs because of the greater number of delivery vehicles in the fleet and higher operating
         $0.4 million in 2004, the increase primarily related to 2 more new stores and 3 kiosks being opened during the quarter.                    costs because of the increase in the volume of business and rising fuel costs. As a percentage of revenue, automotive and travel costs
                                                                                                                                                    increased from 4.0% in 2004 to 4.4% in 2005.
         Results of Operations for the Three Months Ended December 31, 2005 Compared to the Three Months Ended
         December 31, 2004                                                                                                                          Amortization

         Lease Revenue                                                                                                                              Amortization of lease assets for the three months ended December 31, 2005 increased $1.3 million to $8.3 million from $7.0 million
                                                                                                                                                    for the comparable period in 2004 primarily due to the increase in revenue. As a percentage of revenue, amortization of lease assets
         Lease revenue was $22.9 million for the three months ended December 31, 2005 compared with $20.2 million in 2004, an increase of           increased to 30% in 2005 from 29.3% in 2004. The decrease in margins primarily resulted from (a) an increase in the per store
         $2.7 million, or 13.6%. The primary reason for the increase was the increase in the number of lease agreements.                            average number and net book value of units being written-off (2005- 2.9% of revenue; 2004- 2.5% of revenue); and (b) the
                                                                                                                                                    increase in the number of computer leases year over year which leases generate a lower gross margin than most other new products.
         Other Revenue
                                                                                                                                                    Amortization of capital assets and intangible assets for the fourth quarter of 2005 was consistent with the fourth quarter of 2004 at
         Other revenue, which is realized from fees for ancillary services such as the merchandise protection plan, and processing, reinstatement   $0.5 million.
         and other fees related to returned cheques, was $4.7 million for the three months ended December 31, 2005 compared with $3.8 million
         in 2004, an increase of $1 million, or 26.1%. As a percentage of lease revenue, other revenue increased to 20.7% from 18.6% primarily      Operating Income (Income before Interest and Taxes)
         due to increased processing fees and vendor advertising rebates.
                                                                                                                                                    Operating income was $3.0 million in 2005 compared with $2.7 million in 2004, an increase of $0.3 million, or 9.2%. As a
         Expenses                                                                                                                                   percentage of revenue, operating income decreased to 10.9% in 2005 from 11.5% in 2004.


         Operating expenses increased to $15.9 million for the three months ended December 31, 2005 compared with $13.7 million for the             Operating losses from stores open less than 12 months during the quarter were $0.4 million (2004 - $0.1 million). These losses had a
         comparable period in 2004, an increase of $2.2 million, or 15.8%. This increase was in the normal course of business, other than           negative impact on the operating income margin of 1.6% (2004 – 0.5%).
         severance costs incurred in the quarter, as most of the operating costs are variable with revenue. As a percentage of total revenue,
         operating expenses increased to 57.5% of revenue in 2005 from 57.3% in 2004.                                                               Interest Expense

         Salaries and Benefits                                                                                                                      Interest expense for the fourth quarter of 2005 was $15,000 compared to $46,000 for the comparable period primarily due to the
                                                                                                                                                    lower average bank balance outstanding during the period.
         Salaries and benefits were $8 million for the three months ended December 31, 2005 compared with $6.9 million in 2004, an increase
         of $1.1 million, or 15.2%. A greater employee complement because of more stores, the annual merit increases and accrued severance
         costs relating to the termination of the Chief Financial Officer’s agreement, effective March 31, 2006, accounted for the increase. As a
         percentage of revenue, salaries and benefits remained consistent at 29%.




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easyhome annual report 05                                                                                                                                                                                                                                                         easyhome annual report 05
                                      M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS                                                                                               M A N AGEMENT ’S DISCUSSION A N D A N A LYSIS
                              OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                         (continued)                                       OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS                                           (continued)


         Income Tax Expense
                                                                                                                                                       Disclosure Controls and Procedures
         The income tax provision for the three months ended December 31, 2005 was calculated at an effective rate of 41% (2004 – 36%).
         The effective rate for the year 2005 was calculated at 39% which reflects the average rate for current taxes and the expected average         The Company’s Chief Executive Officer and Chief Financial Officer are required to evaluate the effectiveness of the Company’s disclosure
         reversal rate for future income taxes. Because the tax rate used for the first three quarters of 2005 was estimated at 38%, an adjustment     controls and procedures to ensure that information required to be disclosed in the Company’s annual filings (as defined in Multilateral
         to the rate in the fourth quarter was required such that the yearly rate equated to 39%. The increase in the rate is primarily due to a       Instrument 52-109) as of the end of the period covered by the annual filings is recorded, processed, summarized and reported within the
         greater amount of taxable income earned in provinces with a higher tax rate.                                                                  time periods specified in the applicable securities legislation. The Chief Executive Officer and Chief Financial Officer have evaluated the
                                                                                                                                                       Company’s disclosure controls and procedures for the Company’s annual filings for the year ended December 31, 2005 and concluded that
         The total income tax expense of $1.2 million for the quarter represents current taxes due.                                                    such disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the
                                                                                                                                                       Company’s annual filings is recorded, processed, summarized and reported within the time periods specified in the applicable Canadian
         Liquidity and Capital Resources                                                                                                               securities legislation.


         Three months ended December 31, 2005 compared to the three months ended December 31, 2004
                                                                                                                                                       Other
         Cash flow from operating activities was $1.6 million for the fourth quarter of 2005 compared to cash used in operating activities in 2004
         of $0.2 million, a decrease of $1.8 million. Net income for the period remained flat at $1.7 million. Non-cash items increased $4.2 million   Additional information relating to the Company, including the Company’s Annual Information Form, is on SEDAR at www.sedar.com.
         and were partially off-set by an increase in lease asset purchases of $2.4 million. Purchases of lease assets increased to support the
         growth in revenue.                                                                                                                            As at March 7, 2006, there are 9,994,289 common shares, 516,401 options and no warrants outstanding.


         Cash used in investing activities was $0.7 million in 2005 compared to $0.4 million in 2004, the increase primarily attributed to the         Certain information included in this discussion may constitute forward-looking statements. Forward-looking statements are based on
         greater number of stores opened in the quarter.                                                                                               current expectations and entail various risks and uncertainties. These risks and uncertainties could cause or contribute to actual results
                                                                                                                                                       that are materially different from those expressed or implied. The Company disclaims any obligation or intention to update or revise any
         Cash used in financing activities was $0.8 million in 2005 and cash flow from financing activities in 2004 was $0.6 million, a decrease       forward-looking statement, whether as a result of new information, future events, or otherwise.
         of $1.4 million. Most of the change is attributed to the reduction in the Company’s revolving term bank loan.


         Contractual Obligations


         The Company is committed to long-term security service contracts and operating leases for building space, vehicles and signage.
         The minimum annual lease payments plus estimated operating costs required for the next five years and thereafter are approximately
         as follows:


          (in 000’s)                                                                                                            $


                       2006                                                                                                  10,978
                       2007                                                                                                   7,987
                       2008                                                                                                   5,487
                       2009                                                                                                   3,398
                       2010                                                                                                   1,417
                       Thereafter                                                                                               857
                                                                                                                             30,124



         Transactions with Related Parties


         Amounts receivable includes a $206,400 (2004 - $265,400) home purchase loan provided to an officer of the Company as a result of his
         relocation during 2001. The loan is interest-free and is secured by a collateral mortgage on the officer’s residence. The loan is repayable
         in installments of $1,000 per month plus 50% of any net bonuses awarded to the officer. The approximate fair value of the receivable at
         December 31, 2005 is $185,100.




   28                                                                                                                                                                                                                                                                                                   29


easyhome annual report 05                                                                                                                                                                                                                                                            easyhome annual report 05
                                 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING                                                                                                                          AUDITORS’ REPORT



         The accompanying consolidated financial statements and the information in this Annual Report are the responsibility of management and        To the Shareholders of
         have been approved by the Board of Directors.                                                                                                easyhome Ltd.


         The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting
         principles and include some amounts based on management’s best estimates and judgments. When alternative accounting methods                  We have audited the consolidated balance sheets of easyhome Ltd. as at December 31, 2005 and 2004, and the consolidated
         exist, management has chosen those it considers most appropriate in the circumstances. Management has prepared the financial                 statements of income and retained earnings and cash flows for the years then ended. These financial statements are the responsibility
         information presented elsewhere in the annual report and has ensured that it is consistent with the financial statements.                    of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.


         easyhome Ltd. maintains a system of internal controls to provide reasonable assurance that transactions are properly authorized, financial   We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan
         records are accurate and reliable, and the Company’s assets are properly accounted for and adequately safeguarded.                           and perform an audit to obtain reasonable assurance 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
         The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately     includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
         responsible for reviewing and approving the financial statements. The Board of Directors carries out its responsibility for the financial    financial statement presentation.
         statements through its Audit Committee. This Committee meets periodically with management and the external auditors to review the
         financial statements and the annual report and to discuss audit, financial and internal control matters. The Company’s external auditors     In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company
         have full and free access to the Audit Committee.                                                                                            as at December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in accordance with
                                                                                                                                                      Canadian generally accepted accounting principles.
         The financial statements have been subject to an audit by the Company’s external auditors, Ernst & Young LLP, in accordance with
         Canadian generally accepted auditing standards on behalf of the shareholders.


                                                                                                                                                      Edmonton, Canada
                                                                                                                                                      March 20, 2006                                                                                Chartered Accountants




         David Ingram,                                                                     S.W. Johnson,
         President & Chief Executive Officer                                               Executive Vice President & Chief Financial Officer




   30                                                                                                                                                                                                                                                                                                   31


easyhome annual report 05                                                                                                                                                                                                                                                            easyhome annual report 05
                                                                                  easyhome Ltd.                                                                                                                          easyhome Ltd.
                                                                       (Continued under the laws of Ontario)                                                                                                  (Continued under the laws of Ontario)

                                                            CONSOLIDATED BAL ANCE SHEETS                                                                                                          CONSOLIDATED STATEMENTS OF INCOME
                                                                                                                                                                                                        AND RETAINED EARNINGS

                                                                                                                                                                                                                                                      For the year ended December 31
                                                                                                                         As at December 31

                                                                                                                                                                                                                                                        2005                           2004
                                                                                                                  2005                        2004    (in 000’s except earnings per share)                                                                $                             $
         (in 000’s)                                                                                                 $                          $
                                                                                                                                                      REVENUE
         ASSETS       [note 6]                                                                                                                        Lease                                                                                           85,994                        74,479
         Amounts receivable            [notes 2 and 13]                                                            2,174                      1,454   Other                                                                                            17,118                       13,971
         Prepaid expenses                                                                                           888                        796                                                                                                    103,112                       88,450
         Lease assets       [note 3]                                                                             50,946                      41,485
         Capital assets      [note 4]                                                                             6,044                       5,435   EXPENSES
                                                                                                                                                      Salaries and benefits [note 2]                                                                   29,622                       25,888
         Future tax assets        [note 9]                                                                        6,888                       9,058
                                                                                                                                                      Selling, general and administrative                                                              11,183                        9,681
         Intangible assets and deferred costs             [note 5]                                                  188                        279
                                                                                                                                                      Occupancy costs                                                                                  12,841                       11,550
         Goodwill                                                                                                10,779                      10,779
                                                                                                                                                      Automotive and travel                                                                             4,440                          3,571
                                                                                                                 77,907                      69,286                                                                                                   58,086                        50,690

         LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                         AMORTIZATION
         Liabilities                                                                                                                                  Amortization of lease assets           [note 3]                                                  30,861                       25,789
         Bank revolving term loan             [note 6]                                                             1,115                      2,237   Amortization of capital assets, intangible assets, and
         Trade accounts payable                                                                                   8,810                       6,776     deferred costs     [notes 4 and 5]                                                              1,654                          1,583
                                                                                                                                                                                                                                                       32,515                       27,372
         Accrued liabilities                                                                                      1,211                       1,053
                                                                                                                                                      Total operating expenses including amortization
         Accrued payables, bonuses and other employee costs                                                       2,751                       3,105
                                                                                                                                                        and before class action settlement                                                             90,601                       78,062
         Dividends payable         [note 8]                                                                         396                        245
         Deferred lease inducements                                                                                 539                        279    Operating income before class action settlement                                                  12,511                       10,388
         Unearned revenue                                                                                           365                        363    Class action settlement expense             [note 12]                                             3,100                               —
         Income taxes payable                                                                                     1,619                        244    Operating income                                                                                  9,411                       10,388
                                                                                                                 16,806                      14,302   Interest expense [note 11]                                                                           88                          269
                                                                                                                                                      Income before income taxes                                                                        9,323                       10,119
         Commitments and contingencies                     [notes 7 and 12]
                                                                                                                                                      Income taxes        [note 9 and 11]
                                                                                                                                                        Current                                                                                         1,475                               —
         Shareholders’ equity
                                                                                                                                                         Future                                                                                         2,170                          1,367
         Common shares           [note 8]                                                                        46,212                      44,632
                                                                                                                                                                                                                                                        3,645                          1,367
         Contributed surplus           [note 8]                                                                     680                        240
         Retained earnings                                                                                       14,209                      10,112   Net income for the year                                                                           5,678                          8,752
                                                                                                                 61,101                      54,984   Retained earnings, beginning of the year                                                         10,112                          2,090
                                                                                                                 77,907                      69,286   Common share dividends           [note 8]                                                        (1,581)                          (730)
         See accompanying notes                                                                                                                       Retained earnings, end of the year                                                               14,209                        10,112

         On behalf of the Board:                                                                                                                      Earnings per share          [note 10 ]
                                                                                                                                                      Basic                                                                                              0.59                           0.96
                       David Ingram, Director                                              Donald K. Johnson, Director                                Diluted                                                                                            0.55                           0.87
                                                                                                                                                      See accompanying notes

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easyhome annual report 05                                                                                                                                                                                                                                                     easyhome annual report 05
                                                                          easyhome Ltd.
                                                               (Continued under the laws of Ontario)                                                                                                             easyhome Ltd.

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                                                                                                                                                           December 31, 2005 and 2004

                                                                                                                                                  1. SIGNIFICANT ACCOUNTING POLICIES
                                                                                                       For the year ended December 31
                                                                                                                                                  easyhome Ltd. (the “Company”) is in the business of leasing, with or without an option to purchase, brand name home entertainment
                                                                                                                                                  products, appliances and household furniture across Canada.
                                                                                                         2005                           2004
         (in 000’s)                                                                                        $                             $        The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting
                                                                                                                                                  principles. Because the precise determination of reported amounts of revenue and expenses during the reporting period, and reported
                                                                                                                                                  amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the financial statement date, is dependent upon
         OPERATING ACTIVITIES                                                                                                                     future events, the preparation of financial statements for a period necessarily involves the use of estimates and approximations, which
                                                                                                                                                  have been made using careful judgment. Actual results could differ from those estimates. The consolidated financial statements have,
         Net income for the year                                                                         5,678                          8,752
                                                                                                                                                  in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting
         Items not affecting cash:                                                                                                                policies summarized below.
            Recognition of stock based compensation         [note 8]                                       534                           232
                                                                                                                                                  Basis of consolidation
            Amortization of lease assets     [note 3]                                                   30,861                      25,789
            Amortization of capital assets, intangible assets,                                                                                    The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries:
              and deferred costs   [notes 4 and 5]                                                       1,654                          1,673
                                                                                                                                                             - RTO Asset Management Inc.
            Future income taxes                                                                          2,170                          1,367                - RTO Distribution Inc.
         Net change in non-cash operating items -                                                                                                            - RTO (Rentown) Inc.
                                                                                                                                                             - RTO (Rentown) 2000 Inc.
            Lease assets                                                                               (40,322)                    (34,834)
            Other     [note 11]                                                                          2,663                           538      Business cycle
         Cash flow from operating activities                                                              3,238                          3,517
                                                                                                                                                  Lease agreements for new product are written for an initial period of one week or one month, with successive renewal terms ranging
                                                                                                                                                  from 18 to 36 months, and lease agreements for previously enjoyed product are similarly written, with successive renewal terms
         INVESTING ACTIVITIES                                                                                                                     ranging from 4 to 35 months. Fewer than 5% of the Company’s lease agreements carry terms of less than 12 months. Accordingly, an
                                                                                                                                                  unclassified balance sheet has been presented.
         Purchase of capital assets                                                                     (2,553)                     (1,746)
         Proceeds on disposition of capital assets                                                         381                               39   Lease and other revenue
         Repayment of note payable related to acquisition                                                      —                         (160)
                                                                                                                                                  Merchandise is leased to customers pursuant to agreements that provide for weekly or monthly lease payments collected in advance.
         Cash flow used in investing activities                                                          (2,172)                     (1,867)       The lease agreements terminate at the end of the weekly or monthly lease period without any further obligation or cost to the customer.
                                                                                                                                                  The customer may renew the agreement for another week or month although there is no obligation to do so. Revenue from lease
                                                                                                                                                  agreements is recognized when payment is received and the lease period has passed.
         FINANCING ACTIVITIES
         Repayment of bank revolving term loan                                                          (1,122)                     (1,447)       Other revenue from various services and charges to leasing customers include liability waiver, processing and reinstatement fees, which
         Issuance of common shares on exercise of options and warrants                                   1,618                           282      are recognized as collected, and supplier incentives (excluding vendor volume rebates), which are recognized as earned.

         Shares purchased for cancellation      [note 8]                                                  (152)                              —
                                                                                                                                                  Lease and capital assets
         Common share dividend payments          [note 8]                                               (1,410)                          (485)
                                                                                                                                                  Lease and capital assets are recorded at cost, including freight. Vendor volume rebates are recorded as a reduction of the cost of lease
         Cash flow used in financing activities                                                           (1,066)                     (1,650)
                                                                                                                                                  assets.


         Net change in cash                                                                                    —                             —    Assets on lease, excluding game stations, computers and related equipment and assets that were previously held for lease assets that
                                                                                                                                                  had not been leased for at least 90 consecutive days, are amortized using the units of activity method. Under the units of activity
         See accompanying notes
                                                                                                                                                  method, assets on lease are amortized in the proportion of lease payments received to total expected lease payments provided over
                                                                                                                                                  the lease agreement term. Game stations are amortized on a straight-line basis over 18 months. Computers and related equipment are
                                                                                                                                                  amortized on a straight-line basis over 24 months. Held for lease assets are not amortized where such assets have not been leased
                                                                                                                                                  for less than 90 consecutive days. Once held for lease assets have not been leased for at least 90 consecutive days, such assets are
                                                                                                                                                  amortized on a straight line basis over 18 months regardless of future lease activity. Amortization includes amounts which have been
                                                                                                                                                  charged off as stolen, lost or no longer suitable for lease.


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easyhome annual report 05                                                                                                                                                                                                                                                      easyhome annual report 05
                                                                          easyhome Ltd.                                                                                                                               easyhome Ltd.
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                         (continued)                                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                       (continued)
                                                                    December 31, 2005 and 2004                                                                                                                  December 31, 2005 and 2004

          1. SIGNIFICANT ACCOUNTING POLICIES ( continued)                                                                                               1. SIGNIFICANT ACCOUNTING POLICIES ( continued)

          Lease and capital assets ( continued)                                                                                                         Income taxes

          In the event management determines that the future net cash flows to be derived from leasing the assets is less than the carrying value       The Company uses the liability method to account for income taxes. Under this method, future income tax assets and liabilities
          of the assets, the assets are written down to estimated net realizable value. The estimated net realizable value of lease assets is subject   are determined based on differences between financial reporting and tax bases of assets and liabilities, and measured using the
          to measurement uncertainty and the impact on the consolidated financial statements for future periods could be material.                      substantively enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

          Capital assets are amortized over their estimated useful lives using the following rates and methods:                                         Stock-based compensation

                                                                                   Rate                                    Method
                                                                                                                                                        In periods prior to January 1, 2002, the Company recognized no compensation expense when shares or stock options were issued.
                                                                                                                                                        Effective January 1, 2002, the Company adopted new recommendations of the Canadian Institute of Chartered Accountants (CICA) with
          Furniture and fixtures                                                  20%                                 Declining balance
                                                                                                                                                        respect to the fair value method of accounting for stock-based compensation. As permitted by this standard, the Company applied this
          Office equipment                                                     20-30%                                 Declining balance
                                                                                                                                                        change prospectively for new awards granted on or after January 1, 2002. The Company chose to recognize no compensation expense
          Signage                                                                 20%                                 Declining balance
                                                                                                                                                        when stock options were granted to employees and directors under stock option plans without cash settlement features. However, direct
          Automotive                                                              30%                                 Declining balance
                                                                                                                                                        awards of shares to employees, directors and non-employees, and stock option awards granted to non-employees, were accounted for in
          Leasehold improvements                                                                                      Straight-line over the
                                                                                                                      lesser of the related lease       accordance with the fair value method of accounting for stock-based compensation.
                                                                                                                      term or five years
                                                                                                                                                        To date the Company has not granted options with cash or equity settlement features, or granted stock option awards to non-employees.
          Amortization is recorded at one-half of the above rates in the year of acquisition on all capital assets except leasehold improvements,       In 2004, the shareholders approved the implementation of a restricted share unit plan, which permits the direct awarding of units to
          software and display units.                                                                                                                   senior management entitling the respective employees to receive shares of the Company. In 2005 the Board of Directors approved a
                                                                                                                                                        deferred stock unit plan for Canadian resident directors who can elect to receive their remuneration in the form of deferred stock units.
          Lease inducements
                                                                                                                                                        Effective January 1, 2003, the Company adopted the fair value method of accounting for stock options granted to employees and
          Lease inducements are recognized as future obligations when received and are amortized on a straight-line basis over the term of the          directors. As permitted, the Company applied this change prospectively for new awards granted on or after January 1, 2003.
          related leases as an increase or reduction of current rent expense.                                                                           The Company continues to provide pro forma disclosures with respect to options granted in 2002.

          Intangible assets                                                                                                                             The Company’s stock-based compensation plans, consisting of a stock option plan, a restricted share unit plan and deferred stock
                                                                                                                                                        unit plan, are more fully described in note 8.
          Customer lists are amortized on a straight-line basis over five years.
                                                                                                                                                        Impairment of long-lived assets
          Deferred costs
                                                                                                                                                        Long-lived assets of the Company include capital assets, deferred costs and intangible assets with finite lives. These assets are
          Deferred costs are recorded at cost. Amortization of organization costs is computed using the straight-line method over five years.
                                                                                                                                                        tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
                                                                                                                                                        An impairment loss is then recognized when the carrying amount exceeds their fair value.
          Goodwill

                                                                                                                                                        There were no events or changes in circumstances, which indicated that the carrying amounts of long-lived assets may not be
          The carrying value of goodwill is reviewed annually to ensure that the value reflected is not impaired. An impairment loss would be
                                                                                                                                                        recoverable, thereby requiring any further impairment losses to be recognized.
          recognized if the carrying amount of the goodwill exceeds its estimated fair value. Due to the long-term nature of assumptions made,
          it is possible that estimates could prove to be materially incorrect, and accordingly the impact on the consolidated financial statements
          for future periods could be material. The Company performed an impairment test as at December 31, 2005 and determined that the                Foreign currency translation
          carrying value of the goodwill was not impaired.
                                                                                                                                                        The Company purchases lease assets from suppliers in the United States. Transactions denominated in US dollars are translated as
          Earnings per share                                                                                                                            follows: monetary items at the rate of exchange at the balance sheet date, and non-monetary items at historical exchange rates.
                                                                                                                                                        Any resulting gains or losses are included in income.
          Basic earnings per share is computed based on the weighted average number of common shares outstanding during the year. Diluted
          earnings per share is computed using the treasury stock method, which assumes that the cash that would be received on the exercise
          of options and warrants is applied to purchase shares at the average price during the period and that the difference between the
          shares issued upon exercise of the options and warrants and the number of shares obtainable under this computation, on a weighted
          average basis, is added to the number of shares outstanding. Antidilutive options and warrants are not considered in computing diluted
          earnings per share.


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easyhome annual report 05                                                                                                                                                                                                                                                          easyhome annual report 05
                                                                          easyhome Ltd.                                                                                                                                  easyhome Ltd.
                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                         (continued)                                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                       (continued)
                                                                    December 31, 2005 and 2004                                                                                                                     December 31, 2005 and 2004

           2. AMOUNTS RECEIVABLE                                                                                                                        5. OTHER ASSETS
                                                                                                              2005                             2004
          (in 000’s)                                                                                            $                                   $   Intangible assets and deferred costs

          Vendor rebates receivable                                                                          1,329                              998                                                                                                                 2005
          Due from licensee                                                                                     326                                 —                                                                                                          Accumulated           Net book
          Due from related party                                                                               206                              265                                                                                             Cost           amortization            value
          Other                                                                                                 313                             191     (in 000’s)                                                                               $                    $                   $
                                                                                                              2,174                           1,454
                                                                                                                                                        Customer lists                                                                          450               270                    180
                                                                                                                                                        Organization costs                                                                        24                16                        8
          Due from related party is a home purchase loan provided to an officer of the Company as a result of his relocation during 2001. The                                                                                                    474              286                    188
          loan is interest-free and is secured by a collateral mortgage on the officer’s residence. The loan is repayable in instalments of $1,000
          per month plus 50% of any net bonuses awarded to the officer. The approximate fair value of the receivable at December 31, 2005                                                                                                                           2004
          is $185,100.                                                                                                                                                                                                                                         Accumulated            Net book
                                                                                                                                                                                                                                                Cost           amortization             value
          3. LEASE ASSETS                                                                                                                               (in 000’s)                                                                               $                    $                   $


                                                                                                              2005                            2004      Customer lists                                                                           450               183                   267
          (in 000’s)                                                                                            $                               $       Organization costs                                                                       398              386                      12
                                                                                                                                                                                                                                                 848              569                    279
          Lease assets                                                                                      87,057                           70,953
          Accumulated amortization                                                                          (36,111)                        (29,468)    Amortization of $87,000 (2004 - $88,600) was recorded on the intangible assets and $4,000 (2004 - $101,200) on the deferred costs
          Net book value                                                                                    50,946                           41,485     during the year.


          4. CAPITAL ASSETS                                                                                                                             6. BANK LOAN

                                                                                                                         2005                           The bank loan facility was renewed on December 15, 2005 and terminates December 31, 2006. The facility bears interest at prime plus
                                                                                                                    Accumulated            Net book     0.25% and at December 31, 2005, the credit limit was $10,000,000.
                                                                                                 Cost               amortization             value
          (in 000’s)                                                                               $                       $                   $        Covenants and conditions for the facility include a fixed charge cover covenant, a funded debt to EBITDA covenant, capital expenditure
                                                                                                                                                        and lease asset acquisition covenants in accordance with projections and annual approval of the Company’s business plan. During 2004
          Furniture and fixtures                                                                 2,406                1,117                 1,289       and 2005, and at the end of each year, the Company was in compliance with all bank loan covenants.
          Office equipment                                                                       4,239              2,558                   1,681
          Signage                                                                                1,956                 773                   1,183                                                                                                       2005                             2004
          Automotive                                                                                   74                54                     20      (in 000’s)                                                                                         $                                  $
          Leasehold improvements                                                                 3,429              1,558                   1,871
                                                                                                 12,104             6,060                   6,044       Bank revolving term loan                                                                         1,115                          2,237


                                                                                                                         2004
                                                                                                                    Accumulated            Net book     The weighted average interest rate on the bank loan for the year ended December 31, 2005 was 5.4% (2004 – 5.0%).
                                                                                                  Cost              amortization             value
          (in 000’s)                                                                               $                       $                   $        All assets of the Company are pledged as collateral for the facility.


          Furniture and fixtures                                                                 1,950                  855                  1,095
          Office equipment                                                                       3,842                2,098                  1,744
          Signage                                                                                1,669                  528                  1,141
          Automotive                                                                                74                   45                     29
          Leasehold improvements                                                                 2,458                1,032                  1,426
                                                                                                 9,993                4,558                  5,435


   38                                                                                                                                                                                                                                                                                                39


easyhome annual report 05                                                                                                                                                                                                                                                         easyhome annual report 05
                                                                        easyhome Ltd.                                                                                                                                    easyhome Ltd.
                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                   (continued)                                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                        (continued)
                                                                  December 31, 2005 and 2004                                                                                                                       December 31, 2005 and 2004

          7. COMMITMENTS                                                                                                                                  8. SHARE CAPITAL ( continued)

          The Company is committed to long-term security service contracts and operating leases for building space, vehicles and signage.                 Stock options and warrants
          The minimum annual lease payments plus estimated operating costs required for the next five years and thereafter are approximately                                                                                                                 2005                                  2004
          as follows:                                                                                                                                     (in 000’s)                                                                                           #                                      #


          (in 000’s)                                                                                                                $                     Outstanding options and warrants
                                                                                                                                                          Balance, beginning of the year                                                                     1,319                                1,349
                        2006                                                                                                10,978                        Options granted                                                                                          20                                 114
                        2007                                                                                                    7,987                     Options exercised                                                                                    (716)                               (121)
                        2008                                                                                                    5,487                     Warrants exercised                                                                                    (21)                                  (12)
                        2009                                                                                                    3,398                     Options and warrants cancelled, terminated or expired                                                    (5)                                (11)
                        2010                                                                                                    1,417                     Balance, end of the year                                                                              597                               1,319
                        Thereafter                                                                                                  857
                                                                                                                            30,124                        Stock options

           8. SHARE CAPITAL                                                                                                                               Under the Company’s stock option plan, options to purchase common shares may be granted by the Board of Directors to directors,
                                                                                                                                                          officers and employees. Options are granted at exercise prices equal to or greater than fair market value at the grant date, generally
          Authorized                                                                                                                                      vest evenly over a three to five year period, and have exercise lives ranging from five to ten years. The aggregate number of common
          Unlimited preferred shares                                                                                                                      shares reserved for issuance and which may be purchased upon the exercise of options granted pursuant to the plan shall not exceed
          Unlimited common shares with no par value                                                                                                       1,500,000 common shares.


          Common shares issued and outstanding                                                                                                            The Company has granted stock options to directors, officers and employees to purchase 526,000 common shares at prices between
                                                                                                                                                          $2.04 and $16.35 per share. These options expire on dates between February 1, 2006 and April 20, 2011.
                                                                                                 2005                                     2004
                                                                                        Shares          Amount             Shares                Amount                                                                                  2005                                       2004
          (in 000’s)                                                                      #                $                    #                   $                                                                                    Weighted Average                          Weighted Average
                                                                                                                                                                                                                          Shares           Exercise Price            Shares          Exercise Price
          Balance, beginning of the year                                                9,187           44,632             9,054                 44,350   (# of shares in 000’s)                                              #                    $                     #                  $
          Issued for cash for exercised stock
            options and warrants                                                         737             1,627                  133                282    Stock options, beginning of the year                            1,227                    2.76              1,245               2.23
          Shares purchased for cancellation                                               (10)             (47)                 —                   —     Options granted                                                     20                  14.94                  114             8.03
          Balance, end of the year                                                      9,914           46,212              9,187                44,632   Options exercised                                                 (716)                  2.20                  (121)           2.12
                                                                                                                                                          Options cancelled,
                                                                                                                                                            terminated or expired                                             (5)                  7.95                   (11)           4.53
          On May 10, 2005 the Company approved a stock split of the Company’s common shares on a one and a half for one basis. All share                  Stock options, end of the year                                    526                    3.94              1,227               2.76
          capital amounts and earnings per share amounts disclosed in the consolidated financial statements have been retroactively adjusted
          to give effect to the stock split.                                                                                                              The Company has issued options to directors, officers and employees at December 31, 2005 as follows:


          On November 24, 2005 the Company purchased 10,100 shares through a normal course issuer bid. The shares were purchased at a                                                                          Outstanding                                                Exercisable
          price of $15.00 per share for a total of $151,700.                                                                                                                                                 Weighted Average               Weighted                             Weighted
                                                                                                                                                              Range of                                          Remaining                   Average                              Average
          Common share dividends                                                                                                                              Exercise                                         Contractual                  Exercise                             Exercise
                                                                                                                                                               Prices                      Shares                 Life in                    Price                 Shares          Price
          In 2004, the Company commenced paying dividends on common shares. Dividends in the amount of $1,410,000 were paid to common                            $                           #                    Years                        $                     #               $
                                                                                                                                                                                           (in 000’s)                                                              (in 000’s)
          shareholders during 2005 (2004 - $485,000). The Company declared a dividend of $0.04 per share ($396,000) to shareholders of
                                                                                                                                                             2.04 – 3.00                     361                     3.10                        2.05                361                 2.05
          record on November 30, 2005, which was paid on January 4, 2006.
                                                                                                                                                             3.93 – 5.24                      37                     1.88                        4.58                 27                 4.56
                                                                                                                                                             7.43 – 8.00                     107                     3.20                        8.00                 63                 8.00
                                                                                                                                                            10.00 –16.35                      21                     4.48                       14.57                  5                14.21
                                                                                                                                                             2.04 –16.35                     526                     3.09                        3.94                456                 3.14

   40                                                                                                                                                                                                                                                                                                         41


easyhome annual report 05                                                                                                                                                                                                                                                                  easyhome annual report 05
                                                                          easyhome Ltd.                                                                                                                              easyhome Ltd.
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      (continued)                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            (continued)
                                                                    December 31, 2005 and 2004                                                                                                                 December 31, 2005 and 2004

           8. SHARE CAPITAL ( continued)                                                                                                             8. SHARE CAPITAL ( continued)

          Stock-based compensation                                                                                                                   Warrants

          The Company uses the fair value method of accounting for stock options granted to employees and directors on or after January 1, 2003.     In December 2000, the Company issued warrants to acquire 150,000 common shares at an exercise price of $2.04 per share as part
          During the year ended December 31, 2005, the Company granted 20,600 options (2004 – 114,300). Compensation (salaries and                   of the terms of a subordinated debenture financing. The warrants may be exercised at any time over a five year period from issuance.
          benefits) expense of $175,000 (2004 - $106,000), with a corresponding increase in contributed surplus, was recorded in respect of          At December 31, 2005, 70,500 warrants (2004 – 91,500) were outstanding.
          stock options during the year.
                                                                                                                                                     Restricted Share Unit Plan
          The estimated fair value of these options was determined using the Black-Scholes options pricing model with the following assumptions,
          resulting in a weighted-average fair value of $4.38 per option (2004 – $4.09):                                                             On May 10, 2004, the shareholders approved the implementation of a restricted share unit plan (the “Plan”) which permits the
                                                                                                                                                     awarding of restricted share units to senior management of easyhome Ltd., its subsidiaries and its designated affiliates (collectively the
                                                                                                            2005                            2004     “Company”). Each unit entitles the employee to receive one common share of the Company. The units vest on the third anniversary of
                                                                                                                                                     the date of the grant provided certain performance criteria are met. The Company has reserved 225,000 common shares for issuance
          Risk-free interest rate (%)                                                                        3.40                           3.36     under the Plan. The purpose of the Plan is to (i) provide long-term incentives to senior executives of the Company so as to encourage
          Expected hold period to exercise (years)                                                            4.0                             4.0    the long-term retention of senior executives for the success of the Company; (ii) support the objectives of employee share ownership;
          Volatility in the price of the corporation’s shares (%)                                           66.49                          66.96     (iii) foster a responsible balance between short-term and long-term results; and (iv) build and maintain a strong spirit of performance
          Dividend yield (%)                                                                                 0.18                           0.07     and entrepreneurship.


                                                                                                                                                     During 2005, 24,000 units were granted to senior executives of the Company (106,500 - 2004) and, during 2005, an additional 1,317
          The following table provides the required pro forma measures of net income and earnings per share had compensation expense been            (2004 – 909) units were granted as a result of the declaration of common share dividends. Compensation expense is recognized over
          recognized based on the fair value of the options granted in 2002, as at the date of the grant, in accordance with the fair value method   the three-year vesting period. During the year ended December 31, 2005, $304,000 (2004 - $126,000) was recorded as compensation
          of accounting for stock-based compensation:                                                                                                (salaries and benefits) expense, with a corresponding increase in contributed surplus, under the Plan.


                                                                                                            2005                            2004     Deferred Share Unit Plan
          (in 000’s except earnings per share figures)                                                        $                               $
                                                                                                                                                     On May 10, 2005, the Board of Directors approved a Deferred Share Unit Plan as an alternative to compensate Canadian board
          Net income for the year                                                                           5,678                          8,752     members. As at December 31, 2005, 3,606 deferred share units were granted and an additional 21 units were granted as a result of
          Compensation expense                                                                                 38                             20     the declaration of common share dividends. As at December 31, 2005 $55,000 was recorded as compensation expense under the
          Pro forma net income for the year                                                                 5,640                          8,732     Plan, with a corresponding increase in contributed surplus.


          Earnings per share:                                                                                                                        9. INCOME TAXES
          Reported basic earnings per share                                                                  0.59                           0.96
          Compensation expense per share                                                                    (0.00)                         (0.00)    The Company’s tax provision is determined as follows:
          Pro forma basic earnings per share                                                                 0.59                           0.96
                                                                                                                                                                                                                                                         2005                            2004
          Reported diluted earnings per share                                                                0.55                           0.87     ($ in 000’s)                                                                                          $                               $
          Compensation expense per share                                                                    (0.00)                         (0.00)
          Pro forma diluted earnings per share                                                               0.55                           0.87     Combined basic federal and provincial income tax rates                                           35.72%                          35.98%
                                                                                                                                                     Expected income tax expense                                                                        3,330                           3,641
                                                                                                                                                     Impact of changes in substantively enacted tax rates on
          The estimated fair value of these options was determined using the following weighted-average assumptions, resulting in a weighted-          recognized future tax assets                                                                            4                           31
          average fair value of $3.01 per option (2004 - $3.05):                                                                                     Valuation allowance adjustments                                                                          —                        (2,276)
                                                                                                                                                     Non-deductible expenses                                                                              304                             179
                                                                                                            2005                            2004     Other                                                                                                     7                         (208)
                                                                                                                                                                                                                                                        3,645                           1,367
          Risk-free interest rate (%)                                                                        4.49                           4.56
          Expected hold period to exercise (years)                                                            4.0                             4.0
          Volatility in the price of the corporation’s shares (%)                                           84.84                          85.18
          Dividend yield (%)                                                                                 0.00                           0.00


   42                                                                                                                                                                                                                                                                                                 43


easyhome annual report 05                                                                                                                                                                                                                                                          easyhome annual report 05
                                                                         easyhome Ltd.                                                                                                                          easyhome Ltd.
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                         (continued)                                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                             (continued)
                                                                   December 31, 2005 and 2004                                                                                                             December 31, 2005 and 2004

          9. INCOME TAXES ( continued)                                                                                                           11. NET CHANGE IN NON-CASH OPERATING ITEMS


          During 2004, management revised its assessment of the magnitude and timing of positive taxable income that is sustainable in future    The net change in non-cash operating items excluding lease assets is determined as follows:
          periods and accordingly, reduced the valuation allowance recorded in prior years to nil.
                                                                                                                                                                                                                                                    2005                            2004
          Significant components of the Company’s future tax assets are as follows:                                                              ($ in 000’s)                                                                                         $                                  $


                                                                                                            2005                          2004   Amounts receivable                                                                                  (720)                           223
          ($ in 000’s)                                                                                       $                              $    Prepaid expenses                                                                                      (92)                         (132)
                                                                                                                                                 Trade accounts payable                                                                             2,034                           (383)
          Future tax assets                                                                                                                      Accrued liabilities                                                                                  158                           (370)
          Loss carryforwards                                                                                  —                            838   Accrued payables, bonuses and other employee costs                                                  (354)                           952
          Tax cost of lease and capital assets in excess                                                                                         Deferred lease inducement                                                                            260                            227
            of net book value                                                                               5,956                        7,332   Unearned revenue                                                                                          2                             48
          Accounts receivable                                                                                797                           580   Income taxes payable                                                                               1,375                                (27)
          Other                                                                                              135                           308                                                                                                      2,663                            538
                                                                                                           6,888                         9,058

                                                                                                                                                 Supplemental disclosures in respect of the consolidated statement of cash flows comprise the following:
           10. EARNINGS PER SHARE
                                                                                                                                                                                                                                                    2005                            2004
          The reconciliation of net income to net income available to common shareholders is as follows:                                         ($ in 000’s)                                                                                         $                                  $


                                                                                                            2005                          2004   Income taxes paid                                                                                  255                                  87
          ($ in 000’s)                                                                                       $                              $    Interest paid                                                                                        88                            179


          Net income for the year                                                                           5,678                        8,752
                                                                                                                                                 Interest expense of $88,100 (2004 - $268,900) presented on the statement of income includes amortization of financing costs of $0.00
                                                                                                                                                 (2004 - $90,000).
          The number of basic and diluted common shares outstanding, as calculated on a weighted-average basis, is as follows:
                                                                                                                                                 12. CONTINGENCIES
                                                                                                            2005                          2004
          (in 000’s)                                                                                         #                              #    (A) On April 26, 2004 a legal proceeding was commenced against the Company and its wholly-owned subsidiary, RTO Asset
                                                                                                                                                      Management Inc., by Lawrence William Nantais (the “Plaintiff”), a customer of the Company. The Plaintiff obtained an order
          Basic shares outstanding                                                                          9,643                        9,099        pursuant to the Class Proceedings Act, 1992, S.O. 1992 c.6 (the “Act”), as amended, certifying the action as a class proceeding
          Share options (dilutive effect of 517,341 options; 2004 – 1,224,810)                               626                           903        and appointing him as the representative of the Class. The Plaintiff asserted that, to the extent a member of the Class acquires
          Warrants (dilutive effect of 70,500 warrants; 2004 – 91,500)                                        61                            70        ownership of merchandise offered by easyhome, the Company’s lease agreement is an agreement or arrangement for credit
          Diluted shares outstanding                                                                       10,330                       10,072        advanced and the aggregate of all charges and expenses under the lease agreement amounts to interest charged at rates in
                                                                                                                                                      excess of those allowed by law and that the lease agreements are void and unenforceable. The Statement of Claim stated that
                                                                                                                                                      the members of the Class would seek to recover such charges and expenses, as well as damages, costs and interest.
          Stock options to acquire 9,200 common shares (2004 – 2,400) were not included in the calculation of diluted shares as their exercise
          prices exceeded the average market share price for the year.                                                                                On March 4, 2005 the Company settled the class action lawsuit in principle and on June 16, 2005, the Ontario Superior Court
                                                                                                                                                      of Justice certified the class action lawsuit as a class proceeding under the Class Proceedings Act, and granted approval of the
                                                                                                                                                      settlement that had been agreed to between the Company and the representative plaintiff on behalf of the Class.




   44                                                                                                                                                                                                                                                                                            45


easyhome annual report 05                                                                                                                                                                                                                                                     easyhome annual report 05
                                                                         easyhome Ltd.                                                                                                                                 easyhome Ltd.
                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                        (continued)                                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                        (continued)
                                                                   December 31, 2005 and 2004                                                                                                                    December 31, 2005 and 2004

           12. CONTINGENCIES ( continued)                                                                                                               13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ( continued)

               Under the terms of the settlement, the Company was to pay to Class members a credit voucher for every lease agreement under              Credit risk management ( continued)
               which the Class member acquired Company merchandise during the Class period. The total value of the credit vouchers that could
               be claimed, on the basis of known eligible lease agreements, was $7,813,135. The credit vouchers issued to Class members were            The credit risk related to amounts receivable results from the possibility of default on rebate payments. The Company deals with
               transferable, and could be used to purchase Company merchandise, be applied to existing Company lease agreements or be used              credible companies, performs ongoing credit evaluations and allows for uncollectible rebate amounts when determined.
               after starting a new agreement. Unused credit vouchers expired on December 31, 2005 except in certain limited circumstances.
               In addition, the Company paid the legal fees and costs of the Class in the proceeding, and the costs associated with administering       The credit risk related to assets on lease results from the possibility of customer default of agreed payments. The Company leases
               the settlement process. Based on the Company’s estimate of the rate of take-up and redemption of the credit vouchers, the                products to thousands of customers and has no concentration of revenue risk with any particular individual, company or other entity.
               Company recorded a pre-tax provision in its second quarter of 2005 of $3,600,000 to cover the costs of the settlement, including         The Company has a standard collection process in place in the event of payment default, which concludes with the recovery of the
               legal fees awarded under the settlement. Because of the continuing decline in credit voucher redemptions during the third quarter,       lease asset if satisfactory payment terms cannot be worked out, as the Company maintains ownership of the lease assets until payment
               management reduced the provision by $500,000 on September 30, 2005. As at December 31, 2005, the date of expiration of the               options are exercised. Annual lease asset losses normally approximate 3% of lease revenues.
               unused credit vouchers, legal and other costs of $1,066,000 and $1,944,000 in redeemed vouchers were charged to the provision
               reducing the provision to $90,000 as at December 31, 2005 which is included in accrued liabilities.                                      Indemnities

          (B) A motion seeking the authorization to institute a class action was started against the Company in the Province of Quebec (Montreal        The Company indemnifies its directors and officers against any and all claims or losses reasonably incurred in the performance of their
              Superior Court) in November 1997. The plaintiffs were authorized by the Court in July 1999 to proceed with a class action against         service to the Company to the extent permitted by law. The Company has acquired and maintains liability insurance for its directors
              the Company on behalf of all persons who contracted with the Company in the Province of Quebec for the lease or purchase of               and officers.
              one or more items destined for personal use in their home (the “Quebec Class”). The plaintiffs alleged that the Company’s lease
              contracts did not properly comply with the requirements of the Consumer Protection Act (Quebec).                                          14. SEGMENTED INFORMATION

               They were seeking the cancellation of their contracts, or the reduction of their obligations and the reimbursement of all or a portion   Operating segments are defined as components of the Company for which separate financial information is available that is evaluated
               of the amounts paid by the members of the Quebec Class to the Company, as well as exemplary damages in the amount of $200 per            regularly by the chief operating decision maker in allocating resources and assessing performance. The chief operating decision maker
               contract.                                                                                                                                of the Company is the President & Chief Executive Officer.


               The Company entered into a settlement agreement with the plaintiffs, which was approved by the Court on March 18, 2005.                  The Company operates in one reportable and geographic segment, which is the business of leasing, with or without an option to
               Management recorded a provision of $500,000 in a prior year, which was adequate to cover the liability of the Company in                 purchase, direct to the consumer, brand name entertainment products, appliances and household furniture in Canada. As at December
               relation to this matter. During the second quarter of 2005, the Company distributed $299,000 to Quebec Class members and                 31, 2005, the Company operated 165 (2004 – 143) stores in 10 (2004 – 10) provinces, 4 kiosk locations (2004 – nil) and one licensed
               paid $184,000 in legal fees and disbursements.                                                                                           location (2004 - nil).


          13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT                                                                                                 Information about products

          Financial instruments                                                                                                                         Providing information relating to revenue from customers for each product, or group of similar products, is impractical and accordingly,
                                                                                                                                                        only lease revenue has been presented in the consolidated statements of income and retained earnings.
          The fair value of amounts receivable, trade accounts payable and income taxes payable approximate their carrying values, due to
          expected relatively short periods to maturity of these instruments.                                                                           15. COMPARATIVE FIGURES

          The fair value of the bank revolving term loan approximates its carrying value due to interest rates which reflect market rates.              Certain comparative figures have been reclassified to conform with the presentation adopted for the current year


          Interest rate risk management

          The bank revolving term loan bears a floating rate of interest. At December 31, 2005 this rate was 5.25% (2004 – 5.5%).
          The Company does not hedge interest rates and future changes in interest rates will affect the amount of interest expense payable
          by the Company.


          Credit risk management

          The maximum exposures to credit risk are represented by the carrying amount of the amounts receivable and assets on lease with
          customers under merchandise lease agreements.



   46                                                                                                                                                                                                                                                                                                  47


easyhome annual report 05                                                                                                                                                                                                                                                           easyhome annual report 05
                                                                                      Ltd.                                                                                                             Ltd.

                                                     CORPOR ATE GOVERNANCE                                                                                       CORPOR ATE GOVERNANCE                (continued)




              easyhome Ltd. is dedicated to practicing the highest standards of corporate governance. Believing that
                                                                                                                                Corporate Governance and Nominating Committee
              responsible and effective governance is essential to its success, the Company has developed systems and
              procedures that are appropriate for its business. These systems and procedures are reviewed on a regular          The Company’s Board and senior management consider good corporate governance to be central to the
              basis and updated to reflect changing regulations and best practices.                                              effective and efficient operation of the Company. During the past year, the Company’s corporate governance
                                                                                                                                disclosure obligations have changed due to the introduction by the Canadian Securities Administrators of
              The Company’s Directors are experienced business leaders representing a breadth of background and                 National Instrument 58-101 – Disclosure of Corporate Governance Practices (the “National Instrument”)
              experience, including finance and merchandise leasing. On behalf of easyhome’s shareholders, the Board of          and National Policy 58-201 – Corporate Governance Guidelines (the “National Policy”), both of which came
              Directors is responsible for the stewardship of the Company, establishing overall policies, reviewing strategic   into force on June 30, 2005 and effectively replaced the Corporate Governance Guidelines of the TSX.
                                                                                                                                Concurrently, amendments were made to Multilateral Instrument 52-110 – Audit Committees. The National
              plans, and holding accountable the management to whom it delegates the operation of the Company.
                                                                                                                                Policy sets out a series of guidelines for effective corporate governance (the “Guidelines”). The Guidelines
                                                                                                                                address matters such as the constitution and independence of corporate boards, the functions to be performed
              The Board has established three permanent Committees with written mandates for the continuous review              by boards and their committees and the effectiveness and education of board members. The National
              and monitoring of key areas critical to good corporate governance. The Audit Committee, the Compensation          Instrument requires the disclosure by each listed corporation of its approach to corporate governance with
              Committee and the Corporate Governance and Nominating Committee each consist of three Directors, all              reference to the Guidelines as it is recognized that the unique characteristics of individual corporations will
              of whom are independent of management.                                                                            result in varying degrees of compliance.

                                                                                                                                The mandate of the Corporate Governance and Nominating Committee is to assist the Board of Directors
              COMMITTEE STRUCTURE                                                                                               in establishing and maintaining a sound system of corporate governance through a process of continuing
                                                                                                                                assessment and enhancement. The Committee is responsible for examining the effectiveness of the
                                                                                                                                Company’s corporate governance practices and proposing such procedures and policies as the Committee
              Audit Committee                                                                                                   believes are appropriate to ensure that the Board clearly functions independently of management, management
                                                                                                                                is clearly accountable to the Board of Directors of the Company, and procedures are in place to monitor
              The mandate of the Audit Committee is to assist the Board of Directors in its oversight role with respect         the effectiveness of the performance of the Board and individual Directors. In addition, the Committee
              to the quality and integrity of financial information, the effectiveness of the Company’s risk management          is responsible for identifying and recommending to the Board suitable candidates for nomination as new
              and compliance practices, the independent auditor’s performance, qualifications and independence, and              Directors, and reviewing the credentials of Directors standing for re-election.
              the Company’s compliance with legal and regulatory requirements. The Committee reviews the annual
              and interim financial statements of the Company, as well as other public disclosure documents required             A detailed description of the Company’s approach is outlined in the Management Information Circular issued
              by regulatory authorities. The Audit Committee also makes recommendations to the Board regarding the              in connection with the Annual Meeting of Shareholders, a copy of which is available through Equity Transfer
              appointment of independent auditors, reviews the nature and scope of the annual audit, and reviews the            Services Inc.
              adequacy of the internal accounting controls and management store audits.

              Compensation Committee
              The Compensation Committee’s mandate is to review the Company’s compensation strategy with a view to
              aligning compensation with business objectives and performance, and aligning incentives with the interests
              of shareholders to maximize shareholder value. This includes developing compensation recommendations
              for the approval of the full Board for the Company’s Executive Officers, Directors of the Company and all
              other employees. Compensation includes salary, bonuses, benefits, stock option grants, stock purchases and
              other compensation as appropriate. It also includes reviewing the written objectives of the President and
              Chief Executive Officer and his direct reports, annually assessing the performance of the President and Chief
              Executive Officer, and reviewing and assessing a plan for succession. The Committee also ensures there are
              appropriate training, development and benefit programs in place for management and staff.




   48                                                                                                                                                                                                                                                     49


easyhome annual report 05                                                                                                                                                                                                              easyhome annual report 05
                                                                                   Ltd.                                                                                                            Ltd.

                                                                                                                                                                   YOUR EASYHOME TEAM!


                                                              BOARD OF DIRECTORS




                      Donald K. Johnson                                       Ronald G. Gage
                      Chairman                                                Corporate Director
                      easyhome Ltd.
                                                                              Robert (Robin) Korthals
                      David Ingram                                            Corporate Director
                      President & Chief Executive Officer
                      easyhome Ltd.                                           David A. Lewis
                                                                              Corporate Director
                      Douglas Anderson
                      Corporate Director                                      Joseph Rotunda
                                                                              President & Chief Executive Officer                                                 CORPOR ATE INFORMATION
                                                                              EZCorp., Inc.


                                                                                                                                        Edmonton Office                                           Bankers
                                                                                                                                        10239 – 178 Street                                       Canadian Imperial Bank
                                                                                                                                        Edmonton, Alberta                                        of Commerce
                                                                                                                                        T5S 1M3                                                  Edmonton, Alberta
                                                                                                                                        Tel: (780) 930-3000
                                                                                                                                        Fax: (780) 481-7426                                      Transfer Agents
                                                                   OFFICERS                                                                                                                      Equity Transfer Services Inc.
                                                                                                                                        Mississauga Office                                        Toronto, Ontario
                                                                                                                                        Suite # 201
                                                                                                                                                                                                 Listed
                                                                                                                                        170 Robert Speck Parkway
                                                                                                                                                                                                 Toronto Stock Exchange
                        David Ingram                                          Rick Atkinson                                             Mississauga, Ontario
                                                                                                                                                                                                 Trading Symbol: EH
                        President & Chief Executive Officer                   Vice President, Development                               L4Z 3G1
                                                                                                                                        Tel: (905) 272-2788
                        S. William Johnson                                    Dave Maries                                                                                                        Auditors
                                                                                                                                        Fax: (905) 272-9886
                        Executive Vice President &                            Vice President, Marketing & Merchandising                                                                          Ernst & Young LLP
                        Chief Financial Officer                                                                                                                                                  Edmonton, Alberta
                                                                              Randy Robertson                                           Investor Relations
                                                                              Senior Vice President, Operations                         David Ingram                                             Solicitors
                                                                                                                                        President & Chief Executive Officer                      Blake Cassels & Graydon LLP
                                                                                                                                        Tel: (905)272-2788                                       Toronto, Ontario

                                                                                                                                                                                                 Website
                                                                                                                                                                                                 www.easyhome.ca



                                                                                                                                                                 ANNUAL GENERAL MEETING


                                                                                                                          The Annual General Meeting of the Shareholders will be held at 4:30 p.m. (EST) on May 9, 2006 at the TSX Gallery in
                                                                                                                          The Exchange Tower, 130 King Street West, Toronto, Ontario, Canada.



   50                                                                                                                                                                                                                                                  51


easyhome annual report 05                                                                                                                                                                                                           easyhome annual report 05
                  Ltd.

WWW.EASYHOME.CA
annual
 easyhome




                           report 2006



CHARTING THE FUTURE
WITH CONFIDENCE
Growth – the centrepiece
of our strategy


Forging new lines of
business


Innovative operational
upgrades
OUR MISSION
VISION:
Everyone should be given the opportunity to enhance their
home and lifestyle. We are the leader in helping people get
exactly what they want for as long as they want... right now!



MISSION:
We are a relationship-driven business that thrives on the
opportunity to provide customers access to household
goods and services that enhance the quality of their lives.



VALUES:
Integrity, Respect, Quality, Pride and Enterprising




2      easyhome annual report 06
CORPORATE PROFILE

easyhome Ltd. is Canada’s largest           These agreements may be cancelled
merchandise lease company, and the          at any time without further cost to the
third largest in North America, offering    customer and include an unconditional
top-quality, brand name household           service guarantee with an option to
furnishings, appliances and home            purchase. easyhome currently operates
electronic products to consumers under      191 stores across Canada (including one
weekly or monthly lease agreements.         licensed location).




CONTENTS

5      Message to our Shareholders

8      Charting Our Future With Confidence

12     Forging Ahead Into New Lines Of Business

14     Innovating By Upgrading Our Operations

18     Management’s Discussion and Analysis

34     Management’s Responsibility for Financial Reporting

35     Auditors’ Report

36     Consolidated Financial Statements

58     Corporate Governance

62     Milestones




                                                         easyhome annual report 06    3
                                DONALD K. JOHNSON
                                Chairman
                                easyhome Ltd.




                                                    DAVID INGRAM
                                                    President & Chief Executive Officer
                                                    easyhome Ltd.




4   easyhome annual report 06
MESSAGE TO OUR SHAREHOLDERS
To our Shareholders

The past year was an important one          23.9% from last year’s operating income
for easyhome. After strengthening our       (adjusted for $3.1 million in class action
position as the leader in the Canadian      settlement costs) of $12.5 million. Diluted
industry in 2005, we were ready in 2006     earnings per share, excluding the tax
to concentrate all our efforts on driving   asset reduction, were $0.90, an increase
our strategy for long-term growth. We       of 21.6% over diluted earnings per share
opened 28 new stores, four more than        in 2005 (adjusted to take account of the
in the previous year and double the         class action settlement costs) of $0.74.
number launched in 2004. We also made
solid gains in revenue and launched         We have never been in a better position to
easyfinancial, a new division that will      drive growth to new heights than we are
enhance our relationship with customers     today. Financially, our position has been
by providing financial services that         improving for several years, and we have
complement our leasing arrangements.        the strong cash flow we need to undertake
                                            new initiatives. Our EBITDA reached a high
                                            of $17.7 million in 2006, and our return on
Solid Results Based on Steady Growth        capital rose to 22%. Our debt-to-equity
                                            ratio has also steadily declined, and in 2006
The Company’s results show that our         our total debt stood at $6.3 million, or 9%
approach is effective. Over the past six    of equity. Investor confidence completes this
years, we have opened 78 new stores.        picture, as our share price has dramatically
We have increased revenues by 76%           outperformed the TSX, since 2000.
and improved EBT from $1 million to
$15.2 million. This has translated into
superb results for our shareholders,        Charting the Future with Confidence
who have enjoyed a total return on
easyhome shares between 2000 and            After five years dedicated to turning
2006 of 751%, which included a regular      easyhome around and realizing its
dividend that for the fourth quarter        potential, we can confidently say that our
of 2006 was $0.06 per share. This           transformation is complete; we are now
continued our objective of increasing       the company we wanted to be. We have
the dividend every year since 2004.         re-branded our offering, settled legal
                                            questions and put them behind us, and
The addition of new outlets contributed     launched the initiatives that will take us
to our ongoing growth in revenue, which     into a new phase of our development as a
jumped from $103.1 million in 2005 to       leader in the North American merchandise
$119.6 million in 2006. This represents     leasing market. Today we are standing on a
an increase of 16%, and extends our         platform for sustained growth that has taken
comparable revenue growth to 21             many years to build, but that will deliver
consecutive quarters. We also continued     benefits for many more years to come.
building our same-store revenue, which
rose 5.4%. This rate of growth is within    Our strategy for growth rests on the
our planned target range of 5-7%, which     recognition that this is a customer-focused
we consider a healthy level. Operating      business, and we will serve our customers in
income for the year was $15.5 million, up   as many ways as we can. With over 63,000



                                                          easyhome annual report 06       5
MESSAGE TO OUR SHAREHOLDERS CONTINUED

    active customers, easyhome has a strong        deepen our relationship with customers. We      It’s obvious from the results we have
    and loyal base. Yet we also have substantial   have devoted considerable attention to our      achieved not only this year, but in the time
    room in which to grow. Approximately           new Store of the Future, an enhanced store      since we first began turning the Company
    30% of households in Canada – almost           model that benefits from an improved brand       around, that we have excellent management
    3.6 million – match our typical customer       identity, enhanced fixtures and displays         and employees. We would like to thank all
    profile. Of these, nearly 900,000               (such as flat-screen TVs), better utilization    of them for their contribution to the success
    households are at least three times more       of space, and a revamped Customer               of easyhome in establishing and maintaining
    likely to lease than the average consumer,     Service area. These measures are designed       our position as the industry leader.
    and a further 1.3 million between two          to drive increased revenue per square foot
    and three times more likely to lease.          and maximize long-term profitability.            We would also like to thank shareholders
                                                                                                   for their continued confidence in us.
                                                   These efforts will be enhanced by the           We all share a vision of what easyhome
PERCENTAGE OF TOTAL UNITS                          provision of financial services, which           can become, and with your ongoing
ON LEASE (BY CATEGORY)                             we test-launched in 2006 with our first          support we will get there. You have
                                                   easyfinancial kiosks in three locations.         expressed your belief in the Board and
                                                   This was the first step in a plan to provide     Management by investing in the Company,
                                                   financial services across the country. This      and we will repay your confidence in
                                                   business complements our merchandise            the coming years by focusing on the
                                                   leasing and will attract the same               fundamentals of our business and following
                               Electronics
           Furniture           32%                 clientele. The expansion of our offering        a strategy that has served us well.
               42%                                 to customers is integral to our vision of
                                                   becoming bigger, better and stronger.
                                  Appliances       Our business model has been proven and
                Computers         15%
                                                   promises continued success. However, we
                     11%
                                                   are not content with simply expanding our
                                                   Canadian base. The increasing integration
                                                   of the North American economies means           DONALD K. JOHNSON
UNIT GROWTH (BY CATEGORY)                          that we will inevitably compete with            Chairman of the Board
Furniture                                  29%     merchandise leasing companies in the            March 2007
                                                   United States. We are not only ready for this
Computers                                  26%
                                                   competition, we are eager to meet it. We
Appliances                                   7%    have developed a solid, prudent strategy
                                                   for entering the American market that relies
Electronics                               -0.6%
                                                   on both corporate stores in key northern
                                                   states and franchising arrangements for the     DAVID INGRAM
                                                   rest of the U.S. We are very enthusiastic       President & Chief Executive Officer
    Reaching those customers will require a        about this two-pronged approach. It             March 2007
    combination of hard work, sophisticated        will allow us to build our presence in a
    marketing, and expansion of our store          market worth US $6.2 billion in annual
    network. We are especially focused on          revenues in a comparatively short time,
    reaching customers in Quebec, which            while limiting the risk associated with
    is currently an underserved market.            entering new and uncharted territory.
    We have also reviewed our promotional
    campaigns, which will continue to be
    refined and will include a consistent
    television presence across the country.        While a sound strategy
                                                   drives a business, ultimately
    Furthermore, we are using the financial         its success depends on the
    resources at our disposal to not only
                                                   people who implement it.
    increase our geographic scope, but also


6             easyhome annual report 06
                              2006 HIGHLIGHTS
                              Achieved highest EPS                           growth                                       rate in the industry



                              Increased revenue                       16.0%
                              Met same store revenue growth target of                                             5 - 7%
                              Grew potential monthly lease revenue                                         15.3%
                              Opened             28                 new stores



                              Successfully operated                          licensed                                            platform in Canada



                              Tested consumer financial services through                                            easyfinancial

                                                                                                                                          2006                          2005
                              (In 000’s) (except per share amounts and key metrics)


                              INCOME STATEMENT - Year Ended December 31
                              Revenue                                                                                                    $119,566                      $103,112
                              Income before income taxes                                                                                  $15,244                       $12,423 (1)
                              Net earnings                                                                                                 $9,398 (2)                    $7,578 (1)
                              Earnings per share (diluted)                                                                                  $0.90 (2)                     $0.74 (1)
                              BALANCE SHEET - As at December 31
                              Total assets                                                                                                $97,045                      $77,907
                              Lease assets                                                                                                $64,327                      $50,946
                              Shareholders’ equity                                                                                        $69,191                      $61,101
Over the past six years, we   KEY METRICS
                              Same store revenue growth (%)                                                                                  5.4%                          7.5%
have opened 78 new stores,    Units on lease                                                                                               178,808                      154,951
increased revenues by 76%     Customers                                                                                                     63,770                       57,455
and improved EBT from $1      Potential monthly lease revenue                                                                           $9,523,699                   $8,258,180

million to $15.2 million.     (1) excludes class action settlement costs of $3.1 million
                              (2) excludes the $0.4 million impact of future tax expense related to future income tax rate reductions



                                                                                                                                         easyhome annual report 06          7
CHARTING THE FUTURE
WITH CONFIDENCE




WE HAVE MADE GROWTH THE          The performance of our share price and
                                 the steady growth of our store network
                                 over the past five years can be attributed
CENTREPIECE OF OUR STRATEGY      to our business model. We have a proven
                                 formula that works in a variety of markets
                                 and provides solid value for customers.
                                 Yet we also recognize that a business
                                 model can never be static. A dynamic,

easyhome is preparing the        forward-thinking company always needs
                                 to adapt its strategy and processes to a
                                 constantly evolving market. Consequently,

groundwork for what we           we developed our model in important ways
                                 during the past year. Focusing on three key
                                 drivers—Growth, New Lines of Business,

believe will be the most         and Upgrading our Operations—we
                                 brought easyhome to a higher level of
                                 performance, preparing the groundwork for

dynamic period in our history.   what we believe will be the most dynamic
                                 period in the history of our company.




8   easyhome annual report 06
                                                         GROWTH - OUR STRATEGY
  6 year total
  shareholder
                                                         CORE STORE EXPANSION
                                                                                                     operations and stabilizing our network
                                                         2006 was a banner year for our              in Western Canada, where the economy

  return exceeds                                         company’s growth. Having opened a
                                                         record number of 28 stores during the
                                                                                                     has been growing at a torrid pace.


  industry and TSX                                       year, we now operate 191 locations
                                                         across Canada (including one licensed
                                                                                                     In 2008, however, we will be revved up for
                                                                                                     even greater growth: our aim is to boost




 751%
                                                         location) and employ nearly 1,000 people.   store openings to a new all-time high, with
                                                         Our studies of the market indicate that     a goal of 30 to 35 new easyhome stores.
                                                         the country can sustain at least 300
                                                         easyhome outlets, so we are almost          It is important to remember when
                                                         two-thirds of the way to that milestone.    reviewing our growth strategy that we
                                                                                                     are just as concerned with the quality of
                                                                                                     our growth as with its level. The most
                                                         Our long-term growth strategy is            gratifying aspect of our recent growth has
                                                                                                     been that the 67 stores we have opened
                                                         to increase the number of stores            since 2003 are performing substantially
                                                         we operate by 15% annually.                 better than our existing mature outlets.
                                                                                                     Typically, a store that has been open for
                                                                                                     at least three years generates around
                                                         We are very proud to have exceeded that     $60,000 in revenue a month, whereas our
                                                         target this year, but we have decided to    new stores that have reached the three-
                                                         give ourselves a little breathing room in   year mark are generating approximately
                                                         2007 by keeping our expansion at the        $85,000 in revenue a month—a
                                                         level of 21 to 24 new stores during the     significant difference. This bodes well
 Cumulative total returns for the past six fiscal years   year. This will allow us to concentrate     for our future revenue streams, which in
         on $100 from December 31, 2000
                                                         on recruiting the right people for our      turn sustain our capacity for growth.
               to December 31, 2006
       $
900


800


700


600


500


400


300


200


100


  0
      2000    2001   2002   2003    2004   2005   2006

             easyhome Common Shares
              TSX Composite Index



                                                                                                                 easyhome annual report 06     9
STRATEGIC
GROWTH
U.S. EXPANSION

It is inevitable in the history of any company
that it must eventually decide whether it
wants to stay small or join the big leagues.
This year, easyhome has decided to join the
big leagues: starting in June, 2007, we will
expand into the United States.

We have been studying the U.S. market
for five years. It is the largest merchandise
leasing market in the world, worth $6.2
billion and boasting a huge potential
client base.



35% of American households
match the demographic
profile of our customers.


It offers easyhome great potential, and
we are confident that the time to enter              TOTAL REVENUES
it is now, since the recent takeover of             RENT-TO-OWN INDUSTRY
                                                    (IN $US BILLIONS)
Rentway by its competitor Rent-A-Center
                                                                                                                       OTHERS
provides us with a strategic opening.               RENT–A-CENTER                   $2.9
                                                                                                   RENT-A-CENTER       $2.0
With only two main competitors in the                                                                        $2.9
                                                    OTHERS                          $2.0
American market, we believe customers
will be looking for choice—especially in            AARONS                          $1.3
                                                                                                                     AARONS
markets that have recently experienced                                                                               $1.3
                                                    Estimated Total Market          $6.2
store consolidation. In addition, we will
be able to recruit from a newly available
pool of highly qualified personnel. As
the third-largest and fastest-growing            addition, we have concluded a licensing       benefit from our partner’s knowledge of
company in the North American market,            agreement with a United States partner that   local market and competitive conditions
we have much to offer both customers and         grants the exclusive right to open easyhome   while reducing our financial exposure. By
new recruits to the easyhome banner.             franchises in any of the states that do not   providing our partner with marketing, IT
                                                 border Canada. This arrangement has           and purchasing support, we are enhancing
We are, of course, aware that entering           an initial term of six years from the date    the long-term prospects for the success
any new market carries risks. That is why        easyhome opens its third corporate store.     of the easyhome brand. Our approach is
we have developed an extremely careful,          We are confident that this strategy            prudent but ambitious, and we are quietly
well-developed strategy for success. We will     minimizes our risk, while maximizing the      confident that we can bring a significant
begin by opening two new corporate outlets       potential for growth. Franchising is a        number of new easyhome stores to
and purchasing one or two independent            quick, low-cost way of establishing our       American customers in the next five years.
stores that will test our brand offering. In     presence in the United States, since we



10          easyhome annual report 06
GROWTH THROUGH FRANCHISING

Franchising allows us to expand quickly – and is
also an important staff retention tool.
While our efforts in the United States will be      Franchising in the United States and             thwarting competitors from poaching our
spearheaded by franchises, the franchising          licensing in Canada will allow us to expand      experienced and motivated staff. easyhome
concept is not new to us. Franchising is at         more quickly into markets than we would          has reached a stage in its development
present only a minor part of our business,          be able to do through our corporate stores,      where it must consider new ways of growing
yet we anticipate that it will play a larger role   and they also serve as a powerful staff          its brand, and the success of our first
in the company as we evolve.                        retention tool. With the option of franchising   licensed store in a very competitive market
                                                    at our disposal, we have a useful means of       in Alberta augurs well for the future of
                                                                                                     franchising as part of our strategic mix.




                                                                                                                  easyhome annual report 06    11
 FORGING AHEAD INTO
 NEW LINES OF BUSINESS
 FINANCIAL SERVICES

 Financial services constitute a logical          The knowledge and expertise we have          We are the only company to
 complement to our core business.                 gained from these operations has led us to
                                                                                               offer 12-month loans without a
 Merchandise leasing customers can benefit         refine our concept to target customers more
 not only from assistance through consumer        closely, market services more effectively
                                                                                               credit score, yet we do so with
 term loans, but also from ancillary financial     and control collections more rigorously.     screening methods that ensure we
 services, such as cheque cashing, pre-paid                                                    keep losses to acceptable levels
 credit cards and insurance against disability                                                 while generating a healthy return.
 and unemployment.

 In early 2006 we opened our first
 easyfinancial kiosk, in Edmonton, Alberta, to                                                  By making it easier for customers to
 meet this need. Consistent with our strategy                                                  consolidate their existing debt, we provide
 of prudent growth, this kiosk was a test                                                      them with a significantly lower cost of
 outlet; later during the year we added two                                                    borrowing than our competitors do, which
 additional locations whose purpose was to                                                     has the beneficial effect of reducing
 deepen our understanding of the market.          Our strategy is to bridge the gap            defaults while boosting customer loyalty.
 We are delighted to report that the results      between standard banking institutions
 from these tests have been very positive.        and payday lenders for customers             We are now ready to expand our offering
 While it typically requires about a year and a   who find that either they cannot obtain       to include bill payment, wire transfers
 half for a new financial outlet to mature, our    financial services from these providers       and money orders. In addition, we will be
 first store became profitable in 10 months.        or obtain them at a competitive price.       opening six easyfinancial kiosks in 2007
                                                                                               in markets where we have traditionally
                                                                                               performed very well and that have a strong
                                                                                               infrastructure. We view these kiosks as the
                                                                                               next step in our testing phase, and by the
                                                                                               latter part of 2007 we should be ready to
                                                                                               recommend a defined strategy to the Board.




12           easyhome annual report 06
                                                                    NEW BUSINESS OPPORTUNITIES
Tested consumer
financial services
through
easyfinancial




                    easyfinancial Loan Portfolio Growth
                        As at December 31, 2006

          $
900,000
                                                                    STAGING
800,000
                                                                    Another natural arena for us to enter is     us their supplier of choice. This gives us
                                                                    staging. This business, which includes       a window on the industry, which holds
700,000
                                                         $651,266   home staging for the real estate industry,   considerable potential. To fully exploit our
                                                                    presentation staging for corporate           position, we added a warehouse in the
600,000
                                                                    events such as tradeshows, and prop          Greater Toronto Area to our infrastructure
                                                                    supply for the film and TV industries,        that will act as a distribution centre,
500,000
                                                                    is a perfect fit for easyhome. We have        and we have established a dedicated
                                                                    the inventory, expertise and managerial      inventory, staff and brand for our staging
400,000
                                              $368,292              resources needed to provide customers        business. We are now the only national
                                                                    with everything from flat-screen              company with a dedicated staging
300,000
                                                                    televisions to furniture and fittings,        division, and if the Toronto model delivers
                                   $241,140
                                                                    and our scale allows us to deliver           the results we hope for we will roll it out
200,000
                        $148,001
                                                                    our services at competitive rates.           across the country.

100,000                                                             We have been in the staging business
          $30,900
                                                                    since early 2006. Success has come
      0                                                             faster than we anticipated, and during the
              JAN         MAR        JUN        SEPT       DEC
                                                                    year we established a partnership with a
                easyfinancial Loan Portfolio                         national staging association that makes




                                                                                                                             easyhome annual report 06      13
INNOVATING BY UPGRADING
OUR OPERATIONS
                                 STORE OF THE FUTURE

                                 The merchandise leasing sector
                                 benefits from the introduction of
                                 new products and enhancements
                                 that stimulate consumer demand,
                                 especially for products that people
                                 want to test before they own. This
                                 is particularly true in the consumer
                                 electronics field, where flat-screen
                                 technology has witnessed dramatic
                                 reductions in price and increases in
                                 quality; and in computers, where such
                                 developments as wireless keyboards,
                                 larger screen size and improved CPU
                                 capabilities are driving new demand.



                                 We must meet customer
                                 demand for updated technology
                                 and a wider range of products.


                                 We began modernizing the look of our
                                 outlets at the end of 2005 with our
                                 Store of the Future, and in little over
                                 a year we had converted 38 stores to
                                 this new model. All new stores that we
                                 open, as well as relocating, will follow
                                 this design, and by the end of 2007 we
                                 plan to have 82 Stores of the Future. The
                                 performance of these stores, compared
                                 with those employing our original design
                                 and layout, fully justifies this strategy.
                                 This new concept is producing over 14%
                                 more revenue after five months than
                                 stores opened under our old design.




14   easyhome annual report 06
INNOVATIVE APPROACH TO OWNING


  BU Y ING                             THE LEASE MODEL

                                       The settlement of class action
                                       suits in Ontario and Quebec in
                                       2005 served not only to put
  T O L O O K AT                       these legal issues behind us,
                                       but also to stimulate a new
                                       model for our relationship
                                       with our customers. We have
  A N E W W AY                         moved from rental agreements
                                       to leasing arrangements
                                       with our customers.

                                       Leasing is a wise approach for
                                       us to take, since customers
                                       are already familiar with
                                       leasing through other
                                       consumer industries such as
                                       the automotive industry, and
                                       it delivers other significant
                                       benefits.

                                       Leasing brings customers
                                       closer to ownership and
                                       creates a stronger emotional
                                       attachment to products.

                                       This in turn nurtures a greater
                                       sense of ownership, reduces
                                       damage, prolongs the life of
                                       our inventory and increases
                                       customer retention.




Leasing brings customers closer to ownership and
creates a strong emotional attachment to products.
                                           easyhome annual report 06     15
 INNOVATIVE OPERATIONS

 We are in a business that depends heavily on
 attracting and retaining good employees.
 TRAINING TOOLS
 easyhome is committed to progressive            This will be supplemented with regular          stores. The confidence they gain from
 employee policies that will maintain            classroom training for associates               understanding Company policy and how
 employee retention as a central                 selected by our Regional Managers and           to implement it—especially in the area of
 element of our growth strategy.                 Divisional Vice Presidents. The classroom       recruiting, training and motivating fellow
                                                 education consists of intense, in-depth         employees—is the bricks and mortar that
 An important part of retention is training.     managerial training, covering such areas        provide the foundation we will use to grow
 2007 will be the year when we bring on-line     as marketing, hiring and recruitment,           easyhome today and tomorrow. It also
 training together with classroom learning.      depreciation and workforce motivation.          dovetails neatly with our recently launched
 We are updating our training materials,                                                         eh-Way new-hire training program, which
 and have enlisted an outside supplier to        Once associates have completed the              is state-of-the-art online and interactive.
 help us put what will be expanded and           classroom sessions, they will be certified
 improved management training on-line.           and ready to operate their own easyhome




 IT SYSTEM OVERHAUL
                                                                                                   Employee
 easyhome has grown so rapidly over the          A significant step in that direction will come
 past five years that it would be very easy for
 us to simply rely on our existing processes
                                                 in August of 2007, when we unveil our new
                                                 POS data system. This state-of-the-art
                                                                                                   retention remains
                                                                                                   a central element
 to produce further growth. We have resisted     infrastructure will provide us with real-
 that temptation. To be successful, we           time information on our sales, inventory,
 are constantly examining the way we do          customers and purchasing trends. It will
 business to ensure that we have the best
 and most up-to-date systems, technology
                                                 make us the only major company in the
                                                 industry using a live, internet-based system
                                                                                                   of our growth
 and management structure we need. We
 also know that rapid growth requires us
                                                 to track our market, and it will give us a
                                                 competitive advantage that will help us grow      strategy.
 to innovate and improve our processes.          our business and improve profitability.



16           easyhome annual report 06
FINANCIAL
STATEMENTS
18   Management’s Discussion and Analysis

34   Management’s Responsibility for Financial Reporting

35   Auditors’ Report

36   Consolidated Financial Statements

58   Corporate Governance




                                                           easyhome annual report 06   17
 easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of operations and financial condition should
be read in conjunction with and is qualified by the Company’s December 31, 2006
audited consolidated financial statements and the notes relating thereto, and the
Message to Shareholders contained in the Company’s Annual Report.


This management discussion and analysis refers to certain financial measures that
are not determined in accordance with generally accepted accounting principles
(“GAAP”) in Canada. These measures do not have standardized meanings and may
not be comparable to similar measures presented by other companies. Although
measures such as same-store revenue growth and operating income do not have
standardized meanings prescribed by GAAP, these measures are defined herein
or can be determined by reference to our financial statements. We discuss these
measures because we believe that they facilitate the understanding of the results
of our operations and financial position.



Date                                             During 2006, the Company merged the
                                                 operations of three stores with one other
March 5, 2007                                    store location and opened 28 stores
                                                 (2005 – 23 stores) for a store count of
OVERVIEW AND HIGHLIGHTS                          190 as at December 31, 2006 (2005
                                                 – 165 stores). In addition the Company
easyhome Ltd. (“easyhome” or the                 operates one store under a licensing
“Company”) is the largest merchandise            agreement (2005-nil) and three financial
leasing company in Canada with 191               services centers (2005-nil) which operate
store locations nationwide (including one        within its stores; two in Edmonton, Alberta
licensed store). easyhome leases, with or        and one in Mississauga, Ontario.
without an option to purchase, brand name
furniture, appliances, home electronics and      STRATEGY
computers. The brands we offer include
Dell, SPM Micro and Acer computers, Sony,        Our strategy has three key elements:
Toshiba, JVC and RCA home electronics,           i) significantly growing the number of our
Ashley, Serta and Palliser furniture as well          store locations
as GE appliances.                                ii) enhancing the profitability of existing
                                                      store locations and
Through our stores we offer our customers        iii) exploring new growth platforms
lease agreements which enable them to
obtain products they may not otherwise be        GROWING THE NUMBER OF STORE
able to have as a result of being either cash    LOCATIONS
or credit constrained. In addition, our stores
provide lease programs for those customers       We believe that the merchandise leasing
who wish to lease merchandise on a short-        market in Canada is underdeveloped, and
term basis, or try the product before they       that there is a significant opportunity to
make a purchase decision. We commenced           grow by selectively opening new stores.
operations in 1990 and currently operate in      These new stores are placed in locations
all provinces in Canada.                         which, based on consumer research, best
                                                 provides us with access to customers


18               easyhome annual report 06
easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued




who meet both our socio-economic and           EXPLORING NEW GROWTH PLATFORMS
psychographic profiles. In addition, we
will augment store openings with “fold-in”     Several growth platforms are currently being
acquisitions or “account buys” where it        evaluated to ensure that we will continue to
is felt such an acquisition would serve to     expand rapidly into the foreseeable future.
bolster the organic growth of the business
in a given region.                             In early 2006 we commenced testing
                                               higher risk consumer lending through three
ENHANCING STORE PROFITABILITY                  financial services kiosks which are located
                                               within existing easyhome stores. Through
Given that the average store takes three       these locations, we make consumer loans of
years to reach maturity and the Company        up to $5,000 with a term of up to one year.
has opened 67 new stores in the last
three years, enhancing store profitability      In the latter part of 2005, the Company
is a central focus of our operational staff.   entered into a licensing operation with an
There are a number of tactics the Company      experienced merchandise leasing operator
pursues to enhance our operational             in Edmonton, Alberta. We believe that
profitability including:                        having a licensing platform will allow us
                                               to retain competent store managers who
• rolling out the Company’s “Store of the      may have the desire to own their operation.
  Future” to all new locations or where        It will also allow us to expand in certain
  existing locations are being refurbished.    markets without having to deploy our
  The store of the future employs a layout     own capital.
  which helps maximize revenue per
  square foot.                                 We are also introducing new services in
                                               selected markets to enhance the profitability
• providing incentive programs and             of our stores. This includes the recent
  reviewing key performance indicators         introduction of cheque cashing, pre-paid
  to motivate staff to make business           credit cards and retail merchandise sales.
  decisions which enhance store                During the fourth quarter the Company
  profitability.                                chose to close the five kiosks it operated
                                               within Leon’s stores as these kiosks,
• continually reviewing our purchasing to      although moderately profitable, were not
  ensure that we are providing products        generating satisfactory returns to the
  our customers desire and ensure              Company. The costs associated with
  we leverage our increasing scale of          closing the kiosks were not significant and
  operations.                                  the majority of the staff were redeployed in
                                               other locations.
• conducting quarterly store operating
  procedure audits to ensure the stores are    On March 6, 2007 the Company announced
  following our operating procedures.          its U.S growth strategy which has two major
                                               components.
• employing innovative print and television
  advertising to help increase customer        First, the Company signed a Master License
  traffic in our stores                         Agreement (“The License Agreement”) with
                                               an entity controlled by Bud Gates (“Gates


                                                             easyhome annual report 06       19
 easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 continued




LLC”). Mr. Gates is a former Chairman             KEY PERFORMANCE INDICATORS
and CEO of a U.S. based publicly traded
                                                  • revenues (last twelve months)
rent-to-own Company. In addition, Mr. Gates
                                                  • same store revenue growth
has run a series of successful rent-to-own
and other franchises over the last 20 years.      • number of new stores opened in
The License Agreement has an initial six            the period
year term and allows Gates LLC to arrange         • total store count
easyhome franchises in 38 states, which           • potential monthly lease revenue
are not adjacent to Canadian borders. The
                                                  • operating margin (normalized)
Company expects Gates LLC to open few if
any franchise stores during 2007.                 • normalized trailing earnings
                                                  • fully diluted earnings per share
Next, the Company intends to open a                 (normalized)
combination of corporate and franchise            • return on equity (normalized)
stores in the states which border Canada.
The Company has hired a U.S. V.P of               Four key performance indicators or non-
Operations and intends to open its first U.S.      GAAP measures that we use throughout
store during the latter part of the second        this discussion are defined as follows:
quarter of 2007. One to two future stores
may be opened or acquired in the U.S              SAME STORE REVENUE GROWTH
throughout 2007 as the Company refines
its business model there. The Company             Same store revenue growth measures
believes that with the recent acquisition in      the revenue growth for all stores that
the U.S of Rentway by Rent-A-Centre and           have been open for a minimum of 15
the subsequent closing of 132 stores across       months. To calculate annual same
the U.S that it is an appropriate time to enter   store revenue growth, the most recent
the U.S. market. The Company further              12 months revenues are compared
believes that by focusing on a franchise          with revenues for the immediately
strategy it strikes a balance between             preceeding 12 month period.
exploring a significant growth opportunity
while not exposing the Company’s balance          POTENTIAL MONTHLY LEASE REVENUE
sheet to undue risk.
                                                  Potential monthly lease revenue reflects
KEY PERFORMANCE INDICATORS AND                    the revenues our portfolio of leased
NON-GAAP MEASURES.                                merchandise would generate in a month
                                                  providing we collected all lease payments
We measure the success of our strategy            due in that period. Our growth in potential
using a number of key performance                 monthly lease revenue is driven by several
indicators as described in more detail below.     factors including an increased number of
Several of these key performance indicators       customers, an increased number of leased
are not measurements in accordance                assets per customer, as well as an increase
with Canadian GAAP and should not be              in the average price of our leased items.
considered as an alternative to net income        We believe that our potential monthly lease
or any other measure of performance under         revenue is an important indicator of how
Canadian GAAP.                                    revenues will grow in ensuing periods.



20               easyhome annual report 06
easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued




OPERATING MARGIN                                               NORMALIZED TRAILING EARNINGS

We define operating margin as income                            We define normalized trailing earnings as
before interest and taxes. We believe                          net income over the last twelve months
operating margin is an important measure                       adjusted for any unusual items which have
of the profitability of operations which in                     occurred in the period. We believe that
turn helps us assess our ability to generate                   normalized trailing earnings is an important
cash to pay interest on our debt and to pay                    measure of the profitability of operations
dividends.                                                     adjusted for the effects of both unusual
                                                               items and number and weighting of
                                                               trading days.



SUMMARY FINANCIAL RESULTS
For the Years Ended
December 31, 2006 and 2005
                                                       Dec 31               Dec 31                      Variance
(in 000’s)                                              2006                 2005                  $               %
(except earnings for share and percentages)


Revenues                                             $119,566             $103,112          $16,454              16.0
Operating expenses       (1)
                                                        66,608              58,086              8,522            14.7
Amortization expense                                    37,460               32,515             4,945            15.2
Operating income                                      $15,498                $9,411             6,087            64.7
Interest expense                                            254                   88               166         188.5
Net income for the year                                 $8,983              $5,678            $3,305             58.2
Fully diluted EPS                                        $0.86                $0.55             $0.31            56.4


Key Performance Indicators


Normalized earnings ($000’s) (2)                        $9,389               $7,598           $1,791          23.6%
Fully diluted EPS (normalized)                           $0.90                $0.74             $0.16         21.6%
Operating margin (normalized)                            13.0%                12.1%                 —              —
Return on equity (normalized)                            13.6%                12.4%                 —              —
Standard monthly lease revenue ($000)                   $9,524              $8,258             $1,149         15.2%
Number of stores opened                                        28                  24               —              —
Store count                                                 191                  165                25        15.2%
Same store revenue growth                                 5.4%                 7.5%                 —              —

(1) Before amortization and class action settlement expense.
(2) In 2006 net income was adjusted for the $0.4 million charge related to changes in future federal tax rates while in
    2005; net income has been adjusted for $1.9 million (after-tax) in class action settlement costs.




                                                                                 easyhome annual report 06                21
 easyhome Ltd.



 MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 continued




 Day weighting is influenced by a number of       further 6 kiosks within our existing stores
 factors including: the number of business       during 2007, testing both new geographic
 days in a period, as well as the number of      regions and further revisions to the business
 Fridays and Saturdays in a period (given that   model. The decision to roll out the platform
 a substantial portion of our cash collections   on a national basis will be dependent on the
 occur on these two days).                       degree of success encountered during the
                                                 limited roll-out of 2007.
 OUTLOOK
                                                 The Company’s positive 6-year trending in
 The Company expects the positive trending       revenue and net income may be adversely
 in revenue, net income and same store           affected by the operations of Insta-Rent, a
 revenue growth to continue. Revenue growth      Canadian rent-to-own chain with 80 stores
 will come from same stores and new stores       in Canada at December 31, 2006, and
 and is expected to be in the range of 15-18%    by the entry of Aaron Rents and Rent-A-
 for the next few years.                         Center, two large U.,S. merchandise rental
                                                 operators, into the Canadian marketplace.
 Since 2001, the Company has maintained,         The majority of Insta-Rent’s locations are
 as one of its prime financial objectives, same   contained within Brick warehouse and United
 store revenue growth of 5% or more. The         Furniture Warehouse stores and most of
 Company accomplished this for every year        their business is derived from customers
 during this period although same store          who are denied credit at the Brick and United
 revenue growth for 2006 at 5.4% is down         Furniture stores. Aaron Rents opened their
 modestly from 7.5% for 2005. For the next       first franchised store in Kitchener, Ontario
 three years, same store revenue growth is       in the fall of 2003 and now operates a total
 expected to be in the 5-7%. range.              of six franchised stores. Rent-A-Center
 In addition, we will open approximately         acquired five stores in Calgary and Edmonton
 21-24 stores in 2007 which is down from         on March 5, 2004 and currently operate
 28 stores in 2006 primarily as a result of      seven stores in Alberta. Both have stated
 the need to add further strength to our store   their intentions to expand in the Canadian
 management team and work with a very            marketplace.
 tight labour market in Western Canada.
                                                 Other factors that may adversely affect the
 During 2006 the Company opened three            Company’s growth are further competition
 financial services centres in its existing       from merchandise rental businesses and,
 stores. Two of these were located in            to a lesser extent, rental stores that do not
 Edmonton while the third was opened in          offer a purchase option. The Company also
 Mississauga. The centres provide short-         competes with discount stores and other
 term loans (12 months or less), as well as      retail outlets that offer an installment sales
 pre-paid credit card and cheque-cashing         program or offer comparable products and
 services to consumers who generally cannot      prices. Furthermore, additional competitors,
 obtain credit through conventional means.       both domestic and international, may emerge
 As a result of the preliminary success of       since barriers to entry are relatively low.
 these centres the Company will open a




22               easyhome annual report 06
easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued




The biggest limiting factor in the Company’s                   Over the last few years, the Company has
expansion plans will be the hiring and                         improved its hiring competencies and its
retention of the best people for the job.                      training programs such that employee
                                                               retention has improved by 48% since 2000.



SELECTED ANNUAL INFORMATION

Consolidated Income Statements
                                                                                                  (Restated)
                                                        2006           2005           2004          2003        2002
(in 000’s)                                                $              $              $             $           $

Revenue                                              119,566         103,112         88,450         78,090 71,919
Net income (1) (2) (3) (4)                             8,983           5,678          8,752          4,027 2,509

Dividends declared on common shares                    2,474           1,581           730           —           —
Dividends declared on preferred shares                  —                —             —             308         —
Cash dividends declared per share                      0.24             0.16           0.8           —           —

Earnings per share
 Basic                                                  0.89            0.59           0.96          0.55       0.57
 Diluted                                                0.86            0.55           0.87          0.50       0.52

Consolidated Balance Sheets

(in 000s)


Total assets                                          97,045         77,907         69,286         61,665 58,215
Total funded debt                                      6,275          1,115          2,237          3,844 17,229

(1) Net income in 2006 was adversely impacted by a $0.4 million adjustment to future tax expense relating to changes
    in future federal income rates.
(2) Net income in 2005 was adversely impacted by a $1.9 million after-tax charge to income to settle a class action
    lawsuit.
(3) Net income in 2004 was favorably impacted by a recording of a $2.3 million future tax benefit associated with
    operating losses the Company had increased incurred in years prior to 2004.
(4) Effective January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of Chartered
    Accountants with respect to the accounting for cash consideration received from a vendor. Under the new
    recommendations, the Company accrues vendor volume rebates when earned as a reduction to lease assets.
    Earned amounts are amortized on a straigh-line basis over 20 months, representing the average life of the
    underlying lease assets, and recorded as a reduction of lease assets amortization expense. Prior to the adoption
    of the new recommendation, vendor volume rebates were accrued and recorded as other revenue.




                                                                                  easyhome annual report 06            23
 easyhome Ltd.



 MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 continued




 The primary reason for the increase in the      monthly lease revenue portfolio increased
 Company’s revenue and profitability since        by $1.3 million compared with 2005’s
 2001 has been the Company’s return to           increase of $1.1 million. For the year ended
 the basics of the business, that is, leasing    December 31, 2006, an increased customer
 merchandise and collecting lease payments       base accounted for the majority of the
 due. During 1999 and 2000, the Company          lease revenue increase as the number of
 lost focus on the basic business model and      customers increased from 57,455 at the end
 compromised profits by not having the capital    of 2005 to 63,770 at the end of 2006.
 available in order to replenish lease assets,
 and by building the lease agreement portfolio   Lease Revenue
 without sufficient regard to the customers’
 ability to fulfill their obligations under the   Lease revenue was $98.3 million for the year
 agreement. As a result, store personnel         ended December 31, 2006 compared with
 were forced to spend an inordinate amount       $86.0 million in 2005, an increase of $12.3
 of time dealing with delinquent accounts,       million, or 14.3%. As noted in the preceding
 and leases declined as charge-offs of leased    paragraph, this increase is primarily
 assets increased. With the implementation       attributable to a growth in the average
 of more stringent collection criteria and       number of customers from 2005 to 2006
 numerous other operating efficiencies,           which is largely as a result of having 25
 growth in revenue and net income resulted       more stores open at December 31, 2006.
 as the Company’s customer base increased
 and charge-offs decreased. From the first        Other Revenue
 quarter of 2001, the Company’s revenues
 have increased for 21 consecutive quarters.     Other revenue, which is realized from fees
 The increase in revenues has been primarily     from ancillary services, supplier incentives
 as a result of new store openings although      (excluding vendor volume rebates), and other
 same store growth has averaged over 5% per      fees was $21.3 million for the year ended
 annum since 2001.                               December 31, 2006 compared with $17.1
                                                 million in 2005, an increase of $4.2 million,
 The increase in total assets is primarily       or 24.4%. As a percentage of total revenue,
 a result of the increase in lease asset         other revenue increased to 17.8% for
 purchases, which were required to support       2006 from 16.6% for 2005. The increase
 the Company’s growth in its lease portfolio.    was attributable to (i) increased supplier
                                                 incentives due to the increased volume of
 Results of Operations for the Year Ended        lease asset purchases, and (ii) increased
 December 31, 2006 Compared to the Year          charges for ancillary services.
 Ended December 31, 2005
                                                 Expenses
 Revenue
                                                 Operating expenses before amortization
 For the year ended December 31, 2006,           expense and 2005 class action settlement
 total revenue increased $16.5 million           costs increased to $66.6 million for the year
 from $103.1 million to $119.6 million, or       ended December 31, 2006, compared with          For the year ended December 31,
 16.0%. Stores open for less than 12 months      $58.1 million for the comparable period in      2006, total revenue increased
 accounted for $7.1 million, or 67.8% of         2005, an increase of $8.5 million or 14.7%.     $16.5 million from $103.1 million to
 the revenue increase. For fiscal 2006, the       Operating expenses grew largely due to          $119.6 million, or 16.0%.


24               easyhome annual report 06
easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued




the store count being 25 stores greater       revenue in 2006 from 12.5% in 2005.
at December 31, 2006 compared with            This increase occurred as a result of i) the
December 31, 2005. As a percentage of         increased cost of store space particularly
total revenue, operating expenses decreased   in Western Canada and ii) the large number
to 55.7% in 2006 from 56.3% in 2005, as       of new stores opened in the latter part of
the Company benefited from the leverage        2006, which were only starting to grow their
from continued same store revenue growth.     revenue base.

Salaries and Benefits                         Automotive and Travel

Salaries and benefits were $34.0 million       Automotive and travel expenses were $5.1
for the year ended December 31, 2006          million in 2006 compared with $4.4 in
compared to $29.6 million in 2005, an         2005, an increase of $0.7 million or 15.9%.
increase of $4.5 million or 15.2%. Greater    This increase is attributable to higher fleet
staff levels due to an increased number of    lease costs because of the greater number
stores and the impact of annual merit pay     of delivery vehicles in the fleet and higher
increases, accounted for the increase. As a   operating costs because of the increase in
percentage of revenue, salaries and benefits   the volume of business and rising fuel costs.
decreased to 28.5% in 2006 from 28.7%         As a percentage of revenue, automotive and
in 2005.                                      travel costs were unchanged at 4.3%.

Selling, General and Administrative           Amortization

Selling, general and administrative           Amortization of leased assets for the year
expenses were $11.7 million in 2006           ended December 31, 2006 increased to
compared with $11.2 in 2005, an increase      $35.2 million from $30.9 million for the
of $0.5 million or 4.4%. The primary          comparable period ion 2005. Amortization
reason for the increase in selling, general   as a percentage of revenue dropped to
and administrative costs was the increase     29.5% of revenue for 2006, from 29.9% in
in advertising and promotion and store        2005 primarily as a result of the prospective
related administrative costs. However, as a   change in amortization methodology, which
percentage of revenue, selling, general and   commenced on October 1, 2006.
administrative expenses dropped to 9.8%
of revenue in 2006 from 10.8% of revenue      Amortization of property and equipment
in 2005.                                      and intangible assets for the year ended
                                              December 31, 2006 was $2.2 million,
Occupancy Costs                               up from $1.7 million from 2005 and
                                              was primarily attributable to new capital
Occupancy costs were $15.6 million for the    additions at the store level as well as
year ended December 31, 2006 compared         leasehold amortization at the Company’s
with $12.8 million in 2005, an increase of    new Mississauga office.
$2.8 million, or 21.7%. Lease, telephone
and utilities expenses accounted for the      Class Action Settlement Provision
total increase as the store count increased
by 25. As a percentage of revenue,            On June 16, 2005, the Ontario Superior
occupancy costs increased to 13.1% of         Court of Justice certified a class action


                                                             easyhome annual report 06    25
 easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 continued




(which was commenced against the                   stock compensation costs, which are not
Company in April, 2004), as a class                deductible for tax purposes. The change
proceeding under the Class Proceedings             in future federal tax rates had the impact
Act, and, at the same time, granted                of increasing deferred income tax expense
approval of a settlement that had been             by $0.4 million in the year. Adjusting for
agreed to between the Company and the              this change in future rates, the effective tax
representative plaintiff on behalf of the Class.   rate for 2006 was 38.4% down slightly from
Accordingly, during 2005 the Company               2005 due to current year income tax rate
incurred $3.1 million of costs related to          reductions.
the class action settlement, including legal
fees awarded under the settlement.                 LIQUIDITY AND CAPITAL RESOURCES

Operating Income (Income before                    General
Interest and Income Taxes)
                                                   As of December 31, 2006, the balance
Operating income for the year ended                outstanding on the bank revolving term facility
December 31, 2006 was $15.5 million                was $6.3 million (2005 – $1.1 million).
versus $9.4 million in 2005, an increase           As of December 31, 2006, the Company’s
of $6.1 million. Adjusting for the impact          debt to equity ratio was less than 0.09:1
of the 2005 settlement prevision of $3.1           (2005 – 0.02:1). The Company does
million, operating income increased                not expect to raise equity capital in the
by $3.0 million or 23.9%. This 23.9%               near future and will fund working capital
increase occurred inspite of the fact that         requirements and capital requirements from
the Company’s operating income before              internally generated cash flow and its bank
the 2005 settlement provision was down             revolving term facility.
12.7% in the second quarter of 2006 from
the same period in the preceding year.             The bank revolving term facility was renewed
                                                   effective December 2006. The facility is a
Interest Expense                                   fourteen month facility, which expires on
                                                   February 29, 2008, bears interest at prime
Interest expense for the year ended                and has a $20 million limit. The Company’s
December 31, 2006 increased to $0.3                banking covenants include a fixed charge
million from $0.1 in 2005, largely as              coverage ratio, a funded debt-to-cash flow
a result of the increase in average                ratio and a limit on capital expenditures. The
borrowings in 2006 over 2005.                      Company was in compliance with all of its
                                                   banking covenants as of December 31, 2006
Income Tax Expense                                 and 2005.

The Company’s effective income tax rate            The Company incurred $6.1 million of
for the year ended December 31, 2006               capital expenditures during 2006 compared
was 41.3% (2005 – 39.1%). The increase             with $2.6 million in 2005. Related to these
in the effective rate is due to the impact of      expenditures the Company recorded $1.2
changes in the Company’s future tax assets         million of leasehold inducements in 2006
resulting from the future Canadian federal         versus $0.3 million in 2005. The majority
income tax rate reduction which was passed         of the capital expenditures in both years
during the current year as well as increased       related to the costs incurred for new store


26               easyhome annual report 06
easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued


openings, store relocations and store             Cash provided by financing activities was
remodels. In 2006, the Company experienced        $3.5 million in 2006 while $1.1 million was
a larger number of store openings and store       used for financing activities in 2005. The
renovations, as well as adding leaseholds         primary reason for the increase in cash
to its new office in Mississauga. On-going         provided by financing activities was the
maintenance capital requirements, that is,        advance of bank loans in 2006 of $5.2
capital required other than for the purchase      million versus a repayment of loans of $1.1
of stores or customer accounts or for new         million in 2005. This increase was offset in
store openings, are not expected to exceed        part by $1.1 million lower proceeds on the
$0.8 million per year for the next three years.   exercise of stock options and $0.8 million
New store opening and relocation costs are        more in dividend payments.
expected to average approximately $4.0
million per year for the next three years. The    Results of Operations for the Three
Company expects to purchase a new point           Months Ended December 31, 2006
of sale system in 2007 for approximately          Compared to the Three Months Ended
$1.4 million. The Company will also explore       December 31, 2005
acquisition opportunities as they arise.
                                                  Revenue
Year ended December 31, 2006
compared to the year ended                        Revenue for the three months ended
December 31, 2005                                 December 2006 was $31.9 million, an
                                                  increase of 15.3% or $4.2 million over
Cash flow from operating activities for 2006       the comparable three-month period in
was $2.3 million compared to $3.2 million         2005. Stores open for less than 12 months
in 2005, a decrease of $0.9 million. Leased       accounted for $2.9 million or 52.4% of this
asset purchases increased $8.3 million            increase.
from 2005 to 2006. This use of cash was
offset in part by net income and items not        Lease Revenue
affecting cash being $3.3 million and $5.4
million higher, respectively, in 2006 than in     Lease revenue was $26.0 million for the
2005. Purchases of lease assets increased         three months ended December 31, 2006
to support the growth in revenue and the          compared with $22.9 million in 2005, an
increase in net income was a result of            increase of $3.1 million, or 13.4%. This
increased operating profits in 2006.               increase is primarily attributable to an
                                                  11% growth in the number of customers
Cash used in investing activities was $5.8        which is largely as a result of having
million in 2006 and $2.2 million in 2005.         25 more stores open at December 31,
The $3.6 million increase is primarily            2006 than December 31, 2005.
attributable to i) $0.5 million in leaseholds
for the Company’s new Mississauga office,          Other Revenue
ii) $1.1 million for the increased store count
and the increased number of store renovations,    Other revenue, which is realized from fees
iii) $0.5 million for additional vehicle lease    for ancillary services, supplier incentives
buyouts, iv) $0.4 million for leased assets,      (excluding vendor volume rebates), and other
which are to be deployed in the first quarter      fees was $5.9 million for the three months
of 2007, and v) $0.8 million for the increased    ended December 31, 2006 compared with
costs associated with the store of the future.    $4.7 million in 2005, an increase of $1.2


                                                               easyhome annual report 06     27
 easyhome Ltd.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 continued


million or 24.4% for 2005. The increase       Selling, General and Administrative
was attributable to (i) increased co-
operative advertising incentives due to the   Selling, general and administrative expenses
increased volume of lease asset purchases,    were $3.2 million in the fourth quarter of
and (ii) increased charges for ancillary      2006 compared with $3.3 million in 2005,
services.                                     a decrease of $0.1 million or 2.3%.
                                              The primary reason for the decrease in
Expenses                                      selling, general and administration was
                                              a reduction of the Company’s insurance
Operating expenses before amortization        costs. As a percentage of revenue, selling
expense increased to $18.1 million for the    general and administrative expenses
three months ended December 31, 2006          decreased to 10.1% from 11.9% in the
compared with $15.9 for the comparable        comparable period last year.
period in 2005, an increase of $2.2 million
or 13.8%. Operating expenses grew largely     Occupancy Costs
due to the store count being 25 stores
greater at December 31, 2006 compared         Occupancy costs were $4.4 million for the
with December 31, 2005. Operating             three months ended December 31, 2006
expenses in the fourth quarter of 2006        compared with $3.4 million in 2005, an
were adversely impacted by: i) an increase    increase of $1.0 million or 30.5%. Lease,
of losses from stores open less than 12       telephone and utilities expenses accounted
months of $0.4 million, and ii) increased     for the total increase as the store count
stock based compensation of $0.1 million.     increased by 25. As a percentage of
These amounts were more than the offset       revenue, occupancy costs increased to
by the estimated $0.7 million reduction in    13.8% in 2006 from 12.2% in 2005
lease amortization expense caused by the      primarily due to increased lease costs in the
change in accounting for leased assets        Company’s newer stores.
which occurred on October 1, 2006. As
a percentage of total revenue, operating      Automotive and Travel
expenses decreased to 56.7% of revenue
in the fourth quarter in 2006 from 57.5%      Automotive and travel expenses were
in the comparable period in 2005, as the      $1.3 million in the fourth quarter of
Company benefited from the leverage from       2006 compared with $1.2 million in the
continued same store revenue growth.          comparable period in 2005, an increase
                                              of $1.0 million, or 9.4%. This increase
Salaries and Benefits                         is attributable to higher fleet lease costs
                                              because of the greater number of delivery
Salaries and benefits were $9.0 million        vehicles in the fleet and higher operating
for the three months ended December 31,       costs because of the increase in the volume
2006 compared with $8.0 million in 2005,      of business. As a percentage of revenue,
an increase of $1.1 million, or 14.1%.        automotive and travel costs decreased to
Greater staff levels due to an increased      4.2% in 2006 from 4.4% in 2005.
number of stores were the primary reason
for the increase. As a percentage of                                                          Operating income for the fourth
revenue, salaries and benefits decreased to                                                    quarter of 2006 increased $4.2
28.6% in 2006 from 28.9% in 2005.                                                             million or 39.3% from fourth
                                                                                              quarter of 2005.


28               easyhome annual report 06
                                                               easyhome Ltd.



                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS OF
                                                               FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                                               continued


                                                               Amortization                                     2006 increased $0.1 million from 2005
                                                                                                                primarily due to the higher average bank
                                                               Amortization of lease assets for the             revolving term loan balance outstanding
                                                               three months ended December 31, 2006             during the period.
                                                               increased to $8.9 million from $8.3 million
                                                               for the comparable period in 2005, and           Income Tax Expense
                                                               amounted to 27.8% of revenue for the
                                                               fourth quarter of 2006 compared to 30.0%         The Company’s effective income tax rate
                                                               for the fourth quarter of 2005.                  for the three months ended December 31,
                                                                                                                2006 was 37.6%, versus 41.4% for the
                                                               Amortization of property plant and               fourth quarter of 2005. The fourth quarter
                                                               equipment and intangible assets for the          of 2005 included a tax adjustment which
                                                               fourth quarter of 2006 was $0.8 million, an      brought the effective 2005 income tax rate
                                                               increase of $0.3 million from $0.5 million       to 39.1%.
                                                               in 2005.
                                                                                                                Summary of Quarterly Results
                                                               Operating Income
                                                                                                                The Company’s lease business is a portfolio
                                                               Operating income for the fourth quarter of       business and as such is not as seasonal as
                                                               2006 increased $4.2 million or 39.3% from        other retail businesses which generate a
                                                               fourth quarter of 2005.                          significant portion of their sales and profits
                                                                                                                during the Christmas season. Quarterly
                                                               Interest Expense                                 revenue generally does not vary more than
                                                                                                                10% assuming no portfolio growth, no store
                                                               Interest expense for the fourth quarter of       openings or acquisitions.



CONSOLIDATED STATEMENTS OF INCOME
(In $000s, except earnings per share amounts)



                                Dec                 Sept                    June      March              Dec          Sept                June             March
                               2006                 2006                    2006      2006              2005          2005                2005             2005

Revenue                       31,871              30,160                29,005        28,639           27,639        25,656              25,8