<PAGE>   1

                                    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 ACT OF 1934


       For the Quarter ended JUNE 30, 1998 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 June
30, 1998 was 7,815,497.

<PAGE>   2

                           RAINBOW TECHNOLOGIES, INC.


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                ----
<S>        <C>                                                                   <C>
PART I  -  FINANCIAL INFORMATION

           Item 1. Condensed Consolidated Financial Statements

           Condensed Consolidated Balance Sheet at
           June 30, 1998 (unaudited) and December 31, 1997                         3

           Condensed Consolidated Statements of Operations
           for the Three and Six months ended June 30, 1998 
           and 1997 (unaudited)                                                    4

           Condensed Consolidated Statements of Comprehensive Income (Loss)
           for the Three and Six months ended June 30, 1998 and 1997
           (unaudited)                                                             5

           Condensed Consolidated Statements of Cash Flows
           for the Six months ended June 30, 1998 and 1997 (unaudited)             6

           Notes to Condensed Consolidated Financial Statements                    7

           Item 2. Management's Discussion and Analysis of
                   Financial Condition and Results of Operations                  10

PART II  - OTHER INFORMATION

           Item 1 to 5 - Not applicable

           Item 6. Exhibits and reports on Form 8K                                14

SIGNATURES                                                                        14
</TABLE>


                                       2

<PAGE>   3
                           RAINBOW TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                   A S S E T S

                                                                    June 30,        December 31,
                                                                      1998              1997
                                                                 -------------    ---------------
                                                                  (unaudited)
<S>                                                            <C>              <C>
Current assets:
   Cash and cash equivalents .................................   $  29,248,000    $  29,556,000
   Marketable securities available-for-sale...................       4,236,000        6,841,000
   Accounts receivable, net of allowance for
    doubtful accounts of $478,000 and $500,000
    in 1998 and 1997, respectively............................      16,988,000       16,343,000
   Inventories ...............................................       9,469,000        9,780,000
   Unbilled costs and fees ...................................         665,000        1,782,000
   Prepaid expenses and other current assets..................       3,480,000        4,803,000
                                                                 -------------    -------------
        Total current assets..................................      64,086,000       69,105,000

Property, plant and equipment, at cost:
   Buildings .................................................       8,010,000        8,058,000
   Furniture .................................................       1,237,000        1,191,000
   Equipment .................................................      14,791,000       12,963,000
   Leasehold improvements ....................................         699,000          636,000
                                                                 -------------    -------------
                                                                    24,737,000       22,848,000
   Less accumulated depreciation and amortization.............       7,659,000        6,315,000
                                                                 -------------    -------------
        Net property, plant and equipment.....................      17,078,000       16,533,000

Goodwill, net of accumulated amortization of
    $9,887,000 and $8,736,000 in 1998 and 1997,
    respectively..............................................       8,339,000        5,543,000
Product licenses, net of accumulated amortization of
   $692,000 and $469,000 in 1998 and 1997,
   respectively...............................................       6,323,000        6,481,000
Other assets, net of accumulated amortization of
   $3,129,000 and $2,763,000 in 1998 and 1997,
   respectively...............................................       7,594,000        5,389,000
                                                                 -------------    -------------
                                                                 $ 103,420,000    $ 103,051,000
                                                                 =============    =============

                          LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable ..........................................   $   5,366,000    $   4,937,000
   Accrued payroll and related expenses.......................       3,421,000        4,199,000
   Other accrued liabilities..................................       3,575,000        2,986,000
   Income taxes payable ......................................              --          861,000
   Billings in excess of costs and fees.......................          11,000           87,000
   Long-term debt, due within one year........................         256,000          259,000
                                                                 -------------    -------------
        Total current liabilities ............................      12,629,000       13,329,000

Long-term debt, net of current portion........................       1,470,000        1,616,000
Minority interest.............................................       1,316,000        1,723,000
Other liabilities.............................................          15,000           24,000
Shareholders' equity:
   Common stock, $.001 par value, 20,000,000 shares 
     authorized, 7,815,497 and 7,817,836 shares issued 
     and outstanding in 1998 and 1997, respectively...........           8,000            8,000
   Additional paid-in capital ................................      29,823,000       30,633,000
   Accumulated other comprehensive loss.......................      (1,212,000)      (1,906,000)
   Retained earnings..........................................      59,661,000       59,811,000
                                                                 -------------    -------------
                                                                    88,280,000       88,546,000
   Less cost of treasury shares (12,500 and 88,868
      shares in 1998 and 1997, respectively)..................        (290,000)      (2,187,000)
                                                                 -------------    -------------
        Total shareholders' equity............................      87,990,000       86,359,000
                                                                 -------------    -------------
                                                                 $ 103,420,000    $ 103,051,000
                                                                 =============    =============
</TABLE>

                             See accompanying notes.


                                        3



<PAGE>   4



                           RAINBOW TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)

<TABLE>
<CAPTION>

                                              Three months ended              Six months ended 
                                          June 30, 1998  June 30, 1997   June 30, 1998  June 30, 1997
                                          ----------------------------   ----------------------------
<S>                                       <C>          <C>             <C>            <C>
Revenues:
   Software protection products ........   $14,450,000    $15,974,000    $28,620,000    $29,947,000
   Information security products .......    12,302,000      6,859,000     23,152,000     13,669,000
   Ion beam surface treatment ..........         8,000         11,000         18,000         11,000
                                           --------------------------    --------------------------
        Total revenues .................    26,760,000     22,844,000     51,790,000     43,627,000

Operating expenses:
   Cost of software protection products      3,849,000      4,594,000      7,358,000      8,774,000
   Cost of information security products     9,414,000      5,243,000     18,019,000     10,955,000
   Cost of ion beam surface treatment ..            --        417,000         20,000        417,000
   Selling, general and administrative..     6,411,000      5,451,000     12,013,000     10,716,000
   Research and development ............     1,935,000      2,594,000      4,695,000      3,975,000
   Goodwill amortization ...............       683,000        447,000      1,218,000        860,000
   Provision for restructured operations            --             --        370,000             --
   Acquired research and development ...            --             --      4,000,000             --
                                           --------------------------    --------------------------
        Total operating expenses .......    22,292,000     18,746,000     47,693,000     35,697,000
                                           --------------------------    --------------------------
Operating income........................     4,468,000      4,098,000      4,097,000      7,930,000
Interest income ........................       265,000        419,000        584,000        846,000
Interest expense .......................       (53,000)       (70,000)      (109,000)      (140,000)
Other income (expense) .................       145,000        492,000       (989,000)       348,000
                                           --------------------------    --------------------------
Income before provision for taxes ......     4,825,000      4,939,000      3,583,000      8,984,000
Provision for income taxes .............     1,882,000      2,125,000      3,733,000      3,738,000
                                           --------------------------    --------------------------
Net income (loss) ......................   $ 2,943,000    $ 2,814,000     $ (150,000)   $ 5,246,000
                                           ==========================    ==========================

Net income (loss) per share:
   Basic ...............................   $      0.38    $      0.36     $    (0.02)   $      0.67
                                           ==========================    ==========================
   Diluted .............................   $      0.36    $      0.36     $    (0.02)   $      0.66
                                           ==========================    ==========================

Shares used in computing net income 
  (loss) per share:
   Basic ...............................     7,795,000      7,773,000      7,781,000      7,784,000
                                           ==========================    ==========================
   Diluted .............................     8,243,000      7,856,000      7,781,000      7,905,000
                                           ==========================    ==========================
</TABLE>


                             See accompanying notes.



                                        4


<PAGE>   5



                           RAINBOW TECHNOLOGIES, INC.
        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                       Three Months Ended                  Six Months Ended
                                                 June 30, 1998     June 30, 1997    June 30, 1998    June 30, 1997
                                                 -------------------------------    ------------------------------
<S>                                            <C>               <C>                 <C>            <C>
Net income (loss) ............................   $ 2,943,000        $ 2,814,000       $ (150,000)     $ 5,246,000
Other comprehensive income:
   Foreign currency translation adjustment ...       343,000         (1,142,000)       1,148,000       (3,895,000)
   Unrealized gain (loss) on securities ......         3,000           (160,000)          (4,000)        (215,000)
   Reclassification adjustment ...............            --                 --           (6,000)              --
                                                 ------------------------------       ---------------------------
   Other comprehensive income (loss),
       before income taxes ...................       346,000         (1,302,000)       1,138,000       (4,110,000)
   Provision for income taxes related to other
     comprehensive income (loss) .............      (135,000)           521,000         (444,000)       1,644,000
                                                 ------------------------------       ---------------------------
   Other comprehensive income (loss),
     net of taxes ............................       211,000           (781,000)         694,000       (2,466,000)
                                                 ------------------------------       ---------------------------
 Comprehensive income (loss) .................   $ 3,154,000        $ 2,033,000       $  544,000      $ 2,780,000
                                                 ==============================       ===========================

</TABLE>

                             See accompanying notes.





                                       5


<PAGE>   6


                           RAINBOW TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                     Six Months Ended
                                                               June 30, 1998    June 30, 1997
                                                              -------------------------------
<S>                                                         <C>            <C>
Cash flows from operating activities:
  Net income (loss) .......................................   $   (150,000)   $  5,246,000
  Adjustments to reconcile net income (loss)
   to net cash provided by operating activities:
     Amortization .........................................      1,800,000       1,454,000
     Depreciation .........................................      1,405,000       1,002,000
     Provision for loss in contract........................           --           400,000
     Change in deferred income taxes ......................       (651,000)       (106,000)
     Allowance for doubtful accounts ......................        (21,000)         35,000
     Loss from retirement of property, plant, and equipment        (12,000)         34,000
     Write-down of long-term investment ...................      1,320,000          75,000
     Share in investee's loss .............................           --            45,000
     Minority interest in subsidiary's earnings ...........       (306,000)       (401,000)
     Write-off of capitalized software ....................        784,000            --
     Provision for restructured operations ................        370,000            --
     Write-off of in-process research and development .....      4,000,000            --
     Changes in operating assets and liabilities:
       Accounts receivable ................................       (812,000)        190,000
       Inventories ........................................      1,183,000         831,000
       Unbilled costs and fees ............................      1,117,000         581,000
       Prepaid expenses and other current assets ..........        188,000        (133,000)
       Accounts payable ...................................     (1,064,000)     (1,268,000)
       Accrued liabilities ................................     (1,067,000)        872,000
       Billings in excess of costs and fees ...............           --          (227,000)
       Deferred revenues ..................................        (76,000)           --
       Income taxes payable ...............................       (228,000)        985,000
                                                              ------------    ------------
          Net cash provided by operating activities .......      7,780,000       9,615,000

Cash flows from investing activities:
  Purchase of marketable securities .......................     (1,636,000)       (435,000)
  Sale of marketable securities ...........................      4,220,000       2,293,000
  Purchases of property, plant, and equipment .............     (1,983,000)     (4,182,000)
  Net cash paid for acquisition of
    Wyatt River Software, Inc .............................     (7,662,000)           --
  Other non-current assets ................................     (1,660,000)       (570,000)
  Acquired cash from QM Technologies, Inc..................           --           556,000
  Capitalized software development costs ..................       (584,000)       (680,000)
                                                              ------------    ------------
          Net cash used in investing activities ...........     (9,305,000)     (3,018,000)

Cash flows from financing activities:
  Exercise of Rainbow common stock options ................      1,231,000         322,000
  Payment of long-term debt ...............................       (137,000)       (145,000)
  Purchase of treasury stock ..............................       (149,000)           --
  Purchase and retirement of common stock .................       (290,000)     (2,767,000)
                                                              ------------    ------------
          Net cash provided by (used in) financing 
            activities ....................................        655,000      (2,590,000)

Effect of exchange rate changes on cash ...................        562,000      (1,441,000)
                                                              ------------    ------------
Net increase in cash and cash equivalents .................       (308,000)      2,566,000

Cash and cash equivalents at beginning of period ..........     29,556,000      31,735,000
                                                              ------------    ------------
Cash and cash equivalents at end of period ................   $ 29,248,000    $ 34,301,000
                                                              ============    ============

Supplemental disclosure of cash flow information:
  Income taxes paid .......................................   $  4,064,000    $  3,082,000
  Interest paid ...........................................        108,000         140,000

</TABLE>

                             See accompanying notes.


                                        6

<PAGE>   7
                           RAINBOW TECHNOLOGIES, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998
                                   (Unaudited)

1.  Basis of presentation

The accompanying financial statements consolidate the accounts of Rainbow
Technologies, Inc. (the Company) and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated.
Certain amounts previously reported have been reclassified to conform with the
1998 presentation.

In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position at June 30, 1998 and results of operations for the three and six months
ended June 30, 1998 and 1997. 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, 1997 Annual Report on
Form 10-K. Results of operations for the three and six months ended June 30,
1998 are not necessarily indicative of results to be expected for the full year.

The Company has subsidiaries in the United Kingdom, Germany, France, Belarus,
the Netherlands and India. The Company utilizes the currencies of the countries
where its foreign subsidiaries operate as the functional currency. In accordance
with Statement of Financial Accounting Standards No. 52, the balance sheets of
the Company's foreign subsidiaries are translated into U.S. dollars at the
exchange rates at the respective dates. The income statements of those
subsidiaries are translated into U.S. dollars at the weighted average exchange
rates for the respective periods presented.

As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
During the three and six months ended June 30, 1998 total comprehensive income
amounted to $3,154,000 and $544,000, respectively. The total comprehensive
income for the three and six months ended June 30, 1997 amounted to $2,033,000
and $2,780,000, respectively.

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, "Disclosures about Segment of an Enterprise and Related Information,"
(SFAS No. 131), which requires publicly-held companies to report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The statement also
requires additional disclosures with respect to products and services,
geographical areas of operations, and major customers. The company will adopt
SFAS No. 130 effective December 31, 1998 and will restate all periods presented.


                                       7


<PAGE>   8

2. Earnings per share

The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128) effective December 31, 1997. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted 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 reflects
the assumed conversion of all diluted securities. Earnings per share amounts for
all periods presented have been calculated in accordance with the requirements
of SFAS No. 128.

3.  Government Contracts

The Company is both a prime contractor and a subcontractor under fixed-price and
cost-plus-fixed-fee 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 contracts completed during the previous fiscal year.

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 amounts in these financial
statements. These provisional billing rates are adjusted to actual at year-end
and are subject to adjustment after Government audit.

The Company has unbilled costs and fees at June 30, 1998 of $665,000. Based on
the Company's experience with similar contracts in recent years, the unbilled
costs and fees are expected to be collected within one year.

4.  Inventories

Inventoried costs relating to long-term contracts are stated at the 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:

<TABLE>
<CAPTION>

                                         June 30, 1998     December 31, 1997
                                         -------------     -----------------
           <S>                           <C>                <C>
           Raw materials                   $   584,000      $    271,000
           Work in process                     393,000           761,000
           Finished goods                    4,045,000         4,257,000
           Inventoried costs related
             to long-term contracts          4,447,000         4,491,000
                                           -----------      ------------
                                           $ 9,469,000      $  9,780,000
                                           ===========      ============
</TABLE>


                                       8

<PAGE>   9

5.  Acquisitions

In March 1998, the Company purchased certain assets from Elan Computer Group,
Inc. ("Elan") in a cash transaction. The assets included Elan's license manager
software technology, which the Company had previously licensed from Elan, and
Elan's end-user maintenance and support relationships.

In February 1998, the Company acquired Wyatt River Software, Inc. ("Wyatt
River"), including its "LicenseServe" and "LicenseTrack" technology in a cash
transaction. The final consideration is subject to a determination based upon a
balance sheet audit of Wyatt River as of the closing. The Company will also pay
the Wyatt River shareholders an additional sum based upon sales of Wyatt River
technology through June 30, 1999.

6.  Other assets

Included in other assets are certain investments in early-stage companies. The
Company closely monitors the operations and cash flows of these companies to
evaluate their status and ensure that amounts reported for these investments do
not exceed net realizable value. If the Company determines that impairment in
the investment of any such company exists, an adjustment would be made to reduce
the investment amount to net realizable value.

Also included in other assets are capitalized software development costs. Based
on the Company's product development process, technological feasibility is
established upon completion of a working model. Amortization of capitalized
software development costs commence 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 can not be brought to market.

7.  Stock split

On March 17, 1998 the Company announced that its Board of Directors approved a
3-for-2 split of its common stock. The effective date is July 1, 1998 and the
payout date is July 15, 1998. These financial statements have not been adjusted
to reflect the impact of the proposed stock split.


                                       9

<PAGE>   10

                           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.

RESULTS OF OPERATIONS
(dollars in thousands)

<TABLE>
<CAPTION>
                                                   Three Months Ended
                                                        June 30,
                                                 ---------------------
                                                   1998          1997
                                                 --------      --------
<S>                                              <C>           <C>
         Revenues
              Software Protection Products       $ 14,450      $ 15,974
              Information Security Products        12,302         6,859
              IBEST                                     8            11
                                                 --------      --------
              Consolidated                       $ 26,760      $ 22,844
                                                 ========      ========

         Operating Income
              Software Protection Products       $  2,678       $ 4,467
              Information Security Products         1,977           607
              IBEST                                  (187)         (976)
                                                 --------       -------
              Consolidated                       $  4,468       $ 4,098
                                                 ========       =======
  
</TABLE>

<TABLE>
<CAPTION>
                                                    Six Months Ended 
                                                         June 30,
                                                 ----------------------
                                                   1997          1996
                                                 --------      --------
         <S>                                     <C>           <C>
         Revenues
              Software Protection Products       $ 28,620      $ 29,947
              Information Security Products        23,152        13,669
              IBEST                                    18            11
                                                 --------      --------
              Consolidated                       $ 51,790      $ 43,627
                                                 ========      ========

         Operating Income
              Software Protection Products       $  2,017      $  7,490
              Information Security Products         2,554         1,416
              IBEST                                  (474)         (976)
                                                 --------      --------
              Consolidated                       $  4,097      $  7,930
                                                 ========      ========
</TABLE>


REVENUES

Revenues from software protection products for the three and six months ended
June 30, 1998 decreased by 10% and 4%, respectively, when compared to the same
period in 1997. The overall business has been impacted by the economic problems
in Asia and other emerging markets as well as by the erosion of the average
selling prices. Revenues from Europe increased by 5% while revenues from the US
decreased by 9% for the six months ended June 30, 1998 compared with the same
period in 1997. The decrease in US revenues is due to slower sales to US
customers who export their products to Asia as well as lower direct sales to
Asian distributors. The average selling price per product in the quarter ended
June 30, 1998 decreased approximately 8% when compared to the same period in
1997. Unit volume for the three months ended June 30, 1998 decreased by 3% while
unit volume for the six months ended June 30, 1998 increased by 8% when compared
to the corresponding 1997 periods. The decrease in average selling prices and
the increase in unit volume is primarily due to a change in customer mix.


                                       10

<PAGE>   11
Revenues from information security products for the three and six months ended
June 30, 1998 increased by 79% and 69%, respectively, when compared to the same
period in 1997. The revenue growth was primarily due to strong demand for
network security products.

GROSS PROFIT

Gross profit from software protection products for the three and six months
ended June 30, 1998 increased to 73% and 74% of revenues compared to 71% of
revenues for the corresponding periods in 1997. The increase in gross profit is
due to the absence of royalty expenses on the revenues generated from sales of
Elan software as well as benefits from manufacturing efficiencies.

Gross profit from information security products for the three months ended June
30, 1998 decreased to 23% of revenues compared to 24% for the three months ended
June 30, 1997. Gross profit from information security products for the six
months ended June 30, 1998 increased to 22% of revenues compared to 20% for the
six months ended June 30, 1997. The increase for the six month period is due to
the change in mix from predominantly contract revenues to predominantly product
revenues.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses for the three and six months ended
June 30, 1998 increased by 18% and 12%, respectively, when compared to the
corresponding 1997 period. The increase was due to increased staffing and
professional expenses, new product introductions in software protection and
information security products, and higher marketing expenses.

RESEARCH AND DEVELOPMENT

Total research and development expenses for the three months ended June 30, 1998
decreased by 25% when compared to the corresponding 1997 period. The decrease in
research and development expenses was due to the restructuring of research and
development operations. Total research and development expenses for the six
months ended June 30, 1998 increased by 18% when compared to the corresponding
1997 period. The increase was primarily due to the write-off of previously
capitalized computer software development costs of $784,000 in the first quarter
of 1998.

PROVISION FOR RESTRUCTURED OPERATIONS

The sum of $370,000 represents the Company's estimate of the costs of
reorganizing certain operations.

ACQUIRED RESEARCH AND DEVELOPMENT

Based on the results of third-party appraisals, the Company recorded charges of
$4,000,000 in the three months ended March 31, 1998 to expense in-process
research and development costs related to the acquisition of Wyatt River. In the
opinion of management and the appraiser, the acquired in-process research and
development has not yet reached technological feasibility and had no alternative
future use.


                                       11

<PAGE>   12

OTHER INCOME (EXPENSE)

Interest income for the quarter ended June 30, 1998 decreased by 37% compared to
$265,000 for the quarter ended June 30, 1997 because of lower balances of cash
and cash equivalents.

The minority interest share in QMT's operating losses in the three months ended
June 30, 1998 was $118,000 compared to $401,000 in the corresponding period in
1997.

With the purchase of certain Elan assets in March 1998 the original investment
in Elan was written off.

PROVISION FOR INCOME TAXES

The effective tax rate was 39% for the three months ended June 30, 1998 compared
to 43% for the corresponding period in 1997. The effective tax rate for the
first six months of 1998 was negatively affected due to the non-deductibility of
the charges related to the acquired in-process research and development.
Excluding the effect of these charges, the effective tax rate was 39% for the
six months ended June 30, 1998 and 42% for the six months ended June 30, 1997.
The lower tax rate is due to the benefits of the international restructuring of
foreign operations.


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<PAGE>   13

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of operating funds have been from operations and
proceeds from sales of the Company's equity securities. The Company's cash flow
from operations for the six months ended June 30, 1998 and 1997 were $7,780,000
and $9,615,000, respectively. The decrease in cash flow from operations is
attributable to the acquisitions of Wyatt River Software and certain assets of
Elan Computer Group.

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

The Company's use of cash includes purchases of property, plant and equipment,
repayment of long-term debt and investment in long-term assets.

Management believes the Company's current working capital of $51,457,000 and
anticipated working capital to be generated by future operations will be
sufficient to support the Company's requirement for at least the next twelve
months.

IMPACT OF YEAR 2000

The Company has completed a partial assessment and will have to modify portions
of its software so that its computer systems will function properly with respect
to dates in the year 2000 and thereafter. The total Year 2000 project cost is
estimated at less than $100,000 which will be expensed as incurred. To date, the
Company has not incurred nor expensed any of these amounts.

The project is estimated to be completed no later than December 31, 1998, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.

The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived using assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.


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<PAGE>   14

PART II        OTHER INFORMATION

Item 6         Exhibits and Reports on Form 8-K

      (a)      Exhibits

               27 Financial Data Schedule

      (b)      Reports on Form 8-K

               None


                                   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 11, 1998



                                            RAINBOW TECHNOLOGIES, INC.


                                            By: /s/ PATRICK FEVERY
                                                --------------------------------
                                                    Patrick Fevery
                                                    Chief Financial Officer


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