##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

| |            |  |                                                                                          | 
| | ---------- |  | ---------------------------------------------------------------------------------------- | 
| | (Mark One) |  |                                                                                          | 
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| | [ X ]      |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  | 
|
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| |            |  | For the quarterly period ended June 30, 2003                                             | 
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| |            |  | OR                                                                                       | 
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| | [ ]        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 | 
|
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| |            |  | For the Transition Period From

to                                                       | 

Commission File No. 0-24333

RAINBOW RENTALS, INC.
(Exact name of Registrant as specified in its charter)

|                              |  |                                             
|----------------------------- |  | --------------------------------------------
|Ohio
(State of Incorporation) |  | 34-1512520
(IRS Employer Identification No.)

3711 Starr Centre Drive
Canfield, Ohio 44406
(Address of principal executive offices)

330-533-5363
(Registrants telephone number)

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No
[   ]

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of
1934). Yes [   
] No [ x ]

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

|                           |  |                                     |           | 
|-------------------------- |  | ----------------------------------- | --------- | 
|CLASS                      |  | SHARES OUTSTANDING AT JULY 31, 2003
|Common stock, no par value |  |                                     | 5,929,319 | 





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TABLE OF CONTENTS



|                               |                                                                                               |                                    |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1: Financial Statements                                                                 
|                               |                                                                                               | BALANCE SHEETS                    
|                               |                                                                                               | STATEMENTS OF INCOME              
|                               |                                                                                               | STATEMENTS OF SHAREHOLDERS EQUITY
|                               |                                                                                               | STATEMENTS OF CASH FLOWS          
|                               |                                                                                               | NOTES TO FINANCIAL STATEMENTS     
|                               | Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3: Quantitative and Qualitative Disclosures About Market Risk                           
|                               | Item 4: Disclosure Controls and Procedures                                                   
|PART II  OTHER INFORMATION   
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|EX-10.3 Severance Agreement   
|EX-10.4 Employment Agreement  
|EX-31.1   CEO SECTION 302 CERT
|EX-31.2  CFO SECTION 302 CERT 
|EX-32  SECTION 906 CERT       



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##### Table of Contents



RAINBOW RENTALS, INC.
INDEX

|           |  |                                                                                       |  |         
|---------- |  | ------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                       |  | Page No.
|           |  |                                                                                       |  |         
|PART I     |  | FINANCIAL INFORMATION                                                                 |  |         
|          
|          
|          
|          
|          
|Item 1.    |  | Financial Statements                                                                  |  |         
|          
|          
|          
|          
|          
|           |  | Balance Sheets                                                                        |  | 3       
|          
|          
|          
|          
|          
|           |  | Statements of Income                                                                  |  | 4       
|          
|          
|          
|          
|          
|           |  | Statements of Shareholders Equity                                                    |  | 5       
|          
|          
|          
|          
|          
|           |  | Statements of Cash Flows                                                              |  | 6       
|          
|          
|          
|          
|          
|           |  | Notes to Financial Statements                                                         |  | 7       
|          
|          
|          
|          
|          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  | 10      
|          
|          
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 14      
|          
|          
|          
|          
|          
|Item 4.    |  | Disclosure Controls and Procedures                                                    |  | 14      
|          
|          
|          
|          
|          
|PART II    |  | OTHER INFORMATION                                                                     |  |         
|          
|          
|          
|          
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 15      
|          
|          
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 15      
|          
|          
|          
|          
|          
|SIGNATURES |  | 16                                                                                   

2



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##### Table of Contents












RAINBOW RENTALS, INC.
BALANCE SHEETS
(Dollars in thousands)

|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |              |        |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------ | ----------- | ----- | ------------ | ------ |  |  | 
|                              |                                                                                                                                             |                                            |                                      |        |        | (unaudited) |       |              |        | 
|                              |                                                                                                                                             |                                            |                                      |        |        | June 30,    |       | December 31,
|                              |                                                                                                                                             |                                            |                                      |        |        | 2003        |       | 2002        
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             |                                            |                                      | Assets |        |             |       |              |        |  |  | 
|                             
|                             
|                             
|                             
|Current assets                |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              | Cash and cash equivalents                                                                                                                   |                                            | $                                    | 1,188  |        |             | $     | 1,080        |       
|                             
|                             
|                             
|                             
|                              | Rental-purchase merchandise, net                                                                                                            |                                            |                                      | 39,079 |        |             |       | 39,342       |       
|                             
|                             
|                             
|                             
|                              | Income tax receivable                                                                                                                       |                                            |                                      | 1,132  |        |             |       | 939          |       
|                             
|                             
|                             
|                             
|                              | Prepaid expenses and other current assets                                                                                                   |                                            |                                      | 2,212  |        |             |       | 1,926        |       
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             | Total current assets                       |                                      |        | 43,611 |             |       |              | 43,287 | 
|                             
|                             
|                             
|                             
|Property and equipment, net   |                                                                                                                                             |                                            | 5,972                                |        |        |             | 5,558 |             
|                             
|                             
|                             
|                             
|Deferred income taxes         |                                                                                                                                             |                                            | 2,079                                |        |        |             | 1,989 |             
|                             
|                             
|                             
|                             
|Goodwill, net                 |                                                                                                                                             |                                            | 9,236                                |        |        |             | 9,236 |             
|                             
|                             
|                             
|                             
|Other assets, net             |                                                                                                                                             |                                            | 577                                  |        |        |             | 843   |             
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             | Total assets                               |                                      | $      | 61,475 |             |       | $            | 60,913 | 
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             |                                            | Liabilities and Shareholders Equity |        |        |             |       |              |        |  | 
|                             
|                             
|                             
|                             
|Current liabilities           |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              | Deferred revenue                                                                                                                            |                                            | $                                    | 1,121  |        |             | $     | 1,215        |       
|                             
|                             
|                             
|                             
|                              | Accounts payable                                                                                                                            |                                            |                                      | 1,580  |        |             |       | 2,175        |       
|                             
|                             
|                             
|                             
|                              | Accrued compensation and related costs                                                                                                      |                                            |                                      | 2,843  |        |             |       | 2,402        |       
|                             
|                             
|                             
|                             
|                              | Other liabilities and accrued expenses                                                                                                      |                                            |                                      | 2,848  |        |             |       | 2,403        |       
|                             
|                             
|                             
|                             
|                              | Deferred income taxes                                                                                                                       |                                            |                                      | 6,798  |        |             |       | 6,343        |       
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             | Total current liabilities                  |                                      |        | 15,190 |             |       |              | 14,538 | 
|                             
|                             
|                             
|                             
|Long-term debt                |                                                                                                                                             |                                            | 6,750                                |        |        |             | 7,550 |             
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             | Total liabilities                          |                                      |        | 21,940 |             |       |              | 22,088 | 
|                             
|                             
|                             
|                             
|Commitments and contingencies |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|Shareholders equity          |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              | Serial preferred stock, no par value; 2,000,000 shares authorized,
none issued                                                              |                                            |                                      |       |        |             |       |             |       
|                             
|                             
|                             
|                             
|                              | Common stock, no par value; 10,000,000 shares authorized,
6,392,610 issued and 5,929,319 outstanding at
June 30, 2003 and December 31, 2002 |                                            |                                      | 11,039 |        |             |       | 11,039       |       
|                             
|                             
|                             
|                             
|                              | Additional paid-in capital                                                                                                                  |                                            |                                      | 4      |        |             |       | 4            |       
|                             
|                             
|                             
|                             
|                              | Retained earnings                                                                                                                           |                                            |                                      | 30,384 |        |             |       | 29,674       |       
|                             
|                             
|                             
|                             
|                              | Treasury stock, at cost, 463,291 shares at
June 30, 2003 and December 31, 2002                                                              |                                            |                                      | (1,892 | )      |             |       | (1,892       | )     
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             | Total shareholders equity                 |                                      |        | 39,535 |             |       |              | 38,825 | 
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                             | Total liabilities and shareholders equity |                                      | $      | 61,475 |             |       | $            | 60,913 | 
|                              |                                                                                                                                             |                                            |                                      |        |        |             |       |             

See accompanying notes to financial statements.

3



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##### Table of Contents






RAINBOW RENTALS, INC.
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)

|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |           |        |        | 
|------------------------------------------- | ------------------------------------------------------ | -------------------- | ------------------------------------------------------ | --------- | -------------------------- | ------ | ------------------------ | --------- | ----- | ------ | ---- | --------- | ------ | ------ | --- | --------- | ------ | ------ | 
|                                            |                                                        |                      |                                                        |           | (unaudited)                |        | (unaudited)             
|                                            |                                                        |                      |                                                        |           | For the three months ended |        | For the six months ended
|                                            |                                                        |                      |                                                        |           | June 30,                   |        | June 30,                
|                                            |                                                        |                      |                                                        |           |                            |        |                         
|                                            |                                                        |                      |                                                        |           | 2003                       |        | 2002                     |           | 2003  |        | 2002
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |     
|Revenues                                    |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Rental revenue                                         |                      | $                                                      | 24,443    |                            |        | $                        | 23,455    |       |        | $    | 48,457    |        |        | $   | 46,601    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Fees                                                   |                      |                                                        | 677       |                            |        |                          | 714       |       |        |      | 1,315     |        |        |     | 1,352     |       
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise sales                                      |                      |                                                        | 655       |                            |        |                          | 666       |       |        |      | 1,749     |        |        |     | 1,847     |       
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Total revenues                                         |           |                            | 25,775 |                          |           |       | 24,835 |      |           |        | 51,521 |     |           |        | 49,800 | 
|                                           
|                                           
|                                           
|                                           
|Operating expenses                          |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise costs                                      |                      |                                                        | 7,977     |                            |        |                          | 8,380     |       |        |      | 16,754    |        |        |     | 17,207    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Store expenses                                         |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |           |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                        | Salaries and related |                                                        |           | 6,733                      |        |                          |           | 5,783 |        |      |           | 13,127 |        |     |           | 11,807 |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                        | Occupancy            |                                                        |           | 2,401                      |        |                          |           | 2,230 |        |      |           | 4,977  |        |     |           | 4,551  |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                        | Advertising          |                                                        |           | 1,897                      |        |                          |           | 1,690 |        |      |           | 3,476  |        |     |           | 3,276  |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                        | Other expenses       |                                                        |           | 3,604                      |        |                          |           | 3,488 |        |      |           | 7,090  |        |     |           | 6,805  |       
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Total store expenses                                   |           |                            | 14,635 |                          |           |       | 13,191 |      |           |        | 28,670 |     |           |        | 26,439 | 
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Total merchandise costs and store expenses             |           |                            | 22,612 |                          |           |       | 21,571 |      |           |        | 45,424 |     |           |        | 43,646 | 
|                                           
|                                           
|                                           
|                                           
|                                            | General and administrative expenses                    |                      |                                                        | 2,398     |                            |        |                          | 2,116     |       |        |      | 4,423     |        |        |     | 3,831     |       
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of intangible assets                      |                      |                                                        | 45        |                            |        |                          | 44        |       |        |      | 90        |        |        |     | 85        |       
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Total operating expenses                               |           |                            | 25,055 |                          |           |       | 23,731 |      |           |        | 49,937 |     |           |        | 47,562 | 
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Operating income                                       |           |                            | 720    |                          |           |       | 1,104  |      |           |        | 1,584  |     |           |        | 2,238  | 
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                                        |                      | 154                                                    |           |                            |        | 167                      |           |       |        | 297  |           |        |        | 352 |          
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                                        |                      | 57                                                     |           |                            |        | 57                       |           |       |        | 114  |           |        |        | 115 |          
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Income from continuing operations,
before income taxes |           |                            | 509    |                          |           |       | 880    |      |           |        | 1,173  |     |           |        | 1,771  | 
|                                           
|                                           
|                                           
|                                           
|Income tax expense                          |                                                        |                      | 201                                                    |           |                            |        | 355                      |           |       |        | 463  |           |        |        | 716 |          
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Income from continuing operations                      |           |                            | 308    |                          |           |       | 525    |      |           |        | 710    |     |           |        | 1,055  | 
|                                           
|                                           
|                                           
|                                           
|Discontinued operations                     |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Loss from operations of discontinued store, net of tax |                      |                                                        |          |                            |        |                          | (49       | )     |        |      |          |        |        |     | (51       | )     
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Net income                                             |           | $                          | 308    |                          |           | $     | 476    |      |           | $      | 710    |     |           | $      | 1,004  | 
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|Basic earnings per common share:            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Basic earnings per share from continuing operations    |                      | $                                                      | 0.05      |                            |        | $                        | 0.09      |       |        | $    | 0.12      |        |        | $   | 0.18      |       
|                                           
|                                           
|                                           
|                                           
|                                            | Basic loss per share from discontinued operations      |                      |                                                        |          |                            |        |                          | (0.01     | )     |        |      |          |        |        |     | (0.01     | )     
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Basic earnings per share                               |           | $                          | 0.05   |                          |           | $     | 0.08   |      |           | $      | 0.12   |     |           | $      | 0.17   | 
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|Diluted earnings per common share:          |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Diluted earnings per share from continuing operations  |                      | $                                                      | 0.05      |                            |        | $                        | 0.09      |       |        | $    | 0.12      |        |        | $   | 0.18      |       
|                                           
|                                           
|                                           
|                                           
|                                            | Diluted loss per share from discontinued operations    |                      |                                                        |          |                            |        |                          | (0.01     | )     |        |      |          |        |        |     | (0.01     | )     
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                        |                      | Diluted earnings per share                             |           | $                          | 0.05   |                          |           | $     | 0.08   |      |           | $      | 0.12   |     |           | $      | 0.17   | 
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|Weighted average common shares outstanding: |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                                  |                      |                                                        | 5,929,319 |                            |        |                          | 5,927,598 |       |        |      | 5,929,319 |        |        |     | 5,926,672 |       
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            | Diluted                                                |                      |                                                        | 5,931,516 |                            |        |                          | 5,952,333 |       |        |      | 5,930,790 |        |        |     | 5,949,798 |       
|                                            |                                                        |                      |                                                        |           |                            |        |                          |           |       |        |      |           |        |        |     |          

See accompanying notes to financial statements.

4



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##### Table of Contents






RAINBOW RENTALS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)

|                                     |                           |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |       | 
|------------------------------------ | ------------------------- |  | ------------ | ----- | ---------- | - | --------------- | - | -------- | - | ------------- | - | ------ | - | ------ | ----- | ----- | - | ------ | -- |  | - | ------ | ----- | 
|                                     |                           |  | Common Stock |       |            |   |                 |   |          |   |               |   |        |   |        |       | Total
|                                     |                           |  |              |       | Additional |   | Retained        |   | Treasury |   | Shareholders
|                                     |                           |  | Shares       |       | Cost       |   | Paid-in Capital |   | Earnings |   | Stock         |   | Equity
|                                     |                           |  |              |       |            |   |                 |   |          |   |               |   |       
|Balance at December 31, 2001         |                           |  | 5,925,735    |       |            | $ | 11,039          |   |          | $ |              |   |        | $ | 28,033 |       |       | $ | (1,907 | )  |  | $ | 37,165 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Exercise of stock options |  |              | 3,584 |            |   |                 |  |          |   |               | 4 |        |   |        |      |       |   |        | 15 |  |   |        | 19    | 
|                                    
|                                    
|                                    
|                                    
|                                     | Net income                |  |              |      |            |   |                 |  |          |   |               |  |        |   |        | 1,641 |       |   |        |   |  |   |        | 1,641 | 
|                                     |                           |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |      
|Balance at December 31, 2002         |                           |  | 5,929,319    |       |            |   | 11,039          |   |          |   | 4             |   |        |   | 29,674 |       |       |   | (1,892 | )  |  |   | 38,825 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Net income (unaudited)    |  |              |      |            |   |                 |  |          |   |               |  |        |   |        | 710   |       |   |        |   |  |   |        | 710   | 
|                                     |                           |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |      
|Balance at June 30, 2003 (unaudited) |                           |  | 5,929,319    |       |            | $ | 11,039          |   |          | $ | 4             |   |        | $ | 30,384 |       |       | $ | (1,892 | )  |  | $ | 39,535 |      
|                                     |                           |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |      

See accompanying notes to financial statements.

5



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##### Table of Contents






RAINBOW RENTALS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)

|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |         |     |         |        |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------------------------------------------------------------------- | ------------------------------------------------------------------ | --- | ------------------------ | ------ | ------- | --- | ------- | ------ | -
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     | (unaudited)             
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     | For the six months ended
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     | June 30,                
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                         
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     | 2003                     |        | 2002   
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|Cash flows from operating activities |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Income from continuing operations                                                                                         |              | $                                                                      | 710                                                                |     |                          | $      | 1,055   |    
|                                    
|                                    
|                                    
|                                    
|                                     | Reconciliation of income from continuing operations to net
cash provided by operating activities of continuing operations |              |                                                                        |                                                                    |     |                          |        |         |    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | Depreciation of property and equipment and
amortization of intangibles |                                                                    |     | 1,247                    |        |         |     | 1,248   |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | Depreciation and write-down of rental-purchase merchandise             |                                                                    |     | 13,460                   |        |         |     | 14,027  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | Purchases of rental-purchase merchandise                               |                                                                    |     | (16,639                  | )      |         |     | (14,755 | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | Rental-purchase merchandise disposed, net                              |                                                                    |     | 3,443                    |        |         |     | 3,212   |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | Deferred income taxes                                                  |                                                                    |     | 365                      |        |         |     | 1,813   |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | Loss on disposal of property and equipment                             |                                                                    |     | 20                       |        |         |     | 16      |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | (Increase) decrease in                                                 |                                                                    |     |                          |        |         |     |         |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Income tax receivable                                              |     |                          | (193   | )       |     |         | (1,356 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Prepaid expenses and other assets                                  |     |                          | (282   | )       |     |         | 365    |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              | Increase (decrease) in                                                 |                                                                    |     |                          |        |         |     |         |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Accounts payable                                                   |     |                          | (595   | )       |     |         | (2,147 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Accrued income taxes                                               |     |                          |       |         |     |         | (306   | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Accrued compensation and related costs                             |     |                          | 441    |         |     |         | (55    | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Deferred revenue and other liabilities and accrued expenses        |     |                          | 351    |         |     |         | 241    |  
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                     |                                                                                                                           |              |                                                                        | Net cash provided by operating activities of continuing operations |     |                          | 2,328  |         |     |         | 3,358  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Net cash used in operating activities of discontinued operations   |     |                          |       |         |     |         | (156   | )
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                     |                                                                                                                           |              |                                                                        | Net cash provided by operating activities                          |     |                          | 2,328  |         |     |         | 3,202  |  
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|Cash flows from investing activities |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Purchase of property and equipment                                                                                        |              |                                                                        | (1,424                                                             | )   |                          |        | (1,323  | )  
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from the sale of property and equipment                                                                          |              |                                                                        | 4                                                                  |     |                          |        | 36      |    
|                                    
|                                    
|                                    
|                                    
|                                     | Acquisitions                                                                                                              |              |                                                                        |                                                                   |     |                          |        | (312    | )  
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                     |                                                                                                                           |              |                                                                        | Net cash used in investing activities of continuing operations     |     |                          | (1,420 | )       |     |         | (1,599 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           |              |                                                                        | Net cash used in investing activities of discontinued operations   |     |                          |       |         |     |         | (2     | )
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                     |                                                                                                                           |              |                                                                        | Net cash used in investing activities                              |     |                          | (1,420 | )       |     |         | (1,601 | )
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|Cash flows from financing activities |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from long-term debt                                                                                              |              |                                                                        | 16,700                                                             |     |                          |        | 23,914  |    
|                                    
|                                    
|                                    
|                                    
|                                     | Current installments and repayments of long-term debt                                                                     |              |                                                                        | (17,500                                                            | )   |                          |        | (24,854 | )  
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from stock options exercised                                                                                     |              |                                                                        |                                                                   |     |                          |        | 19      |    
|                                    
|                                    
|                                    
|                                    
|                                     | Loan fees paid                                                                                                            |              |                                                                        |                                                                   |     |                          |        | (316    | )  
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                     |                                                                                                                           |              |                                                                        | Net cash used in financing activities                              |     |                          | (800   | )       |     |         | (1,237 | )
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|Net increase in cash                 |                                                                                                                           |              | 108                                                                    |                                                                    |     |                          | 364    |        
|                                    
|                                    
|                                    
|                                    
|Cash at beginning of period          |                                                                                                                           |              | 1,080                                                                  |                                                                    |     |                          | 1,839  |        
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|Cash at end of period                |                                                                                                                           | $            | 1,188                                                                  |                                                                    |     | $                        | 2,203  |        
|                                     |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|Supplemental cash flow information   |                                                                                                                           |              |                                                                        |                                                                    |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Net cash paid during the period for                                                                                       |              |                                                                        |                                                                    |     |                          |        |         |    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           | Interest     |                                                                        |                                                                    | 243 |                          |        |         | 262 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                           | Income taxes |                                                                        |                                                                    | 375 |                          |        |         | 616 |        

See accompanying notes to financial statements.

6



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##### Table of Contents






RAINBOW RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

1. Basis of Presentation

Rainbow Rentals, Inc. (the Company) is engaged in the rental and sale of
home electronics, furniture, appliances and computers to the general public.
At June 30, 2003 the Company operated 123 stores in 14 states: Connecticut,
Georgia, Kentucky, Maryland, Massachusetts, Michigan, New York, North Carolina,
Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia. The
Companys corporate office is located in Canfield, Ohio.

The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Therefore, certain information and disclosures,
normally required with financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have
been condensed or omitted. In the opinion of management, the financial
statements contain all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows of the Company. The results of operations for the
periods presented are not necessarily indicative of the results for the entire
year. It is suggested these financial statements be read in conjunction with
the financial statements and notes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2002.

Certain reclassifications have been made to prior year financial data in
order to conform to the 2003 presentation.

2. Long-Term Debt

The Company entered into a revolving financing agreement (the Credit
Facility) in January 2002 that matures in January 2005. The agreement allows
the Company to borrow up to $25.0 million; however, borrowings are limited to
32% of the Companys net rental purchase merchandise, less outstanding letters
of credit, which totaled $2.9 million at June 30, 2003. Excess availability at
June 30, 2003 was approximately $2.9 million. The Companys tangible assets,
primarily rental purchase merchandise, serve as the security for the debt. The
Company can elect interest to be charged on a portion of the outstanding debt
balance at the London Interbank Offering Rate (LIBOR) plus a range of 250  325
basis points and the remaining debt balance, if any, would be at the prime rate
plus a range of 50  125 basis points. In addition, the Company must pay a
commitment fee equal to a range of 37.5 to 50 basis points per annum on the
unused portion of the loan commitment. The interest rate ranges above are all
dependent on the Companys most recent quarterly leverage ratio. Borrowings
under the Credit Facility mature three years after the date of the loan. At
June 30, 2003, the outstanding loan balance totaled $6.8 million with a
weighted average interest rate of 5.78%.

7



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##### Table of Contents



The Credit Facility requires the Company to meet certain quarterly
financial covenants and ratios including maximum leverage, minimum interest
coverage, minimum net worth, fixed charge coverage and rental merchandise usage
ratios. The Credit Facility contains non-financial covenants that limits
actions of the Company with respect to additional indebtedness, certain loans
and investments, payment of dividends, acquisitions, mergers and
consolidations, dispositions of assets or subsidiaries, issuance of capital
stock, capital expenditures and leases. At June 30, 2003, the Company was in
compliance with the covenants and financial reporting requirements.

3. Earnings Per Share

Basic earnings per common share are computed using net income available to
common shareholders divided by the weighted average number of common shares
outstanding. For computation of diluted earnings per share, the weighted
average number of common shares outstanding is increased to give effect to
stock options considered to be common stock equivalents.

The following table shows the amounts used in computing earnings per
share.

|                           |                                             |   |                            |           |                          |   |      |           |      |   |      |           |  |   |      |           | 
|-------------------------- | ------------------------------------------- | - | -------------------------- | --------- | ------------------------ | - | ---- | --------- | ---- | - | ---- | --------- |  | - | ---- | --------- | 
|                           |                                             |   | For the three months ended |           | For the six months ended
|                           |                                             |   | June 30,                   |           | June 30,                
|                           |                                             |   |                            |           |                         
|                           |                                             |   | 2003                       |           | 2002                     |   | 2003 |           | 2002
|                           |                                             |   |                            |           |                          |   |      |           |     
|Numerator:                 |                                             |   |                            |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                          
|                          
|                          
|                          
|                           | Net income available to common shareholders |   | $                          | 308       |                          |   | $    | 476       |      |   | $    | 710       |  |   | $    | 1,004     | 
|                          
|                          
|                          
|                          
|Denominator:               |                                             |   |                            |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                          
|                          
|                          
|                          
|                           | Basic weighted average shares               |   |                            | 5,929,319 |                          |   |      | 5,927,598 |      |   |      | 5,929,319 |  |   |      | 5,926,672 | 
|                          
|                          
|                          
|                          
|                           | Effect of dilutive stock options            |   |                            | 2,197     |                          |   |      | 24,735    |      |   |      | 1,471     |  |   |      | 23,126    | 
|                           |                                             |   |                            |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                           | Diluted weighted average shares             |   |                            | 5,931,516 |                          |   |      | 5,952,333 |      |   |      | 5,930,790 |  |   |      | 5,949,798 | 
|                           |                                             |   |                            |           |                          |   |      |           |      |   |      |           |  |   |      |          
|Basic earnings per share   |                                             | $ | 0.05                       |           |                          | $ | 0.08 |           |      | $ | 0.12 |           |  | $ | 0.17 |          
|                           |                                             |   |                            |           |                          |   |      |           |      |   |      |           |  |   |      |          
|Diluted earnings per share |                                             | $ | 0.05                       |           |                          | $ | 0.08 |           |      | $ | 0.12 |           |  | $ | 0.17 |          
|                           |                                             |   |                            |           |                          |   |      |           |      |   |      |           |  |   |      |          

Stock options of 408,700 and 289,000 shares for the three months ended
June 30, 2003 and 2002, respectively, were not included in diluted earnings per
share because their effects were anti-dilutive. For the six months ended June
30, 2003 and 2002, stock options of 429,950 and 299,250, respectively, were not
included in diluted earnings per share because their effects were
anti-dilutive.

8



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##### Table of Contents



4. Stock-Based Compensation

The Company sponsors a stock option and incentive plan for the benefit of
its employees. In December 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure,which amended SFAS No. 123, Accounting for
Stock-Based Compensation.SFAS No. 148 requires companies electing not to
expense stock options to provide the pro forma net income and earnings per
share information not only annually, but also on a quarterly basis. No
stock-based compensation costs are reflected in net income since all stock
options were granted with an exercise price equal to the market price on the
date of grant, consistent with the provisions of Accounting Principles Board
(APB) 25.

The following table illustrates the effect on net income and earnings per
share had compensation costs for stock options been measured using SFAS No.
123:

|                                            |             |  |                            |      |                          |  |      |      |      |  |   |      |  |  |   |       | 
|------------------------------------------- | ----------- |  | -------------------------- | ---- | ------------------------ |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ----- | 
|                                            |             |  | (unaudited)                |      | (unaudited)             
|                                            |             |  | For the three months ended |      | For the six months ended
|                                            |             |  | June 30,                   |      | June 30,                
|                                            |             |  | 2003                       |      | 2002                     |  | 2003 |      | 2002
|                                            |             |  |                            |      |                          |  |      |      |     
|Net income                                  |             |  |                            |      |                          |  |      |      |      |  |   |      |  |  |   |      
|                                           
|                                           
|                                           
|                                           
|                                            | As reported |  | $                          | 308  |                          |  | $    | 476  |      |  | $ | 710  |  |  | $ | 1,004 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Pro forma   |  |                            | 259  |                          |  |      | 444  |      |  |   | 628  |  |  |   | 941   | 
|                                           
|                                           
|                                           
|                                           
|Basic and diluted earnings per common share |             |  |                            |      |                          |  |      |      |      |  |   |      |  |  |   |      
|                                           
|                                           
|                                           
|                                           
|                                            | As reported |  |                            | 0.05 |                          |  |      | 0.08 |      |  |   | 0.12 |  |  |   | 0.17  | 
|                                           
|                                           
|                                           
|                                           
|                                            | Pro forma   |  |                            | 0.04 |                          |  |      | 0.07 |      |  |   | 0.11 |  |  |   | 0.16  | 

5. Severance Agreement

On May 7, 2003, the Company announced the departure of its Chief Operating
Officer (COO), who also served as a director. The Company entered into a
severance agreement with its former COO that will pay him $329 in salary and
other compensation through May 2004. Current accounting pronouncements
required the Company to expense the fair value of the severance agreement
during the second quarter of 2003. The net effect of the severance agreement decreased basic and diluted earnings per share $0.03.

9



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##### Table of Contents



Forward-Looking Statements

Statements made in this Form 10-Q, other than those concerning historical
information, or, in future filings by Rainbow Rentals, Inc. with the Securities
and Exchange Commission (SEC), in the Companys press releases or other public
or shareholder communications, or in oral statements made with the approval of
an authorized executive officer, constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, and are
made pursuant to the safe harbor provisions of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements use such words as may, will, should, expects, plans,
anticipates, estimates, believes, thinks, continues, indicates,
outlook, looks, goals, initiatives, projects, or variations thereof.
Forward-looking statements are based on managements current beliefs and
assumptions regarding future events and operating performance and speak only as
of the date made. These statements are likely to address the Companys growth
strategy, future financial performance (including sales and earnings),
strategic initiatives, marketing and expansion plans and the impact of
operating initiatives. Forward-looking statements are subject to a number of
risks, uncertainties and other factors, many of which are outside the control
of the Company that could cause the Companys actual results to differ
materially from those expressed or implied in such statements. These risks and
uncertainties include the following: risks associated with general economic
conditions; failure to adequately execute plans and unforeseen circumstances
beyond the Companys control in connection with development, implementation and
execution of new business processes, procedures and programs; greater than
expected expenses associated with the Companys activities; the effects of new
accounting standards; and other risks and uncertainties described in the
Companys Annual Report on Form 10-K for the year ended December 31, 2002, and
in other reports and exhibits to reports filed with the SEC. You are strongly
urged to review such filings for a more detailed discussion of such risks and
uncertainties. The Companys SEC filings are available, at no
charge, at www.sec.gov through the Companys web site at
www.rainbowrentals.com. The foregoing list of important factors is
not exclusive. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.




Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations

General

Rental-purchase merchandise is rented to individuals under flexible
agreements that allow customers to own the merchandise after making a specified
number of rental payments, which generally occur over a period ranging from 12
to 30 months. Customers have the option to return the merchandise at any time
without further obligation, and also have the option to purchase the
merchandise at any time during the rental term.

New Store Openings

The Companys primary method of growth is through the opening of new store
locations. New stores have a maturation period of approximately three years
and generally are dilutive to earnings during the first year of operation as
they build a customer base and develop a recurring revenue stream. The timing
and performance of new store openings and the number of stores in various
stages of the three-year maturation process will have an affect on quarterly
comparisons. During the first six months of 2003, the Company opened four
stores and closed three stores, which were consolidated into existing Rainbow
locations. The Company anticipates opening two more stores in 2003, for an
aggregate six stores in 2003. The Company has elected to defer opening
additional stores until completion of its previously disclosed strategic
planning initiative.

10



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##### Table of Contents



Results of Operations

The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenues.

|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |      |      |       |  
|------------------------------------------- | ----------------------------------- | -------------------- | ------------------------------------------------------ | ---- | -------------------------- | ----- | ------------------------ | ---- | ---- | ----- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | -
|                                            |                                     |                      |                                                        |      | (unaudited)                |       | (unaudited)             
|                                            |                                     |                      |                                                        |      | For the three months ended |       | For the six months ended
|                                            |                                     |                      |                                                        |      | June 30,                   |       | June 30,                
|                                            |                                     |                      |                                                        |      | 2003                       |       | 2002                     |      | 2003 |       | 2002
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |     
|Revenues                                    |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                           
|                                           
|                                           
|                                           
|                                            | Rental revenue                      |                      |                                                        | 94.8 | %                          |       |                          | 94.4 | %    |       |      | 94.0 | %    |       |      | 93.6 | %   
|                                           
|                                           
|                                           
|                                           
|                                            | Fees                                |                      |                                                        | 2.6  |                            |       |                          | 2.9  |      |       |      | 2.6  |      |       |      | 2.7  |     
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise sales                   |                      |                                                        | 2.6  |                            |       |                          | 2.7  |      |       |      | 3.4  |      |       |      | 3.7  |     
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                            |                                     |                      | Total revenues                                         |      |                            | 100.0 |                          |      |      | 100.0 |      |      |      | 100.0 |      |      |      | 100.0 |  
|                                           
|                                           
|                                           
|                                           
|Operating expenses                          |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise costs                   |                      |                                                        | 30.9 |                            |       |                          | 33.7 |      |       |      | 32.5 |      |       |      | 34.6 |     
|                                           
|                                           
|                                           
|                                           
|                                            | Store expenses                      |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |      |     
|                                           
|                                           
|                                           
|                                           
|                                            |                                     | Salaries and related |                                                        |      | 26.1                       |       |                          |      | 23.3 |       |      |      | 25.4 |       |      |      | 23.7 |      
|                                           
|                                           
|                                           
|                                           
|                                            |                                     | Occupancy            |                                                        |      | 9.3                        |       |                          |      | 9.0  |       |      |      | 9.7  |       |      |      | 9.1  |      
|                                           
|                                           
|                                           
|                                           
|                                            |                                     | Advertising          |                                                        |      | 7.4                        |       |                          |      | 6.8  |       |      |      | 6.7  |       |      |      | 6.6  |      
|                                           
|                                           
|                                           
|                                           
|                                            |                                     | Other expenses       |                                                        |      | 14.0                       |       |                          |      | 14.0 |       |      |      | 13.8 |       |      |      | 13.7 |      
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                            |                                     |                      | Total store expenses                                   |      |                            | 56.8  |                          |      |      | 53.1  |      |      |      | 55.6  |      |      |      | 53.1  |  
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                            |                                     |                      | Total merchandise costs and store expenses             |      |                            | 87.7  |                          |      |      | 86.8  |      |      |      | 88.1  |      |      |      | 87.7  |  
|                                           
|                                           
|                                           
|                                           
|                                            | General and administrative expenses |                      |                                                        | 9.3  |                            |       |                          | 8.5  |      |       |      | 8.6  |      |       |      | 7.7  |     
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of intangible assets   |                      |                                                        | 0.2  |                            |       |                          | 0.2  |      |       |      | 0.2  |      |       |      | 0.2  |     
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                           
|                                           
|                                           
|                                           
|                                            |                                     |                      | Total operating expenses                               |      |                            | 97.2  |                          |      |      | 95.5  |      |      |      | 96.9  |      |      |      | 95.6  |  
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                            |                                     |                      | Operating income                                       |      |                            | 2.8   |                          |      |      | 4.5   |      |      |      | 3.1   |      |      |      | 4.4   |  
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                     |                      | 0.6                                                    |      |                            |       | 0.7                      |      |      |       | 0.6  |      |      |       | 0.7  |     
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                     |                      | 0.2                                                    |      |                            |       | 0.3                      |      |      |       | 0.2  |      |      |       | 0.2  |     
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                            |                                     |                      | Income from continuing operations,
before income taxes |      |                            | 2.0   |                          |      |      | 3.5   |      |      |      | 2.3   |      |      |      | 3.5   |  
|                                           
|                                           
|                                           
|                                           
|Income tax expense                          |                                     |                      | 0.8                                                    |      |                            |       | 1.4                      |      |      |       | 0.9  |      |      |       | 1.4  |     
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                            |                                     |                      | Income from continuing operations                      |      |                            | 1.2   |                          |      |      | 2.1   |      |      |      | 1.4   |      |      |      | 2.1   |  
|                                           
|                                           
|                                           
|                                           
|Loss on discontinued operations, net of tax |                                     |                      |                                                       |      |                            |       | (0.2                     | )    |      |       |     |      |      |       | (0.1 | )   
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     
|                                            |                                     |                      | Net income                                             |      |                            | 1.2   | %                        |      |      | 1.9   | %    |      |      | 1.4   | %    |      |      | 2.0   | %
|                                            |                                     |                      |                                                        |      |                            |       |                          |      |      |       |      |      |      |       |      |     

Comparison of Three Months Ended June 30, 2003 and 2002

Total revenues from continuing operations increased $940,000, or 3.8%, to
$25.78 million for the three months ended June 30, 2003, compared to $24.84
million for the comparable 2002 period. Revenue increased $976,000 from the
nine stores opened after April 1, 2002 (not including the four stores opened in
late-June 2003). Revenue from comparable stores, or stores in operation the
entire three month periods ended June 30, 2003 and 2002, declined $54,000, or
0.2%. Comparable store revenue, although relatively flat, was mainly affected
by the following two factors: (a) there was a comparable quarter decline in
units on rent, mainly computer and furniture accessories; and (b) offsetting
the decline in units on rent was an increase in average rental rates, which
included changes in product mix.

Merchandise costs from continuing operations decreased $403,000, or 4.8%,
to $7.98 million for the three months ended June 30, 2003 compared to $8.38
million for the three months ended June 30, 2002. Merchandise costs totaled
30.9% and 33.7% of total

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revenues for the three months ended June 30, 2003 and 2002, respectively. The decrease in merchandise costs from continuing
operations as a percentage of total revenue from continuing operations was
primarily the result of increased rental rates, lower costs of new merchandise
and changes in product mix. To a lesser extent, merchandise costs were
positively affected by a $157,000 adjustment to depreciation of rental purchase
merchandise.

Store expenses from continuing operations increased $1.44 million, or
10.9%, to $14.63 million for the three months ended June 30, 2003 compared to
$13.19 million for the three months ended June 30, 2002. Store expenses
associated with stores opened after April 1, 2002 (non-comparable stores)
accounted for $644,000 of the increase. Comparable store salaries and related
expenses increased $642,000 and comparable store advertising expenses increased
$100,000. The increase in comparable store salaries and related expenses was
due to increased wages (due to additional store staffing and higher pay rates),
workers compensation premium costs and medical expenses. The increase in
comparable store advertising expenses was the result of managements decision
to utilize advertising spending earmarked for the third quarter of 2003 in the
second quarter. This decision was based on maintaining the momentum of
increasing units on rent throughout the second quarter. Store expense from
continuing operations totaled 56.8% and 53.1% of total revenue from continuing
operations for the three months ended June 30, 2003 and 2002, respectively.
Comparable store expenses as a percentage of comparable store revenue totaled
55.2% and 52.2%, respectively, for the three months ended June 30, 2003 and
2002.

General and administrative expenses increased $282,000, or 13.3%, to $2.40
million for the three months ended June 30, 2003 compared to $2.12 million for
the three months ended June 30, 2002. The increase in general and
administrative expenses was primarily attributable to $329,000 in severance
costs associated with the departure of the Companys Chief Operating Officer in
May 2003, which was partially offset by a decline in legal expenses. General
and administrative expenses totaled 9.3% and 8.5% of total revenues from
continuing operations for the three months ended June 30, 2003 and 2002,
respectively.

Income tax expense from continuing operations decreased $154,000 to
$201,000 for the three months ended June 30, 2003, from $355,000 for the three
months ended June 30, 2002. This decrease was attributable to a decline in
income from continuing operations as well as a decline in the Companys
effective tax rate to 39.5% for the three months ended June 30, 2003 from 40.3%
for the comparable 2002 period due to a higher proportion of state taxable
income in states with lower income tax rates.

Comparison of Six Months Ended June 30, 2003 and 2002

Total revenues from continuing operations increased $1.72 million, or
3.5%, to $51.52 million for the six months ended June 30, 2003, compared to
$49.80 million for the six months ended June 30, 2002. Revenue increased $2.26
million from the 11 store openings in 2002. This was partially offset by a
$544,000, or 1.1%, decline in revenue from comparable stores, or stores in
operation the entire six-month periods ended June 30, 2003 and 2002. The
decline in comparable store revenue was mainly attributable to a decline in
units on rent, which was partially offset by an increase in average rental
rates, which included changes in product mix.

Merchandise costs from continuing operations decreased $453,000, or 2.6%,
to $16.75 million for the six months ended June 30, 2003 compared to $17.21
million for the six months ended June 30, 2002. Merchandise costs totaled
32.5% and 34.6% of total revenues for the six months ended June 30, 2003 and
2002, respectively. The decrease in merchandise costs from continuing
operations as a percentage of total revenue from continuing operations was
primarily the result of increased rental rates and lower costs of new merchandise.

Store expenses from continuing operations increased $2.23 million, or
8.4%, to $28.67 million for the six months ended June 30, 2003 compared to
$26.44 million for the six months ended June 30, 2002. Store expenses
associated with stores opened after January 1, 2002 (non-comparable stores)
accounted for $1.46 million of the increase. Store expenses were also affected
by an increase in comparable store salaries and related expenses totaling
$666,000, which was due to increased wages (due to additional store staffing
and higher pay rates) and higher workers compensation premium costs. To a
lesser extent, comparable occupancy expense increased $73,000 due primarily to
lease buy-outs associated with two underperforming stores that were closed
during the first quarter of 2003. Store expense from continuing operations
totaled 55.6% and 53.1% of total revenue from continuing operations for the six
months ended June 30, 2003 and 2002, respectively. Comparable store expenses
as a percentage of comparable store revenue totaled 54.7% and 52.7%,
respectively, for the six months ended June 30, 2003 and 2002.

General and administrative expenses increased $592,000, or 15.4%, to $4.42
million for the six months ended June 30, 2003 compared to $3.83 million for
the six months ended June 30, 2002. The increase in general and administrative
expenses was attributable to a number of factors including severance costs
associated with the departure of the Companys Chief Operating Officer in May
2003, expenses related to reorganizing the Companys regional management team,
and training costs associated with enhancing

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store associates and regional managers skills and preparing potential managers for future store openings and
replacements. General and administrative expenses totaled 8.6% and 7.7% of
total revenues from continuing operations for the six months ended June 30,
2003 and 2002, respectively.

Interest expense decreased $55,000 comparing the six months ended June 30,
2003 and 2002 primarily due to lower average outstanding debt.

Income tax expense from continuing operations decreased $253,000 to
$463,000 for the six months ended June 30, 2003, from $716,000 for the six
months ended June 30, 2002. This decrease was attributable to a decline in
income from continuing operations as well as a decline in the Companys
effective tax rate to 39.5% for the six months ended June 30, 2003 from 40.4%
for the comparable 2002 period due to a higher proportion of state taxable
income in states with lower income tax rates.

Liquidity and Capital Resources

The Companys primary requirements for capital consist of purchasing
additional and/or replacement rental-purchase merchandise, expenditures related
to new store openings, acquisitions and working capital requirements for new
and existing stores. The primary sources of liquidity and capital are from
operations and borrowings.

For the six months ended June 30, 2003 and 2002, cash provided by
operations of continuing operations totaled $2.33 million and
$3.36 million,
respectively. The decrease in cash provided by operations was primarily
affected by increased purchases of rental purchase merchandise and a decline in
income from operations, which was partially offset by changes in accounts
payable (due mainly to the timing of inventory purchases). Cash used in
investing activities totaled $1.42 million and $1.60 million for the six months
ended June 30, 2003 and 2002, respectively. The decrease in cash used in
investing activities was mostly due to acquisitions of customer accounts in
2002, which was partially offset by an increase in property and equipment
purchases in 2003. Cash used in financing activities totaled $800,000 and
$1.24 million for the six months ended June 30, 2003 and 2002, respectively.
This change was mainly attributable to loan fees paid during 2002.

In January 2002, the Company refinanced its debt with a $25.0 million
revolving loan agreement (the Credit Facility) that matures in January 2005.
A borrowing base ($12.5 million at June 30, 2003) measured against rental purchase merchandise limits borrowings
under the Credit Facility to 32% of rental purchase inventory, less outstanding
letters of credit, which totaled $2.9 million at June 30, 2003. Excess
availability was approximately $2.9 million at June 30, 2003. The agreement
requires the Company to meet certain quarterly financial covenants and ratios
including maximum leverage, minimum interest coverage, minimum net worth, fixed
charge coverage and rental merchandise usage ratios. In addition, the Company
must meet requirements regarding monthly, quarterly and annual financial
reporting. The agreement also contains non-financial covenants that limit
actions of the Company with respect to additional indebtedness, certain loans
and investments, payment of dividends, acquisitions, mergers and
consolidations, dispositions of assets or subsidiaries, issuance of capital
stock, capital expenditures and leases.

The Company opened
four stores (two stores each in two new markets) in June 2003 and
plans to open two additional stores during the remainder of 2003 with cash provided by
operations. The Company believes it will continue to have the opportunity to
increase the number of its stores and rental-purchase agreements through
selective acquisitions. Potential acquisitions may vary in size and the
Company may consider larger acquisitions that could be material to the Company.
To provide any additional funds necessary for the continued pursuit of its
growth strategies, the Company may use cash flow from operations, borrow
additional amounts under its Credit Facility, or use its own equity securities,
the availability of which will depend upon market and other conditions. There
can be no assurance that such additional financing will be available to the
Company.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The application of this Interpretation is not expected to have
an effect on the Companys financial position or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities,which amends and clarifies accounting for derivative
instruments and hedging activities under SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities.SFAS No. 149 provides guidance relating to
decisions made (a) as part of the Derivatives Implementation Group process, (b)
in connection with other FASB projects

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dealing with financial instruments and (c) regarding implementation issues raised in the application of the definition
of a derivative and the characteristics of a derivative that contains financing
components. SFAS No. 149 is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The application
of this Statement is not expected to have an effect on the Companys
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments and Characteristics of both Liabilities and Equity,which
requires freestanding financial instruments such as mandatorily redeemable
shares, forward purchase contracts, written put options to be reported as
liabilities by their issuers as well as related new disclosure requirements.
The provisions of SFAS No. 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the beginning of
the first interim period that commences after June 15, 2003. The application
of this Statement is not expected to have an effect on the Companys financial
position or results of operations.




Item 3: Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in information about market risk from that
provided in the 2002 Annual Report on Form 10-K.




Item 4: Disclosure Controls and Procedures

The Company evaluated the design and operation of its disclosure controls
and procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made under the supervision and with the participation of
management, including the Companys principal executive officer and principal
financial officer within the 90-day period prior to the filing of this
Quarterly Report on Form 10-Q. The principal executive officer and principal
financial officer have concluded, based on their review, that the Companys
disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c)
and 15d-14(c), are effective to ensure that information required to be
disclosed by the Company in reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. No significant changes
were made to the Companys internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.

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##### Table of Contents






PART II  OTHER INFORMATION
RAINBOW RENTALS, INC.
JUNE 30, 2003




Item 4. Submission of Matters to a Vote of Security Holders



The Company held its annual meeting of shareholders on May 14, 2003. The
matters approved by the shareholders at the annual meeting
and the voting results as to each matter are set forth below. Election of Directors for a one-year term:


|                    |  |     |           |          |  |  |         | 
|------------------- |  | --- | --------- | -------- |  |  | ------- | 
|Name                |  | For |           | Withheld
|                    |  |     |           |         
|Wayland J. Russell  |  |     | 5,581,924 |          |  |  | 317,150 | 
|                   
|                   
|                   
|                   
|Michael J. Viveiros |  |     | 5,581,924 |          |  |  | 317,150 | 
|                   
|                   
|                   
|                   
|Brian L. Burton     |  |     | 5,798,074 |          |  |  | 101,000 | 
|                   
|                   
|                   
|                   
|Ivan J. Winfield    |  |     | 5,798,074 |          |  |  | 101,000 | 
|                   
|                   
|                   
|                   
|Robert A. Glick     |  |     | 5,798,074 |          |  |  | 101,000 | 

Ratification of the appointment of KPMG LLP as auditors for the year ended
December 31, 2003:

|          |  |          |  |        
|--------- |  | -------- |  | -------
|For       |  | Withheld |  | Abstain
|          |  |          |  |        
|5,898,974 |  | 100      |  | 0      




Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits  Exhibit 10.3  Severance
Agreement by and between Lawrence S. Hendricks and the CompanyExhibit 10.4  Employment
Agreement by and between the Company and S. Robert HarrisExhibit 31.1  CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 31.2  CFO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 32  CEO and CFO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (b) Reports of Form 8-K  Report on Form 8-K dated April 30, 2003 to report the results of
operations for the three months ended
March 31, 2003.Report on Form 8-K dated May 7, 2003 announcing the departure of Lawrence
S. Hendricks as Chief
Operating Officer of the Company and the appointment of Robert Harris as Chief
Operating Officer of the Company.




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SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

| |  |                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  | RAINBOW RENTALS, INC.
(Registrant)                                                                                                   
|
| |  | /s/ WAYLAND J. RUSSELLWayland J. Russell, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date:  August 12, 2003  
|
| |  | /s/ MICHAEL A. PECCHIAMichael A. Pecchia,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date:  August 12, 2003

16