##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q(Mark One)

|      |  |                                                                                                                                         
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|[ X ] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2002
|      |  |                                                                                                                                         
|      |  | OR                                                                                                                                      
|      |  |                                                                                                                                         
|[  
] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period From  to              

Commission File No. 0-24333

RAINBOW RENTALS, INC.

(Exact name of Registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X   No

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

|                           |  |                                       
|-------------------------- |  | --------------------------------------
|CLASS                      |  | SHARES OUTSTANDING AT OCTOBER 31, 2002
|                           |  |                                       
|Common stock, no par value |  | 5,929,319                             





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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4: CONTROLS AND PROCEDURES                                                              
|PART II.  OTHER INFORMATION 
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|SARBANES-OXLEY CERTIFICATIONS



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##### Table of Contents



RAINBOW RENTALS, INC.
INDEX

|                              |  |         |  |                                                                                       |  |         
|----------------------------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | --------
|                              |  |         |  |                                                                                       |  | Page No.
|                              |  |         |  |                                                                                       |  |         
|PART I.                       |  |         |  | FINANCIAL INFORMATION                                                                 |  |         
|                              |  |         |  |                                                                                       |  |         
|                              |  | Item 1. |  | Financial Statements                                                                  |  |         
|                              |  |         |  |                                                                                       |  |         
|                              |  |         |  | Balance Sheets                                                                        |  | 3       
|                              |  |         |  |                                                                                       |  |         
|                              |  |         |  | Statements of Income                                                                  |  | 4       
|                              |  |         |  |                                                                                       |  |         
|                              |  |         |  | Statements of Shareholders Equity                                                    |  | 5       
|                              |  |         |  |                                                                                       |  |         
|                              |  |         |  | Statements of Cash Flows                                                              |  | 6       
|                              |  |         |  |                                                                                       |  |         
|                              |  |         |  | Notes to Financial Statements                                                         |  | 7       
|                              |  |         |  |                                                                                       |  |         
|                              |  | Item 2. |  | Managements
Discussion and Analysis of Financial Condition
and Results of Operations |  | 9       
|                              |  |         |  |                                                                                       |  |         
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 12      
|                              |  |         |  |                                                                                       |  |         
|                              |  | Item 4. |  | Controls and Procedures                                                               |  | 12      
|                              |  |         |  |                                                                                       |  |         
|PART II.                      |  |         |  | OTHER INFORMATION                                                                     |  |         
|                              |  |         |  |                                                                                       |  |         
|                              |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 13      
|                              |  |         |  |                                                                                       |  |         
|SIGNATURES                    |  | 14     
|                              |  |         |  |                                                                                       |  |         
|SARBANES-OXLEY CERTIFICATIONS |  | 15     

2



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##### Table of Contents









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

|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |              |        |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------ | ------------- | ----- | ------------ | ------ |  |  | 
|                              |                                                                                                                                       |                                            |                                      |        |        | (unaudited)   |       |              |        | 
|                              |                                                                                                                                       |                                            |                                      |        |        | September 30, |       | December 31,
|                              |                                                                                                                                       |                                            |                                      |        |        | 2002          |       | 2001        
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       |                                            |                                      | Assets |        |               |       |              |        |  |  | 
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|Current assets                |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              | Cash and cash equivalents                                                                                                             |                                            | $                                    | 1,574  |        |               | $     | 1,839        |       
|                              | Rental-purchase merchandise, net                                                                                                      |                                            |                                      | 36,050 |        |               |       | 39,330       |       
|                              | Income tax receivable                                                                                                                 |                                            |                                      | 2,009  |        |               |       |             |       
|                              | Prepaid expenses and other current assets                                                                                             |                                            |                                      | 1,770  |        |               |       | 2,143        |       
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       | Total current assets                       |                                      |        | 41,403 |               |       |              | 43,312 | 
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|Property and equipment, net   |                                                                                                                                       |                                            | 5,513                                |        |        |               | 5,177 |             
|Deferred income taxes         |                                                                                                                                       |                                            | 1,839                                |        |        |               | 1,546 |             
|Goodwill, net                 |                                                                                                                                       |                                            | 9,236                                |        |        |               | 9,098 |             
|Other assets, net             |                                                                                                                                       |                                            | 965                                  |        |        |               | 988   |             
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       | Total assets                               |                                      | $      | 58,956 |               |       | $            | 60,121 | 
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       |                                            | Liabilities
and Shareholders Equity |        |        |               |       |              |        |  | 
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|Current liabilities           |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              | Deferred revenue                                                                                                                      |                                            | $                                    | 1,081  |        |               | $     | 1,263        |       
|                              | Accounts payable                                                                                                                      |                                            |                                      | 2,720  |        |               |       | 3,827        |       
|                              | Accrued income taxes                                                                                                                  |                                            |                                      |       |        |               |       | 306          |       
|                              | Accrued compensation and related costs                                                                                                |                                            |                                      | 1,772  |        |               |       | 2,082        |       
|                              | Other liabilities and accrued expenses                                                                                                |                                            |                                      | 2,414  |        |               |       | 2,062        |       
|                              | Deferred income taxes                                                                                                                 |                                            |                                      | 6,946  |        |               |       | 3,976        |       
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       | Total current liabilities                  |                                      |        | 14,933 |               |       |              | 13,516 | 
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|Long-term debt                |                                                                                                                                       |                                            | 5,500                                |        |        |               | 9,440 |             
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       | Total liabilities                          |                                      |        | 20,433 |               |       |              | 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 September 30, 2002 and 5,925,735 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                       | outstanding at December 31, 2001           |                                      |        | 11,039 |               |       |              | 11,039 | 
|                              | Additional paid-in capital                                                                                                            |                                            |                                      | 4      |        |               |       |             |       
|                              | Retained earnings                                                                                                                     |                                            |                                      | 29,372 |        |               |       | 28,033       |       
|                              | Treasury stock, at cost, 463,291 shares at September 30, 2002
and 466,875 shares at December 31, 2001                                 |                                            |                                      | (1,892 | )      |               |       | (1,907       | )     
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       | Total shareholders equity                 |                                      |        | 38,523 |               |       |              | 37,165 | 
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                       | Total liabilities and shareholders equity |                                      | $      | 58,956 |               |       | $            | 60,121 | 
|                              |                                                                                                                                       |                                            |                                      |        |        |               |       |             

See accompanying notes to financial statements.

3



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

|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |           |        |        | 
|------------------------------------------- | ---------------------------------------------------------- | -------------------- | ------------------------------------------ | --------- | -------------------------- | ------ | ------------------------- | --------- | ----- | ------ | ---- | --------- | ------ | ------ | --- | --------- | ------ | ------ | 
|                                            |                                                            |                      |                                            |           | (unaudited)                |        | (unaudited)              
|                                            |                                                            |                      |                                            |           | For the three months ended |        | For the nine months ended
|                                            |                                                            |                      |                                            |           | September 30,              |        | September 30,            
|                                            |                                                            |                      |                                            |           |                            |        |                          
|                                            |                                                            |                      |                                            |           | 2002                       |        | 2001                      |           | 2002  |        | 2001
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |     
|Revenues                                    |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Rental revenue                                             |                      | $                                          | 22,945    |                            |        | $                         | 21,395    |       |        | $    | 69,554    |        |        | $   | 66,072    |       
|                                            | Fees                                                       |                      |                                            | 700       |                            |        |                           | 663       |       |        |      | 2,052     |        |        |     | 2,046     |       
|                                            | Merchandise sales                                          |                      |                                            | 725       |                            |        |                           | 596       |       |        |      | 2,572     |        |        |     | 2,414     |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total revenues                             |           |                            | 24,370 |                           |           |       | 22,654 |      |           |        | 74,178 |     |           |        | 70,532 | 
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|Operating expenses                          |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Merchandise costs                                          |                      |                                            | 8,362     |                            |        |                           | 8,036     |       |        |      | 25,572    |        |        |     | 24,466    |       
|                                            | Store expenses                                             |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |           |       
|                                            |                                                            | Salaries and related |                                            |           | 6,080                      |        |                           |           | 5,328 |        |      |           | 17,909 |        |     |           | 16,560 |       
|                                            |                                                            | Occupancy            |                                            |           | 2,557                      |        |                           |           | 2,029 |        |      |           | 7,119  |        |     |           | 6,341  |       
|                                            |                                                            | Advertising          |                                            |           | 1,323                      |        |                           |           | 1,285 |        |      |           | 4,634  |        |     |           | 4,329  |       
|                                            |                                                            | Other                |                                            |           | 3,323                      |        |                           |           | 3,126 |        |      |           | 10,093 |        |     |           | 9,889  |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total store expenses                       |           |                            | 13,283 |                           |           |       | 11,768 |      |           |        | 39,755 |     |           |        | 37,119 | 
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total merchandise costs and store expenses |           |                            | 21,645 |                           |           |       | 19,804 |      |           |        | 65,327 |     |           |        | 61,585 | 
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | General and administrative expenses                        |                      |                                            | 1,962     |                            |        |                           | 1,821     |       |        |      | 5,794     |        |        |     | 5,450     |       
|                                            | Amortization of goodwill and noncompete agreements         |                      |                                            | 45        |                            |        |                           | 168       |       |        |      | 130       |        |        |     | 516       |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Total operating expenses                   |           |                            | 23,652 |                           |           |       | 21,793 |      |           |        | 71,251 |     |           |        | 67,551 | 
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Operating income                           |           |                            | 718    |                           |           |       | 861    |      |           |        | 2,927  |     |           |        | 2,981  | 
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|Interest expense                            |                                                            |                      | 135                                        |           |                            |        | 141                       |           |       |        | 487  |           |        |        | 555 |          
|Other expense, net                          |                                                            |                      | 57                                         |           |                            |        | 58                        |           |       |        | 227  |           |        |        | 170 |          
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Income before income taxes                 |           |                            | 526    |                           |           |       | 662    |      |           |        | 2,213  |     |           |        | 2,256  | 
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|Income taxes                                |                                                            |                      | 191                                        |           |                            |        | 268                       |           |       |        | 874  |           |        |        | 913 |          
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            |                                                            |                      | Net income                                 |           | $                          | 335    |                           |           | $     | 394    |      |           | $      | 1,339  |     |           | $      | 1,343  | 
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|Earnings
per common share:                  |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Basic                                                      |                      | $                                          | 0.06      |                            |        | $                         | 0.07      |       |        | $    | 0.23      |        |        | $   | 0.23      |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Diluted                                                    |                      | $                                          | 0.06      |                            |        | $                         | 0.07      |       |        | $    | 0.23      |        |        | $   | 0.23      |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|Weighted
average common shares outstanding: |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Basic                                                      |                      |                                            | 5,929,319 |                            |        |                           | 5,925,735 |       |        |      | 5,927,564 |        |        |     | 5,925,735 |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Diluted                                                    |                      |                                            | 5,932,648 |                            |        |                           | 5,946,905 |       |        |      | 5,944,081 |        |        |     | 5,938,340 |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|Pro
forma net income data:                  |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Net income as reported                                     |                      | $                                          | 335       |                            |        | $                         | 394       |       |        | $    | 1,339     |        |        | $   | 1,343     |       
|                                            | Pro forma adjustment for goodwill amortization, net of tax |                      |                                            |          |                            |        |                           | 75        |       |        |      |          |        |        |     | 234       |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Pro forma net income                                       |                      | $                                          | 335       |                            |        | $                         | 469       |       |        | $    | 1,339     |        |        | $   | 1,577     |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|Pro
forma earnings per common share:        |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Basic                                                      |                      | $                                          | 0.06      |                            |        | $                         | 0.08      |       |        | $    | 0.23      |        |        | $   | 0.27      |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          
|                                            | Diluted                                                    |                      | $                                          | 0.06      |                            |        | $                         | 0.08      |       |        | $    | 0.23      |        |        | $   | 0.27      |       
|                                            |                                                            |                      |                                            |           |                            |        |                           |           |       |        |      |           |        |        |     |          

See accompanying notes to financial statements.

4



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

|                                          |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |       | 
|----------------------------------------- | ------------------------------------- |  | ------------ | ----- | ---------- | - | --------------- | - | -------- | - | ------------- | - | ------ | - | ------ | ----- | ----- | - | ------ | -- |  | - | ------ | ----- | 
|                                          |                                       |  | Common Stock |       |            |   |                 |   |          |   |               |   |        |   |        |       | Total
|                                          |                                       |  |              |       | Additional |   | Retained        |   | Treasury |   | Shareholders
|                                          |                                       |  | Shares       |       | Cost       |   | Paid-in Capital |   | Earnings |   | Stock         |   | Equity
|                                          |                                       |  |              |       |            |   |                 |   |          |   |               |   |       
|                                          |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |      
|Balance at December 31, 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)                |  |              |      |            |   |                 |  |          |   |               |  |        |   |        | 1,339 |       |   |        |   |  |   |        | 1,339 | 
|                                          |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |      
|                                          |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |      
|Balance at September 30, 2002 (unaudited) |                                       |  | 5,929,319    |       |            | $ | 11,039          |   |          | $ | 4             |   |        | $ | 29,372 |       |       | $ | (1,892 | )  |  | $ | 38,523 |      
|                                          |                                       |  |              |       |            |   |                 |   |          |   |               |   |        |   |        |       |       |   |        |    |  |   |        |      

See accompanying notes to financial statements.

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

|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |         |     |         |        |  
|------------------------------------ | ------------------------------------------------------------------------- | ------------ | ---------------------------------------------------------------------- | ----------------------------------------- | --- | ------------------------- | ------ | ------- | --- | ------- | ------ | -
|                                     |                                                                           |              |                                                                        |                                           |     | (unaudited)              
|                                     |                                                                           |              |                                                                        |                                           |     | For the nine months ended
|                                     |                                                                           |              |                                                                        |                                           |     | September 30,            
|                                     |                                                                           |              |                                                                        |                                           |     |                          
|                                     |                                                                           |              |                                                                        |                                           |     | 2002                      |        | 2001   
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|Cash flows from operating activities |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     | Net income                                                                |              | $                                                                      | 1,339                                     |     |                           | $      | 1,343   |    
|                                     | Reconciliation of net income to net cash provided
by operating activities |              |                                                                        |                                           |     |                           |        |         |    
|                                     |                                                                           |              | Depreciation of property and equipment and
amortization of intangibles |                                           |     | 1,846                     |        |         |     | 2,216   |       
|                                     |                                                                           |              | Depreciation of rental-purchase merchandise                            |                                           |     | 20,515                    |        |         |     | 19,817  |       
|                                     |                                                                           |              | Purchases of rental-purchase merchandise                               |                                           |     | (22,244                   | )      |         |     | (24,143 | )     
|                                     |                                                                           |              | Rental-purchase merchandise disposed, net                              |                                           |     | 4,969                     |        |         |     | 4,655   |       
|                                     |                                                                           |              | Write-down of rental purchase merchandise                              |                                           |     | 168                       |        |         |     | 46      |       
|                                     |                                                                           |              | Deferred income taxes                                                  |                                           |     | 2,677                     |        |         |     | 569     |       
|                                     |                                                                           |              | Write-off of goodwill from sale of store                               |                                           |     |                          |        |         |     | 260     |       
|                                     |                                                                           |              | Loss on disposal of property and equipment                             |                                           |     | 124                       |        |         |     | 8       |       
|                                     |                                                                           |              | Gain on sale of store assets                                           |                                           |     |                          |        |         |     | (110    | )     
|                                     |                                                                           |              | (Increase) decrease in                                                 |                                           |     |                           |        |         |     |         |       
|                                     |                                                                           |              |                                                                        | Income tax receivable                     |     |                           | (2,009 | )       |     |         | 146    |  
|                                     |                                                                           |              |                                                                        | Prepaid expenses and other assets         |     |                           | 363    |         |     |         | (178   | )
|                                     |                                                                           |              | Increase (decrease) in                                                 |                                           |     |                           |        |         |     |         |       
|                                     |                                                                           |              |                                                                        | Accounts payable                          |     |                           | (1,107 | )       |     |         | 2,931  |  
|                                     |                                                                           |              |                                                                        | Accrued income taxes                      |     |                           | (306   | )       |     |         |       |  
|                                     |                                                                           |              |                                                                        | Accrued compensation and related costs    |     |                           | (310   | )       |     |         | (350   | )
|                                     |                                                                           |              |                                                                        | Other liabilities and accrued expenses    |     |                           | 170    |         |     |         | 189    |  
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        | Net cash provided by operating activities |     |                           | 6,195  |         |     |         | 7,399  |  
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|Cash flows from investing activities |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     | Purchase of property and equipment, net                                   |              |                                                                        | (1,945                                    | )   |                           |        | (1,714  | )  
|                                     | Proceeds from the sale of property and equipment                          |              |                                                                        | 37                                        |     |                           |        | 49      |    
|                                     | Proceeds from the sale of store assets                                    |              |                                                                        |                                          |     |                           |        | 272     |    
|                                     | Acquisitions                                                              |              |                                                                        | (315                                      | )   |                           |        | (245    | )  
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        | Net cash used in investing activities     |     |                           | (2,223 | )       |     |         | (1,638 | )
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|Cash flows from financing activities |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     | Proceeds from long-term debt                                              |              |                                                                        | 25,464                                    |     |                           |        | 17,495  |    
|                                     | Current installments and repayments of long-term debt                     |              |                                                                        | (29,404                                   | )   |                           |        | (23,732 | )  
|                                     | Proceeds from stock option exercises                                      |              |                                                                        | 19                                        |     |                           |        |        |    
|                                     | Loan fees paid                                                            |              |                                                                        | (316                                      | )   |                           |        | (50     | )  
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        | Net cash used in financing activities     |     |                           | (4,237 | )       |     |         | (6,287 | )
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|Net decrease in cash                 |                                                                           |              | (265                                                                   | )                                         |     |                           | (526   | )      
|Cash at beginning of period          |                                                                           |              | 1,839                                                                  |                                           |     |                           | 1,426  |        
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|Cash at end of period                |                                                                           | $            | 1,574                                                                  |                                           |     | $                         | 900    |        
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     |                                                                           |              |                                                                        |                                           |     |                           |        |        
|Supplemental cash flow information   |                                                                           |              |                                                                        |                                           |     |                           |        |        
|                                     | Net cash paid during the period for                                       |              |                                                                        |                                           |     |                           |        |         |    
|                                     |                                                                           | Interest     |                                                                        | $                                         | 389 |                           |        | $       | 580 |        
|                                     |                                                                           | Income taxes |                                                                        |                                           | 639 |                           |        |         | 305 |        

See accompanying notes to financial statements.

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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
September 30, 2002 the Company operated 123 stores in 14 states: Connecticut,
Delaware, Georgia, Maryland, Massachusetts, Michigan, New York, North Carolina,
Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia. The
Companys corporate office is located in Canfield, Ohio.

The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Therefore, certain information and disclosures,
normally required with financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have
been condensed or omitted. In the opinion of management, the financial
statements contain all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows of the Company. The results of operations for the
periods presented are not necessarily indicative of the results for the entire
year. It is suggested these financial statements be read in conjunction with the
financial statements and notes included in the Companys Annual Report on Form
10-K for 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 nine months ended
|                           |                                             |   | September 30,                                    |           | September 30,            
|                           |                                             |   | 2002                                             |           | 2001                      |   | 2002 |           | 2001
|                           |                                             |   |                                                  |           |                           |   |      |           |     
|                           |                                             |   | (Dollars in thousands, except per share amounts)
|Numerator:                 |                                             |   |                                                  |           |                           |   |      |           |      |   |      |           |  |   |      |          
|                           | Net income available to common shareholders |   | $                                                | 335       |                           |   | $    | 394       |      |   | $    | 1,339     |  |   | $    | 1,343     | 
|Denominator:               |                                             |   |                                                  |           |                           |   |      |           |      |   |      |           |  |   |      |          
|                           | Basic weighted average shares               |   |                                                  | 5,929,319 |                           |   |      | 5,925,735 |      |   |      | 5,927,564 |  |   |      | 5,925,735 | 
|                           | Effect of diluted stock options             |   |                                                  | 3,329     |                           |   |      | 21,170    |      |   |      | 16,517    |  |   |      | 12,605    | 
|                           |                                             |   |                                                  |           |                           |   |      |           |      |   |      |           |  |   |      |           | 
|                           | Diluted weighted average shares             |   |                                                  | 5,932,648 |                           |   |      | 5,946,905 |      |   |      | 5,944,081 |  |   |      | 5,938,340 | 
|                           |                                             |   |                                                  |           |                           |   |      |           |      |   |      |           |  |   |      |           | 
|Basic earnings per share   |                                             | $ | 0.06                                             |           |                           | $ | 0.07 |           |      | $ | 0.23 |           |  | $ | 0.23 |          
|                           |                                             |   |                                                  |           |                           |   |      |           |      |   |      |           |  |   |      |           | 
|Diluted earnings per share |                                             | $ | 0.06                                             |           |                           | $ | 0.07 |           |      | $ | 0.23 |           |  | $ | 0.23 |          
|                           |                                             |   |                                                  |           |                           |   |      |           |      |   |      |           |  |   |      |           | 

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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, less outstanding letters of credit.
The Companys rental purchase merchandise serves as the security for the debt.
The Company can elect interest to be charged on a portion of the outstanding
debt balance at the London Interbank Offering Rate (LIBOR) plus a range of 250 
325 basis points and the remaining debt balance, if any, would be at the prime
rate plus a range of 50  125 basis points. In addition, the Company must pay a
commitment fee equal to a range of 37.5 to 50 basis points per annum on the
unused portion of the loan commitment. The interest rate ranges above are all
dependent on the Companys most recent quarterly leverage ratio. Borrowings
under the Credit Facility mature three years after the date of the loan. At
September 30, 2002, the outstanding loan balance totaled $5.5 million with a
weighted average interest rate of 5.14%. Excess availability at September 30,
2002 was approximately $4.4 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 September 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 nine months ended
|                                               |  | September 30,              |      | September 30,            
|                                               |  | 2002                       |      | 2001                      |  | 2002 |      | 2001
|                                               |  |                            |      |                           |  |      |      |     
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|Net income, as reported                        |  | $                          | 335  |                           |  | $    | 394  |      |  | $ | 1,339 |  |  | $ | 1,343 | 
|Goodwill amortization, net of tax              |  |                            |     |                           |  |      | 75   |      |  |   |      |  |  |   | 234   | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|Net income, as adjusted                        |  | $                          | 335  |                           |  | $    | 469  |      |  | $ | 1,339 |  |  | $ | 1,577 | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|Basic earnings per common share, as reported   |  | $                          | 0.06 |                           |  | $    | 0.07 |      |  | $ | 0.23  |  |  | $ | 0.23  | 
|Goodwill amortization, net of tax              |  |                            |     |                           |  |      | 0.01 |      |  |   |      |  |  |   | 0.04  | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|Basic earnings per common share, as adjusted   |  | $                          | 0.06 |                           |  | $    | 0.08 |      |  | $ | 0.23  |  |  | $ | 0.27  | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|Diluted earnings per common share, as reported |  | $                          | 0.06 |                           |  | $    | 0.07 |      |  | $ | 0.23  |  |  | $ | 0.23  | 
|Goodwill amortization, net of tax              |  |                            |     |                           |  |      | 0.01 |      |  |   |      |  |  |   | 0.04  | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 
|Diluted earnings per common share, as adjusted |  | $                          | 0.06 |                           |  | $    | 0.08 |      |  | $ | 0.23  |  |  | $ | 0.27  | 
|                                               |  |                            |      |                           |  |      |      |      |  |   |       |  |  |   |       | 

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##### Table of Contents






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. 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
twelve stores. No further store openings are planned for the remainder of 2002.
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 nine months ended
|                   |                                                    |                      |                                            |      | September 30,              |       | September 30,            
|                   |                                                    |                      |                                            |      | 2002                       |       | 2001                      |      | 2002 |       | 2001
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |     
|Revenues           |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   | Rental revenue                                     |                      |                                            | 94.1 | %                          |       |                           | 94.5 | %    |       |      | 93.8 | %    |       |     | 93.7 | %   
|                   | Fees                                               |                      |                                            | 2.9  |                            |       |                           | 2.9  |      |       |      | 2.8  |      |       |     | 2.9  |     
|                   | Merchandise sales                                  |                      |                                            | 3.0  |                            |       |                           | 2.6  |      |       |      | 3.4  |      |       |     | 3.4  |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total revenues                             |      |                            | 100.0 |                           |      |      | 100.0 |      |      |      | 100.0 |     |      |      | 100.0 |  
|Operating expenses |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   | Merchandise costs                                  |                      |                                            | 34.3 |                            |       |                           | 35.5 |      |       |      | 34.5 |      |       |     | 34.7 |     
|                   | Store expenses                                     |                      |                                           
|                   |                                                    | Salaries and related |                                            |      | 25.0                       |       |                           |      | 23.5 |       |      |      | 24.2 |       |     |      | 23.5 |      
|                   |                                                    | Occupancy            |                                            |      | 10.5                       |       |                           |      | 8.9  |       |      |      | 9.6  |       |     |      | 9.0  |      
|                   |                                                    | Advertising          |                                            |      | 5.4                        |       |                           |      | 5.7  |       |      |      | 6.2  |       |     |      | 6.1  |      
|                   |                                                    | Other                |                                            |      | 13.6                       |       |                           |      | 13.8 |       |      |      | 13.6 |       |     |      | 14.0 |      
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total store expenses                       |      |                            | 54.5  |                           |      |      | 51.9  |      |      |      | 53.6  |     |      |      | 52.6  |  
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total merchandise costs and store expenses |      |                            | 88.8  |                           |      |      | 87.4  |      |      |      | 88.1  |     |      |      | 87.3  |  
|                   | General and administrative expenses                |                      |                                            | 8.0  |                            |       |                           | 8.0  |      |       |      | 7.8  |      |       |     | 7.7  |     
|                   | Amortization of goodwill and noncompete agreements |                      |                                            | 0.2  |                            |       |                           | 0.7  |      |       |      | 0.2  |      |       |     | 0.7  |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Total operating expenses                   |      |                            | 97.0  |                           |      |      | 96.1  |      |      |      | 96.1  |     |      |      | 95.7  |  
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Operating income                           |      |                            | 3.0   |                           |      |      | 3.9   |      |      |      | 3.9   |     |      |      | 4.3   |  
|Interest expense   |                                                    |                      | 0.5                                        |      |                            |       | 0.6                       |      |      |       | 0.7  |      |      |       | 0.8 |     
|Other expense, net |                                                    |                      | 0.3                                        |      |                            |       | 0.3                       |      |      |       | 0.3  |      |      |       | 0.3 |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Income before income taxes                 |      |                            | 2.2   |                           |      |      | 3.0   |      |      |      | 2.9   |     |      |      | 3.2   |  
|Income taxes       |                                                    |                      | 0.8                                        |      |                            |       | 1.2                       |      |      |       | 1.1  |      |      |       | 1.3 |     
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     
|                   |                                                    |                      | Net income                                 |      |                            | 1.4   | %                         |      |      | 1.8   | %    |      |      | 1.8   | %   |      |      | 1.9   | %
|                   |                                                    |                      |                                            |      |                            |       |                           |      |      |       |      |      |      |       |     |     

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##### Table of Contents



Comparison of the Three and Nine Months Ended September 30, 2002 and 2001

Total revenues increased $1.7 million, or 7.6%, to $24.4 million for the
three months ended September 30, 2002 compared to $22.7 million for the three
months ended September 30, 2001. Revenue from comparable stores for the
three-month period, or stores in operation on July 1, 2001, increased $867,000,
or 3.8%, and was primarily attributable to an increase in average rental rates
and, to a lesser extent, an increase in collection performance. The increase in
average rental rates was primarily the effect of raising rental rates on
pre-rented merchandise during the second quarter of 2002 towards historical
levels as the quality of such merchandise improved over the previous year.
Additionally, average rental rates on new merchandise were higher comparing the
three months ended September 30, 2002 to September 30, 2001 due to effect of
lowered rental rates during 2001 and subsequently increasing rates in 2002, and,
to a lesser extent, changes in product mix. Partially offsetting these increases
was a slight decline in the number of units on rent due to a decrease in
customers comparing the three-month periods. Revenue from the 16 stores opened
after July 1, 2001 increased $850,000 comparing the three months ended September
30, 2002 to 2001 as these stores continue to build a customer base and develop a
recurring revenue stream.

Total revenues increased $3.6 million, or 5.2%, to $74.2 million for the
nine months ended September 30, 2002 compared to $70.6 million for the nine
months ended September 30, 2001. Revenue from comparable stores for the
nine-month period, or stores in operation on January 1, 2001, increased $1.4
million, or 2.0%, and, similar to the three-month period above, was due to an
increase in average rental rates and collection performance. The number of units
on rent remained flat comparing the nine months ended September 30, 2002 and
2001. Revenue from the 18 stores opened after January 1, 2001 accounted for $2.4
million of the increase as these stores continue to build a customer base and
develop a recurring revenue stream.

Merchandise costs increased $326,000, or 4.1%, to $8.3 million for the
three months ended September 30, 2002 compared to $8.0 million for the three
months ended September 30, 2001. Merchandise costs totaled 34.3% and 35.5% 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 $1.1 million, or 4.5%, to $25.6 million for the
nine months ended September 30, 2002 compared to $24.5 million for the nine
months ended September 30, 2001. Merchandise costs totaled 34.5% and 34.7% of
total revenues comparing the respective nine-month periods. The slight decrease
in merchandise costs as a percentage of revenue was the result of higher rental
merchandise margins in the last several months. The Company lowered rental rates
in mid-2001 in order to move older, pre-rented merchandise and to generate
additional customer traffic. The Company only began in the second quarter 2002
to raise rental rates towards historical levels.

Store expenses increased $1.5 million, or 12.9%, to $13.3 million for the
three months ended September 30, 2002 compared to $11.8 million for the three
months ended September 30, 2001. An increase in store expenses from the 16
stores opened after July 1, 2001 accounted for 67% of the increase, or $1.0
million. Costs associated with the consolidation of one store and required
write-down of leasehold improvements of a store identified for sale contributed
to the increase in store expenses. Increased comparable store salaries and
related expenses, in addition to normal scheduled rent increases, accounted for
the remainder of the increase. However, total comparable store expenses as a
percentage of comparable store revenue remained flat. Store expenses totaled
54.5% and 51.9% of total revenues, respectively, for the three months ended
September 30, 2002 and 2001.

Store expenses increased $2.6 million, or 7.1%, to $39.7 million for the
nine months ended September 30, 2002 compared to $37.1 million for the nine
months ended September 30, 2001. Store expenses associated with the 18 stores
opened after January 1, 2001 accounted for $2.4 million of the increase. Costs
associated with the consolidation of one store and required write-down of
leasehold improvements of a store identified for sale contributed to the
increase in store expenses. Increased comparable store salaries and related
expenses, in addition to normal scheduled rent increases, accounted for the
remainder of the increase. However, total comparable store expenses as a
percentage of comparable store revenue improved from 51.8% for the nine months
ended September 30, 2001 to 51.2% for the nine months ended September 30, 2002.
Store expenses totaled 53.6% and 52.6% of total revenues, respectively, for the
nine months ended September 30, 2002 and 2001.

General and administrative expenses increased $141,000, or 7.7%, to $2.0
million for the three months ended September 30, 2002 compared to $1.8 million
for the three months ended September 30, 2001. For the nine months ended
September 30, 2002, general and administrative expense increased $344,000, or
6.3%, to $5.8 million compared to $5.5 million for the nine months ended
September 30, 2001. The increase in general and administrative expenses for the
three- and nine-month periods was mostly attributable to higher costs associated
with the Companys manager trainee program due to more new store openings. In
addition, increased compensation for regional managers, due to higher
profitability of comparable stores and more regional managers, contributed to
the increase in general and administrative expenses comparing the respective
three- and nine-month periods. General and administrative expenses totaled 8.0%
of revenues for both the three months

10



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ended September 30, 2002 and 2001 and 7.8%
and 7.7% of revenues, respectively, for the nine months ended September 30, 2002
and 2001.

Interest expense remained relatively unchanged comparing the three months
ended September 30, 2002 to September 30, 2001. For the nine months ended
September 30, 2002 and 2001, interest expense decreased $68,000 due to lower
average outstanding debt and lower interest rates during 2002.

Income taxes decreased $77,000 and $39,000 comparing the respective three-
and nine-month periods and was due to a decline in income before tax in addition
to a decline in the Companys effective tax rate. The Companys effective tax
rate declined from 40.5% for the nine months ended September 30, 2001 to 39.5%
for the nine months ended September 30, 2002 due to a higher proportion of state
taxable income in states with lower income tax rates.

Liquidity and Capital Resources

The Companys primary requirements for capital consist of purchasing
additional and/or replacement rental-purchase merchandise, expenditures related
to new store openings, acquisitions and working capital requirements for new and
existing stores. The primary sources of liquidity and capital are from
operations, borrowings and the issuance of capital stock. For the nine months
ended September 30, 2002 and 2001, purchases of rental merchandise (excluding
acquired inventory) totaled $22.2 million and $24.1 million, respectively. This
$1.9 million decrease in purchases of rental merchandise was due to a decline in
units on rent and, to a lesser degree, a better utilization of idle inventory.

For the nine months ended September 30, 2002 and 2001, cash provided by
operations totaled $6.2 million and $7.4 million, respectively. The $1.2 million
reduction of cash provided by operations was primarily from changes in accounts
payable and purchases of rental purchase merchandise (see above). Changes in
accounts payable was primarily the result of timing of payments to vendors,
which were higher during the nine months ended September 30, 2002 versus the
comparable period due to higher fourth quarter 2001 inventory purchases. Cash
used in investing activities totaled $2.2 million and $1.6 million,
respectively, for the nine months ended September 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. The Company made substantial reductions in debt during both
the 2002 and 2001 nine-month periods. As a result, cash used in financing
activities was $4.2 million and $6.3 million for the nine months ended September
30, 2002 and 2001, respectively.

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 September 30, 2002 was
approximately $4.4 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.

The Company has opened twelve new stores in 2002 and does not expect to
open any additional stores for the remainder of the year. The Company expects to
open between 10 and 15 stores commencing in the second quarter of 2003. 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.

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Forward-Looking Statements

Statements made in this Form 10-Q, other than those concerning historical
information, or, in future filings by Rainbow Rentals, Inc. with the Securities
and Exchange Commission (SEC), in the Companys press releases or other public
or shareholder communications, or in oral statements made with the approval of
an authorized executive officer, constitute forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, and are
made pursuant to the safe harbor provisions of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements use such words as may, will, should, expects, plans,
anticipates, estimates, believes, thinks, continues, indicates,
outlook, looks, goals, initiatives, projects, or variations thereof.
Forward-looking statements are based on managements current beliefs and
assumptions regarding future events and operating performance and speak only as
of the date made. These statements are likely to address the Companys growth
strategy, future financial performance (including sales and earnings), strategic
initiatives, marketing and expansion plans and the impact of operating
initiatives. Forward-looking statements are subject to a number of risks,
uncertainties and other factors, many of which are outside the control of the
Company that could cause the Companys actual results to differ materially from
those expressed or implied in such statements. These risks and uncertainties
include the following: risks associated with general economic conditions;
failure to adequately execute plans and unforeseen circumstances beyond the
Companys control in connection with development, implementation and execution
of new business processes, procedures and programs; greater than expected
expenses associated with the Companys activities; the effects of new accounting
standards; and other risks and uncertainties described in the Companys Annual
Report on Form 10-K for the year ended December 31, 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.




Item 4: Controls and Procedures



| | (a) |  | Evaluation of disclosure controls and procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Based on an evaluation of our disclosure controls and procedures
conducted within 90 days of the date of filing this report on Form
10-Q, with the participation of management, including the principal
executive officer and the principal financial officer, as contemplated
by Securities Exchange Act Rule 13a-15, we have concluded that such
disclosure controls and procedures are effective to ensure that
material information relating to the Company are effective during the
period for which this periodic report has been prepared.
|
| | (b) |  | Changes in internal control                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | There were no significant changes made in the Companys internal
disclosure controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation performed
pursuant to Securities Exchange Act Rule 13a-15 referred to above.                                                                                                                                                                                                                                                                    

12



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




Item 6. Exhibits and Reports on Form 8-K



| | A. |  | Exhibits: None           
| | -- |  | -------------------------
|
| | B. |  | Reports on Form 8-K: None

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SIGNATURES

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



| | RAINBOW RENTALS, INC.
(Registrant)
| | ----------------------------------



| | /s/ WAYLAND J. RUSSELL
Wayland J. Russell, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2002
| | -------------------------------------------------------------------------------------------------------------------------------------



| | /s/ MICHAEL A. PECCHIA
Michael A. Pecchia,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 12, 2002
| | ---------------------------------------------------------------------------------------------------------------------------------------

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Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

I, Wayland J. Russell, the Chairman and Chief Executive Officer of Rainbow
Rentals, Inc. (the Company), certify that to the best of my knowledge, based
upon a review of the Quarterly Report on Form 10-Q for the period ended
September 30, 2002 of the Company (the Report):



| |  |  | (1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and                   
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results
of operations of the Company.

/s/ WAYLAND J. RUSSELL

---

November 12, 2002

15



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##### Table of Contents



Certification of the Principal
Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

I, Michael A. Pecchia, Chief Financial Officer of Rainbow Rentals, Inc. (the Company) certify that to the best of my
knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the
Company (the Report):

(1)  The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)  The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.

/s/ Michael A. Pecchia

---

Michael A. Pecchia
Rainbow Rentals, Inc.
Chief Financial Officer

November 12, 2002

16



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##### Table of Contents






Certification of the Principal
Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Wayland J. Russell, the Chairman and Chief Executive Officer of Rainbow Rentals, Inc. (the Company), certify that:



| |  | (1) I have reviewed this quarterly report on Form 10-Q of the Company;                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|
| |  | (3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the Company as of, and for, the
periods presented in this quarterly report;                      
|
| |  | (4) The Companys other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Company and we have:                                                                                                            



| |  |  | (a) designed such disclosure controls and procedures to
ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) evaluated the effectiveness of the Companys
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the Evaluation Date); and                                                                                                  
|
| |  |  | (c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;                                                                                                                     



| |  | (5) The Companys other certifying officer and I have disclosed,
based on our most recent evaluation, to the Companys auditors and
the audit committee of Companys board of directors (or persons
performing the equivalent function):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the Companys ability to record, process, summarize
and report financial data and have identified for the
Companys auditors any material weaknesses in internal
controls; and
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Companys internal controls; and                                                                                                                                     



| |  | (6) The Companys other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

/s/ Wayland J. Russell

---

Wayland J. Russell
Rainbow Rentals, Inc.
Chairman and Chief Executive Officer

November 12, 2002

17



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##### Table of Contents



Certification of the Principal
Financial Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Michael A. Pecchia, the Chief Financial Officer of Rainbow Rentals, Inc. (the Company), certify that:



| |  | (1) I have reviewed this quarterly report on Form 10-Q of the Company;                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|
| |  | (3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the Company as of, and for, the
periods presented in this quarterly report;                      
|
| |  | (4) The Companys other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Company and we have:                                                                                                            



| |  |  | (a) designed such disclosure controls and procedures to
ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) evaluated the effectiveness of the Companys
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the Evaluation Date); and                                                                                                  
|
| |  |  | (c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;                                                                                                                     



| |  | (5) The Companys other certifying officer and I have disclosed,
based on our most recent evaluation, to the Companys auditors and
the audit committee of Companys board of directors (or persons
performing the equivalent function):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the Companys ability to record, process, summarize
and report financial data and have identified for the
Companys auditors any material weaknesses in internal
controls; and
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Companys internal controls; and                                                                                                                                     



| |  | (6) The Companys other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

/s/ Michael A. Pecchia

---

Michael A. Pecchia
Rainbow Rentals, Inc.
Chief Financial Officer

November 12, 2002

18