Note A - Basis of Presentation

The consolidated financial statements include the accounts of Aaron’s, Inc. (the “Company”) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The consolidated balance sheet as of June 30, 2011, the consolidated statements of earnings for the three and six months ended June 30, 2011 and 2010, and the consolidated statements of cash flows for the six months ended June 30, 2011 and 2010, are unaudited. The preparation of interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Management does not believe these estimates or assumptions will change significantly in the future absent unsurfaced and unforeseen events. Generally, actual experience has been consistent with management’s prior estimates and assumptions; however, actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments (generally consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements. We suggest you read these financial statements in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2010. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of operating results for the full year.

Certain reclassifications have been made to the prior periods to conform to the current period presentation. Prior period share information has been adjusted to reflect the conversion of the former Nonvoting Common Stock into shares of Class A Common Stock and renaming the Class A Common Stock as Common Stock.

Accounting Policies and Estimates

See Note A to the consolidated financial statements in the 2010 Annual Report on Form 10-K.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with maturity dates of less than three months when purchased.

Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of investment securities held to maturity at June 30, 2011 are as follows. The securities are recorded at amortized cost in the consolidated balance sheets and mature at various dates during 2012 and 2013. There were no investment securities held by the Company at December 31, 2010.

		September 30,		September 30,		September 30,			September 30,
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)

Corporate Bonds	$	32,922	$	1	$	(106	)	$	32,817

Lease Merchandise

Lease merchandise adjustments for the three month periods ended June 30 were $10.4 million in 2011 and $13.5 million in 2010. Lease merchandise adjustments for the six month periods ended June 30 were $19.9 million in 2011 and $23.1 million in 2010. These adjustments are recorded as a component of operating expenses under the allowance method, which includes losses incurred but not yet identified.

Goodwill and Other Intangibles

During the six months ended June 30, 2011 the Company recorded $874,000 in goodwill, $136,000 in customer relationship intangibles, $82,000 in non-compete intangibles, and $17,000 in acquired franchise development rights in connection with a series of acquisitions of sales and lease ownership businesses. Customer relationship intangibles are amortized on a straight-line basis over their estimated useful lives of two years. Other intangible assets are amortized using the straight-line method over the life of the asset. Amortization expense was $476,000 and $801,000 for the three month periods ended June 30, 2011 and 2010, respectively. Amortization expense was $976,000 and $1.7 million for the six month periods ended June 30, 2011 and 2010, respectively. The aggregate purchase price for these asset acquisitions totaled $1.7 million, with the principal tangible assets acquired consisting of lease merchandise and fixtures and equipment. These purchase price allocations are tentative and preliminary; the Company anticipates finalizing them prior to December 31, 2011. The results of operations of the acquired businesses are included in the Company’s results of operations from the dates of acquisition and are not significant.

Stock Compensation

The results of operations for the three months ended June 30, 2011 and 2010 include $607,000 and $865,000, respectively, in compensation expense related to unvested stock option grants. The results of operations for the six months ended June 30, 2011 and 2010 include $1.2 million and $1.6 million, respectively, in compensation expense related to unvested stock option grants. The results of operations for the three months ended June 30, 2011 and 2010 include $751,000 and $361,000, respectively, in compensation expense related to restricted stock unit (“RSUs”) awards and restricted stock awards (“RSAs”). The results of operations for the six months ended June 30, 2011 and 2010 include $1.2 million and $815,000, respectively, in compensation expense related to RSUs and RSAs. The Company granted 225,000 RSUs and 6,000 RSAs in the six months ended June 30, 2011. The Company granted 347,250 stock options and 300,000 RSUs in the six months ended June 30, 2010. Approximately 100,000 and 9,000 options were exercised during the three month period ended June 30, 2011 and 2010, respectively. Approximately 261,000 and 29,000 options were exercised during the six month period ended June 30, 2011 and 2010, respectively, and 137,000 and 146,000 RSAs vested on February 28, 2011 and 2010, respectively. The aggregate number of shares of common stock that may be issued or transferred under the Company’s incentive stock awards plan is 14,735,112 as of June 30, 2011.

Deferred Compensation

Effective July 1, 2009, the Company implemented the Aaron’s, Inc. Deferred Compensation Plan an unfunded, nonqualified deferred compensation plan for a select group of management, highly compensated employees and non-employee directors. On a pre-tax basis, eligible employees can defer receipt of up to 75% of their base compensation and up to 100% of their incentive pay compensation, and eligible non-employee directors can defer receipt of up to 100% of both their cash and stock director fees. In addition, the Company may elect to make restoration matching contributions on behalf of eligible employees to compensate such employees for certain limitations on the amount of matching contributions an employee can receive under the Company’s tax-qualified 401(k) plan.

Compensation deferred under the plan is credited to each participant’s deferral account and a deferred compensation liability is recorded in accounts payable and accrued expenses in the consolidated balance sheets. The deferred compensation plan liability was $5.5 million and $3.5 million as of June 30, 2011 and December 31, 2010, respectively. Liabilities under the plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments. The Company has established a Rabbi Trust to fund obligations under the plan with Company-owned life insurance (“COLI”) contracts. The obligations are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The cash surrender value of these COLI contracts totaled $5.3 million and $3.5 million as of June 30, 2011 and December 31, 2010, respectively, and is included in prepaid expenses and other assets in the consolidated balance sheets.

Deferred compensation expense charged to operations for the Company’s matching contributions totaled $90,000 and $44,000 in the three month periods ended June 30, 2011 and 2010, respectively. Deferred compensation expense charged to operations for the Company’s matching contributions totaled $191,000 and $115,000 in the six month periods ended June 30, 2011 and 2010, respectively. Total benefits of $27,000 were paid in the first six months of 2011 and no benefits were paid in 2010.

Income Taxes

The Company files a federal consolidated income tax return in the United States, and the parent company and its subsidiaries file in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local tax examinations by tax authorities for years before 2007.

As of June 30, 2011 and December 31, 2010, the amount of uncertain tax benefits that, if recognized, would affect the effective tax rate is $1.2 million, including interest and penalties. The Company recognizes potential interest and penalties related to uncertain tax benefits as a component of income tax expense.

Fair Value of Financial Instruments

The fair values of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature. At June 30, 2011 and December 31, 2010, the fair value of fixed rate long-term debt approximated its carrying value. The fair value of debt is estimated using valuation techniques that consider risk-free borrowing rates and credit risk.

Earnings Per Share

Earnings per share is computed by dividing net earnings by the weighted average number of shares of Common Stock outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive effect of stock options, RSUs and RSAs. Such stock options had the effect of increasing the weighted average shares outstanding assuming dilution by approximately 1.1 million and 830,000 for the three months ended at June 30, 2011 and 2010, respectively. Stock options had the effect of increasing the weighted average shares outstanding assuming dilution by approximately 985,000 and 789,000 for the six months ended at June 30, 2011 and 2010, respectively. RSUs had the effect of increasing the weighted average shares outstanding assuming dilution by approximately 160,000 and 165,000 for the three and six months ended at June 30, 2011, respectively. There were no RSAs or RSUs that had the effect of increasing the weighted average shares outstanding assuming dilution for the three and six months ended June 30, 2010.

There were no anti-dilutive stock options excluded from the computation of earnings per share assuming dilution for the three months ended June 30, 2011. Anti-dilutive stock options excluded from the computation of earnings per share assuming dilution were 336,000 for the three months ended June 30, 2010. Anti-dilutive stock options excluded from the computation of earnings per share assuming dilution were 293,000 and 336,000 for the six months ended June 30, 2011 and 2010, respectively. Anti-dilutive RSUs and RSAs excluded from the computation of earnings per share assuming dilution were 6,000 and 438,000 for the three months ended at June 30, 2011 and 2010, respectively. Anti-dilutive RSUs and RSAs excluded from the computation of earnings per share assuming dilution were 6,000 and 438,000 for the six months ended at June 30, 2011 and 2010, respectively.

Derivative Financial Instruments

The Company utilizes derivative financial instruments to mitigate its exposure to certain market risks associated with its ongoing operations. The primary risk it seeks to manage through the use of derivative financial instruments is commodity price risk, including the risk of increases in the market price of diesel fuel used in the Company’s delivery vehicles. All derivative financial instruments are recorded at fair value on the consolidated balance sheets. The Company does not use derivative financial instruments for trading or speculative purposes. The Company is exposed to counterparty credit risk on all its derivative financial instruments. The counterparties to these contracts are high credit quality commercial banks, which the Company believes largely minimize the risk of counterparty default. The Company’s fuel hedges expired during the six months ended June 30, 2011. The fair value of the hedges as of December 31, 2010, and the changes in their fair values during the six months ended June 30, 2011 and 2010 were immaterial.

Assets Held for Sale

Certain properties, primarily consisting of parcels of land, met the held for sale classification criteria at June 30, 2011 and December 31, 2010. After adjustment to fair value, the $11.8 million carrying value of these properties has been classified as assets held for sale in the consolidated balance sheets as of June 30, 2011 and December 31, 2010. The Company estimated the fair values of these properties using the market values for similar properties and these are considered Level 2 assets as defined in FASB ASC Topic 820, “Fair Value Measurements.”

Disposal Activities

During the second quarter of 2010 the Company closed eight of its Aaron’s Office Furniture stores and plans to have the remaining four stores closed by September 30, 2010. As a result, the Company recorded $2.0 million in closed store reserves, $4.7 million in lease merchandise write-downs and other miscellaneous expenses. The charges, totaling $7.1 million, were recorded within operating expenses on the consolidated statement of earnings and are included in the Other segment category.

Concentration of Credit Risk

The Company maintained its cash and cash equivalents in a limited number of banks. Bank balances typically exceed coverage provided by the Federal Deposit Insurance Corporation. However due to the size and strength of the banks where the balances are held, such exposure to loss is considered minimal.