##### 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 June 30, 2002OR[    ]
        
        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
Common stock, no par value |  | SHARES OUTSTANDING AT JULY 31, 2002
5,929,319





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TABLE OF CONTENTS



|                                   |  |  |  |  |  |  |  | 
|---------------------------------- |  |  |  |  |  |  |  | 
|INDEX                             
|BALANCE SHEETS                    
|STATEMENTS OF INCOME              
|STATEMENTS OF SHAREHOLDERS EQUITY
|STATEMENTS OF CASH FLOWS          
|NOTES TO FINANCIAL STATEMENTS     
|PART II  OTHER INFORMATION       
|SIGNATURES                        
|EX-99.1 Certification Letter      



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##### Table of Contents






RAINBOW RENTALS, INC.INDEX

|           |         |                                    |                                                             |          |   |    |    |  | 
|---------- | ------- | ---------------------------------- | ----------------------------------------------------------- | -------- | - | -- | -- |  | 
|PART I.    |         | FINANCIAL INFORMATION              |                                                             | Page No.
|           |         |                                    |                                                             |          |   |   
|           | Item 1. |                                    | Financial Statements                                        |          |   |    |   
|          
|          
|          
|          
|           |         |                                    |                                                             |          |   |    |    | 
|          
|          
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|           |         | Balance Sheets                     |                                                             |          | 3 |   
|          
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|          
|           |         |                                    |                                                             |          |   |    |    | 
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|          
|          
|          
|           |         | Statements of Income               |                                                             |          | 4 |   
|          
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|          
|           |         |                                    |                                                             |          |   |    |    | 
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|           |         | Statements of Shareholders' Equity |                                                             |          | 5 |   
|          
|          
|          
|          
|           |         |                                    |                                                             |          |   |    |    | 
|          
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|          
|           |         | Statements of Cash Flows           |                                                             |          | 6 |   
|          
|          
|          
|          
|           |         |                                    |                                                             |          |   |    |    | 
|          
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|           |         | Notes to Financial Statements      |                                                             |          | 7 |   
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|           |         |                                    |                                                             |          |   |    |    | 
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|          
|           | Item 2. |                                    | Management's Discussion and Analysis of Financial Condition |          |   |    |   
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|           |         | and Results of Operations          |                                                             |          | 8 |   
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|           |         |                                    |                                                             |          |   |    |    | 
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|           | Item 3. |                                    | Quantitative and Qualitative Disclosures About Market Risk  |          |   | 12 |   
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|           |         |                                    |                                                             |          |   |    |    | 
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|PART II.   |         | OTHER INFORMATION                  |                                                             |          |   |   
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|           |         |                                    |                                                             |          |   |    |    | 
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|           | Item 6. |                                    | Exhibits and Reports on Form 8-K                            |          |   | 13 |   
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|          
|           |         |                                    |                                                             |          |   |    |    | 
|          
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|          
|          
|SIGNATURES |         |                                    |                                                             |          |   |    | 14 | 

2



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##### Table of Contents






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

|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |              |        |  |  | 
|----------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------ | ----------- | ----- | ------------ | ------ |  |  | 
|                              |                                                                                                                                                                   |                                            |                                      |        |        | (unaudited) |       |              |        | 
|                              |                                                                                                                                                                   |                                            |                                      |        |        | June 30,    |       | December 31,
|                              |                                                                                                                                                                   |                                            |                                      |        |        | 2002        |       | 2001        
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   |                                            |                                      | Assets |        |             |       |              |        |  |  | 
|                             
|                             
|                             
|                             
|Current assets                |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              | Cash and cash equivalents                                                                                                                                         |                                            | $                                    | 2,203  |        |             | $     | 1,839        |       
|                             
|                             
|                             
|                             
|                              | Rental-purchase merchandise, net                                                                                                                                  |                                            |                                      | 37,079 |        |             |       | 39,330       |       
|                             
|                             
|                             
|                             
|                              | Income tax receivable                                                                                                                                             |                                            |                                      | 1,356  |        |             |       |             |       
|                             
|                             
|                             
|                             
|                              | Prepaid expenses and other current assets                                                                                                                         |                                            |                                      | 1,766  |        |             |       | 2,143        |       
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   | Total current assets                       |                                      |        | 42,404 |             |       |              | 43,312 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|Property and equipment, net   |                                                                                                                                                                   |                                            | 5,470                                |        |        |             | 5,177 |             
|                             
|                             
|                             
|                             
|Deferred income taxes         |                                                                                                                                                                   |                                            | 1,556                                |        |        |             | 1,546 |             
|                             
|                             
|                             
|                             
|Goodwill, net                 |                                                                                                                                                                   |                                            | 9,233                                |        |        |             | 9,098 |             
|                             
|                             
|                             
|                             
|Other assets, net             |                                                                                                                                                                   |                                            | 1,097                                |        |        |             | 988   |             
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   | Total assets                               |                                      | $      | 59,760 |             |       | $            | 60,121 | 
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                                   |                                            | Liabilities and Shareholders Equity |        |        |             |       |              |        |  | 
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|Current liabilities           |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              | Deferred revenue                                                                                                                                                  |                                            | $                                    | 1,053  |        |             | $     | 1,263        |       
|                             
|                             
|                             
|                             
|                              | Accounts payable                                                                                                                                                  |                                            |                                      | 1,680  |        |             |       | 3,827        |       
|                             
|                             
|                             
|                             
|                              | Accrued income taxes                                                                                                                                              |                                            |                                      |       |        |             |       | 306          |       
|                             
|                             
|                             
|                             
|                              | Accrued compensation and related costs                                                                                                                            |                                            |                                      | 2,027  |        |             |       | 2,082        |       
|                             
|                             
|                             
|                             
|                              | Other liabilities and accrued expenses                                                                                                                            |                                            |                                      | 2,513  |        |             |       | 2,062        |       
|                             
|                             
|                             
|                             
|                              | Deferred income taxes                                                                                                                                             |                                            |                                      | 5,799  |        |             |       | 3,976        |       
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   | Total current liabilities                  |                                      |        | 13,072 |             |       |              | 13,516 | 
|                             
|                             
|                             
|                             
|Long-term debt                |                                                                                                                                                                   |                                            | 8,500                                |        |        |             | 9,440 |             
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   | Total liabilities                          |                                      |        | 21,572 |             |       |              | 22,956 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|Commitments and contingencies |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|Shareholders equity          |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                             
|                             
|                             
|                             
|                              | Serial preferred stock, no par value; 2,000,000 shares authorized
none issued                                                                                     |                                            |                                      |       |        |             |       |             |       
|                             
|                             
|                             
|                             
|                              | Common stock, no par value; 10,000,000 shares authorized,
6,392,610 issued, 5,929,319 outstanding at June 30, 2002
and 5,925,735 outstanding at December 31, 2001 |                                            |                                      | 11,039 |        |             |       | 11,039       |       
|                             
|                             
|                             
|                             
|                              | Additional paid-in capital                                                                                                                                        |                                            |                                      | 4      |        |             |       |             |       
|                             
|                             
|                             
|                             
|                              | Retained earnings                                                                                                                                                 |                                            |                                      | 29,037 |        |             |       | 28,033       |       
|                             
|                             
|                             
|                             
|                              | Treasury stock, at cost, 463,291 shares at June 30, 2002
and 466,875 shares at December 31, 2001                                                                  |                                            |                                      | (1,892 | )      |             |       | (1,907       | )     
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   | Total shareholders equity                 |                                      |        | 38,188 |             |       |              | 37,165 | 
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             
|                              |                                                                                                                                                                   | Total liabilities and shareholders equity |                                      | $      | 59,760 |             |       | $            | 60,121 | 
|                              |                                                                                                                                                                   |                                            |                                      |        |        |             |       |             

See accompanying notes to financial statements.

3



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##### Table of Contents






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

|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |           |        |        | 
|------------------------------------------- | ---------------------------------------------------------- | -------------------- | ------------------------------------------ | --------- | -------------------------- | ------ | ------------------------ | --------- | ----- | ------ | ---- | --------- | ------ | ------ | --- | --------- | ------ | ------ | 
|                                            |                                                            |                      |                                            |           | (unaudited)                |        | (unaudited)             
|                                            |                                                            |                      |                                            |           | For the three months ended |        | For the six months ended
|                                            |                                                            |                      |                                            |           | June 30,                   |        | June 30,                
|                                            |                                                            |                      |                                            |           | 2002                       |        | 2001                     |           | 2002  |        | 2001
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |     
|Revenues                                    |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Rental revenue                                             |                      | $                                          | 23,463    |                            |        | $                        | 22,211    |       |        | $    | 46,609    |        |        | $   | 44,677    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Fees                                                       |                      |                                            | 714       |                            |        |                          | 698       |       |        |      | 1,352     |        |        |     | 1,383     |       
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise sales                                          |                      |                                            | 666       |                            |        |                          | 680       |       |        |      | 1,847     |        |        |     | 1,818     |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total revenues                             |           |                            | 24,843 |                          |           |       | 23,589 |      |           |        | 49,808 |     |           |        | 47,878 | 
|                                           
|                                           
|                                           
|                                           
|Operating expenses                          |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Merchandise costs                                          |                      |                                            | 8,383     |                            |        |                          | 8,041     |       |        |      | 17,210    |        |        |     | 16,430    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Store expenses                                             |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |           |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                            | Salaries and related |                                            |           | 5,805                      |        |                          |           | 5,522 |        |      |           | 11,829 |        |     |           | 11,232 |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                            | Occupancy            |                                            |           | 2,223                      |        |                          |           | 2,069 |        |      |           | 4,530  |        |     |           | 4,161  |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                            | Advertising          |                                            |           | 1,724                      |        |                          |           | 1,520 |        |      |           | 3,310  |        |     |           | 3,043  |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                            | Other                |                                            |           | 3,508                      |        |                          |           | 3,269 |        |      |           | 6,771  |        |     |           | 6,764  |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total store expenses                       |           |                            | 13,260 |                          |           |       | 12,380 |      |           |        | 26,440 |     |           |        | 25,200 | 
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total merchandise costs and store expenses |           |                            | 21,643 |                          |           |       | 20,421 |      |           |        | 43,650 |     |           |        | 41,630 | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | General and administrative expenses                        |                      |                                            | 2,116     |                            |        |                          | 1,841     |       |        |      | 3,831     |        |        |     | 3,545     |       
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of goodwill and noncompete agreements         |                      |                                            | 44        |                            |        |                          | 174       |       |        |      | 85        |        |        |     | 349       |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total operating expenses                   |           |                            | 23,803 |                          |           |       | 22,436 |      |           |        | 47,566 |     |           |        | 45,524 | 
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Operating income                           |           |                            | 1,040  |                          |           |       | 1,153  |      |           |        | 2,242  |     |           |        | 2,354  | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                                            |                      | 167                                        |           |                            |        | 188                      |           |       |        | 352  |           |        |        | 413 |          
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                                            |                      | 74                                         |           |                            |        | 262                      |           |       |        | 203  |           |        |        | 347 |          
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Income before income taxes                 |           |                            | 799    |                          |           |       | 703    |      |           |        | 1,687  |     |           |        | 1,594  | 
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|Income taxes                                |                                                            |                      | 323                                        |           |                            |        | 285                      |           |       |        | 683  |           |        |        | 645 |          
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                            |                      | Net income                                 |           | $                          | 476    |                          |           | $     | 418    |      |           | $      | 1,004  |     |           | $      | 949    | 
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|Earnings
per common share:                  |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Basic and diluted earnings per share                       |                      | $                                          | 0.08      |                            |        | $                        | 0.07      |       |        | $    | 0.17      |        |        | $   | 0.16      |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|Weighted
average common shares outstanding: |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                                      |                      |                                            | 5,927,598 |                            |        |                          | 5,925,735 |       |        |      | 5,926,672 |        |        |     | 5,925,735 |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            | Diluted                                                    |                      |                                            | 5,952,333 |                            |        |                          | 5,932,146 |       |        |      | 5,949,798 |        |        |     | 5,934,057 |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|Pro forma net income data:                  |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Net income as reported                                     |                      | $                                          | 476       |                            |        | $                        | 418       |       |        | $    | 1,004     |        |        | $   | 949       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Pro forma adjustment for goodwill amortization, net of tax |                      |                                            |          |                            |        |                          | 79        |       |        |      |          |        |        |     | 160       |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Pro forma net income                                       |                      | $                                          | 476       |                            |        | $                        | 497       |       |        | $    | 1,004     |        |        | $   | 1,109     |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|Pro forma earnings per common share:        |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          
|                                           
|                                           
|                                           
|                                           
|                                            | Pro forma basic and diluted earnings per share             |                      | $                                          | 0.08      |                            |        | $                        | 0.08      |       |        | $    | 0.17      |        |        | $   | 0.19      |       
|                                            |                                                            |                      |                                            |           |                            |        |                          |           |       |        |      |           |        |        |     |          

See accompanying notes to financial statements.

4



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##### Table of Contents






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

|                                     |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |  |   |        |    |  |   |        |       | 
|------------------------------------ | ------------------------------------- |  | ------------ | ----- | ---------- | - | --------------- | - | -------- | - | ------------- | - | ------ | - | ------ | ----- |  | - | ------ | -- |  | - | ------ | ----- | 
|                                     |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |  |   |        |    |  |   | Total 
|                                     |                                       |  | Common
Stock |       | Additional |   | Retained        |   | Treasury |   | Shareholders'
|                                     |                                       |  | Shares       |       | Cost       |   | Paid-in Capital |   | Earnings |   | Stock         |   | Equity
|                                     |                                       |  |              |       |            |   |                 |   |          |   |               |   |       
|Balance at December 31, 2000         |                                       |  | 5,925,735    |       |            | $ | 11,039          |   |          | $ |              |   |        | $ | 26,859 |       |  | $ | (1,907 | )  |  | $ | 35,991 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Net income                            |  |              |      |            |   |                 |  |          |   |               |  |        |   |        | 1,174 |  |   |        |   |  |   |        | 1,174 | 
|                                     |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |  |   |        |    |  |   |        |      
|Balance at December 31, 2001         |                                       |  | 5,925,735    |       |            |   | 11,039          |   |          |   |              |   |        |   | 28,033 |       |  |   | (1,907 | )  |  |   | 37,165 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Exercise of stock options (unaudited) |  |              | 3,584 |            |   |                 |  |          |   |               | 4 |        |   |        |      |  |   |        | 15 |  |   |        | 19    | 
|                                    
|                                    
|                                    
|                                    
|                                     | Net income (unaudited)                |  |              |      |            |   |                 |  |          |   |               |  |        |   |        | 1,004 |  |   |        |   |  |   |        | 1,004 | 
|                                     |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |  |   |        |    |  |   |        |      
|Balance at June 30, 2002 (unaudited) |                                       |  | 5,929,319    |       |            | $ | 11,039          |   |          | $ | 4             |   |        | $ | 29,037 |       |  | $ | (1,892 | )  |  | $ | 38,188 |      
|                                     |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |  |   |        |    |  |   |        |      

See accompanying notes to financial statements.

5



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##### Table of Contents






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

|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |         |     |         |        |  
|------------------------------------ | ------------------------------------------------------------------------- | ------------ | ---------------------------------------------------------------------- | ----------------------------------------- | --- | ------------------------ | ------ | ------- | --- | ------- | ------ | -
|                                     |                                                                           |              |                                                                        |                                           |     | (unaudited)             
|                                     |                                                                           |              |                                                                        |                                           |     | For the six months ended
|                                     |                                                                           |              |                                                                        |                                           |     | June 30,                
|                                     |                                                                           |              |                                                                        |                                           |     |                         
|                                     |                                                                           |              |                                                                        |                                           |     | 2002                     |        | 2001   
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|Cash flows from operating activities |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Net income                                                                |              | $                                                                      | 1,004                                     |     |                          | $      | 949     |    
|                                    
|                                    
|                                    
|                                    
|                                     | Reconciliation of net income to net cash provided
by operating activities |              |                                                                        |                                           |     |                          |        |         |    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Depreciation of property and equipment and
amortization of intangibles |                                           |     | 1,249                    |        |         |     | 1,473   |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Depreciation of rental-purchase merchandise                            |                                           |     | 13,927                   |        |         |     | 13,293  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Purchases of rental-purchase merchandise                               |                                           |     | (14,866                  | )      |         |     | (15,716 | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Rental-purchase merchandise disposed, net                              |                                           |     | 3,215                    |        |         |     | 3,155   |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Write-down of rental purchase merchandise                              |                                           |     | 102                      |        |         |     | 46      |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Deferred income taxes                                                  |                                           |     | 1,813                    |        |         |     | 300     |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Write-off of goodwill from sale of store                               |                                           |     |                         |        |         |     | 260     |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Loss on disposal of property and equipment                             |                                           |     | 16                       |        |         |     | 11      |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Gain on sale of store assets                                           |                                           |     |                         |        |         |     | (110    | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | (Increase) decrease in                                                 |                                           |     |                          |        |         |     |         |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              |                                                                        | Income tax receivable                     |     |                          | (1,356 | )       |     |         | 137    |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              |                                                                        | Prepaid expenses and other assets         |     |                          | 365    |         |     |         | (167   | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              | Increase (decrease) in                                                 |                                           |     |                          |        |         |     |         |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              |                                                                        | Accounts payable                          |     |                          | (2,147 | )       |     |         | 815    |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              |                                                                        | Accrued income taxes                      |     |                          | (306   | )       |     |         |       |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              |                                                                        | Accrued compensation and related costs    |     |                          | (55    | )       |     |         | (131   | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           |              |                                                                        | Other liabilities and accrued expenses    |     |                          | 241    |         |     |         | 678    |  
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                     |                                                                           |              |                                                                        | Net cash provided by operating activities |     |                          | 3,202  |         |     |         | 4,993  |  
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|Cash flows from investing activities |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Purchase of property and equipment, net                                   |              |                                                                        | (1,325                                    | )   |                          |        | (1,046  | )  
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from the sale of property and equipment                          |              |                                                                        | 36                                        |     |                          |        | 31      |    
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from the sale of store assets                                    |              |                                                                        |                                          |     |                          |        | 272     |    
|                                    
|                                    
|                                    
|                                    
|                                     | Acquisitions                                                              |              |                                                                        | (312                                      | )   |                          |        | (245    | )  
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                     |                                                                           |              |                                                                        | Net cash used in investing activities     |     |                          | (1,601 | )       |     |         | (988   | )
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|Cash flows from financing activities |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from long-term debt                                              |              |                                                                        | 23,914                                    |     |                          |        | 11,225  |    
|                                    
|                                    
|                                    
|                                    
|                                     | Current installments and repayments of long-term debt                     |              |                                                                        | (24,854                                   | )   |                          |        | (14,942 | )  
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from stock option exercises                                      |              |                                                                        | 19                                        |     |                          |        |        |    
|                                    
|                                    
|                                    
|                                    
|                                     | Loan fees paid                                                            |              |                                                                        | (316                                      | )   |                          |        | (50     | )  
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                     |                                                                           |              |                                                                        | Net cash used in financing activities     |     |                          | (1,237 | )       |     |         | (3,767 | )
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|Net increase in cash                 |                                                                           |              | 364                                                                    |                                           |     |                          | 238    |        
|                                    
|                                    
|                                    
|                                    
|Cash at beginning of period          |                                                                           |              | 1,839                                                                  |                                           |     |                          | 1,426  |        
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|Cash at end of period                |                                                                           | $            | 2,203                                                                  |                                           |     | $                        | 1,664  |        
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|Supplemental cash flow information   |                                                                           |              |                                                                        |                                           |     |                          |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Net cash paid during the period for                                       |              |                                                                        |                                           |     |                          |        |         |    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Interest     |                                                                        | $                                         | 262 |                          |        | $       | 449 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                           | Income taxes |                                                                        |                                           | 616 |                          |        |         | 278 |        

See accompanying notes to financial statements.

6



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##### Table of Contents






RAINBOW RENTALS, INC.NOTES TO FINANCIAL STATEMENTS

1. Basis of Presentation

Rainbow Rentals, Inc. (the Company) is engaged in the rental and sale of
home electronics, furniture, appliances and computers to the general public.
At June 30, 2002 the Company operated 118 stores in 13 states: Connecticut,
Delaware, Georgia, Massachusetts, Michigan, New York, North Carolina, Ohio,
Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia. The
Company has since opened one additional store in July 2002. The Companys
corporate office is located in Canfield, Ohio.

The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Therefore, certain information and disclosures,
normally required with financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have
been condensed or omitted. In the opinion of management, the financial
statements contain all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows of the Company. The results of operations for the
periods presented are not necessarily indicative of the results for the entire
year. It is suggested these financial statements be read in conjunction with
the financial statements and notes included in the Companys Annual Report on
Form 10-K for fiscal year ended December 31, 2001.

Certain
reclassifications have been made to prior year financial data in
order to conform to the 2002 presentation.

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 six months ended
|                           |                                             |   | June 30,                                         |           | June 30,                
|                           |                                             |   | 2002                                             |           | 2001                     |   | 2002 |           | 2001
|                           |                                             |   |                                                  |           |                          |   |      |           |     
|                           |                                             |   | (Dollars in thousands, except per share amounts)
|Numerator:                 |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                          
|                          
|                          
|                          
|                           | Net income available to common shareholders |   | $                                                | 476       |                          |   | $    | 418       |      |   | $    | 1,004     |  |   | $    | 949       | 
|                          
|                          
|                          
|                          
|                           |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                          
|                          
|                          
|                          
|Denominator:               |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                          
|                          
|                          
|                          
|                           | Basic weighted average shares               |   |                                                  | 5,927,598 |                          |   |      | 5,925,735 |      |   |      | 5,926,672 |  |   |      | 5,925,735 | 
|                          
|                          
|                          
|                          
|                           | Effect of diluted stock options             |   |                                                  | 24,735    |                          |   |      | 6,411     |      |   |      | 23,126    |  |   |      | 8,322     | 
|                           |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                           | Diluted weighted average shares             |   |                                                  | 5,952,333 |                          |   |      | 5,932,146 |      |   |      | 5,949,798 |  |   |      | 5,934,057 | 
|                           |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                           |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          
|                          
|                          
|                          
|                          
|Basic earnings per share   |                                             | $ | 0.08                                             |           |                          | $ | 0.07 |           |      | $ | 0.17 |           |  | $ | 0.16 |          
|                           |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          
|Diluted earnings per share |                                             | $ | 0.08                                             |           |                          | $ | 0.07 |           |      | $ | 0.17 |           |  | $ | 0.16 |          
|                           |                                             |   |                                                  |           |                          |   |      |           |      |   |      |           |  |   |      |          

7



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##### Table of Contents



3. Long-Term Debt

The Company entered into a revolving financing agreement (the Credit
Facility) with a syndicate of three financial institutions on January 11,
2002, which refinanced its existing debt at that time. The agreement allows
the Company to borrow up to $25.0 million; however, borrowings are limited to
32% of the Companys rental purchase merchandise, which serves as the security
for the debt. Interest is charged, at the Companys option, at the London
Interbank Offering Rate (LIBOR) plus 3% with the remaining balance at the prime
rate plus 1%, or combination thereof. In addition, the Company must pay a
commitment fee equal to 0.50% per annum on the unused portion of the loan
commitment. Borrowings under the Credit Facility mature three years after the
date of the loan. At June 30, 2002, the outstanding loan balance totaled $8.5
million with a weighted average interest rate of 4.88%. Excess availability at
June 30, 2002 was approximately $2.4 million.

The Credit Facility requires the Company to meet certain quarterly
financial covenants and ratios including maximum leverage, minimum interest
coverage, minimum net worth, fixed charge coverage and rental merchandise usage
ratios. The Company must meet requirements regarding monthly, quarterly and
annual financial reporting. The Credit Facility contains non-financial
covenants that restrict actions of the Company with respect to additional
indebtedness, certain loans and investments, payment of dividends,
acquisitions, mergers and consolidations, dispositions of assets or
subsidiaries, issuance of capital stock, capital expenditures and leases. At
June 30, 2002, the Company was in compliance with the covenants and financial
reporting requirements.

4. Goodwill

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets,effective January 1, 2002. SFAS No.
142 requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least annually,
or more frequently if circumstances indicate potential impairment. In 2002,
the Company ceased amortization of goodwill and assessed goodwill for
impairment. No impairment losses were recorded upon the adoption and
implementation of SFAS No. 142.

The pro forma effect of the adoption of SFAS No. 142 on net income and
earnings per share is as follows:

|                                                         |  |                            |      |                          |  |      |      |      |  |   |       |  |  |   |       | 
|-------------------------------------------------------- |  | -------------------------- | ---- | ------------------------ |  | ---- | ---- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                         |  | (unaudited)                |      | (unaudited)             
|                                                         |  | For the three months ended |      | For the six months ended
|                                                         |  | June 30,                   |      | June 30,                
|                                                         |  | 2002                       |      | 2001                     |  | 2002 |      | 2001
|                                                         |  |                            |      |                          |  |      |      |     
|Net income, as reported                                  |  | $                          | 476  |                          |  | $    | 418  |      |  | $ | 1,004 |  |  | $ | 949   | 
|                                                        
|                                                        
|                                                        
|                                                        
|Goodwill amortization, net of tax                        |  |                            |     |                          |  |      | 79   |      |  |   |      |  |  |   | 160   | 
|                                                         |  |                            |      |                          |  |      |      |      |  |   |       |  |  |   |       | 
|Net income, as adjusted                                  |  | $                          | 476  |                          |  | $    | 497  |      |  | $ | 1,004 |  |  | $ | 1,109 | 
|                                                         |  |                            |      |                          |  |      |      |      |  |   |       |  |  |   |       | 
|                                                         |  |                            |      |                          |  |      |      |      |  |   |       |  |  |   |       | 
|                                                        
|                                                        
|                                                        
|                                                        
|Basic and diluted earnings per common share, as reported |  | $                          | 0.08 |                          |  | $    | 0.07 |      |  | $ | 0.17  |  |  | $ | 0.16  | 
|                                                        
|                                                        
|                                                        
|                                                        
|Goodwill amortization, net of tax                        |  |                            |     |                          |  |      | 0.01 |      |  |   |      |  |  |   | 0.03  | 
|                                                         |  |                            |      |                          |  |      |      |      |  |   |       |  |  |   |       | 
|Basic and diluted earnings per common share, as adjusted |  | $                          | 0.08 |                          |  | $    | 0.08 |      |  | $ | 0.17  |  |  | $ | 0.19  | 
|                                                         |  |                            |      |                          |  |      |      |      |  |   |       |  |  |   |       | 

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

General

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

The Companys primary method of growth is through the opening of new store
locations. New store openings are dilutive to earnings for the first nine to
twelve months as they build a customer base and develop a recurring revenue
stream.

8



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##### Table of Contents



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. In 2002, through the date of this report, the Company has opened
seven stores. Additionally, the Company acquired the accounts from two
competitors stores and consolidated them into existing Company stores.

Results of Operations

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

|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |      |      |       |  
|------------------ | -------------------------------------------------- | -------------------- | ------------------------------------------ | ---- | -------------------------- | ----- | ------------------------ | ---- | ---- | ----- | ---- | ---- | ---- | ----- | --- | ---- | ---- | ----- | -
|                   |                                                    |                      |                                            |      | (unaudited)                |       | (unaudited)             
|                   |                                                    |                      |                                            |      | For the three months ended |       | For the six months ended
|                   |                                                    |                      |                                            |      | June 30,                   |       | June 30,                
|                   |                                                    |                      |                                            |      | 2002                       |       | 2001                     |      | 2002 |       | 2001
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |     
|Revenues           |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|                   | Rental revenue                                     |                      |                                            | 94.4 | %                          |       |                          | 94.2 | %    |       |      | 93.6 | %    |       |     | 93.3 | %   
|                  
|                  
|                  
|                  
|                   | Fees                                               |                      |                                            | 2.9  |                            |       |                          | 2.9  |      |       |      | 2.7  |      |       |     | 2.9  |     
|                  
|                  
|                  
|                  
|                   | Merchandise sales                                  |                      |                                            | 2.7  |                            |       |                          | 2.9  |      |       |      | 3.7  |      |       |     | 3.8  |     
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|                   |                                                    |                      | Total revenues                             |      |                            | 100.0 |                          |      |      | 100.0 |      |      |      | 100.0 |     |      |      | 100.0 |  
|                  
|                  
|                  
|                  
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|Operating expenses |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|                   | Merchandise costs                                  |                      |                                            | 33.7 |                            |       |                          | 34.1 |      |       |      | 34.6 |      |       |     | 34.3 |     
|                  
|                  
|                  
|                  
|                   | Store expenses                                     |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |      |     
|                  
|                  
|                  
|                  
|                   |                                                    | Salaries and related |                                            |      | 23.4                       |       |                          |      | 23.4 |       |      |      | 23.7 |       |     |      | 23.4 |      
|                  
|                  
|                  
|                  
|                   |                                                    | Occupancy            |                                            |      | 9.0                        |       |                          |      | 8.8  |       |      |      | 9.1  |       |     |      | 8.7  |      
|                  
|                  
|                  
|                  
|                   |                                                    | Advertising          |                                            |      | 6.9                        |       |                          |      | 6.5  |       |      |      | 6.6  |       |     |      | 6.4  |      
|                  
|                  
|                  
|                  
|                   |                                                    | Other                |                                            |      | 14.1                       |       |                          |      | 13.8 |       |      |      | 13.6 |       |     |      | 14.2 |      
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total store expenses                       |      |                            | 53.4  |                          |      |      | 52.5  |      |      |      | 53.0  |     |      |      | 52.7  |  
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total merchandise costs and store expenses |      |                            | 87.1  |                          |      |      | 86.6  |      |      |      | 87.6  |     |      |      | 87.0  |  
|                  
|                  
|                  
|                  
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|                   | General and administrative expenses                |                      |                                            | 8.5  |                            |       |                          | 7.8  |      |       |      | 7.7  |      |       |     | 7.4  |     
|                  
|                  
|                  
|                  
|                   | Amortization of goodwill and noncompete agreements |                      |                                            | 0.2  |                            |       |                          | 0.7  |      |       |      | 0.2  |      |       |     | 0.7  |     
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|                   |                                                    |                      | Total operating expenses                   |      |                            | 95.8  |                          |      |      | 95.1  |      |      |      | 95.5  |     |      |      | 95.1  |  
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Operating income                           |      |                            | 4.2   |                          |      |      | 4.9   |      |      |      | 4.5   |     |      |      | 4.9   |  
|                  
|                  
|                  
|                  
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|Interest expense   |                                                    |                      | 0.7                                        |      |                            |       | 0.8                      |      |      |       | 0.7  |      |      |       | 0.9 |     
|                  
|                  
|                  
|                  
|Other expense, net |                                                    |                      | 0.3                                        |      |                            |       | 1.1                      |      |      |       | 0.4  |      |      |       | 0.7 |     
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Income before income taxes                 |      |                            | 3.2   |                          |      |      | 3.0   |      |      |      | 3.4   |     |      |      | 3.3   |  
|                  
|                  
|                  
|                  
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                  
|                  
|                  
|                  
|Income taxes       |                                                    |                      | 1.3                                        |      |                            |       | 1.2                      |      |      |       | 1.4  |      |      |       | 1.3 |     
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Net income                                 |      |                            | 1.9   | %                        |      |      | 1.8   | %    |      |      | 2.0   | %   |      |      | 2.0   | %
|                   |                                                    |                      |                                            |      |                            |       |                          |      |      |       |      |      |      |       |     |     

Comparison of the Three and Six Months Ended June 30, 2002 and 2001

Total revenues increased $1.2 million, or 5.3%, to $24.8 million for the
three months ended June 30, 2002 compared to $23.6 million for the three months
ended June 30, 2001. Revenue from comparable stores for the three-month
period, or stores in operation on April 1, 2001, increased $720,000, or 3.1%,
and was primarily due to an increase in merchandise on rent. To a lesser
extent, improved collection performance and an increase in the average rate
charged per rental agreement contributed to the increase in total revenues from
comparable stores. The increase in average rental rates was primarily the
effect of raising rates towards historical levels during 2002 as the quality of
pre-rented merchandise improved over the previous year. During mid-2001,
rental rates were lowered as a result of a declining customer base and an
increase in older,

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pre-rented merchandise. Revenue from the 10 stores opened
after April 1, 2001 increased $603,000 comparing the three months ended June
30, 2002 to 2001 as these stores build a customer base and develop a recurring
revenue stream.

Total revenues increased $1.9 million, or 4.0%, to $49.8 million for the
six months ended June 30, 2002 compared to $47.9 million for the six months
ended June 30, 2001. Revenue from comparable stores for the six-month period,
or stores in operation on January 1, 2001, increased $666,000, or 1.4%, and was
primarily due to an increase in merchandise on rent and improved collection
performance. Revenue from the 12 stores opened after January 1, 2001 increased
$1.4 million comparing the six months ended June 30, 2002 to 2001 as these
stores build a customer base and develop a recurring revenue stream.
Partially offsetting the above increases was the loss of revenue recorded
during the prior period associated with an underperforming store sold in May
2001.

Merchandise costs increased $342,000, or 4.3%, to $8.4 million for the
three months ended June 30, 2002 compared to $8.0 million for the three months
ended June 30, 2001. Merchandise costs totaled 33.7% and 34.1% of total
revenues comparing the respective three-month periods. The decrease in
merchandise costs as a percentage of revenue was primarily the result of higher
rental merchandise margins due to an improvement in the quality of older,
pre-rented merchandise and higher rental rates, as mentioned above.

Merchandise costs increased $780,000, or 4.7%, to $17.2 million for the
six months ended June 30, 2002 compared to $16.4 million for the six months
ended June 30, 2001. Merchandise costs totaled 34.6% and 34.3% of total
revenues comparing the respective six-month periods. The increase in
merchandise costs as a percentage of revenue was primarily the effect of
lowering prices on new and pre-rented merchandise during mid-2001, which was
predominantly offset by increased rental rates during the first half of 2002,
as explained above.

Store expenses increased $880,000, or 7.1%, to $13.3 million for the three
months ended June 30, 2002 compared to $12.4 million for the three months ended
June 30, 2001. An increase in store expenses from the 10 stores opened after
April 1, 2001 accounted for 90% of the increase, or $791,000. Comparable store
expenses increased less than 1% comparing the three-month periods as a result
of the Companys cost containment initiatives and financial controls
implemented during 2002. Store expenses totaled 53.4% and 52.5% of total
revenues, respectively, for the three months ended June 30, 2002 and 2001.

Store expenses increased $1.2 million, or 4.9%, to $26.4 million for the
six months ended June 30, 2002 compared to $25.2 million for the six months
ended June 30, 2001. Store expenses associated with the 12 stores opened after
January 1, 2001 were $1.3 million higher, which was partially offset by a
decline in comparable store expenses resulting from stores operating more
efficiently as a result of implementing operational and financial controls
during 2002. New store openings accounted for most of the increases in
salaries and related expenses and advertising expense. Occupancy expense,
which increased $369,000, was mainly attributable to new store openings and, to
a lesser extent, normal scheduled rent increases at comparable stores. The
slight increase in other store expenses was primarily the result of higher
expenses associated with new store openings, which was mostly offset by store
operating efficiencies and financial controls, mentioned above. Store expenses
totaled 53.0% and 52.7% of total revenues, respectively, for the six months
ended June 30, 2002 and 2001.

General and administrative expenses increased $275,000, or 14.9%, to $2.1
million for the three months ended June 30, 2002 compared to $1.8 million for
the three months ended June 30, 2001. For the six months ended June 30, 2002,
general and administrative expense increased $286,000, or 8.1%, to $3.8 million
compared to $3.5 million for the six months ended June 30, 2001. The increase
in general and administrative expenses for the three- and six-month periods was
attributable to increased legal expenses, higher travel costs associated with
the Companys manager trainee program and increased incentive bonuses for
regional managers. General and administrative expenses totaled 8.5% and 7.8%
of total revenues, respectively, for the three months ended June 30, 2002 and
2001 and 7.7% and 7.4%, respectively, for the six months ended June 30, 2002
and 2001.

Interest expense decreased $21,000 and $61,000 comparing the respective
three- and six-month periods due to lower average outstanding debt and lower
interest rates.

Income taxes increased $38,000 for both the comparable three- and
six-month periods and was attributable to an increase in income before income
taxes. The Companys effective income tax rate remained at 40.5%.

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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, borrowings and the issuance of capital stock. For the six months
ended June 30, 2002 and 2001, purchases of rental merchandise (excluding
acquired inventory) amounted to $14.9 million and $15.7 million, respectively.

For the six months ended June 30, 2002 and 2001, cash provided by
operations totaled $3.2 million and $5.0 million, respectively. Due to
seasonality, purchases of rental purchase merchandise increased during the
fourth quarter of 2001 and, as a consequence, payments to vendors were higher
during the first half of 2002 as payments for such inventory were made. The
reduction in cash from changes in accounts payable comparing the six months
ended June 30, 2002 and 2001 was partially offset by the $800,000 decline in
purchases of rental purchase merchandise, mentioned above. Cash used in
investing activities totaled $1.6 million and $1.0 million, respectively, for
the six months ended June 30, 2002 and 2001, and was mainly attributable to
increased property and equipment purchases during 2002, primarily for new
stores, in addition to cash provided by the sale of store assets in May 2001.
Due to significant repayments on the Companys debt during the six months ended
June 30, 2001, cash used in financing activities totaled $3.8 million compared
to $1.2 million for the six months ended June 30, 2002.

On January 11, 2002, the Company refinanced its debt with a $25.0 million
revolving loan agreement (the Credit Facility) that matures in January 2005.
A borrowing base measured against rental purchase merchandise limits borrowings
under the Credit Facility to 32% of rental purchase inventory less outstanding
letters of credit. Excess availability as of June 30, 2002 was approximately
$2.4 million. The agreement requires the Company to meet certain quarterly
financial covenants and ratios including maximum leverage, minimum interest
coverage, minimum net worth, fixed charge coverage and rental merchandise usage
ratios. In addition, the Company must meet requirements regarding monthly,
quarterly and annual financial reporting. The agreement also contains
non-financial covenants that restrict actions of the Company with respect to
additional indebtedness, certain loans and investments, payment of dividends,
acquisitions, mergers and consolidations, dispositions of assets or
subsidiaries, issuance of capital stock, capital expenditures and leases. In
the event of default, the outstanding loan balance will be subject to the then
prime interest rate plus 3%, in addition to the loan becoming currently due.
Interest charged on portions of the outstanding principal balance, subject to
managements discretion, is at LIBOR plus 3% and the remaining outstanding
balance is at prime plus 1%. The weighted average interest rate charged on the
outstanding balance at June 30, 2002 was 4.88%.

The Company has opened seven new stores in 2002, to the date of this
report, including one in July, and plans to open approximately five more stores
during the remainder of the year. The Company believes it will continue to
have the opportunity to increase the number of its stores and rental-purchase
agreements through selective acquisitions. During April and May 2002, the
Company acquired the accounts from two competitors and consolidated them into
existing Company stores. Potential acquisitions may vary in size and the
Company may consider larger acquisitions that could be material to the Company.
To provide any additional funds necessary for the continued pursuit of its
growth strategies, the Company may use cash flow from operations, borrow
additional amounts under its Credit Facility, or use its own equity securities,
the availability of which will depend upon market and other conditions. There
can be no assurance that such additional financing will be available on terms
acceptable to the Company or its current lender.

Forward-Looking Statements

Statements made in this Form 10-Q, other than those concerning historical
information, or, in future filings by Rainbow Rentals, Inc. with the Securities
and Exchange Commission (SEC), in the Companys press releases or other public
or shareholder communications, or in oral statements made with the approval of
an authorized executive officer, constitute forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, and are
made pursuant to the safe harbor provisions of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements use such words as may, will, should, expects, plans,
anticipates, estimates, believes, thinks, continues, indicates,
outlook, looks, goals, initiatives, projects, or variations thereof.
Forward-looking statements are based on managements current beliefs and
assumptions regarding future events and operating performance and speak only as
of the date made. These statements are likely to address the Companys growth
strategy, future financial performance (including sales and earnings),
strategic initiatives, marketing and expansion plans and the impact of
operating initiatives. Forward-looking statements are subject to a number of
risks, uncertainties and other

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factors, many of which are outside the control
of the Company that could cause the Companys actual results to differ
materially from those expressed or implied in such statements. These risks and
uncertainties include the following: risks associated with general economic
conditions; failure to adequately execute plans and unforeseen circumstances
beyond the Companys control in connection with development, implementation and
execution of new business processes, procedures and programs; greater than
expected expenses associated with the Companys activities; the effects of new
accounting standards; and other risks and uncertainties described in the
Companys Annual Report on Form 10-K for the year ended December 31, 2001, and
in other reports and exhibits to reports filed with the SEC. You are strongly
urged to review such filings for a more detailed discussion of such risks and
uncertainties. The Companys SEC filings are available, at no
charge, at www.sec.gov and
through the Companys web site at www.rainbowrentals.com. The foregoing list of important factors is
not exclusive. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in information about market risk from that
provided in the 2001 Annual Report on Form 10-K.

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PART II  OTHER
INFORMATIONRAINBOW RENTALS, INC.JUNE 30, 2002

Item 6. Exhibits and Reports on Form 8-K



| | A. |  | Exhibits: 99.1  Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 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. RUSSELL
Wayland J. Russell, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date:  August 13, 2002  
|                                                                                                                                      
|/s/ MICHAEL A. PECCHIA
Michael A. Pecchia,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date:  August 13, 2002

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