TABLE OF CONTENTS




|                                             |  |  |  |  |  |  |  | 
|-------------------------------------------- |  |  |  |  |  |  |  | 
|INDEX                                       
|CONDENSED BALANCE SHEETS                    
|CONDENSED STATEMENTS OF INCOME              
|CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY
|CONDENSED STATEMENTS OF CASH FLOWS          
|NOTES TO CONDENSED FINANCIAL STATEMENTS     
|PART II  OTHER INFORMATION                 
|SIGNATURES                                  



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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 September 30, 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
(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 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 OCTOBER 31, 2001
|Common stock, no par value |  | 5,925,735                             



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RAINBOW RENTALS, INC.
INDEX

|           |  |                                                                                       |  |         
|---------- |  | ------------------------------------------------------------------------------------- |  | --------
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  | Page No.
|          
|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                            |  | 12      
|           |  |                                                                                       |  |         
|PART II.   |  | OTHER INFORMATION                                                                     |  |         
|           |  |                                                                                       |  |         
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 13      
|           |  |                                                                                       |  |         
|SIGNATURES |  |                                                                                       |  | 14      

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

|                            |                                                                                                      |                                            |                                      |        |        |               |        |              |        |  |  | 
|--------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------ | ------------- | ------ | ------------ | ------ |  |  | 
|                            |                                                                                                      |                                            |                                      |        |        | (unaudited)   |        |              |        | 
|                            |                                                                                                      |                                            |                                      |        |        | September 30, |        | December 31,
|                            |                                                                                                      |                                            |                                      |        |        | 2001          |        | 2000        
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      |                                            |                                      | Assets |        |               |        |              |        |  |  | 
|Current assets              |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            | Cash                                                                                                 |                                            | $                                    | 900    |        |               | $      | 1,426        |       
|                            | Rental-purchase merchandise, net                                                                     |                                            |                                      | 36,151 |        |               |        | 36,545       |       
|                            | Income tax receivable                                                                                |                                            |                                      | 632    |        |               |        | 778          |       
|                            | Prepaid expenses and other current assets                                                            |                                            |                                      | 1,871  |        |               |        | 1,709        |       
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      | Total current assets                       |                                      |        | 39,554 |               |        |              | 40,458 | 
|Property and equipment, net |                                                                                                      |                                            | 5,425                                |        |        |               | 5,259  |             
|Deferred income taxes       |                                                                                                      |                                            | 1,845                                |        |        |               | 1,460  |             
|Goodwill, net               |                                                                                                      |                                            | 9,229                                |        |        |               | 9,887  |             
|Other assets, net           |                                                                                                      |                                            | 1,109                                |        |        |               | 1,365  |             
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      | Total assets                               |                                      | $      | 57,162 |               |        | $            | 58,429 | 
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      |                                            | Liabilities and Shareholders Equity |        |        |               |        |              |        |  | 
|Current liabilities         |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            | Short-term debt                                                                                      |                                            | $                                    | 6,103  |        |               | $      |             |       
|                            | Accounts payable                                                                                     |                                            |                                      | 5,244  |        |               |        | 2,410        |       
|                            | Accrued compensation and related costs                                                               |                                            |                                      | 1,175  |        |               |        | 1,525        |       
|                            | Other liabilities and accrued expenses                                                               |                                            |                                      | 2,674  |        |               |        | 2,485        |       
|                            | Deferred income taxes                                                                                |                                            |                                      | 4,632  |        |               |        | 3,678        |       
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      | Total current liabilities                  |                                      |        | 19,828 |               |        |              | 10,098 | 
|Long-term debt              |                                                                                                      |                                            |                                     |        |        |               | 12,340 |             
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      | Total liabilities                          |                                      |        | 19,828 |               |        |              | 22,438 | 
|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                                                                                    |                                            |                                      | 28,202 |        |               |        | 26,859       |       
|                            | Treasury stock, 466,875 common shares at cost                                                        |                                            |                                      | (1,907 | )      |               |        | (1,907       | )     
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      | Total shareholders equity                 |                                      |        | 37,334 |               |        |              | 35,991 | 
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             
|                            |                                                                                                      | Total liabilities and shareholders equity |                                      | $      | 57,162 |               |        | $            | 58,429 | 
|                            |                                                                                                      |                                            |                                      |        |        |               |        |             

See accompanying notes to condensed financial statements.

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

|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |           |        |        | 
|------------------------------------------- | -------------------------------------------------- | -------------------- | ------------------------------------------ | --------- | -------------------------- | ------ | ------------------------- | --------- | ----- | ------ | ---- | --------- | ------ | ------ | ----- | --------- | ------ | ------ | 
|                                            |                                                    |                      |                                            |           | (unaudited)                |        | (unaudited)              
|                                            |                                                    |                      |                                            |           | For the three months ended |        | For the nine months ended
|                                            |                                                    |                      |                                            |           | September 30,              |        | September 30,            
|                                            |                                                    |                      |                                            |           |                            |        |                          
|                                            |                                                    |                      |                                            |           | 2001                       |        | 2000                      |           | 2001  |        | 2000
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |     
|Revenues                                    |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            | Rental revenue                                     |                      | $                                          | 21,395    |                            |        | $                         | 22,096    |       |        | $    | 66,072    |        |        | $     | 63,959    |       
|                                            | Fees                                               |                      |                                            | 663       |                            |        |                           | 762       |       |        |      | 2,046     |        |        |       | 2,126     |       
|                                            | Merchandise sales                                  |                      |                                            | 596       |                            |        |                           | 669       |       |        |      | 2,414     |        |        |       | 2,290     |       
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            |                                                    |                      | Total revenues                             |           |                            | 22,654 |                           |           |       | 23,527 |      |           |        | 70,532 |       |           |        | 68,375 | 
|Operating expenses                          |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            | Merchandise costs                                  |                      |                                            | 8,036     |                            |        |                           | 7,851     |       |        |      | 24,466    |        |        |       | 22,531    |       
|                                            | Store expenses                                     |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |           |       
|                                            |                                                    | Salaries and related |                                            |           | 5,328                      |        |                           |           | 5,948 |        |      |           | 16,560 |        |       |           | 16,298 |       
|                                            |                                                    | Occupancy            |                                            |           | 2,037                      |        |                           |           | 2,071 |        |      |           | 6,198  |        |       |           | 5,402  |       
|                                            |                                                    | Advertising          |                                            |           | 1,285                      |        |                           |           | 1,059 |        |      |           | 4,329  |        |       |           | 3,121  |       
|                                            |                                                    | Other expenses       |                                            |           | 3,001                      |        |                           |           | 3,195 |        |      |           | 9,490  |        |       |           | 8,868  |       
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            |                                                    |                      | Total store expenses                       |           |                            | 11,651 |                           |           |       | 12,273 |      |           |        | 36,577 |       |           |        | 33,689 | 
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            |                                                    |                      | Total merchandise costs and store expenses |           |                            | 19,687 |                           |           |       | 20,124 |      |           |        | 61,043 |       |           |        | 56,220 | 
|                                            | General and administrative expenses                |                      |                                            | 1,922     |                            |        |                           | 1,874     |       |        |      | 5,741     |        |        |       | 5,203     |       
|                                            | Amortization of goodwill and noncompete agreements |                      |                                            | 168       |                            |        |                           | 172       |       |        |      | 516       |        |        |       | 438       |       
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            |                                                    |                      | Total operating expenses                   |           |                            | 21,777 |                           |           |       | 22,170 |      |           |        | 67,300 |       |           |        | 61,861 | 
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            |                                                    |                      | Operating income                           |           |                            | 877    |                           |           |       | 1,357  |      |           |        | 3,232  |       |           |        | 6,514  | 
|Interest expense                            |                                                    |                      | 141                                        |           |                            |        | 266                       |           |       |        | 555  |           |        |        | 662   |          
|Other expense, net                          |                                                    |                      | 74                                         |           |                            |        | 105                       |           |       |        | 421  |           |        |        | 299   |          
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            |                                                    |                      | Income before income taxes                 |           |                            | 662    |                           |           |       | 986    |      |           |        | 2,256  |       |           |        | 5,553  | 
|Income taxes                                |                                                    |                      | 268                                        |           |                            |        | 407                       |           |       |        | 913  |           |        |        | 2,277 |          
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            |                                                    |                      | Net income                                 |           | $                          | 394    |                           |           | $     | 579    |      |           | $      | 1,343  |       |           | $      | 3,276  | 
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|Earnings per common share:                  |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            | Basic and diluted earnings per share               |                      | $                                          | 0.07      |                            |        | $                         | 0.10      |       |        | $    | 0.23      |        |        | $     | 0.55      |       
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|Weighted average common shares outstanding: |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            | Basic                                              |                      |                                            | 5,925,735 |                            |        |                           | 5,925,735 |       |        |      | 5,925,735 |        |        |       | 5,925,735 |       
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          
|                                            | Diluted                                            |                      |                                            | 5,946,905 |                            |        |                           | 5,969,609 |       |        |      | 5,938,340 |        |        |       | 5,935,846 |       
|                                            |                                                    |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |       |          

See accompanying notes to condensed financial statements.

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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) |  |              |  |          |   |          |  |               |   |        | 1,343 |       |   |        |  |  |   |        | 1,343 | 
|                                          |                        |  |              |   |          |   |          |   |               |   |        |       |       |   |        |   |  |   |        |      
|Balance at September 30, 2001 (unaudited) |                        |  | 5,925,735    |   |          | $ | 11,039   |   |               | $ | 28,202 |       |       | $ | (1,907 | ) |  | $ | 37,334 |      
|                                          |                        |  |              |   |          |   |          |   |               |   |        |       |       |   |        |   |  |   |        |      

See accompanying notes to condensed financial statements.

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

|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |         |       |         |        |  
|------------------------------------ | ------------------------------------------------------------------------- | ------------ | ---------------------------------------------------------------------- | --------------------------------------------------- | --- | ------------------------- | ------ | ------- | ----- | ------- | ------ | -
|                                     |                                                                           |              |                                                                        |                                                     |     | (unaudited)              
|                                     |                                                                           |              |                                                                        |                                                     |     | For the nine months ended
|                                     |                                                                           |              |                                                                        |                                                     |     | September 30,            
|                                     |                                                                           |              |                                                                        |                                                     |     |                          
|                                     |                                                                           |              |                                                                        |                                                     |     | 2001                      |        | 2000   
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|Cash flows from operating activities |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|                                     | Net income                                                                |              | $                                                                      | 1,343                                               |     |                           | $      | 3,276   |      
|                                     | Reconciliation of net income to net cash provided
by operating activities |              |                                                                        |                                                     |     |                           |        |         |      
|                                     |                                                                           |              | Depreciation of property and equipment and
amortization of intangibles |                                                     |     | 2,216                     |        |         |       | 1,971   |       
|                                     |                                                                           |              | Depreciation of rental-purchase merchandise                            |                                                     |     | 19,817                    |        |         |       | 18,146  |       
|                                     |                                                                           |              | Loss on write-down of rental purchase merchandise                      |                                                     |     | 46                        |        |         |       |        |       
|                                     |                                                                           |              | Write-off of goodwill from sale of store                               |                                                     |     | 260                       |        |         |       |        |       
|                                     |                                                                           |              | Deferred income taxes                                                  |                                                     |     | 569                       |        |         |       | 450     |       
|                                     |                                                                           |              | (Gain) loss on disposal of property and equipment                      |                                                     |     | 8                         |        |         |       | (115    | )     
|                                     |                                                                           |              | Gain on sale of store assets                                           |                                                     |     | (110                      | )      |         |       |        |       
|                                     |                                                                           |              | Purchases of rental-purchase merchandise                               |                                                     |     | (24,143                   | )      |         |       | (22,759 | )     
|                                     |                                                                           |              | Rental-purchase merchandise disposed, net                              |                                                     |     | 4,655                     |        |         |       | 4,416   |       
|                                     |                                                                           |              | (Increase) decrease in                                                 |                                                     |     |                           |        |         |       |         |       
|                                     |                                                                           |              |                                                                        | Income tax receivable                               |     |                           | 146    |         |       |         | (251   | )
|                                     |                                                                           |              |                                                                        | Prepaid expenses and other current assets           |     |                           | (178   | )       |       |         | 95     |  
|                                     |                                                                           |              | Increase (decrease) in                                                 |                                                     |     |                           |        |         |       |         |       
|                                     |                                                                           |              |                                                                        | Accounts payable                                    |     |                           | 2,931  |         |       |         | 399    |  
|                                     |                                                                           |              |                                                                        | Accrued income taxes                                |     |                           |       |         |       |         | (432   | )
|                                     |                                                                           |              |                                                                        | Accrued compensation and related costs              |     |                           | (350   | )       |       |         | (369   | )
|                                     |                                                                           |              |                                                                        | Other liabilities and accrued expenses              |     |                           | 189    |         |       |         | (122   | )
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|                                     |                                                                           |              |                                                                        | Net cash provided by operating activities           |     |                           | 7,399  |         |       |         | 4,705  |  
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|Cash flows from investing activities |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|                                     | Purchase of property and equipment, net                                   |              |                                                                        | (1,714                                              | )   |                           |        | (2,118  | )    
|                                     | Proceeds from sale of property and equipment                              |              |                                                                        | 49                                                  |     |                           |        | 141     |      
|                                     | Proceeds from sale of store assets                                        |              |                                                                        | 272                                                 |     |                           |        |        |      
|                                     | Acquisitions                                                              |              |                                                                        | (245                                                | )   |                           |        | (3,736  | )    
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|                                     |                                                                           |              |                                                                        | Net cash used in investing activities               |     |                           | (1,638 | )       |       |         | (5,713 | )
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|Cash flows from financing activities |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|                                     | Proceeds from long-term debt                                              |              |                                                                        | 17,495                                              |     |                           |        | 23,542  |      
|                                     | Current installments and repayments of long-term debt                     |              |                                                                        | (23,732                                             | )   |                           |        | (22,850 | )    
|                                     | Loan origination fees paid                                                |              |                                                                        | (50                                                 | )   |                           |        |        |      
|                                     | Principal payments under capital lease obligations                        |              |                                                                        |                                                    |     |                           |        | (124    | )    
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|                                     |                                                                           |              |                                                                        | Net cash provided by (used in) financing activities |     |                           | (6,287 | )       |       |         | 568    |  
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|Net decrease in cash                 |                                                                           |              | (526                                                                   | )                                                   |     |                           | (440   | )      
|Cash at beginning of period          |                                                                           |              | 1,426                                                                  |                                                     |     |                           | 440    |        
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|Cash at end of period                |                                                                           | $            | 900                                                                    |                                                     |     | $                         |       |        
|                                     |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|Supplemental cash flow information   |                                                                           |              |                                                                        |                                                     |     |                           |        |        
|                                     | Net cash paid during the period for                                       |              |                                                                        |                                                     |     |                           |        |         |      
|                                     |                                                                           | Interest     |                                                                        |                                                     | 580 |                           |        |         | 651   |        
|                                     |                                                                           | Income taxes |                                                                        |                                                     | 305 |                           |        |         | 2,600 |        

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

The financial statements of Rainbow Rentals, Inc. (Rainbow or Company)
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 |           | For the nine months ended
|                           |                                             |                                 |      | September 30,              |           | September 30,            
|                           |                                             |                                 |      |                            |           |                          
|                           |                                             |                                 |      | 2001                       |           | 2000                      |      | 2001 |           | 2000
|                           |                                             |                                 |      |                            |           |                           |      |      |           |     
|Numerator:                 |                                             |                                 |      |                            |           |                           |      |      |           |      |      |       |           |   |      |      
|                           | Net income available to common shareholders |                                 | $    | 394                        |           |                           | $    | 579  |           |      | $    | 1,343 |           |   | $    | 3,276 |          
|Denominator:               |                                             |                                 |      |                            |           |                           |      |      |           |      |      |       |           |   |      |      
|                           |                                             | Basic weighted average shares   |      |                            | 5,925,735 |                           |      |      | 5,925,735 |      |      |       | 5,925,735 |   |      |       | 5,925,735 | 
|                           |                                             | Effect of diluted stock options |      |                            | 21,170    |                           |      |      | 43,874    |      |      |       | 12,605    |   |      |       | 10,111    | 
|                           |                                             |                                 |      |                            |           |                           |      |      |           |      |      |       |           |   |      |      
|                           |                                             | Diluted weighted average shares |      |                            | 5,946,905 |                           |      |      | 5,969,609 |      |      |       | 5,938,340 |   |      |       | 5,935,846 | 
|                           |                                             |                                 |      |                            |           |                           |      |      |           |      |      |       |           |   |      |      
|Basic earnings per share   |                                             | $                               | 0.07 |                            |           | $                         | 0.10 |      |           | $    | 0.23 |       |           | $ | 0.55 |      
|                           |                                             |                                 |      |                            |           |                           |      |      |           |      |      |       |           |   |      |      
|Diluted earnings per share |                                             | $                               | 0.07 |                            |           | $                         | 0.10 |      |           | $    | 0.23 |       |           | $ | 0.55 |      
|                           |                                             |                                 |      |                            |           |                           |      |      |           |      |      |       |           |   |      |      

3. Acquisitions

The Company has 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 non-compete
agreements. The aggregate purchase price of acquisitions for the nine months
ended September 30, 2001 and the year ended December 31, 2000 were $245 and
$3,721, respectively. See New Accounting Pronouncements on page 11 of this
document regarding business combinations, goodwill, other intangible assets and
the impairment or disposal of long-lived assets.

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

General

The Company is engaged in the rental and sale of home electronics,
furniture, appliances and computers to the general public. Rainbow currently
operates 113 stores in eleven states: Connecticut, Massachusetts, Michigan, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Tennessee and Virginia. At September 30, 2000, Rainbow operated 110 stores.
Rainbows corporate headquarters is located in Canfield, Ohio.

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 third quarter, Rainbow opened four new stores  two in existing
markets and two in new markets. Since the beginning of 2001, Rainbow opened six
stores, consolidated two stores into existing locations and sold one store.
Rainbow is planning twelve new store openings during calendar 2002.

Rainbows primary method of growth is through the opening of new store
locations. New store openings are dilutive to earnings generally 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.

|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |      |      |       |  
|------------------ | -------------------------------------------------- | -------------------- | ------------------------------------------ | ---- | -------------------------- | ----- | ------------------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | --- | ---- | ---- | ----- | -
|                   |                                                    |                      |                                            |      | (unaudited)                |       | (unaudited)              
|                   |                                                    |                      |                                            |      | For the three months ended |       | For the nine months ended
|                   |                                                    |                      |                                            |      | September 30,              |       | September 30,            
|                   |                                                    |                      |                                            |      |                            |       |                          
|                   |                                                    |                      |                                            |      | 2001                       |       | 2000                      |      | 2001 |       | 2000
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |     
|Revenues           |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   | Rental revenue                                     |                      |                                            | 94.5 | %                          |       |                           | 93.9 | %    |       |      | 93.7 | %    |       |     | 93.5 | %   
|                   | Fees                                               |                      |                                            | 2.9  |                            |       |                           | 3.2  |      |       |      | 2.9  |      |       |     | 3.1  |     
|                   | Merchandise sales                                  |                      |                                            | 2.6  |                            |       |                           | 2.9  |      |       |      | 3.4  |      |       |     | 3.4  |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total revenues                             |      |                            | 100.0 |                           |      |      | 100.0 |      |      |      | 100.0 |     |      |      | 100.0 |  
|Operating expenses |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   | Merchandise costs                                  |                      |                                            | 35.5 |                            |       |                           | 33.4 |      |       |      | 34.7 |      |       |     | 33.0 |     
|                   | Store expenses                                     |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |      |     
|                   |                                                    | Salaries and related |                                            |      | 23.5                       |       |                           |      | 25.3 |       |      |      | 23.5 |       |     |      | 23.8 |      
|                   |                                                    | Occupancy            |                                            |      | 9.0                        |       |                           |      | 8.8  |       |      |      | 8.8  |       |     |      | 7.9  |      
|                   |                                                    | Advertising          |                                            |      | 5.7                        |       |                           |      | 4.5  |       |      |      | 6.1  |       |     |      | 4.6  |      
|                   |                                                    | Other expenses       |                                            |      | 13.2                       |       |                           |      | 13.5 |       |      |      | 13.5 |       |     |      | 13.0 |      
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total store expenses                       |      |                            | 51.4  |                           |      |      | 52.1  |      |      |      | 51.9  |     |      |      | 49.3  |  
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total merchandise costs and store expenses |      |                            | 86.9  |                           |      |      | 85.5  |      |      |      | 86.6  |     |      |      | 82.3  |  
|                   | General and administrative expenses                |                      |                                            | 8.5  |                            |       |                           | 8.0  |      |       |      | 8.1  |      |       |     | 7.6  |     
|                   | Amortization of goodwill and noncompete agreements |                      |                                            | 0.7  |                            |       |                           | 0.7  |      |       |      | 0.7  |      |       |     | 0.6  |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total operating expenses                   |      |                            | 96.1  |                           |      |      | 94.2  |      |      |      | 95.4  |     |      |      | 90.5  |  
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Operating income                           |      |                            | 3.9   |                           |      |      | 5.8   |      |      |      | 4.6   |     |      |      | 9.5   |  
|Interest expense   |                                                    |                      | 0.6                                        |      |                            |       | 1.1                       |      |      |       | 0.8  |      |      |       | 1.0 |     
|Other expense, net |                                                    |                      | 0.3                                        |      |                            |       | 0.5                       |      |      |       | 0.6  |      |      |       | 0.4 |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Income before income taxes                 |      |                            | 3.0   |                           |      |      | 4.2   |      |      |      | 3.2   |     |      |      | 8.1   |  
|Income taxes       |                                                    |                      | 1.2                                        |      |                            |       | 1.7                       |      |      |       | 1.3  |      |      |       | 3.3 |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Net income                                 |      |                            | 1.8   | %                         |      |      | 2.5   | %    |      |      | 1.9   | %   |      |      | 4.8   | %
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     

Comparison of the Three and Nine Months Ended September 30, 2001 and 2000

Total revenues decreased $873,000, or 3.7%, to $22.6 million for the three
months ended September 30, 2001 compared to $23.5 million for the three months
ended September 30, 2000. Revenues from comparable stores (stores in operation
on July 1, 2000) totaled $22.0 million for the three months ended September 30,
2001, a decline of $1.3 million compared to the same prior year period. The
decline in comparable store revenue was partially due to a decrease in average
customers per store comparing the three months ended September 30, 2001 and
2000. To a lesser extent, a decrease in the average rate charged per rental
agreement contributed to the decline in comparable store revenue. The decline in
comparable store revenue was partially offset by a $514,000 increase in revenue
from stores opened and acquired after July 1, 2000, which totaled $651,000 and
$137,000, respectively, for the three months ended September 30, 2001 and 2000.

Total revenues increased $2.1 million, or 3.2%, to $70.5 million for the
nine months ended September 30, 2001 compared to $68.4 million for the nine
months ended September 30, 2000. Revenue from stores opened and acquired in 2000
totaled $7.4 million for the nine months ended September 30, 2001, an increase
of $5.5 million compared to the same prior year period due to the inclusion of a
full nine months results in 2001. This increase was partially offset by a $3.4
million

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decline in revenue from comparable stores (stores in operation on January 1,
2000), which totaled $62.7 million and $66.1 million, respectively, for the nine
months ended September 30, 2001 and 2000. The decline in comparable store
revenue was primarily due to a decrease in average customers per store.
Management believes the decline in customers per store was due to increased
competition and other market factors.

Merchandise costs increased $185,000, or 2.4%, to $8.0 million for the
three months ended September 30, 2001 compared to $7.8 million for the three
months ended September 30, 2000. The increase in merchandise costs was primarily
due to stores opened and acquired after July 1, 2000, which accounted for
$133,000, or 72% of the increase. Merchandise costs totaled 35.5% of revenues
for the three months ended September 30, 2001 compared to 33.4% of revenues for
the three months ended September 30, 2000.

Merchandise costs increased $1.9 million, or 8.6%, to $24.4 million for the
nine months ended September 30, 2001 compared to $22.5 million for the nine
months ended September 30, 2000. The increase was predominantly due to the
inclusion of a full nine months merchandise costs from stores opened and
acquired in 2000. Merchandise costs totaled 34.7% of revenues for the nine
months ended September 30, 2001 compared to 33.0% of revenues for the nine
months ended September 30, 2000.

The increases in merchandise costs as a percentage of revenue comparing
both the three- and nine-month periods were primarily due to increased rentals
of older, pre-rented merchandise at lower rental rates. In addition, the Company
recently lowered rental rates on new merchandise in an effort to increase its
customer base. As a result, the
Companys customer base increased 2.6% during the month of September 2001, which
should have a positive effect on future revenues if the increase can be
maintained. To a lesser extent, promotional merchandise and special offers
contributed to the increased merchandise costs as a percentage of revenues.

Store expenses decreased $622,000, or 5.1%, to $11.7 million for the three
months ended September 30, 2001 compared to $12.3 million for the three months
ended September 30, 2000. The decrease was primarily attributable to a decline
in salaries and related expenses associated with staffing reductions at the
store level as a result of the decline in the number of customers per store
since mid-2000. Other store expenses declined $194,000 from store-level cost
reductions; however, advertising spending increased $226,000 reflecting
managements effort to increase customer traffic. Store expenses modestly
decreased to 51.4% of revenues for the three months ended September 30, 2001
from 52.1% of revenues for the three months ended September 30, 2000.

Store expenses increased $2.9 million, or 8.6%, to $36.6 million for the
nine months ended September 30, 2001 compared to
$33.7 million for the nine
months ended September 30, 2000. The increase was partly due to increases in
occupancy and other expenses totaling $796,000 and $622,000, respectively, which
was attributable to stores opened and acquired during 2000. In addition,
advertising expense increased $1.2 million comparing the nine month periods due
to both stores opened and acquired in 2000 and increased spending levels in an
effort to rebuild Rainbows customer base. Store expenses totaled 51.9% of
revenues for the nine months ended September 30, 2001 compared to 49.3% of
revenues for the nine months ended September 30, 2000. The increase in store
expenses as a percentage of revenue was largely attributable to the decline in
comparable store revenue mentioned above.

General and administrative expenses increased $538,000 comparing the nine
months ended September 30, 2001 and 2000. This increase was primarily due to
expanding the Companys regional management team, adding key support personnel
and increased consulting fees in an effort to facilitate the Companys
anticipated growth.

Income taxes decreased $139,000 and $1.4 million, respectively, comparing
the three and nine months ended September 30, 2001 and 2000. This was
attributable to a decline in income before tax for both the three- and
nine-month periods. For the nine months ended September 30, 2001, the Companys
effective income tax rate was 40.5%, a decline from 41.0% for the nine months
ended September 30, 2000 due to lower effective state 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 nine months ended September 30, 2001 and 2000, purchases of rental
merchandise (excluding acquired

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inventory) amounted to $24.1 million and $22.8 million, respectively.

For the nine months ended September 30, 2001, cash provided by operations
totaled $7.4 million compared to $4.7 million for the nine months ended
September 30, 2000. Cash used in investing activities decreased $4.1 million and
totaled $1.6 million and $5.7 million, respectively, for the nine months ended
September 30, 2001 and 2000. The decrease was primarily due to fewer new store
openings and acquisitions of stores and related merchandise during 2001 as
compared to 2000. Due to significant repayments on the Companys debt, cash used
in financing activities totaled $6.3 million for the nine months ended September
30, 2001 compared to financing activities providing $568,000 for the nine months
ended September 30, 2000.

The Company has
$14.0 million revolving loan facility (the Credit Facility) with a maturity
date of March 1,
2002. The Credit Facility includes certain cash flow, net worth and
other covenants. At September 30, 2001, the Company was not in
compliance with two of the four covenants of the Credit Facility. As a consequence, the interest rate charged on the
outstanding balance increased to 8% (equal to prime plus 3%) effective October 1,
2001. Prior to that date, the interest rate charged on a portion of the
outstanding balance was based on the Interbank Offering Rate plus an
additional margin ranging from 1.875% to 2.25% (depending on the Companys
leverage ratio) with interest on the remaining balance at prime.
The weighted average rate charged on the Companys Credit Facility
for the quarter ended September 30, 2001 was 6.50%. In addition, the
Credit Facility has been reduced to $11 million. At
October 31, 2001, availability under the existing reduced
facility was approximately $3 million. In November 2001,
the Company signed a proposal to replace its existing facility with a
secured three-year $25 million syndicated facility. The Company
expects to complete the refinancing early in the first quarter of
2002, subject to customary conditions, due diligence and execution of
definitive documentation. The Company believes the new agreement,
when executed, will provide the Company with sufficient availability
to meet its anticipated working capital requirements and capital
expenditure requirements over the next 12 months.

New Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Statement 144 provides a single accounting model for long-lived assets
to be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of Statement No. 121, Statement 144 significantly changes
the criteria that would have to be met to classify an asset as held-for-sale.
This distinction is important because assets held-for-sale are stated at lower
of their fair values or carrying amounts and depreciation is no longer
recognized. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company has not yet determined the impact that Statement 144 will have on its
consolidated financial position, results of operations or cash flows.

In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria for intangible assets acquired and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement 144.

The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a

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purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to adoption of Statement 142.

Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after the adoption. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company will be required to test the intangible
asset for impairment in accordance with the provisions of Statement 142 within
the first interim period. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle in the first interim period.

In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption.

As of the date of the adoption, the Company expects to have unamortized
goodwill in the amount of $9.1 million all of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense related to
goodwill was $486,000 and $394,000 for the year ended December 31, 2000 and the
nine months ended September 30, 2001, respectively.

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, (iii) the ability of the Company to refinance its
current debt and obtain additional financing and (iv) 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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PART II  OTHER INFORMATION
RAINBOW RENTALS, INC.SEPTEMBER 30, 2001

Item 6. Exhibits and Reports on Form 8-K

A.     Exhibits: None

B.     Reports on Form 8-K: None

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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:  November 12, 2001  
|
| |  |                                                                                                                                        
|
| |  | /s/ MICHAEL A. PECCHIAMichael A. Pecchia,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date:  November 12, 2001

14