TABLE OF CONTENTS




|                                                                                              |                                                          |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  |  | 
|CONDENSED BALANCE SHEETS                                                                     
|CONDENSED STATEMENTS OF INCOME                                                               
|CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY                                                 
|CONDENSED STATEMENTS OF CASH FLOWS                                                           
|NOTES TO CONDENSED FINANCIAL STATEMENTS                                                      
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                              | General                                                 
|                                                                                              | New Store Openings                                      
|                                                                                              | Results of Operations                                   
|                                                                                              | Comparison of Three Months Ended March 31, 2001 and 2000
|                                                                                              | Liquidity and Capital Resources                         
|                                                                                              | Forward- Looking Statements                             
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                           
|PART II  OTHER INFORMATION RAINBOW RENTALS, INC.                                            
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|Exhibit 4.6                                                                                  



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##### Table of Contents



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

FORM 10-Q

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One)
|          
|[X]        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|          
|          
|          
|           |  | For the quarterly period ended March 31, 2001                                           
|          
|           |  | OR                                                                                      
|          
|[   ]      |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|          
|          
|          
|           |  | For the Transition Period From ____ to ____.                                            

Commission File No. 0-24333

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

|                         |  |                                  
|------------------------ |  | ---------------------------------
|Ohio                     |  | 34-1512520                       
|(State of Incorporation) |  | (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 check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x  No

Indicate 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 APRIL 30, 2001
|                           |  |                                     
|Common stock, no par value |  | 5,925,735                           





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##### Table of Contents



RAINBOW RENTALS, INC.
INDEX

|           |  |  |         |  |  |                                                                                       |  |          |    |  |  |  |  | 
|---------- |  |  | ------- |  |  | ------------------------------------------------------------------------------------- |  | -------- | -- |  |  |  |  | 
|           |  |  |         |  |  |                                                                                       |  | Page No.
|           |  |  |         |  |  |                                                                                       |  |         
|PART I     |  |  |         |  |  | FINANCIAL INFORMATION                                                                
|          
|          
|          
|          
|           |  |  | Item 1. |  |  | Financial Statements                                                                 
|          
|          
|          
|          
|           |  |  |         |  |  | Condensed Balance Sheets                                                              |  |          | 3  | 
|          
|          
|          
|          
|           |  |  |         |  |  | Condensed Statements of Income                                                        |  |          | 4  | 
|          
|          
|          
|          
|           |  |  |         |  |  | Condensed Statements of Shareholders Equity                                          |  |          | 5  | 
|          
|          
|          
|          
|           |  |  |         |  |  | Condensed Statements of Cash Flows                                                    |  |          | 6  | 
|          
|          
|          
|          
|           |  |  |         |  |  | Notes to Condensed Financial Statements                                               |  |          | 7  | 
|          
|          
|          
|          
|           |  |  | Item 2. |  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |          | 8  | 
|          
|          
|          
|          
|           |  |  | Item 3. |  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |          | 11 | 
|          
|          
|          
|          
|PART II    |  |  |         |  |  | OTHER INFORMATION                                                                    
|          
|          
|          
|          
|           |  |  | Item 6. |  |  | Exhibits and Reports on Form 8-K                                                      |  |          | 12 | 
|          
|          
|          
|          
|SIGNATURES |  |  |         |  |  | 13                                                                                    | 

2



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##### Table of Contents






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

|                            |                                                                                                      |                                            |       |        |        |             |        |              |        |  |  |  |  |  |  | 
|--------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------ | ------ | ----------- | ------ | ------------ | ------ |  |  |  |  |  |  | 
|                            |                                                                                                      |                                            |       |        |        | (unaudited)
|                            |                                                                                                      |                                            |       |        |        | March 31,   |        | December 31,
|                            |                                                                                                      |                                            |       |        |        | 2001        |        | 2000        
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                            |                                                                                                      |                                            |       | Assets
|                           
|                           
|                           
|                           
|Current assets             
|                           
|                           
|                           
|                           
|                            | Cash                                                                                                 |                                            | $     | 1,206  |        |             | $      | 1,426        |       
|                           
|                           
|                           
|                           
|                            | Rental-purchase merchandise, net                                                                     |                                            |       | 36,804 |        |             |        | 36,545       |       
|                           
|                           
|                           
|                           
|                            | Income tax receivable                                                                                |                                            |       | 824    |        |             |        | 777          |       
|                           
|                           
|                           
|                           
|                            | Prepaid expenses and other current assets                                                            |                                            |       | 1,929  |        |             |        | 1,709        |       
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                            |                                                                                                      | Total current assets                       |       |        | 40,763 |             |        |              | 40,457 | 
|                           
|                           
|                           
|                           
|Property and equipment, net |                                                                                                      |                                            | 5,348 |        |        |             | 5,259  |             
|                           
|                           
|                           
|                           
|Deferred income taxes       |                                                                                                      |                                            | 1,460 |        |        |             | 1,460  |             
|                           
|                           
|                           
|                           
|Goodwill, net               |                                                                                                      |                                            | 9,846 |        |        |             | 9,887  |             
|                           
|                           
|                           
|                           
|Other assets, net           |                                                                                                      |                                            | 1,283 |        |        |             | 1,365  |             
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                           
|                           
|                           
|                           
|                            |                                                                                                      | Total assets                               |       | $      | 58,700 |             |        | $            | 58,428 | 
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                            |                                                                                                      | Liabilities and Shareholders Equity      
|                           
|                           
|                           
|                           
|Current liabilities        
|                           
|                           
|                           
|                           
|                            | Short-term debt                                                                                      |                                            | $     | 10,905 |        |             | $      |             |       
|                           
|                           
|                           
|                           
|                            | Accounts payable                                                                                     |                                            |       | 3,201  |        |             |        | 2,409        |       
|                           
|                           
|                           
|                           
|                            | Accrued compensation and related costs                                                               |                                            |       | 832    |        |             |        | 1,525        |       
|                           
|                           
|                           
|                           
|                            | Other liabilities and accrued expenses                                                               |                                            |       | 2,178  |        |             |        | 1,704        |       
|                           
|                           
|                           
|                           
|                            | Deferred revenue                                                                                     |                                            |       | 1,084  |        |             |        | 781          |       
|                           
|                           
|                           
|                           
|                            | Deferred income taxes                                                                                |                                            |       | 3,978  |        |             |        | 3,678        |       
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                            |                                                                                                      | Total current liabilities                  |       |        | 22,178 |             |        |              | 10,097 | 
|                           
|                           
|                           
|                           
|Long-term debt              |                                                                                                      |                                            |      |        |        |             | 12,340 |             
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                            |                                                                                                      | Total liabilities                          |       |        | 22,178 |             |        |              | 22,437 | 
|                           
|                           
|                           
|                           
|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 5,925,735 outstanding |                                            |       | 11,039 |        |             |        | 11,039       |       
|                           
|                           
|                           
|                           
|                            | Retained earnings                                                                                    |                                            |       | 27,390 |        |             |        | 26,859       |       
|                           
|                           
|                           
|                           
|                            | Treasury stock, 466,875 common shares at cost                                                        |                                            |       | (1,907 | )      |             |        | (1,907       | )     
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                            |                                                                                                      | Total shareholders equity                 |       |        | 36,522 |             |        |              | 35,991 | 
|                            |                                                                                                      |                                            |       |        |        |             |        |             
|                            |                                                                                                      | Total liabilities and shareholders equity |       | $      | 58,700 |             |        | $            | 58,428 | 
|                            |                                                                                                      |                                            |       |        |        |             |        |             

See accompanying notes to condensed financial statements.

3



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

|                                            |                                                    |                      |                                            |           |                            |        |      |           |       |        |  |  |  |  | 
|------------------------------------------- | -------------------------------------------------- | -------------------- | ------------------------------------------ | --------- | -------------------------- | ------ | ---- | --------- | ----- | ------ |  |  |  |  | 
|                                            |                                                    |                      |                                            |           | (unaudited)               
|                                            |                                                    |                      |                                            |           | For the three months ended
|                                            |                                                    |                      |                                            |           | March 31,                 
|                                            |                                                    |                      |                                            |           |                           
|                                            |                                                    |                      |                                            |           | 2001                       |        | 2000
|                                            |                                                    |                      |                                            |           |                            |        |     
|Revenues                                   
|                                           
|                                           
|                                           
|                                           
|                                            | Rental revenue                                     |                      | $                                          | 22,466    |                            |        | $    | 20,761    |      
|                                           
|                                           
|                                           
|                                           
|                                            | Fees                                               |                      |                                            | 686       |                            |        |      | 671       |      
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise sales                                  |                      |                                            | 1,138     |                            |        |      | 1,030     |      
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                            |                                                    |                      | Total revenues                             |           |                            | 24,290 |      |           |       | 22,462 | 
|                                           
|                                           
|                                           
|                                           
|Operating expenses                         
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise costs                                  |                      |                                            | 8,388     |                            |        |      | 7,507     |      
|                                           
|                                           
|                                           
|                                           
|                                            | Store expenses                                    
|                                           
|                                           
|                                           
|                                           
|                                            |                                                    | Salaries and related |                                            |           | 5,710                      |        |      |           | 5,135 |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                    | Occupancy            |                                            |           | 2,092                      |        |      |           | 1,618 |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                    | Advertising          |                                            |           | 1,524                      |        |      |           | 1,046 |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                    | Other expenses       |                                            |           | 3,344                      |        |      |           | 2,861 |       
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                            |                                                    |                      | Total store expenses                       |           |                            | 12,670 |      |           |       | 10,660 | 
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                            |                                                    |                      | Total merchandise costs and store expenses |           |                            | 21,058 |      |           |       | 18,167 | 
|                                           
|                                           
|                                           
|                                           
|                                            | General and administrative expenses                |                      |                                            | 1,855     |                            |        |      | 1,618     |      
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of goodwill and noncompete agreements |                      |                                            | 175       |                            |        |      | 132       |      
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                            |                                                    |                      | Total operating expenses                   |           |                            | 23,088 |      |           |       | 19,917 | 
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                            |                                                    |                      | Operating income                           |           |                            | 1,202  |      |           |       | 2,545  | 
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                                    |                      | 226                                        |           |                            |        | 198  |          
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                                    |                      | 85                                         |           |                            |        | 73   |          
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                            |                                                    |                      | Income before income taxes                 |           |                            | 891    |      |           |       | 2,274  | 
|                                           
|                                           
|                                           
|                                           
|Income taxes                                |                                                    |                      | 360                                        |           |                            |        | 932  |          
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                    |                      | Net income                                 |           | $                          | 531    |      |           | $     | 1,342  | 
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|Earnings per common share:                 
|                                           
|                                           
|                                           
|                                           
|                                            | Basic and diluted earnings per share               |                      | $                                          | 0.09      |                            |        | $    | 0.23      |      
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                              |                      |                                            | 5,925,735 |                            |        |      | 5,925,735 |      
|                                            |                                                    |                      |                                            |           |                            |        |      |          
|                                            | Diluted                                            |                      |                                            | 5,935,968 |                            |        |      | 5,925,735 |      
|                                            |                                                    |                      |                                            |           |                            |        |      |          

See accompanying notes to condensed financial statements.

4



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

|                                      |                        |  |              |   |          |   |          |   |               |   |        |       |       |   |        |   |  |   |        |       |  |  |  |  | 
|------------------------------------- | ---------------------- |  | ------------ | - | -------- | - | -------- | - | ------------- | - | ------ | ----- | ----- | - | ------ | - |  | - | ------ | ----- |  |  |  |  | 
|                                      |                        |  | Common Stock |   |          |   |          |   |               |   |        |       | Total
|                                      |                        |  |              |   | Retained |   | Treasury |   | Shareholders'
|                                      |                        |  | Shares       |   | Cost     |   | Earnings |   | Stock         |   | Equity
|                                      |                        |  |              |   |          |   |          |   |               |   |       
|Balance at December 31, 1999          |                        |  | 5,925,735    |   |          | $ | 11,039   |   |               | $ | 22,754 |       |       | $ | (1,907 | ) |  | $ | 31,886 |      
|                                     
|                                     
|                                     
|                                     
|                                      | Net income             |  |              |  |          |   |          |  |               |   |        | 4,105 |       |   |        |  |  |   |        | 4,105 | 
|                                      |                        |  |              |   |          |   |          |   |               |   |        |       |       |   |        |   |  |   |        |      
|Balance at December 31, 2000          |                        |  | 5,925,735    |   |          |   | 11,039   |   |               |   | 26,859 |       |       |   | (1,907 | ) |  |   | 35,991 |      
|                                     
|                                     
|                                     
|                                     
|                                      | Net income (unaudited) |  |              |  |          |   |          |  |               |   |        | 531   |       |   |        |  |  |   |        | 531   | 
|                                      |                        |  |              |   |          |   |          |   |               |   |        |       |       |   |        |   |  |   |        |      
|Balance at March 31, 2001 (unaudited) |                        |  | 5,925,735    |   |          | $ | 11,039   |   |               | $ | 27,390 |       |       | $ | (1,907 | ) |  | $ | 36,522 |      
|                                      |                        |  |              |   |          |   |          |   |               |   |        |       |       |   |        |   |  |   |        |      

See accompanying notes to condensed financial statements.

5



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

|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |        |        |      |        |   |  |  |  | 
|------------------------------------ | ------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------ | ---------------------- | ------ | ------ | ------ | ---- | ------ | - |  |  |  | 
|                                     |                                                                           |                                                                        |                                           |                                           |        | (unaudited)           
|                                     |                                                                           |                                                                        |                                           |                                           |        | For three months ended
|                                     |                                                                           |                                                                        |                                           |                                           |        | March 31,             
|                                     |                                                                           |                                                                        |                                           |                                           |        |                       
|                                     |                                                                           |                                                                        |                                           |                                           |        | 2001                   |        | 2000  
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|Cash flows from operating activities
|                                    
|                                    
|                                    
|                                    
|                                     | Net income                                                                |                                                                        | $                                         | 531                                       |        |                        | $      | 1,342  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Reconciliation of net income to net cash provided
by operating activities
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Depreciation of property and equipment and
amortization of intangibles |                                           |                                           | 722    |                        |        |        | 622    |     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Depreciation of rental-purchase merchandise                            |                                           |                                           | 6,615  |                        |        |        | 5,876  |     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Deferred income taxes                                                  |                                           |                                           | 300    |                        |        |        | 150    |     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | (Gain) loss on disposal of property and equipment                      |                                           |                                           |       |                        |        |        | (81    | )   
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Purchases of rental-purchase merchandise                               |                                           |                                           | (8,490 | )                      |        |        | (6,945 | )   
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Rental-purchase merchandise disposed, net                              |                                           |                                           | 1,743  |                        |        |        | 1,627  |     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Increase (decrease) in                                                
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |                                                                        | Income tax receivable                     |                                           |        | (47                    | )      |        |        | (161 | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |                                                                        | Prepaid expenses and other current assets |                                           |        | (220                   | )      |        |        | (130 | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |                                                                        | Accounts payable                          |                                           |        | 792                    |        |        |        | 336  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |                                                                        | Accrued compensation and related costs    |                                           |        | (693                   | )      |        |        | (793 | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |                                                                        | Other liabilities and accrued expenses    |                                           |        | 474                    |        |        |        | (43  | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |                                                                        | Deferred revenue                          |                                           |        | 303                    |        |        |        |     |       
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|                                     |                                                                           |                                                                        |                                           | Net cash provided by operating activities |        |                        | 2,030  |        |        |      | 1,800  |  
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|Cash flows from investing activities
|                                    
|                                    
|                                    
|                                    
|                                     | Purchase of property and equipment, net                                   |                                                                        |                                           | (578                                      | )      |                        |        | (751   | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds on the sale of property and equipment                            |                                                                        |                                           | 10                                        |        |                        |        | 93     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Acquisitions                                                              |                                                                        |                                           | (247                                      | )      |                        |        |       |       
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|                                     |                                                                           |                                                                        |                                           | Net cash used in investing activities     |        |                        | (815   | )      |        |      | (658   | )
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|Cash flows from financing activities
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from long-term debt                                              |                                                                        |                                           | 5,865                                     |        |                        |        | 7,330  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Repayments of long-term debt                                              |                                                                        |                                           | (7,300                                    | )      |                        |        | (8,833 | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Principal payments under capital lease obligations                        |                                                                        |                                           |                                          |        |                        |        | (38    | )     
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|                                     |                                                                           |                                                                        |                                           | Net cash used in financing activities     |        |                        | (1,435 | )      |        |      | (1,541 | )
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|Net decrease in cash                 |                                                                           |                                                                        | (220                                      | )                                         |        |                        | (399   | )     
|                                    
|                                    
|                                    
|                                    
|Cash at beginning of period          |                                                                           |                                                                        | 1,426                                     |                                           |        |                        | 440    |       
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|Cash at end of period                |                                                                           | $                                                                      | 1,206                                     |                                           |        | $                      | 41     |       
|                                     |                                                                           |                                                                        |                                           |                                           |        |                        |        |       
|Supplemental cash flow information: 
|                                    
|                                    
|                                    
|                                    
|                                     | Net cash paid during the period for                                      
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Interest                                                               |                                           | $                                         | 195    |                        |        | $      | 204    |     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Income taxes                                                           |                                           |                                           | 169    |                        |        |        | 973    |     

See accompanying notes to condensed financial statements.

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

1. Basis of Presentation

Rainbow Rentals, Inc. (Company) is engaged in the rental and sale of
home electronics, furniture, appliances and computers to the general public.
The Company operates 112 stores in eleven states: Connecticut, Massachusetts,
Michigan, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South
Carolina, Tennessee and Virginia. The Companys corporate headquarters 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 for
fiscal year ended December 31, 2000.

2. 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
|             |                                             |  | March 31,                 
|             |                                             |  |                           
|             |                                             |  | 2001                       |           | 2000
|             |                                             |  |                            |           |     
|Numerator:  
|            
|            
|            
|            
|             | Net income available to common shareholders |  | $                          | 531       |      |  | $ | 1,342     | 
|            
|            
|            
|            
|Denominator:
|             | Basic weighted average shares               |  |                            | 5,925,735 |      |  |   | 5,925,735 | 
|            
|            
|            
|            
|             | Effect of dilutive stock options            |  |                            | 10,233    |      |  |   |          | 
|             |                                             |  |                            |           |      |  |   |          
|             | Diluted weighted average shares             |  |                            | 5,935,968 |      |  |   | 5,925,735 | 
|             |                                             |  |                            |           |      |  |   |          
|             | Basic earnings per share                    |  | $                          | 0.09      |      |  | $ | 0.23      | 
|             |                                             |  |                            |           |      |  |   |          
|             | Diluted earnings per share                  |  | $                          | 0.09      |      |  | $ | 0.23      | 
|             |                                             |  |                            |           |      |  |   |          

3. Acquisitions

The Company has recently made acquisitions of stores, rental purchase
merchandise and rental purchase agreements. All acquisitions made were
accounted for using the purchase method of accounting. Accordingly, all
identifiable assets were recorded at their estimated fair market value at the
date of acquisition. The excess of the acquisition cost over the estimated
fair value of the net assets acquired (goodwill) is being amortized on a
straight-line basis over periods ranging from 18 to 20 years. Assets acquired,
other than goodwill, consisted primarily of rental-purchase merchandise,
property and equipment and noncompete agreements. The aggregate purchase
price of acquisitions for the three months ended March 31, 2001 and the year
ended December 31, 2000 were $247 and $3,385, respectively.

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4. Short-Term Debt

The Company has a revolving loan agreement with a lending institution,
which matures March 1, 2002 and is classified as short-term based on the
maturity date. The maximum revolving loan amount under this agreement at March
31, 2001 was $16.0 million, of which $10.9 million was outstanding. Interest
is charged on the outstanding loan balance at prime, however, the Company can
request to have interest charged on a portion of the outstanding loan balance
at the Interbank Offering Rate (IBOR) plus 200 basis points. At March 31,
2001, $10.0 million of the outstanding loan balance was subject to a rate of
7.06% (IBOR plus 200 basis points) and the remaining loan balance was subject
to the prime rate of 8.0%. Additionally, the loan agreement calls for a nonuse
fee equal to 0.25% per annum on the daily average amount by which the maximum
revolving amount exceeds the outstanding loan balance.

The loan agreement is secured by substantially all assets, contract rights,
documents and all rental agreements of the Company. There are four debt
covenants that require the Company to maintain certain financial ratios as well
as a minimum net worth. At March 31, 2001, the Company was in compliance
with the covenants in the amended loan agreement.




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




General

Generally, 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 (ranging from 12 to 24 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.

During the current first quarter, the Company opened two new stores in
existing markets and completed one acquisition. On March 1, 2001, the Company
purchased the assets of two stores located in Tennessee and consolidated them
into existing Company locations.




New Store Openings

The Companys primary method of growth is through the opening of new store
locations. New store openings are dilutive to earnings for the first nine to
twelve months as they build a customer base and develop a recurring revenue
stream. Generally, new stores have a maturation period of approximately three
years. The timing of new store openings and the number of stores in various
stages of the three-year maturation process will have an effect on quarterly
comparisons.

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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.

|                          |                                                    |                      |                                            |      |                            |       |      |      |      |       |  |  |  |  | 
|------------------------- | -------------------------------------------------- | -------------------- | ------------------------------------------ | ---- | -------------------------- | ----- | ---- | ---- | ---- | ----- |  |  |  |  | 
|                          |                                                    |                      |                                            |      | For the three months ended
|                          |                                                    |                      |                                            |      |                           
|                          |                                                    |                      |                                            |      | 2001                       |       | 2000
|                          |                                                    |                      |                                            |      |                            |       |     
|Statement of Income Data:
|                         
|                         
|                         
|                         
|Revenues                 
|                         
|                         
|                         
|                         
|                          | Rental revenue                                     |                      |                                            | 92.5 | %                          |       |      | 92.4 | %   
|                         
|                         
|                         
|                         
|                          | Fees                                               |                      |                                            | 2.8  |                            |       |      | 3.0  |     
|                         
|                         
|                         
|                         
|                          | Merchandise sales                                  |                      |                                            | 4.7  |                            |       |      | 4.6  |     
|                          |                                                    |                      |                                            |      |                            |       |      |     
|                          |                                                    |                      | Total revenues                             |      |                            | 100.0 |      |      |      | 100.0 | 
|                         
|                         
|                         
|                         
|Operating expenses       
|                         
|                         
|                         
|                         
|                          | Merchandise costs                                  |                      |                                            | 34.5 |                            |       |      | 33.4 |     
|                         
|                         
|                         
|                         
|                          | Store expenses                                    
|                         
|                         
|                         
|                         
|                          |                                                    | Salaries and related |                                            |      | 23.5                       |       |      |      | 22.9 |      
|                         
|                         
|                         
|                         
|                          |                                                    | Occupancy            |                                            |      | 8.6                        |       |      |      | 7.2  |      
|                         
|                         
|                         
|                         
|                          |                                                    | Advertising          |                                            |      | 6.3                        |       |      |      | 4.7  |      
|                         
|                         
|                         
|                         
|                          |                                                    | Other expenses       |                                            |      | 13.8                       |       |      |      | 12.7 |      
|                          |                                                    |                      |                                            |      |                            |       |      |     
|                          |                                                    |                      | Total store expenses                       |      |                            | 52.2  |      |      |      | 47.5  | 
|                          |                                                    |                      |                                            |      |                            |       |      |     
|                          |                                                    |                      | Total merchandise costs and store expenses |      |                            | 86.7  |      |      |      | 80.9  | 
|                         
|                         
|                         
|                         
|                          | General and administrative expenses                |                      |                                            | 7.6  |                            |       |      | 7.2  |     
|                         
|                         
|                         
|                         
|                          | Amortization of goodwill and noncompete agreements |                      |                                            | 0.7  |                            |       |      | 0.6  |     
|                          |                                                    |                      |                                            |      |                            |       |      |     
|                          |                                                    |                      | Total operating expenses                   |      |                            | 95.0  |      |      |      | 88.7  | 
|                          |                                                    |                      |                                            |      |                            |       |      |     
|                          |                                                    |                      | Operating income                           |      |                            | 5.0   |      |      |      | 11.3  | 
|                         
|                         
|                         
|                         
|Interest expense          |                                                    |                      | 0.9                                        |      |                            |       | 0.9  |     
|                         
|                         
|                         
|                         
|Other expense, net        |                                                    |                      | 0.4                                        |      |                            |       | 0.3  |     
|                          |                                                    |                      |                                            |      |                            |       |      |     
|                          | Income before income taxes                         |                      |                                            | 3.7  |                            |       |      | 10.1 |     
|                         
|                         
|                         
|                         
|Income taxes              |                                                    |                      | 1.5                                        |      |                            |       | 4.1  |     
|                          |                                                    |                      |                                            |      |                            |       |      |     
|                          | Net income                                         |                      |                                            | 2.2  | %                          |       |      | 6.0  | %   
|                          |                                                    |                      |                                            |      |                            |       |      |     




Comparison of Three Months Ended March 31, 2001 and 2000

For the three months ended March 31, 2001, total revenues increased $1.8
million to $24.3 million from $22.5 million, an increase of 8.1% over the
comparable 2000 period. Revenue from the 18 stores opened and acquired in 2000
increased $2.3 million, offsetting a decrease of $0.5 million in revenue from
comparable stores (stores in operation on January 1, 2000). Comparable store
revenue decreased to $21.9 million from $22.4 million, a decrease of 2.5%. The
decrease in comparable store revenue was due to a decline in the number of
customers per store during the last half of 2000. Management believes the
decline in customers was due to staffing shortages, increased competition and
other market factors.

For the three months ended March 31, 2001, merchandise costs increased to
$8.4 million from $7.5 million, an increase of 11.7% over the comparable 2000
period due to merchandise costs associated with stores opened and acquired in
2000. As a percentage of revenues, merchandise costs increased to 34.5% from
33.4% due primarily to increased rentals of older, pre-rented merchandise at
reduced rental rates in order to decrease the amount of pre-rented merchandise
accumulated during 2000. Promotional merchandise and special offers also
contributed to the percentage increase of merchandise costs.

For the three months ended March 31, 2001, total store expenses increased
$2.0 million to $12.7 million from $10.7 million, an increase of 18.8% over the
comparable 2000 period. The increase in total store expenses was primarily due
to the expenses associated with the 18 stores opened and acquired in 2000,
which accounted for 78.1% of the total increase in store expenses, or $1.6
million. Store expenses of comparable stores increased $0.4 million (3.4%) due
primarily to an increase in advertising and, to a lesser extent, expenses
associated with the growth of stores opened during 1999. The increase in
advertising expense of comparable stores was due to increased levels of
spending in an

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##### Table of Contents



effort to rebuild the Companys customer base. As a percentage of total
revenues, total store expenses increased to 52.2% from 47.5% primarily due to
store expenses of comparable stores, which increased to 49.0% in 2001 from
46.8% in the comparable 2000 period. The percentage increase was primarily due
to a 2.5% decrease in comparable store revenue and an increase in advertising
expense. Also contributing to the percentage increase in total store expenses
was the increased number of new store openings in 2000 compared to 1999, which
totaled 11 and 9, respectively, and expenses of the stores acquired in 2000
which totaled $0.6 million and 67% of revenue.

For the three months ended March 31, 2001, general and administrative
expenses increased to $1.9 million from $1.6 million, an increase of 14.6% over
the comparable 2000 period and, as a percentage of total revenues, increased to
7.6% from 7.2%. The increase was primarily due to the expansion of the
Companys regional management team, the addition of several key support
personnel and increased consulting fees, all of which were necessitated by the
Companys anticipated growth.

For the three months ended March 31, 2001, operating income decreased to
$1.2 million from $2.5 million, a decrease of 52.8% over the comparable 2000
period and, as a percentage of total revenues, decreased to 5.0% from 11.3% due
to the factors discussed above.

For the three months ended March 31, 2001, the Companys effective tax
rate decreased to 40.5% from 41.0% due to lower effective state tax rates.

For the three months ended March 31, 2001, net income decreased to $0.5
million from $1.3 million, a decrease of 60.4% over the comparable 2000 period
and, as a percentage of total revenues, decreased to 2.2% from 6.0% due to the
factors discussed above.




Liquidity and Capital Resources

The Companys primary requirements for capital consist of purchasing
additional and replacement rental-purchase merchandise, expenditures related to
new store openings, acquisitions and working capital requirements for new and
existing stores. For the three months ended March 31, 2001 and 2000, purchases
of rental merchandise (excluding acquisitions) amounted to $8.5 million and
$6.9 million, respectively. The increase reflects merchandise inventory
purchased for new store openings and acquisitions (excludes acquired
inventory).

For the three months ended March 31, 2001, cash provided by operating
activities increased to $2.0 million from $1.8 million for the comparable 2000
period. Cash used in investing activities increased to $0.8 million from $0.7
million. Cash used in financing activities decreased to $1.4 million from $1.5
million.

The Company currently has a $14.0 million revolving loan agreement with a
lending institution (the Credit Facility) with a maturity date of March 1,
2002. The Credit Facility includes certain cash flow, net worth and idle
inventory requirements, as well as covenants which limit the ability of the
Company to incur additional indebtedness, grant liens, transfer assets outside
the ordinary course of business, pay dividends, engage in acquisition
transactions and make capital expenditures (excluding the purchase of rental
merchandise) in excess of a specified amount. Availability under the Companys
Credit Facility as of May 15, 2001 was approximately $3.0 million. The Company
is seeking new long-term debt financing with other institutional lenders to replace its
current Credit Facility.

The Company plans to open approximately four stores during the remainder
of the year. 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, seek to obtain
additional debt or equity financing, or use its own equity securities, the
availability of which will depend upon market and other conditions. There can
be no

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assurance that such additional financing will be available on terms acceptable
to the Company.




Forward- Looking Statements

When used in this Form 10-Q, or, in future filings by Rainbow Rentals,
Inc. with the Securities and Exchange Commission, 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, the words or phrases
will likely result, are expected to, will continue, is anticipated,
estimate, project or similar expressions are intended to identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties including, but not limited to, (i) the ability of the Company
to execute effectively its expansion program, (ii) the ability to attract and retain
quality store personnel and (iii) changes in the governments regulation of the
industry, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above and other factors could
affect the Companys financial performance and could cause the Companys actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements. For
further information, please refer to the Companys filings with the Securities
and Exchange Commission, including specifically the Risk Factors contained in
the Companys prospectus dated June 4, 1998.

The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.




Item 3: Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in information about market risk from that
provided in the 2000 Annual Report to Shareholders.

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##### Table of Contents






PART II  OTHER INFORMATION
RAINBOW RENTALS, INC.
MARCH 31, 2001




|        |  |                                  |  |                                                                                                                                                                                                            
|------- |  | -------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 6. |  | Exhibits and Reports on Form 8-K
|       
|A.      |  | Exhibit No.                     
|       
|        |  | 4.6                              |  | Consent and Amendment No. 14 and
Fifth Amended and Restated Supplement A to Loan and Security Agreement between
the Company and Bank of America National Trust and Savings Association,
dated May 15, 2001.
|       
|B.      |  | Reports on Form 8-K:  None      

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##### Table of Contents






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. RUSSELL                      
| |                                             
| | Wayland J. Russell, Chairman and            
| | Chief Executive Officer                     
| | (Principal Executive Officer)               
| | Date:  May 15, 2001                         
|
|
| | /s/ MICHAEL A. PECCHIA                      
| |                                             
| | Michael A. Pecchia,                         
| | Chief Financial Officer                     
| | (Principal Financial and Accounting Officer)
| | Date:  May 15, 2001                         

13