FORM 10-Q

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

        |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACTS OF 1934

For the Quarter ended JUNE 30, 2002              Commission file number: 0-16641

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

        DELAWARE                                      95-3745398
(State of incorporation)                   (I.R.S. Employer Identification No.)

50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA                   92618
(Address of principal executive offices)                (Zip Code)

Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days.

                                 Yes |X| No |_|

The number of shares of common stock, $.001 par value, outstanding as of August
5, 2002, was 26,721,580.

<PAGE>

                           RAINBOW TECHNOLOGIES, INC.

                                TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION                                              Page
                                                                            ----

Item 1. Condensed Consolidated Financial Statements

        Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited)
          and December 31, 2001 ...........................................   4

        Condensed Consolidated Statements of Operations for the three
          and six months ended June 30, 2002 and 2001 (unaudited) .........   5

        Condensed Consolidated Statements of Comprehensive Loss for the
          three and six months ended June 30, 2002 and 2001 (unaudited) ...   6

        Condensed Consolidated Statements of Cash Flows for the six
          months ended June 30, 2002 and 2001 (unaudited) .................   7

        Notes to Condensed Consolidated Financial Statements (unaudited) ..   8

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations .............................................  14

PART II - OTHER INFORMATION

Item 1 to 5 - Not applicable

Item 6. Exhibits and reports on Form 8K ...................................  17

SIGNATURES ................................................................  20


                                       2
<PAGE>

INTRODUCTORY NOTE

      The Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Company intends that
such forward-looking statements be subject to the safe harbors created thereby.
These forward-looking statements include (i) the existence and development of
the Company's technical and manufacturing capabilities, (ii) anticipated
competition, (iii) potential future growth in revenues and income, (iv)
potential future decreases in costs, and (v) the need for, and availability of
additional financing.

      The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on the assumption that the Company will not
lose a significant customer or customers or experience increased fluctuations of
demand or rescheduling of purchase orders, that the Company's markets will
continue to grow, that the Company's products will remain accepted within their
respective markets and will not be replaced by new technology, that competitive
conditions within the Company's markets will not change materially or adversely,
that the Company will retain key technical and management personnel, that the
Company's forecasts will accurately anticipate market demand, that there will be
no material adverse change in the Company's operations or business and that the
Company will not experience significant supply shortages with respect to
purchased components, sub-systems or raw materials. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks, which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.


                                       3
<PAGE>

                           RAINBOW TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                                 June 30, 2002     December 31, 2001
                                                                                                 -------------     -----------------
                                                                                                  (unaudited)
<S>                                                                                                 <C>                <C>
                                                       ASSETS
Current assets:
  Cash and cash equivalents ...............................................................         $  37,875          $  28,778
  Marketable available-for-sale and trading securities ....................................               215              1,195
  Accounts receivable, net of allowance for doubtful accounts of $1,424 and
       $1,858 in 2002 and 2001, respectively ..............................................            20,725             24,492
  Inventories .............................................................................            10,213             20,711
  Income tax receivable ...................................................................             4,700              1,844
  Deferred income taxes ...................................................................                --             13,901
  Unbilled costs and fees .................................................................             1,851              2,227
  Prepaid expenses and other current assets ...............................................             1,907              1,634
                                                                                                    ---------          ---------
    Total current assets ..................................................................            77,486             94,782
Property, plant and equipment, at cost:
  Equipment ...............................................................................            21,630             20,838
  Buildings ...............................................................................             7,344              6,655
  Furniture ...............................................................................             2,956              2,810
  Leasehold improvements ..................................................................             2,958              2,946
                                                                                                    ---------          ---------
                                                                                                       34,888             33,249
  Less accumulated depreciation and amortization ..........................................            19,883             17,336
                                                                                                    ---------          ---------
    Net property, plant and equipment .....................................................            15,005             15,913
  Goodwill, net of accumulated amortization of $35,530 and $22,104 in 2002
       and 2001, respectively .............................................................             1,695             15,638
  Software development costs, net of accumulated amortization of $18,539 and
      $11,218 in 2002 and 2001, respectively ..............................................             4,237             10,768
  Product licenses, net of accumulated amortization of $4,615 and $3,537 in
       2002 and 2001, respectively ........................................................             4,905              4,030
  Deferred income taxes ...................................................................                --              2,421
  Other assets ............................................................................             2,295              2,413
                                                                                                    ---------          ---------
                                                                                                    $ 105,623          $ 145,965
                                                                                                    =========          =========

                                       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable ........................................................................         $   7,428          $   9,929
  Accrued payroll and related expenses ....................................................             6,064              5,063
  Accrued restructuring costs .............................................................             2,599              3,130
  Warranty reserve ........................................................................             2,279              2,417
  Other accrued liabilities ...............................................................             7,330              5,041
  Long-term debt, due within one year .....................................................               235                211
                                                                                                    ---------          ---------
    Total current liabilities .............................................................            25,935             25,791
  Long-term debt, net of current portion ..................................................               411                476
  Other liabilities .......................................................................             3,115              2,959
  Commitments and contingencies
  Shareholders' equity:
  Common stock, $.001 par value, 55,000,000 shares authorized, 26,546,869 and
       26,157,594 shares issued and outstanding in 2002 and 2001, respectively ............                27                 26
  Additional paid-in capital ..............................................................            59,893             56,885
  Accumulated other comprehensive loss ....................................................              (131)            (1,539)
  Retained earnings .......................................................................            17,013             61,367
                                                                                                    ---------          ---------
                                                                                                       76,802            116,739
  Less cost of treasury shares (150,000 shares) ...........................................              (640)                --
                                                                                                    ---------          ---------
    Total shareholders' equity ............................................................            76,162            116,739
                                                                                                    ---------          ---------
                                                                                                    $ 105,623          $ 145,965
                                                                                                    =========          =========
</TABLE>

                             See accompanying notes.


                                       4
<PAGE>

                           RAINBOW TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                   Three Months Ended                     Six Months Ended
                                                              -------------------------------     -------------------------------
                                                              June 30, 2002     June 30, 2001     June 30, 2002     June 30, 2001
                                                              -------------     -------------     -------------     -------------
                                                                                          (unaudited)
<S>                                                           <C>               <C>               <C>               <C>
Revenues:
  eSecurity Products .....................................    $      12,280     $      16,406     $      24,333     $      33,653
  Secure Communications Products .........................           18,700            17,137            37,832            35,785
                                                              -------------     -------------     -------------     -------------
    Total revenues .......................................           30,980            33,543            62,165            69,438
Operating expenses:
  Cost of eSecurity Products .............................           19,225             7,305            25,362            14,836
  Cost of Secure Communications Products .................           15,107            12,971            30,250            28,149
  Selling, general and administrative ....................            9,400            11,402            16,091            22,803
  Research and development ...............................            2,881             3,384             4,730             6,412
  Goodwill amortization ..................................               --               252                --               505
                                                              -------------     -------------     -------------     -------------
    Total operating expenses .............................           46,613            35,314            76,433            72,705
                                                              -------------     -------------     -------------     -------------
Operating loss ...........................................          (15,633)           (1,771)          (14,268)           (3,267)
Loss on marketable trading securities ....................              (59)             (959)              (90)           (3,548)
Interest income ..........................................              119               139               207               365
Interest expense .........................................              (31)              (38)              (79)              (68)
Other income (expense), net ..............................               29              (595)              277              (392)
                                                              -------------     -------------     -------------     -------------
Loss from continuing operations before income taxes ......          (15,575)           (3,224)          (13,953)           (6,910)
Benefit (provision) for income taxes .....................          (13,384)            1,225           (13,733)            2,626
                                                              -------------     -------------     -------------     -------------
Loss from continuing operations ..........................          (28,959)           (1,999)          (27,686)           (4,284)
Loss from discontinued operations, net of applicable taxes          (15,963)             (256)          (16,668)             (542)
                                                              -------------     -------------     -------------     -------------
Net loss .................................................    $     (44,922)    $      (2,255)    $     (44,354)    $      (4,826)
                                                              =============     =============     =============     =============
Basic and diluted loss per share:
   Loss from continuing operations .......................    $       (1.09)    $       (0.08)    $       (1.05)    $       (0.17)
                                                              =============     =============     =============     =============
   Loss from discontinued operations .....................    $       (0.60)    $       (0.01)    $       (0.63)    $       (0.02)
                                                              =============     =============     =============     =============
Net loss .................................................    $       (1.69)    $       (0.09)    $       (1.68)    $       (0.19)
                                                              =============     =============     =============     =============

Shares used in computing net loss per share:
   Basic .................................................           26,546            26,055            26,476            26,038
                                                              =============     =============     =============     =============
   Diluted ...............................................           26,546            26,055            26,476            26,038
                                                              =============     =============     =============     =============
</TABLE>

                             See accompanying notes.


                                       5
<PAGE>

                           RAINBOW TECHNOLOGIES, INC.
             CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                     Three Months Ended                  Six Months Ended
                                                               -------------------------------     -------------------------------
                                                               June 30, 2002     June 30, 2001     June 30, 2002     June 30, 2001
                                                               -------------     -------------     -------------     -------------
                                                                                           (unaudited)
<S>                                                            <C>               <C>               <C>               <C>
Net loss ..................................................    $     (44,922)    $      (2,255)    $     (44,354)    $      (4,826)
Other comprehensive income (loss):
  Foreign currency translation adjustment .................            2,917              (535)            2,394            (2,237)
  Unrealized loss on securities ...........................              (86)             (121)             (123)             (171)
                                                               -------------     -------------     -------------     -------------
  Other comprehensive income (loss), before income taxes ..            2,831              (656)            2,271            (2,408)
  Benefit (provision) for income taxes related to other
     comprehensive income (loss) ..........................           (1,075)              249              (863)              915
                                                               -------------     -------------     -------------     -------------
  Other comprehensive income (loss), net of taxes .........            1,756              (407)            1,408            (1,493)
                                                               -------------     -------------     -------------     -------------
Comprehensive loss ........................................    $     (43,166)    $      (2,662)    $     (42,946)    $      (6,319)
                                                               =============     =============     =============     =============
</TABLE>

                             See accompanying notes.


                                       6
<PAGE>

                           RAINBOW TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                 Six Months Ended
                                                                          -------------------------------
                                                                          June 30, 2002     June 30, 2001
                                                                          -------------     -------------
                                                                                     (unaudited)
<S>                                                                       <C>               <C>
Cash flows from operating activities:
  Net loss ...........................................................    $     (44,354)    $      (4,826)
  Adjustments to reconcile net loss to net cash provided by
    operating activities:
  Amortization .......................................................            2,285             4,181
  Depreciation .......................................................            1,808             1,909
  Change in deferred income taxes ....................................           16,260              (182)
  Reversal of allowance for doubtful accounts ........................             (656)              (19)
  Minority interest in subsidiary's earnings .........................              100                22
  Unrealized loss on marketable trading securities ...................               90             3,548
  Provision for excess and obsolete inventory ........................            9,619             1,167
  Warranty provision .................................................              769               101
  Write-off of long-term investment ..................................              260                --
  Write-off of capitalized and developed software ....................            5,436                --
  Write-off of Spectria goodwill .....................................           12,840                --
  Provision for impairment of assets on discontinued operations ......            2,118                --
  Tax benefit of exercise of common stock options ....................               --               137
Changes in operating assets and liabilities:
    Accounts receivable ..............................................            4,826            11,532
    Inventories ......................................................            1,021              (442)
    Unbilled costs and fees ..........................................              376            (2,363)
    Prepaid expenses and other current assets ........................             (300)              413
    Accounts payable .................................................           (2,709)           (1,574)
    Accrued liabilities ..............................................              (96)           (3,767)
    Billings in excess of costs and fees .............................              248              (350)
    Income taxes .....................................................           (2,710)           (3,673)
                                                                          -------------     -------------
      Net cash provided by operating activities ......................            7,231             5,814
Cash flows from investing activities:
  Purchases of property, plant and equipment .........................             (737)           (3,260)
  Capitalized software development costs .............................             (423)           (4,001)
  Other assets .......................................................              826               332
  Net cash paid for acquisition of Impex Computacion, S.A. de C.V ....             (297)               --
  Additional investment in Rainbow Technologies (Taiwan) Co. Ltd. ....             (225)               --
  Cash paid for investment in DataSafe Technologies, China ...........               --              (231)
  Investment in Rainbow Technologies K.K., Japan .....................               --            (1,357)
  Additional investment in Rainbow Goldensoft, China .................               --            (1,031)
                                                                          -------------     -------------
      Net cash used in investing activities ..........................             (856)           (9,548)
Cash flows from financing activities:
  Exercise of common stock options ...................................            3,009               461
  Repayment of line of credit ........................................               --            (3,129)
  Repayment of long-term debt ........................................             (110)             (155)
  Purchase of treasury stock .........................................             (640)               --
                                                                          -------------     -------------
      Net cash provided by (used in) financing activities ............            2,259            (2,823)
Effect of exchange rate changes on cash ..............................              463               731
                                                                          -------------     -------------
Net increase (decrease) in cash and cash equivalents .................            9,097            (5,826)
Cash and cash equivalents at beginning of year .......................           28,778            19,458
                                                                          -------------     -------------
Cash and cash equivalents at end of year .............................    $      37,875     $      13,632
                                                                          =============     =============
</TABLE>

                             See accompanying notes.


                                       7
<PAGE>

                           RAINBOW TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2002
                                   (Unaudited)

1. Basis of presentation

Rainbow Technologies, Inc. (the Company) develops, manufactures, programs and
markets software and internet security products which prevent the unauthorized
use of intellectual property, including software programs, provides privacy and
security for network communications and develops and manufactures secure
communication products for satellite communications. The accompanying financial
statements consolidate the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated. Certain amounts previously reported have been reclassified to
conform to the 2002 presentation.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements. Actual results could differ from those estimates. Significant
estimates made in preparing these financial statements include the allowance for
doubtful accounts, the reserve for excess and obsolete inventory, goodwill
valuations, accrued warranty costs, restructuring costs, the valuation allowance
for deferred tax assets and total estimated contract costs associated with
billed and unbilled contract revenue.

Management determines the appropriate classification of its investments in
marketable securities at the time of purchase. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and carried at fair value with the unrealized holding
gains and losses included in earnings. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of Accumulated Other Comprehensive Loss within Shareholders'
Equity.

In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all normal recurring adjustments
necessary for a fair presentation of the financial position at June 30, 2002 and
results of operations for the three and six months ended June 30, 2002 and 2001.
The condensed consolidated financial statements do not include footnotes and
certain financial information normally presented annually under generally
accepted accounting principles and, therefore, should be read in conjunction
with the Company's December 31, 2001 Annual Report on Form 10-K. Results of
operations for the three and six months ended June 30, 2002 are not necessarily
indicative of results to be expected for the full year.

The Company has subsidiaries in the United Kingdom, Germany, France,
Netherlands, India, Australia, China, Taiwan, Japan and Mexico. The Company
utilizes the currencies of the countries where its foreign subsidiaries operate
as the functional currency. Balance sheet accounts denominated in foreign
currency are translated at exchange rates as of the date of the balance sheet
and income statement accounts are translated at average exchange rates for the
period. Translation gains and losses are accumulated as a separate component of
Accumulated Other Comprehensive Loss within Shareholders' Equity. The Company
has adopted local currencies as the functional currencies for its subsidiaries
because their principal economic activities are most closely tied to the
respective local currencies.

2. Earnings per share

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflect the assumed conversion of all diluted
securities.

3. Government Contracts

The Company is both a prime contractor and subcontractor under fixed-price and
cost-reimbursement contracts with the U.S. Government (Government). At the
commencement of each contract or contract modification, the Company submits
pricing proposals to the Government to establish indirect cost rates applicable
to such contracts. These rates, after audit and approval by the Government, are
used to settle costs on completed contracts.

To facilitate interim billings during the performance of its contracts, the
Company establishes provisional billing rates, which are used in recognizing
contract revenue and contract accounts receivable. The provisional billing rates
are adjusted to actual at year-end and are subject to adjustment after
Government audit.


                                       8
<PAGE>

4. Inventories

Inventoried costs relating to long-term contracts are stated at actual
production costs, including pro-rata allocations of factory overhead and general
and administrative costs incurred-to-date, reduced by amounts identified with
revenue recognized on units delivered. The costs attributed to units delivered
under such long-term contracts are based on the estimated average cost of all
units expected to be produced.

Inventories, other than inventoried costs relating to long-term contracts, are
stated at the lower of cost (first-in, first-out basis) or market.

Inventories consist of the following:
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                    June 30, 2002  December 31, 2001
                                                                    -------------  -----------------
     <S>                                                            <C>               <C>
     Raw materials ..............................................   $     10,585      $     14,016
     Work in process ............................................          2,027             2,643
     Finished goods .............................................          5,878             5,883
     Inventoried costs relating to long-term contracts, net of
        amounts attributed to revenues recognized to date .......          4,777             4,569
     Reserve for excess and obsolete inventory ..................        (13,054)           (6,400)
                                                                    ------------      ------------
                                                                    $     10,213      $     20,711
                                                                    ============      ============
</TABLE>

5. Goodwill and other intangible assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and
other Intangible Assets." SFAS No. 141 addresses financial accounting and
reporting for a business combination and requires all business combinations to
be accounted for using the purchase method. SFAS No. 141 is effective for any
business combinations initiated after June 30, 2001. SFAS No. 142 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. Goodwill and other intangible assets with
indefinite lives are no longer amortized but instead are subject to an
impairment test at least annually. The impairment test is comprised of two
parts. The first step compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount exceeds the fair
value of the reporting unit, the second step of the goodwill impairment test
must be performed. The second step compares the implied fair value of the
reporting unit's goodwill with the respective carrying amount in order to
determine the amount of impairment loss, if any. In accordance with SFAS No.
142, the Company performed the first part of the two-step goodwill impairment
test for its business segments with goodwill, excluding the $12.8 million of
goodwill related to the Spectria business segment, which was written-off and
included in the loss from discontinued operations in the consolidated statement
of operations for the three and six months ended June 30, 2002 (see note 12).
For each of the Company's business segments for which goodwill was recorded, the
Company determined that the fair value exceeded the carrying amount as of
January 1, 2002. As a result, the second step of the impairment test was not
required. Additionally, under SFAS No. 142, the Company ceased amortizing its
remaining goodwill balance which will result in reduced amortization of
approximately $0.6 million, net of tax, in fiscal 2002. Total amortization
expense for the three and six months ended June 30, 2002 for other intangible
assets subject to amortization, were $1.0 million and $2.3 million,
respectively.

The following table reconciles the Company's net loss and net income (loss) per
share from continuing operations as reported, to the amounts adjusted for the
exclusion of goodwill amortization, net of the related income tax effect for the
period prior to the adoption of SFAS No. 142.

(dollars in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                Three Months Ended                    Six Months Ended
                                                          -------------------------------     -------------------------------
                                                          June 30, 2002     June 30, 2001     June 30, 2002     June 30, 2001
                                                          -------------     -------------     -------------     -------------
<S>                                                       <C>               <C>               <C>               <C>
Net loss from continuing operations:
   As reported .......................................    $     (28,959)    $      (1,999)    $     (27,686)    $      (4,284)
   eSecurity Products goodwill amortization,
     net of tax ......................................               --               156                --               313
                                                          -------------     -------------     -------------     -------------
       As adjusted ...................................    $     (28,959)    $      (1,843)    $     (27,686)    $      (3,971)
                                                          =============     =============     =============     =============
Basic & diluted income (loss) per share from
 continuing operations:
   As reported .......................................    $       (1.09)    $       (0.08)    $       (1.05)    $       (0.17)
   eSecurity Products goodwill amortization,
     net of tax ......................................               --              0.01                --              0.01
                                                          -------------     -------------     -------------     -------------

       As adjusted ...................................    $       (1.09)    $       (0.07)    $       (1.05)    $       (0.16)
                                                          =============     =============     =============     =============
</TABLE>


                                       9
<PAGE>

The following table presents details of the Company's other intangible assets
that are subject to amortization:

(dollars in thousands):

<TABLE>
<CAPTION>
                                                     June 30, 2002                                December 31, 2001
                                      ---------------------------------------------  ----------------------------------------------
                                                      Accumulated                                     Accumulated
                                         Gross        Amortization         Net           Gross        Amortization         Net
                                      ------------    ------------     ------------   ------------    ------------     ------------
<S>                                   <C>             <C>              <C>            <C>             <C>              <C>
Software development costs .........  $     22,776    $    (18,539)    $      4,237   $     21,986    $    (11,218)    $     10,768
Product license ....................         9,520          (4,615)           4,905          7,567          (3,537)           4,030
                                      ------------    ------------     ------------   ------------    ------------     ------------
                           Total ...  $     32,296    $    (23,154)    $      9,142   $     29,553    $    (14,755)    $     14,798
                                      ============    ============     ============   ============    ============     ============
</TABLE>

At June 30, 2002, the amortization of the remaining balance of other intangible
assets of $9.1 million will be $1.6 million for the remainder of 2002. The
amortization for each of the fiscal years 2003, 2004, 2005, 2006 and thereafter
will be $2.4 million, $2.2 million, $1.3 million, $0.8 million and $0.6 million,
respectively. At June 30, 2002, the Company had $0.2 million of unamortized
software development costs included in the remaining balance of other intangible
assets of $9.1 million, which had not begun amortization. Amortization of
software development costs commences when the products are available for general
release to customers.

6. Software development costs

SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Amortization of capitalized software
development costs commences when the products are available for general release
to customers and are determined using the straight-line method over the expected
useful lives of the respective products. These amounts are written-off if it is
determined that the projects cannot be brought to market.

7. Other assets

Other assets primarily represent investments in early stage companies that are
accounted for on the cost basis. The Company periodically reviews these
investments for other-than-temporary declines in fair value and writes down
investments to their fair value when an other-than-temporary decline has
occurred based on the specific identification method. The Company generally
believes an other-than-temporary decline has occurred when the fair value of the
investment is below the carrying value for two consecutive quarters, absent
evidence to the contrary.

8. Industry segments

In June 2002, the Company announced that its Spectria segment had experienced
rapidly deteriorating business prospects due to a severe decline in IT services
infrastructure spending. Consequently, the Company discontinued Spectria and is
closing its facility in Long Beach, California. Spectria's results of operations
are included in the loss from discontinued operations in the consolidated
statement of operations for the three and six months ended June 30, 2002. The
identifiable assets, after applicable eliminations for Spectria as of June 30,
2002 were $0.6 million as compared with $16.5 million as of December 31, 2001
(see note 12).

The Company has two business segments comprising continuing operations. The
first segment focuses on commercial security products, including solutions for
reliable identity, secure internet and wireless transaction acceleration,
licensing solutions for software publishers, easy to deploy Web security
solutions and security training and consulting for enterprise IT staff
(eSecurity Products). The second segment provides products and services for
enterprise, government and defense applications for products providing security
for classified information, for products providing personal identity
authentication for government and defense applications, and custom design
services for enterprises, government and defense applications requiring either
extraordinary performance and/or security (Secure Communications Products).
These two business segments are increasingly working closely together. The
identifiable assets, after applicable eliminations, for each segment from
continuing operations as of June 30, 2002, were $79.3 million and $25.7 million,
respectively, compared with $101.8 million and $27.7 million as of December 31,
2001.

Intercompany revenues for the three and six months ended June 30, 2002 were
$16,000 and $17,000, respectively, and $91,000 and $266,000, respectively, for
the corresponding periods in the prior year. Intercompany revenues are generated
by the Secure Communications segment.


                                       10
<PAGE>

9. Recent accounting pronouncements

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that opinion). SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions than were included
under the previous standards. Under SFAS No. 144, a component of a business that
either has been disposed of or is classified as held for sale is reported in
discontinued operations if (i) the operations and cash flows will be, or have
been, eliminated from the on-going operations of the company as a result of the
disposal transaction and, (ii) the company will not have any significant
continuing involvement in such operations.

In June 2002, the Company announced that its Spectria segment had experienced
rapidly deteriorating business prospects due to a severe decline in IT services
infrastructure spending. Consequently, the Company discontinued Spectria and is
closing its facility in Long Beach, California. The Company wrote-off Spectria's
goodwill balance of $12.8 million and recorded a $2.1 million provision based on
management's current estimates of the amounts to be realized on the disposal of
its assets. The amount the Company will ultimately realize could differ from the
assumptions currently used in arriving at the anticipated loss. Spectria's
results of operations are included in the loss from discontinued operations in
the consolidated statement of operations for the three and six months ended June
30, 2002 (see note 12).

10. Litigation

In September 1998, a patent infringement action was filed against the Company by
Globetrotter, Inc., alleging that certain of the Company's products infringe
patents owned by Globetrotter. The complaint seeks unspecified monetary damages
and a permanent injunction banning the use of the products alleged to infringe
the Globetrotter patents. On September 24, 2001, the District Court granted
partial summary judgment in favor of the Company as it relates to allegations by
Globetrotter. The Company has filed a counterclaim alleging antitrust and unfair
competition and has been vigorously prosecuting their antitrust and other
business tort claims. The counterclaims are presently set for trial on December
2, 2002.

In July 1998, a patent infringement claim was filed against the Company by
Andrew Pickholtz, alleging that certain of the Company's products infringe a
patent owned by Pickholtz. The complaint seeks unspecified monetary damages. The
Company filed a motion for summary judgment of noninfringement that was decided
in favor of the Company in December 2000. In January 2001, Mr. Pickholtz filed a
notice of appeal. After considering legal briefs filed by the Company and by Mr.
Pickholtz, the Court of Appeals for the Federal Circuit heard oral arguments in
the case on November 7, 2001. On April 3, 2002, the appellate court issued an
opinion which reversed the trial court's entry of summary judgment in favor of
the Company, and remanded the case to the trial court for further proceedings.
Mr. Pickholtz filed a petition seeking a rehearing as to certain issues, which
the appellate court denied on April 29, 2002. The matter is now tentatively
scheduled for mediation on September 13, 2002. The Company continues to believe
the claims are without merit and intends to continue to vigorously defend
against any infringement claims made by Mr. Pickholtz.

In June 2002, a breach of contract lawsuit was filed against the Company by a
supplier. The complaint seeks damages of $3.9 million. The Company has recorded
$2.6 million related to this matter that is included in accounts payable. The
Company believes that the additional claim is without merit and intends to
vigorously defend this matter.

The Company is also involved in other legal proceedings and claims arising in
the ordinary course of business. The Company does not believe that any
liabilities related to the legal proceedings to which it is a party are likely
to be, individually or in the aggregate, material to the Company's consolidated
financial condition, results of operations or cash flows.

11. Restructuring charges

In the third quarter of 2001, the Company restructured and consolidated its
Digital Rights Management and iVEA operations (eSecurity Products), resulting in
a net staff reduction of 97 employees across all employee groups, primarily in
the U.S., and recorded restructuring charges of $6.4 million.

The following table summarizes the Company's restructuring costs and activities
from continuing operations in the restructuring reserves:

(dollars in thousands):


                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                        Facilities
                                                           and
                                                        Equipment        Severance          Total
                                                       ------------     ------------     ------------
<S>                                                    <C>              <C>              <C>
Charged to costs and expenses at September 30, 2001    $      4,699     $      1,131     $      5,830
Cash payments                                                  (538)            (931)          (1,469)
                                                       ------------     ------------     ------------

Restructuring balance, December 31, 2001                      4,161              200            4,361
Cash payments                                                  (503)            (173)            (676)
                                                       ------------     ------------     ------------
Restructuring balance, June 30, 2002                   $      3,658     $         27     $      3,685
                                                       ============     ============     ============
</TABLE>

The following table summarizes the Company's restructuring costs and activities
from discontinued operations in the restructuring reserves:

<TABLE>
<CAPTION>
                                                                 Facilities
                                                                    and
                                                                 Equipment
                                                                ------------
<S>                                                             <C>
Charged to costs and expenses at September 30, 2001             $        572
Cash payments                                                           (160)
                                                                ------------

Restructuring balance, December 31, 2001                                 412
Cash payments                                                           (112)
                                                                ------------

Restructuring balance, June 30, 2002                            $        300
                                                                ============
</TABLE>

The current portion of the restructuring reserve of $2.6 million relating to
office space reduction and severance is shown separately under current
liabilities while the long-term portion of the reserve of $1.4 million is
recorded in other liabilities. Exit activities are anticipated to continue
through 2002 with certain lease obligations currently expiring in 2005.

12. Discontinued operations and other charges

In June 2002, the Company announced that its Spectria segment had experienced
rapidly deteriorating business prospects due to a severe decline in IT services
infrastructure spending. Consequently, the Company discontinued Spectria and is
closing its facility in Long Beach, California. The Company wrote-off Spectria's
goodwill balance of $12.8 million and recorded a $2.1 million provision based on
management's current estimates of the amounts to be realized on the disposal of
its assets. The amount the Company will ultimately realize could differ from the
assumptions currently used in arriving at the anticipated loss. Spectria's
results of operations are included in the loss from discontinued operations in
the consolidated statement of operations for the three and six months ended June
30, 2002.

The revenues and loss from discontinued operations for the three and six months
ended June 30, 2002 and 2001 related to the disposal of Spectria are as follows:

(dollars in thousands)

<TABLE>
<CAPTION>
                                            Three Months Ended                  Six Months Ended
                                     -------------------------------     -------------------------------
                                     June 30, 2002     June 30, 2001     June 30, 2002     June 30, 2001
                                     -------------     -------------     -------------     -------------
<S>                                  <C>               <C>               <C>               <C>
Revenues .........................   $         909     $       3,802     $       2,745     $       8,107
Loss from discontinued operations.   $     (15,963)    $        (256)    $     (16,668)    $        (542)
</TABLE>


                                       12
<PAGE>

The assets and liabilities of Spectria at June 30, 2002 and December 31, 2001
consisted of the following:

(dollars in thousands)

                                                June 30, 2002  December 31, 2001
                                                -------------  -----------------

Cash and accounts receivable ..................   $        483   $      2,576
Prepaid expenses and other current assets .....             53            384
Property, plant and equipment .................             31            652
Goodwill, net of accumulated amortization .....             --         12,840
                                                  ------------   ------------

Total assets of discontinued operations .......   $        567   $     16,452
                                                  ============   ============
Accounts payable and other
    accrued liabilities .......................   $      1,553   $      1,209
Accrued payroll and related expenses ..........            401            598
Accrued restructuring costs ...................            300            412
Long-term debt ................................             --            162
                                                  ------------   ------------
Total liabilities of discontinued operations ..   $      2,254   $      2,381
                                                  ============   ============

In June 2002, the Company recorded total other charges of $29.4 million from
continuing operations which included $16.0 million related to slow moving
inventories and discontinued products from its eSecurity segment and $13.4
million of provision for income taxes, which included $11.6 million of deferred
income tax valuation allowance. Other charges from its eSecurity segment
resulted from lower than expected sales forecasts and discontinued products.

The following table summarizes the other charges from continuing operations
recorded in the second quarter of 2002:

(dollars in thousands)

<TABLE>
<CAPTION>
                                                       Cost           Selling,         Research         Provision
                                                        of           General and          and          for Income
                                                       Sales        Administrative    Development         Taxes            Total
                                                   -------------    --------------   -------------    -------------    -------------
<S>                                                <C>              <C>              <C>              <C>              <C>
Reserve for excess and obsolete inventory........  $       8,392                                                       $       8,392
Write-off of capitalized and developed software..          5,043                                                               5,043
Warranty reserve ................................            462                                                                 462
Provision for bad debts..........................                             198                                                198
Reserve for employee severance...................            168              633                                                801
Write-off of long-term investment................                             260                                                260
Other charges....................................            200              300              334                               834
Provision for income taxes.......................                                                            13,384           13,384
                                                   -------------    -------------    -------------    -------------    -------------

Other charges, June 30, 2002.....................  $      14,265    $       1,391    $         334    $      13,384    $      29,374
                                                   =============    =============    =============    =============    =============
</TABLE>

13. Income taxes

The Company recorded income tax expense from continuing operations of $13.4
million and $13.7 million for the three and six months ended June 30, 2002,
respectively, and an income tax benefit of $1.2 million and $2.6 million for the
three and six months ended June 30, 2001. During June 2002, the Company
determined that the realization of its net deferred tax asset is uncertain and,
therefore, recorded $11.6 million of valuation allowance in accordance with SFAS
No. 109, "Accounting for Income Taxes".


                                       13
<PAGE>

                           RAINBOW TECHNOLOGIES, INC.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion and analysis of certain significant
factors which have affected the consolidated results of operations, and the
consolidated financial position of the Company during the periods included in
the accompanying condensed consolidated financial statements. This discussion
should be read in conjunction with the related condensed consolidated financial
statements and associated notes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. The Company believes that the following are some of
the more critical judgment areas in the application of its accounting policies
that currently affect its consolidated financial condition and results of
operations.

Revenue Recognition

eSecurity recognizes revenues from product sales at the time of shipment. Secure
Communications recognizes revenue and profit as work progresses on long-term
contracts using the percentage-of-completion method, which relies on estimates
of total expected contract revenue and costs. Catalog product revenues and
revenues under certain fixed-price contracts calling for delivery of a specified
number of units are recognized as deliveries are made. Revenues under
cost-reimbursement contracts are recognized as costs are incurred and include
estimated earned fees in the proportion that costs incurred to date bear to
total estimated costs. Certain contracts are awarded on a fixed-price incentive
fee basis. Incentive fees on such contracts are considered when estimating
revenues and profit rates and are recognized when the amounts can reasonably be
determined. The costs attributed to units delivered under fixed-price contracts
are based on the estimated average cost per unit at contract completion. Profits
expected to be realized on long-term contracts are based on total revenues and
estimated costs at completion. Revisions to contract profits are recorded in the
accounting period in which the revisions are known. Estimated losses on
contracts are recorded when identified. For research and development and other
cost-plus-fee type contracts, the Company recognizes contract earnings using the
percentage-of-completion method in the proportion that costs incurred to date
bear to total estimated costs. Spectria recognizes revenues from eBusiness
consulting fees as services are performed on a time and materials basis.

Accounts Receivable

The Company is required to estimate the collectibility of its trade receivables
and unbilled costs and fees. A considerable amount of judgment is required in
assessing the ultimate realization of these receivables including the current
credit-worthiness of each customer. Significant changes in required reserves may
occur in the future depending on future market conditions.

Inventory

The Company is required to state its inventories at the lower of cost or market.
In assessing the ultimate realization of inventories, the Company is required to
exercise judgment in its assessment of future demand requirements and compare
that with the current or committed inventory levels. It is possible that changes
in required inventory reserves may continue to occur in the future due to market
conditions.

Income Taxes

The Company has significant deferred tax assets, which are subject to periodic
recoverability assessments. A valuation allowance against the deferred tax
assets is recorded if the Company determines that it is not more likely than not
that these assets will be realized. This is based upon the expectation of future
taxable income and tax planning strategies. The Company's judgment regarding
future taxable income may change due to future market conditions and its ability
to continue to successfully execute its restructuring program and other factors.
These changes, if any, may require possible material adjustments to these
deferred tax asset balances.


                                       14
<PAGE>

Impairment of Goodwill

The Company performs an annual impairment test of its goodwill, or more
frequently, if certain impairment indicators exist. The Company's judgment
regarding the existence of impairment indicators is based on legal factors,
market conditions and operational performance of acquired businesses. Future
events could cause the Company to conclude that impairment indicators exist and
that goodwill associated with acquired businesses is impaired. Any resulting
impairment loss could have a material adverse impact on the Company's
consolidated financial condition and results of operations.

Capitalized Software Development Costs

The Company's policy on capitalized software costs determines the timing of
recognition of certain development costs. In addition, this policy determines
whether the cost is classified as development expense or cost of license fees.
Management is required to use professional judgment in determining whether
development costs meet the criteria for immediate expense or capitalization.

Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon completion of
a working model. Amortization of capitalized software development costs
commences when the products are available for general release to customers and
is determined using the straight-line method over the expected useful lives of
the respective products.

RESULTS OF OPERATIONS

(dollars in thousands)

<TABLE>
<CAPTION>
                                                               Three Months Ended                   Six Months Ended
                                                        -------------------------------     -------------------------------
                                                        June 30, 2002     June 30, 2001     June 30, 2002     June 30, 2001
                                                        -------------     -------------     -------------     -------------
<S>                                                     <C>               <C>               <C>               <C>
Revenues from continuing operations:
  eSecurity Products                                    $      12,280     $      16,406     $      24,333     $      33,653
  Secure Communications Products                               18,700            17,137            37,832            35,785
                                                        -------------     -------------     -------------     -------------

    Total revenues from continuing operations           $      30,980     $      33,543     $      62,165     $      69,438
                                                        =============     =============     =============     =============

Operating income (loss) from continuing operations:
  eSecurity Products                                    $     (18,418)    $      (5,104)    $     (20,738)    $      (9,793)
  Secure Communications Products                                2,785             3,333             6,470             6,526
                                                        -------------     -------------     -------------     -------------

     Total operating loss from continuing operations    $     (15,633)    $      (1,771)    $     (14,268)    $      (3,267)
                                                        =============     =============     =============     =============
</TABLE>

REVENUES FROM CONTINUING OPERATIONS

On a consolidated basis, revenues from continuing operations for the three and
six months ended June 30, 2002 decreased by 8% and 10% to $31.0 million and
$62.2 million from the same periods in the prior year. The decrease is due to
lower revenues in the eSecurity segment, partially offset by higher revenues in
the Secure Communications segment. Revenues from international markets for the
three months ended June 30, 2002 increased 1% to $6.7 million and decreased 16%
to $11.9 million for the six months ended June 30, 2002 as compared to the same
periods in the prior year. The decrease in revenues for the six months ended
June 30, 2002 was primarily due to a decrease in revenues in Europe partially
offset by an increase in revenues in Asia Pacific. The decrease in revenues in
Europe was primarily due to lower demand for security products while the
increase in revenues in Asia Pacific was primarily due to revenues generated by
the Company's office in Japan, which was opened in the fourth quarter of 2001.
Revenues from domestic markets for the three and six months ended June 30, 2002
decreased by 10% to $24.3 million and 9% to $50.3 million, respectively, from
the same periods in the prior year. The decrease in domestic revenues was due to
the aforementioned decrease in revenues from the Company's eSecurity segment.

eSecurity revenues for the three and six months ended June 30, 2002 decreased by
25% to $12.3 million and 28% to $24.3 million when compared to the same periods
in 2001. The decrease in revenues was primarily due to decreased demand in North
America and Europe for business software applications and a decline in OEM
markets for Cryptoswift SSL acceleration devices.

Secure Communications revenues for the three and six months ended June 30, 2002
increased 9% to $18.7 million and 6% to $37.8 million when compared to the same
periods in 2001. The increase in revenues was primarily due to continued growth
in demand for network security products.


                                       15
<PAGE>

GROSS PROFIT FROM CONTINUING OPERATIONS

Gross profit from eSecurity for the three months ended June 30, 2002 decreased
to (57%) of revenues compared to 56% of revenues for the corresponding period in
2001. Gross profit for the six months ended June 30, 2002 decreased to (4%) of
revenues compared to 56% of revenues for the corresponding period in 2001. These
decreases were primarily due to increases in cost of revenues which included
other charges of $8.4 million in inventory reserves, $5.0 million of write-off
of capitalized and developed software, $0.5 million in warranty reserves and
$0.4 million in severance and other accruals. Excluding these charges, gross
profit for the three and six months ended June 30, 2002 increased to 60% of
revenues and decreased to 54% of revenues, respectively. The increase in gross
profit for the three months ended June 30, 2002 was primarily attributable to
increased efficiencies in manufacturing operations.

Gross profit from Secure Communications for the three months ended June 30, 2002
decreased to 19% of revenues compared to 24% of revenues for the corresponding
period in 2001. Gross profit for the six months ended June 30, 2002 decreased to
20% of revenues compared to 21% of revenues for the corresponding period in
2001. The decrease was primarily due to a change in product mix.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses consist primarily of
personnel-related expenses, sales commission, promotional activities, and
professional fees. Selling, general and administrative expenses from continuing
operations for the three months ended June 30, 2002 were $9.4 million or 30% of
revenues as compared to $11.4 million or 34% of revenues for the corresponding
period in 2001. Selling, general and administrative expenses from continuing
operations for the six months ended June 30, 2002 were $16.1 million or 26% of
revenues as compared to $22.8 million or 33% of revenues for the corresponding
period in 2001. These decreases reflected the overall reduction in expenses
primarily in the eSecurity segment, as a result of a decrease in staff and lower
marketing expenses, partially offset by other charges of $1.4 million relating
to severance and other accruals recorded in 2002.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of salaries and other
personnel-related expenses, costs related to engineering development tools, and
subcontracting costs. Research and development expenses from continuing
operations for the three months ended June 30, 2002 were $2.9 million or 9% of
revenues, as compared to research and development expense of $3.4 million or 10%
of revenues for the corresponding period in 2001. Research and development
expenses from continuing operations for the six months ended June 30, 2002 were
$4.7 million or 8% of revenues, as compared to research and development expense
of $6.4 million or 9% of revenues for the corresponding period in 2001. The
decreases in research and development expenses were primarily due to a decrease
in compensation as a result of the decrease in staff in the United States and
greater use of research and development resources in India and China, partially
offset by higher costs capitalized in the corresponding period in 2001 and
higher unfunded research and development expenses in 2002 relating to the
Company's Secure Communications segment.

MARKETABLE TRADING SECURITIES

At June 30, 2001, the difference between the estimated fair value and the cost
of the trading securities resulted in an unrealized loss of $3.5 million, which
was recognized in earnings for the six months ended June 30, 2001. Unrealized
losses on the trading securities recognized in earnings during the six months
ended June 30, 2002 was $90,000.

PROVISION FOR INCOME TAXES

The effective tax rate was 38% for the three and six months ended June 30, 2001.
The Company recorded income tax expense from continuing operations of $13.4
million and $13.7 million for the three and six months ended June 30, 2002,
respectively, and an income tax benefit of $1.2 million and $2.6 million for the
three and six months ended June 30, 2001. During June 2002, the Company
determined that the realization of its net deferred tax asset is uncertain and,
therefore, recorded $11.6 million of valuation allowance in accordance with SFAS
No. 109, "Accounting for Income Taxes."

RESULTS OF DISCONTINUED OPERATIONS

Discontinued operations for the three and six months ended June 30, 2002
reported operating results and net losses of $16.0 million and $16.7 million,
respectively, as compared with losses of $0.3 million and $0.5 million for the
corresponding periods in 2001. Spectria's losses in 2002 included $12.8 million
of write-off of goodwill and a $2.1 million provision based on management's
current estimates of the amounts to be realized on the disposal of its assets.
The amount the Company will ultimately realize could differ from the assumptions
currently used in arriving at the anticipated loss.


                                       16
<PAGE>

INVENTORIES

Raw materials decreased approximately $3.4 million to $10.6 million at June 30,
2002 as compared with $14.0 million at June 30, 2001. The decrease was primarily
due to write-off of obsolete inventory and reduced purchases due to lower volume
of sales.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of operating funds have been from operations.
Net cash provided by operating activities for the six months ended June 30, 2002
and 2001 were $7.2 million and $5.8 million, respectively. Operating activities
in 2002 included a decrease in accounts receivable of $4.8 million primarily due
to increased collection activities and non-cash charges of $9.6 million of
provision for excess and obsolete inventory, $5.4 million of write-off of
capitalized and developed software, $14.9 million of write-off of goodwill and
provisions for impairment of assets relating to discontinued operations and
$16.3 million in deferred income taxes primarily due to the Company's valuation
allowance for deferred tax assets. Operating activities in 2001 included a
decrease in accounts receivable of $11.5 million primarily due to the decrease
in revenues relating to the Company's CryptoSwift product line and non-cash
charges of $3.5 million for unrealized loss on marketable trading securities and
$1.2 million of provision for excess and obsolete inventory.

Net cash used in investing activities for the six months ended June 30, 2002 and
2001 were $0.9 million and $9.5 million, respectively. Investing activities in
2002 included $0.7 million on capital expenditures and $0.5 million of net cash
paid for acquisition of Impex Computacion S.A. de C.V. in Mexico and purchase of
remaining shares in the Company's subsidiary in Taiwan. Investing activities in
2001 included $3.3 million on capital expenditures, $4.0 million on development
of new products and $2.4 million of payments for investment in the Company's
joint venture in Japan and purchase of additional shares in the Company's
subsidiary in China. The decrease in capital expenditures in 2002 as compared to
the corresponding period in 2001 was in line with the Company's overall
reduction in expenses.

Net cash provided by financing activities for the six months ended June 30, 2002
was $2.3 million while net cash used in financing activities for the six months
ended June 30, 2001 was $2.8 million. Financing activities included in 2002 were
$0.6 million in repurchase of the Company's common stock and $3.0 million
received from common stock options exercised while financing activities in 2001
included $3.1 million repayment of the line of credit.

The Company intends to use its capital resources to expand its product lines and
for possible acquisitions of additional products and technologies. The Company
has no significant capital commitments or requirements at this time.

At June 30, 2002, the Company's subsidiaries in the United Kingdom, Germany,
France, Netherlands and Japan carried approximately $0.5 million, $1.0 million,
$1.4 million, $2.8 million and $2.5 million, respectively, in interest earning
deposits which may result in foreign exchange gains or losses due to the fact
that the functional currency in those subsidiaries is not the U.S. dollar.

The Company believes that its current working capital of $51.6 million and
anticipated working capital to be generated by future operations will be
sufficient to support the Company's working capital requirements for at least
the next twelve months.

PART II OTHER INFORMATION

Item 6  Exhibits and Reports on Form 8-K

(a)   Exhibits

      EXHIBIT
      NUMBER                                   DESCRIPTION
      ------                                   -----------

       2(i)               Agreement and Plan of Reorganization, dated as of
                          January 26, 1995 among the Company, Rainbow
                          Acquisition Inc., a California corporation and a
                          wholly owned subsidiary of Rainbow, and Mykotronx,
                          Inc., a California corporation ("Mykotronx")
                          (incorporated by reference to the Company's
                          Registration Statement on Form S-4 under the
                          Securities Act of 1933, as amended, effective on April
                          20, 1995, Registration No. 33-89918).

       2(ii)              Agreement and Plan of Merger, dated September 30,
                          1996, by and among the Company, RNBO Acquisition
                          Corporation, a Nevada corporation and a wholly-owned
                          subsidiary of the Company, and Software Security,
                          Inc., a Connecticut corporation (incorporated by
                          reference to Exhibit 2(ii) of the Company's 1996
                          Annual Report on Form 10-K under the Securities
                          Exchange Act of 1934 filed in March 1997 (the "1996
                          10-K")).

                                       17
<PAGE>

      EXHIBIT
      NUMBER                                   DESCRIPTION
      ------                                   -----------

       2(iii)             Agreement and Plan of Merger, dated March 6, 1998, by
                          and among the Company, WRS Acquisition Corp., a
                          California corporation and wholly owned subsidiary of
                          the Company, and Wyatt River Software, Inc.
                          (incorporated by reference to Exhibit 2(iii) of the
                          Company's 1997 Annual Report on Form 10-K under the
                          Securities Exchange Act of 1934 filed in March 1998
                          (the "1997 10-K")).

       3(i)               Articles of Incorporation of Rainbow, as amended
                          (incorporated by reference to Exhibit 3(a) to
                          Rainbow's Registration Statement on Form S-18 under
                          the Securities Act of 1933, as amended, filed on July
                          20, 1987 - File No. 33-15956-LA (the "S-18
                          Registration Statement")).

       3(ii)              By-Laws of Rainbow (incorporated by reference to
                          Exhibit 3(b) to the S-18 Registration Statement).

       4(a)               See Exhibit 3(i).

       4(b)               See Exhibit 3(ii).

       4(c)               Rights Agreement, dated as of July 29, 1997, between
                          the Company and U.S. Stock Transfer Corporation, as
                          Rights Agent (incorporated by reference to Exhibit
                          4(c) to the Company's 1997 10-K).

      10(a)               Lease for premises at 50 Technology Drive, Irvine,
                          California, dated June 1, 1995, between the Company
                          and Birtcher Medical Systems, Inc., a California
                          corporation (filed as an exhibit to the Company's 1995
                          Form 10-K).

      10(b)               Agreement, dated October 1996, between the Company and
                          National Semiconductor Corporation (incorporated by
                          reference to Exhibit 10(b) of the Company's 1998
                          Annual Report on Form 10-K under the Securities
                          Exchange Act of 1934 filed in March, 1999 (the "1998
                          10-K")).

      10(c)               Agreement, dated December 1998, between the Company
                          and EM Microelectronic -- Marin S.A. (incorporated by
                          reference to Exhibit 10(c) of the 1998 10-K).

      10(d)               1990 Incentive Stock Option Plan as amended
                          (incorporated by reference to Exhibit 10(j) of the
                          1991 10-K).

      10(e)               Employment Agreement, dated February 16, 1990, between
                          the Company and Walter W. Straub (incorporated by
                          reference to Exhibit 10(j) of the 1989 10-K).

      10(f)               Change of Control Agreement, dated February 16, 1990,
                          between the Company and Walter W. Straub (incorporated
                          by reference to Exhibit 10(k) of the 1989 10-K).

      10(g)               Employment Agreement, dated January 15, 1992, between
                          the Company and Peter M. Craig (incorporated by
                          reference to Exhibit 10(m) of the 1991 10-K).

      10(h)               Change of Control Agreement, dated January 15, 1992,
                          between the Company and Peter M. Craig (incorporated
                          by reference to Exhibit 10(n) of the 1991 10-K).

      10(i)               Employment Agreement, dated January 5, 1995, between
                          the Company and Norman L. Denton, III (incorporated by
                          reference to Exhibit 10(j) of the Company's 1994
                          Annual Report on Form 10-K under the Securities
                          Exchange Act of 1934, filed in March 1995 (the "1994
                          10-K")).

      10(j)               Change of Control Agreement, dated January 5, 1995,
                          between the Company and Norman L. Denton, III
                          (incorporated by reference to Exhibit 10(k) to the
                          1994 10-K).

      10(k)               Employment Agreement, dated January 5, 1995, between
                          the Company and Patrick E. Fevery (incorporated by
                          reference to Exhibit 10(l) of the 1994 10-K).

      10(l)               Change of Control Agreement, dated January 5, 1995,
                          between the Company and Patrick E. Fevery
                          (incorporated by reference to Exhibit 10(m) of the
                          1994 10-K).

      10(m)               Employment Agreement, dated January 5, 1995, between
                          the Company and Paul A. Bock (incorporated by
                          reference to Exhibit 10(n) of the 1994 10-K).

      10(n)               Change of Control Agreement, dated January 5, 1995,
                          between the Company and Paul A. Bock (incorporated by
                          reference to Exhibit 10(o) of the 1994 10-K).

      10(o)               Employment Agreement, dated April 7, 1997, between the
                          Company and Aviram Margalith (incorporated by
                          reference to Exhibit 10(o) of the 1997 10-K).

      10(p)               Change of Control Agreement, dated April 7, 1997,
                          between the Company and Aviram Margalith (incorporated
                          by reference to Exhibit 10(p) of the 1997 10-K).

      10(q)               Employment Agreement, dated January 1, 1998, between
                          the Company and Laurie Casey (incorporated by
                          reference to Exhibit 10(q) of the 1997 10-K).

      10(r)               Change of Control Agreement, dated January 1, 1998,
                          between the Company and Laurie Casey (incorporated by
                          reference to Exhibit 10(r) of the 1997 10-K).


                                       18
<PAGE>

      EXHIBIT
      NUMBER                                   DESCRIPTION
      ------                                   -----------

      10(s)               Employment Agreement, dated January 1, 1998, between
                          the Company and Richard Burris (incorporated by
                          reference to Exhibit 10(s) of the 1997 10-K).

      10(t)               Change of Control Agreement, dated January 1, 1998,
                          between the Company and Richard Burris (incorporated
                          by reference to Exhibit 10(t) of the 1997 10-K).

      10(u)               Manufacturing Agreement, dated September 30, 1997,
                          between AlliedSignal, Inc. and Mykotronx, Inc.
                          (incorporated by reference to Exhibit 10(u) of the
                          1998 10-K).

      10(v)               Development Agreement, dated September 30, 1997,
                          between AlliedSignal, Inc. and Mykotronx, Inc.
                          (incorporated by reference to Exhibit 10(v) of the
                          1998 10-K).

      10(w)               Agreement for Design and Product Purchase, dated
                          September 4, 1997, between IBM Microelectronics and
                          Rainbow Technologies, Inc. and Mykotronx, Inc.
                          (incorporated by reference to Exhibit 10(w) of the
                          1998 10-K).

      10(x)               Leases for premises at 357, 359, and 371 Van Ness Way,
                          Torrance, California, dated September 8, 1993,
                          September 25, 1996 and October 2, 1997, respectively,
                          between Surf Management Associates, a California
                          limited partnership, and Mykotronx, Inc., a California
                          Corporation (incorporated by reference to Exhibit
                          10(x) of the 1999 Form 10-K).

      10(y)               Lease for premises at 111 West Ocean Boulevard, Long
                          Beach, California, between Stevens Creek Associates, a
                          California general partnership, and the Company
                          (incorporated by reference to Exhibit 10(y) of the
                          1999 Form 10-K).

      10(z)               Lease for premises at 8 Hughes, Irvine, California,
                          between Alton Irvine Partners, LLC, a California
                          limited liability company, and the Company.
                          (Incorporated by reference to Exhibit 10(z) of the
                          2000 Form 10-K).

      10(aa)              2000 Incentive Stock Option Plan (incorporated by
                          reference to Rainbow's Registration Statement on Form
                          S-8 filed under the Securities Act of 1933).

      10(bb)              Asset Purchase Agreement, dated December 29, 2000
                          between Kaster Chase Applied Research Limited and
                          Mykotronx, Inc. (incorporated by reference to Exhibit
                          10(bb) of the 2000 Form 10-K).

      99(a)               Certification Pursuant to 18 U.S.C. Section 1350, as
                          Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                          Act of 2002 - Walter W. Straub, President and Chief
                          Executive Officer and Patrick E. Fevery, Vice
                          President and Chief Financial Officer

(b)   Reports on Form 8-K

      None


                                       19
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.

Dated: August 13, 2002

                                            RAINBOW TECHNOLOGIES, INC.


                                            By: /s/ Patrick E. Fevery
                                               ---------------------------------
                                               Vice President and Chief
                                               Financial Officer


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