##### Table of Contents



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 SEPTEMBER 30, 2003 |  | Commission file number: 0-16641

RAINBOW TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)


|                                                                                 |  |                                                
|-------------------------------------------------------------------------------- |  | -----------------------------------------------
|DELAWARE
(State of incorporation)                                                |  | 95-3745398
(I.R.S. Employer Identification No.)
|                                                                                 |  |                                                
|50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA
(Address of principal executive offices) |  | 92618
(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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes [X] No [  ]

The number of shares of common stock, $.001 par value, outstanding as of
November 4, 2003, was 26,814,104.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME                     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS            
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT 10(U)                
|EXHIBIT 10(V)                
|EXHIBIT 10 (W)               
|EXHIBIT 10 (X)               
|EXHIBIT 10(Y)                
|EXHIBIT 31(A)                
|EXHIBIT 31(B)                
|EXHIBIT 32(A)                



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##### Table of Contents



RAINBOW TECHNOLOGIES, INC.

TABLE OF CONTENTS

|                                 |                                                                                               |                                                                                                                                  |    |      |   | 
|-------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                                 |                                                                                               |                                                                                                                                  |    | Page
|                                 |                                                                                               |                                                                                                                                  |    |     
|PART I  -  FINANCIAL INFORMATION |                                                                                               |                                                                                                                                  |    |     
|                                 | Item 1. Condensed Consolidated Financial Statements (unaudited)                               |                                                                                                                                  |    |      |  
|                                 |                                                                                               | Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                                                |    |      | 3 | 
|                                 |                                                                                               | Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2003 and 2002                      |    |      | 4 | 
|                                 |                                                                                               | Condensed
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended
September 30, 2003 and 2002 |    |      | 5 | 
|                                 |                                                                                               | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002                            |    |      | 6 | 
|                                 |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                             |    |      | 7 | 
|                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                  |    | 15   |  
|                                 | Item 3. Not applicable                                                                        |                                                                                                                                  |    |      |  
|                                 | Item 4. Controls and Procedures                                                               |                                                                                                                                  |    | 19   |  
|PART II - OTHER INFORMATION      |                                                                                               |                                                                                                                                  |    |     
|                                 | Item 1. Legal Proceedings                                                                     |                                                                                                                                  |    | 20   |  
|                                 | Item 2 and 3. Not applicable                                                                  |                                                                                                                                  |    |      |  
|                                 | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                  |    | 20   |  
|                                 | Item 5.
Other Information                                                                     |                                                                                                                                  |    | 20   |  
|                                 | Item 6. Exhibits and reports on Form 8-K                                                      |                                                                                                                                  |    | 20   |  
|SIGNATURES                       |                                                                                               |                                                                                                                                  | 24 |     

2



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##### Table of Contents









PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements




RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |         |         | 
|------------------------------------ | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ------ | ------------------ | ------- | ----------------- | ------ | ------- | ------- | 
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        | September 30, 2003 |         | December 31, 2002
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                  
|ASSETS                               |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                  
|                                     | Current assets:                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |       
|                                     |                                         | Cash and cash equivalents                                                                                                                           |                                            | $                                 | 58,938 |                    |         | $                 | 50,922 |        
|                                     |                                         | Marketable available-for-sale and trading securities                                                                                                |                                            |                                   | 269    |                    |         |                   | 301    |        
|                                     |                                         | Accounts receivable, net of allowance for doubtful accounts of $674 and
$626 in 2003 and 2002, respectively                                         |                                            |                                   | 17,554 |                    |         |                   | 19,221 |        
|                                     |                                         | Inventories                                                                                                                                         |                                            |                                   | 12,101 |                    |         |                   | 9,308  |        
|                                     |                                         | Income tax receivable                                                                                                                               |                                            |                                   | 549    |                    |         |                   | 5,572  |        
|                                     |                                         | Prepaid expenses and other current assets                                                                                                           |                                            |                                   | 5,403  |                    |         |                   | 1,765  |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         |                                                                                                                                                     |                                            | Total current assets              |        |                    | 94,814  |                   |        |         | 87,089  | 
|                                     | Property, plant and equipment, at cost: |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |       
|                                     |                                         | Equipment                                                                                                                                           |                                            |                                   | 23,228 |                    |         |                   | 21,981 |        
|                                     |                                         | Buildings                                                                                                                                           |                                            |                                   | 8,551  |                    |         |                   | 7,769  |        
|                                     |                                         | Furniture                                                                                                                                           |                                            |                                   | 3,346  |                    |         |                   | 2,909  |        
|                                     |                                         | Leasehold improvements                                                                                                                              |                                            |                                   | 3,633  |                    |         |                   | 2,889  |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         |                                                                                                                                                     | 38,758                                     |                                   |        |                    | 35,548  |                  
|                                     |                                         | Less accumulated depreciation and amortization                                                                                                      |                                            |                                   | 25,002 |                    |         |                   | 21,628 |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         |                                                                                                                                                     |                                            | Net property, plant and equipment |        |                    | 13,756  |                   |        |         | 13,920  | 
|                                     |                                         | Software development costs, net of accumulated amortization of $4,828 and
$8,156 in 2003 and 2002, respectively                                     |                                            |                                   | 3,083  |                    |         |                   | 3,775  |        
|                                     |                                         | Product licenses, net of accumulated amortization of $6,764 and $5,567 in
2003 and 2002, respectively                                               |                                            |                                   | 1,803  |                    |         |                   | 2,944  |        
|                                     |                                         | Intangible assets, net of accumulated amortization of $44 and $34 in
2003 and 2002, respectively                                                    |                                            |                                   | 10,537 |                    |         |                   | 101    |        
|                                     |                                         | Goodwill                                                                                                                                            |                                            |                                   | 9,843  |                    |         |                   | 2,680  |        
|                                     |                                         | Other assets                                                                                                                                        |                                            |                                   | 674    |                    |         |                   | 1,080  |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         |                                                                                                                                                     |                                            | Total Assets                      |        | $                  | 134,510 |                   |        | $       | 111,589 | 
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                  
|                                     | Current liabilities:                    |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |       
|                                     |                                         | Accounts payable                                                                                                                                    |                                            | $                                 | 10,446 |                    |         | $                 | 8,138  |        
|                                     |                                         | Accrued payroll and related expenses                                                                                                                |                                            |                                   | 6,056  |                    |         |                   | 6,602  |        
|                                     |                                         | Warranty reserve                                                                                                                                    |                                            |                                   | 1,521  |                    |         |                   | 1,844  |        
|                                     |                                         | Income taxes payable                                                                                                                                |                                            |                                   | 2,692  |                    |         |                   | 1,442  |        
|                                     |                                         | Accrued acquisition costs                                                                                                                           |                                            |                                   | 5,621  |                    |         |                   |       |        
|                                     |                                         | Accrued litigation settlement                                                                                                                       |                                            |                                   | 1,965  |                    |         |                   |       |        
|                                     |                                         | Accrued expenses and other current liabilities                                                                                                      |                                            |                                   | 9,605  |                    |         |                   | 6,908  |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         |                                                                                                                                                     | Total current liabilities                  |                                   |        | 37,906             |         |                   |        | 24,934  |        
|                                     |                                         | Long-term accrued restructuring costs                                                                                                               |                                            |                                   | 2,094  |                    |         |                   | 2,349  |        
|                                     |                                         | Other liabilities                                                                                                                                   |                                            |                                   | 3,318  |                    |         |                   | 1,926  |        
|                                     |                                         | Commitments
and contingencies (see Note 12)                                                                                                         |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         | Stockholders equity:                                                                                                                               |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         | Common stock, $.001 par value, 55,000,000 shares authorized, 26,916,973 and
26,268,936 shares issued and outstanding in 2003 and 2002, respectively |                                            |                                   | 27     |                    |         |                   | 26     |        
|                                     |                                         | Additional paid-in capital                                                                                                                          |                                            |                                   | 59,356 |                    |         |                   | 58,313 |        
|                                     |                                         | Accumulated other comprehensive income                                                                                                              |                                            |                                   | 3,459  |                    |         |                   | 348    |        
|                                     |                                         | Retained earnings                                                                                                                                   |                                            |                                   | 28,350 |                    |         |                   | 23,693 |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         |                                                                                                                                                     | Total stockholders equity                 |                                   |        | 91,192             |         |                   |        | 82,380  |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        
|                                     |                                         |                                                                                                                                                     | Total Liabilities and Stockholders Equity |                                   | $      | 134,510            |         |                   | $      | 111,589 |        
|                                     |                                         |                                                                                                                                                     |                                            |                                   |        |                    |         |                   |        |        

See accompanying notes.

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

|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |        |         | 
|---------------------------------------------------------------- | -------------------------------------- | ------------------------ | ----- | ------------------ | ------ | ------------------ | ----- | ------------------ | ------ | ------------------ | ------ | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                 |                                        |                          |       | Three Months Ended |        | Nine Months Ended 
|                                                                 |                                        |                          |       |                    |        |                   
|                                                                 |                                        |                          |       | September 30, 2003 |        | September 30, 2002 |       | September 30, 2003 |        | September 30, 2002
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                   
|Revenues:                                                        |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 | eSecurity Products                     |                          | $     | 12,534             |        |                    | $     | 11,417             |        |                    | $      | 37,844 |         |   | $       | 35,750 |        
|                                                                 | Secure Communications Products         |                          |       | 22,907             |        |                    |       | 18,926             |        |                    |        | 64,770 |         |   |         | 56,758 |        
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 |                                        | Total revenues           |       |                    | 35,441 |                    |       |                    | 30,343 |                    |        |        | 102,614 |   |         |        | 92,508  | 
|Operating expenses:                                              |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 | Cost of eSecurity Products             |                          |       | 2,865              |        |                    |       | 3,977              |        |                    |        | 12,009 |         |   |         | 29,339 |        
|                                                                 | Cost of Secure Communications Products |                          |       | 17,968             |        |                    |       | 13,877             |        |                    |        | 49,183 |         |   |         | 44,127 |        
|                                                                 | Selling, general and administrative    |                          |       | 8,602              |        |                    |       | 7,776              |        |                    |        | 24,484 |         |   |         | 23,867 |        
|                                                                 | Research and development               |                          |       | 2,015              |        |                    |       | 2,365              |        |                    |        | 5,956  |         |   |         | 7,095  |        
|                                                                 | Litigation settlement                  |                          |       |                   |        |                    |       |                   |        |                    |        | 3,632  |         |   |         |       |        
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 |                                        | Total operating expenses |       |                    | 31,450 |                    |       |                    | 27,995 |                    |        |        | 95,264  |   |         |        | 104,428 | 
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|Operating income (loss)                                          |                                        |                          | 3,991 |                    |        |                    | 2,348 |                    |        |                    | 7,350  |        |         |   | (11,920 | )     
|Income (loss) on long-term investments and marketable
securities |                                        |                          | 3     |                    |        |                    | (18   | )                  |        |                    | (1,204 | )      |         |   | (108    | )     
|Change in value for common stock to be issued                    |                                        |                          | (333  | )                  |        |                    |      |                    |        |                    | (333   | )      |         |   |        |       
|Other income (expense), net                                      |                                        |                          | (478  | )                  |        |                    | 125   |                    |        |                    | 250    |        |         |   | 531     |       
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|Income (loss) from continuing operations before income
taxes     |                                        |                          | 3,183 |                    |        |                    | 2,455 |                    |        |                    | 6,063  |        |         |   | (11,497 | )     
|Provision for income taxes                                       |                                        |                          | (634  | )                  |        |                    |      |                    |        |                    | (1,152 | )      |         |   | (13,733 | )     
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|Income (loss) from continuing operations                         |                                        |                          | 2,549 |                    |        |                    | 2,455 |                    |        |                    | 4,911  |        |         |   | (25,230 | )     
|Loss from discontinued operations, net of applicable taxes       |                                        |                          | (168  | )                  |        |                    | (639  | )                  |        |                    | (254   | )      |         |   | (17,307 | )     
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|Net income (loss)                                                |                                        | $                        | 2,381 |                    |        | $                  | 1,816 |                    |        | $                  | 4,657  |        |         | $ | (42,537 | )     
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |        |        
|Basic income (loss) per share:                                   |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 | Continuing operations                  |                          | $     | 0.10               |        |                    | $     | 0.09               |        |                    | $      | 0.18   |         |   | $       | (0.95  | )      
|                                                                 | Discontinued operations                |                          |       | (0.01              | )      |                    |       | (0.02              | )      |                    |        | (0.01  | )       |   |         | (0.66  | )      
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|Net income (loss)                                                |                                        | $                        | 0.09  |                    |        | $                  | 0.07  |                    |        | $                  | 0.17   |        |         | $ | (1.61   | )     
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |        |        
|Diluted income (loss) per share:                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 | Continuing operations                  |                          | $     | 0.10               |        |                    | $     | 0.09               |        |                    | $      | 0.18   |         |   | $       | (0.95  | )      
|                                                                 | Discontinued operations                |                          |       | (0.01              | )      |                    |       | (0.02              | )      |                    |        | (0.01  | )       |   |         | (0.66  | )      
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|Net income (loss)                                                |                                        | $                        | 0.09  |                    |        | $                  | 0.07  |                    |        | $                  | 0.17   |        |         | $ | (1.61   | )     
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |        |        
|Shares used in computing net income (loss) per share:            |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 | Basic                                  |                          |       | 26,808             |        |                    |       | 26,326             |        |                    |        | 26,699 |         |   |         | 26,479 |        
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       
|                                                                 | Diluted                                |                          |       | 27,869             |        |                    |       | 26,532             |        |                    |        | 27,478 |         |   |         | 26,479 |        
|                                                                 |                                        |                          |       |                    |        |                    |       |                    |        |                    |        |        |         |   |         |       

See accompanying notes.

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

|                                   |                                         |   |                    |     |                    |   |                    |      |                    |   |       |       |  |   |         |       |  
|---------------------------------- | --------------------------------------- | - | ------------------ | --- | ------------------ | - | ------------------ | ---- | ------------------ | - | ----- | ----- |  | - | ------- | ----- | -
|                                   |                                         |   | Three Months Ended |     | Nine Months Ended 
|                                   |                                         |   |                    |     |                   
|                                   |                                         |   | September 30, 2003 |     | September 30, 2002 |   | September 30, 2003 |      | September 30, 2002
|                                   |                                         |   |                    |     |                    |   |                    |      |                   
|Net income (loss)                  |                                         | $ | 2,381              |     |                    | $ | 1,816              |      |                    | $ | 4,657 |       |  | $ | (42,537 | )    
|Other comprehensive income (loss): |                                         |   |                    |     |                    |   |                    |      |                    |   |       |       |  |   |         |      
|                                   | Foreign currency translation adjustment |   |                    | 605 |                    |   |                    | 144  |                    |   |       | 2,137 |  |   |         | 1,628 |  
|                                   | Unrealized gain (loss) on securities    |   |                    | 92  |                    |   |                    | (376 | )                  |   |       | 974   |  |   |         | (452  | )
|                                   |                                         |   |                    |     |                    |   |                    |      |                    |   |       |       |  |   |         |      
|                                   | Other comprehensive income (loss)       |   |                    | 697 |                    |   |                    | (232 | )                  |   |       | 3,111 |  |   |         | 1,176 |  
|                                   |                                         |   |                    |     |                    |   |                    |      |                    |   |       |       |  |   |         |      
|Comprehensive income (loss)        |                                         | $ | 3,078              |     |                    | $ | 1,584              |      |                    | $ | 7,768 |       |  | $ | (41,361 | )    
|                                   |                                         |   |                    |     |                    |   |                    |      |                    |   |       |       |  |   |         |      

See accompanying notes.

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

|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                    |         |        |        |  
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ------- | ------------------ | ------- | ------------------ | ------- | ------ | ------ | -
|                                                                               |                                                                                          |                                   |                                           |         | Nine Months Ended 
|                                                                               |                                                                                          |                                   |                                           |         |                   
|                                                                               |                                                                                          |                                   |                                           |         | September 30, 2003 |         | September 30, 2002
|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                   
|Cash flows from operating activities:                                          |                                                                                          |                                   |                                           |         |                    |         |                    |        
|                                                                               | Net income (loss)                                                                        |                                   | $                                         | 4,657   |                    |         | $                  | (42,537 | )     
|                                                                               | Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                   |                                           |         |                    |         |                    |         |       
|                                                                               | Amortization                                                                             |                                   |                                           | 2,709   |                    |         |                    | 3,281   |       
|                                                                               | Depreciation                                                                             |                                   |                                           | 2,913   |                    |         |                    | 2,995   |       
|                                                                               | Provision (benefit) for doubtful accounts                                                |                                   |                                           | 13      |                    |         |                    | (898    | )     
|                                                                               | Minority interest in subsidiarys earnings                                               |                                   |                                           | 176     |                    |         |                    | 188     |       
|                                                                               | Loss on long-term investments and marketable securities                                  |                                   |                                           | 1,204   |                    |         |                    | 108     |       
|                                                                               | Provision (benefit) for excess and obsolete inventory                                    |                                   |                                           | (250    | )                  |         |                    | 10,198  |       
|                                                                               | Warranty provision                                                                       |                                   |                                           | 33      |                    |         |                    | 409     |       
|                                                                               | Litigation settlement                                                                    |                                   |                                           | 3,632   |                    |         |                    |        |       
|                                                                               | Loss
on change in value for common stock to be issued                                    |                                   |                                           | 333     |                    |         |                    |        |       
|                                                                               | Write-off of capitalized and developed software                                          |                                   |                                           |        |                    |         |                    | 5,436   |       
|                                                                               | Write-off of Spectria goodwill                                                           |                                   |                                           |        |                    |         |                    | 12,840  |       
|                                                                               | Provision for impairment of assets on discontinued operations                            |                                   |                                           |        |                    |         |                    | 2,356   |       
|                                                                               | Change in deferred income taxes                                                          |                                   |                                           |        |                    |         |                    | 16,322  |       
|                                                                               | Tax benefit of exercise of common stock options                                          |                                   |                                           |        |                    |         |                    | 295     |       
|                                                                               | Write-off of long-term investment                                                        |                                   |                                           |        |                    |         |                    | 260     |       
|Changes in operating assets and liabilities, net of effects from acquisitions: |                                                                                          |                                   |                                           |         |                    |         |                    |        
|                                                                               |                                                                                          | Accounts receivable               |                                           |         | 4,112              |         |                    |         | 8,803  |       
|                                                                               |                                                                                          | Inventories                       |                                           |         | (1,940             | )       |                    |         | 573    |       
|                                                                               |                                                                                          | Prepaid expenses and other assets |                                           |         | (1,502             | )       |                    |         | 1,246  |       
|                                                                               |                                                                                          | Accounts payable                  |                                           |         | 1,829              |         |                    |         | (2,489 | )     
|                                                                               |                                                                                          | Accrued liabilities               |                                           |         | 1,081              |         |                    |         | (1,564 | )     
|                                                                               |                                                                                          | Income taxes                      |                                           |         | 6,221              |         |                    |         | (3,169 | )     
|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                    |        
|                                                                               |                                                                                          |                                   | Net cash provided by operating activities |         |                    | 25,221  |                    |         |        | 14,653 |  
|Cash flows from investing activities:                                          |                                                                                          |                                   |                                           |         |                    |         |                    |        
|                                                                               | Purchases of property, plant and equipment                                               |                                   |                                           | (1,310  | )                  |         |                    | (1,236  | )     
|                                                                               | Capitalized software development costs                                                   |                                   |                                           | (842    | )                  |         |                    | (656    | )     
|                                                                               | Product licenses and other intangible assets                                             |                                   |                                           | (682    | )                  |         |                    | (3      | )     
|                                                                               | Purchases of marketable available-for-sale securities                                    |                                   |                                           | (489    | )                  |         |                    |        |       
|                                                                               | Sale of marketable available-for-sale securities                                         |                                   |                                           | 599     |                    |         |                    |        |       
|                                                                               | Net cash paid for acquisition of Chrysalis-ITS, Canada                                   |                                   |                                           | (15,764 | )                  |         |                    |        |       
|                                                                               | Net cash paid for acquisition of Proteq Ltda., Brazil                                    |                                   |                                           | (692    | )                  |         |                    |        |       
|                                                                               | Net cash paid for investments                                                            |                                   |                                           | 68      |                    |         |                    | 5       |       
|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                    |         |       
|                                                                               |                                                                                          |                                   | Net cash used in investing activities     |         |                    | (19,112 | )                  |         |        | (1,890 | )
|Cash flows from financing activities:                                          |                                                                                          |                                   |                                           |         |                    |         |                    |        
|                                                                               | Exercise of common stock options                                                         |                                   |                                           | 3,829   |                    |         |                    | 3,071   |       
|                                                                               | Retirement of common stock                                                               |                                   |                                           | (2,785  | )                  |         |                    |        |       
|                                                                               | Purchase of treasury stock                                                               |                                   |                                           |        |                    |         |                    | (2,411  | )     
|                                                                               | Repayment of long-term debt                                                              |                                   |                                           | (160    | )                  |         |                    | (171    | )     
|                                                                               | Cash paid to minority stockholder of Rainbow Technologies K.K., Japan                    |                                   |                                           |        |                    |         |                    | (292    | )     
|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                    |         |       
|                                                                               |                                                                                          |                                   | Net cash provided by financing activities |         |                    | 884     |                    |         |        | 197    |  
|Effect of exchange rate changes on cash                                        |                                                                                          |                                   | 1,023                                     |         |                    |         | 390                |        
|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                    |        
|Net increase in cash and cash equivalents                                      |                                                                                          |                                   | 8,016                                     |         |                    |         | 13,350             |        
|Cash and cash equivalents at beginning of period                               |                                                                                          |                                   | 50,922                                    |         |                    |         | 28,778             |        
|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                    |        
|Cash and cash equivalents at end of period                                     |                                                                                          | $                                 | 58,938                                    |         |                    | $       | 42,128             |        
|                                                                               |                                                                                          |                                   |                                           |         |                    |         |                    |         |       

Supplemental schedule of noncash investing and financing activities:

The Company purchased all of the
capital stock of Chrysalis for $20.1 million (see Note 4).
In conjunction with the acquisition, liabilities were assumed as follows:

|                                |                     |   |         |       | 
|------------------------------- | ------------------- | - | ------- | ----- | 
|Fair value of assets acquired   |                     | $ | 25,570  |      
|Cash paid for the capital stock |                     |   | (20,096 | )    
|                                |                     |   |         |      
|                                | Liabilities assumed |   | $       | 5,474 | 
|                                |                     |   |         |      

See accompanying notes.

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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

1.     Description of the Company and Summary of Significant Accounting Policies

The Company

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 high assurance satellite
communications and voice and data links.

Basis of Consolidation

The accompanying financial statements consolidate the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.

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 September
30, 2003 and results of operations for the three and nine months ended
September 30, 2003 and 2002. The condensed consolidated financial
statements do not include certain footnotes and financial information
normally presented annually under accounting principles generally accepted
in the United States and, therefore, should be read in conjunction with the
Companys December 31, 2002 Annual Report on Form 10-K. Results of
operations for the three and nine months ended September 30, 2003 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, Mexico, Brazil, Hong
Kong and Canada. Excluding Hong Kong and Canada, the Company utilizes the
currencies of the countries where its foreign subsidiaries operate as the
functional currency. Balance sheet accounts denominated in foreign
currencies 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 Income within
Stockholders Equity. The Company has adopted local currencies as the
functional currencies for these subsidiaries because their principal
economic activities are most closely tied to the respective local
currencies.

For its Hong Kong and Canada subsidiaries, the Company
utilizes the U.S. dollar as the functional currency as the majority of its
transactions are in U.S. dollars. Accordingly, monetary assets and
liabilities are remeasured into U.S. dollars at the exchange
rate in effect at the balance sheet date. Revenue, expenses, gains and
losses are remeasured at the average exchange rate for the period,
and non-monetary assets and liabilities are remeasured at historical
rates. The resultant remeasurement gains or losses are recognized in
the consolidated statements of income.

Basis of Presentation

In the second quarter of 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 closed its facility in Long Beach,
California. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, Spectrias results of operations are included in the loss from
discontinued operations in the consolidated statements of income for
the three and nine months ended September 30, 2003 and 2002 (see
Note 14).
Unless otherwise indicated, the Notes to Consolidated Financial Statements
relate to continuing operations.

Certain amounts previously reported have been reclassified to conform with
the 2003 presentation.

Use of Estimates

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 realizability, accrued warranty
costs, restructuring costs, the valuation allowance for deferred tax assets
and total estimated contract costs associated with billed and unbilled
contract revenue.

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RAINBOW TECHNOLOGIES,
INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

Marketable Securities

All investment securities are considered to be either trading or
available-for-sale and are carried at fair value. Management determines the
classification of its investments in marketable securities at the time of
purchase and re-evaluates its appropriateness at each balance sheet date.
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 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
Income within Stockholders Equity.

Included in Marketable Securities at September 30, 2003 and December 31, 2002
were trading securities of $42,000 and $25,000, respectively, and
available-for-sale securities of $0.2 million and $0.3 million, respectively.

Stock Option Plans

The Company follows the disclosure-only provisions of SFAS 123, Accounting for
Stock-Based Compensation, as amended, and, accordingly, accounts for its
stock-based compensation plans using the intrinsic value method under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations.

For purposes of pro forma disclosures, the following table illustrates the
effect on net income (loss) and income (loss) per share, had compensation
expense for the employee stock-based plans been recorded based on the fair
value method under SFAS 123:

(in thousands, except per share amounts)

|                                                                                                                             |                                  |   |                    |       |                    |   |                    |      |                    |   |        |       |  |   |         |         |  
|---------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | - | ------------------ | ----- | ------------------ | - | ------------------ | ---- | ------------------ | - | ------ | ----- |  | - | ------- | ------- | -
|                                                                                                                             |                                  |   | Three Months Ended |       | Nine Months Ended 
|                                                                                                                             |                                  |   |                    |       |                   
|                                                                                                                             |                                  |   | September 30, 2003 |       | September 30, 2002 |   | September 30, 2003 |      | September 30, 2002
|                                                                                                                             |                                  |   |                    |       |                    |   |                    |      |                   
|Net income (loss), as reported                                                                                               |                                  | $ | 2,381              |       |                    | $ | 1,816              |      |                    | $ | 4,657  |       |  | $ | (42,537 | )      
|Deduct: total stock-based employee
compensation
expense determined under fair value based
method, net of related tax effects |                                  |   | (1,030             | )     |                    |   | (1,647             | )    |                    |   | (3,478 | )     |  |   | (5,246  | )      
|                                                                                                                             |                                  |   |                    |       |                    |   |                    |      |                    |   |        |       |  |   |         |        
|                                                                                                                             | Net income (loss), as adjusted   |   | $                  | 1,351 |                    |   | $                  | 169  |                    |   | $      | 1,179 |  |   | $       | (47,783 | )
|                                                                                                                             |                                  |   |                    |       |                    |   |                    |      |                    |   |        |       |  |   |         |        
|                                                                                                                             | Basic income (loss) per share:   |   |                    |       |                    |   |                    |      |                    |   |        |       |  |   |         |         |  
|                                                                                                                             | As reported                      |   | $                  | 0.09  |                    |   | $                  | 0.07 |                    |   | $      | 0.17  |  |   | $       | (1.61   | )
|                                                                                                                             | As adjusted                      |   | $                  | 0.05  |                    |   | $                  | 0.01 |                    |   | $      | 0.04  |  |   | $       | (1.80   | )
|                                                                                                                             | Diluted income (loss) per share: |   |                    |       |                    |   |                    |      |                    |   |        |       |  |   |         |         |  
|                                                                                                                             | As reported                      |   | $                  | 0.09  |                    |   | $                  | 0.07 |                    |   | $      | 0.17  |  |   | $       | (1.61   | )
|                                                                                                                             | As adjusted                      |   | $                  | 0.05  |                    |   | $                  | 0.01 |                    |   | $      | 0.04  |  |   | $       | (1.80   | )

Accrued Litigation Settlement

The Company applies the provisions of
Emerging Issues Task Force (EITF) 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys
Own Stock to its accrued litigation settlement balance
(see Note 12) included in the accompanying condensed consolidated
balance sheet. As a result, increases or decreases in the fair value
of the Companys common stock will result in an increase or a
decrease in the accrued litigation settlement balance with a
corresponding impact to non-operating income or expense. For the quarter ended
September 30, 2003, the Company recorded non-operating expense
of $333,000 to reflect the increase in the Companys common
stock fair value.

2.     Earnings per share

Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share is computed by dividing net income
available to common stockholders by the weighted average number of common and
common equivalent shares outstanding for the period, which includes the
additional dilution related to conversion of stock options as computed under
the treasury stock method.

The following table presents reconciliation of the denominator for the basic
EPS computation to the denominator of the diluted EPS computation:

(in thousands)

|                                                             |  |                    |        |                    |  |                    |        |                    |  |  |        |  |  |  |        | 
|------------------------------------------------------------ |  | ------------------ | ------ | ------------------ |  | ------------------ | ------ | ------------------ |  |  | ------ |  |  |  | ------ | 
|                                                             |  | Three Months Ended |        | Nine Months Ended 
|                                                             |  |                    |        |                   
|                                                             |  | September 30, 2003 |        | September 30, 2002 |  | September 30, 2003 |        | September 30, 2002
|                                                             |  |                    |        |                    |  |                    |        |                   
|Weighted average shares used for basic
EPS computation       |  |                    | 26,808 |                    |  |                    | 26,326 |                    |  |  | 26,699 |  |  |  | 26,479 | 
|Effect of dilutive stock options                             |  |                    | 1,061  |                    |  |                    | 206    |                    |  |  | 779    |  |  |  |       | 
|                                                             |  |                    |        |                    |  |                    |        |                    |  |  |        |  |  |  |        | 
|Weighted average shares used for the diluted
EPS computation |  |                    | 27,869 |                    |  |                    | 26,532 |                    |  |  | 27,478 |  |  |  | 26,479 | 
|                                                             |  |                    |        |                    |  |                    |        |                    |  |  |        |  |  |  |        | 

For the nine months ended September 30, 2002, the Company incurred losses and,
therefore, all stock options were anti-dilutive and not included in the
calculation of diluted earnings per share. The antidilutive shares
excluded from the dilutive computation for the three months ended
September 30, 2003 and 2002 were 1,062,000 and 3,753,000,
respectively.

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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

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 contracts completed during the
previous 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. The provisional billing
rates are adjusted to actual at year-end and are subject to adjustment after
Government audit.

4.     Acquisitions

On September 5, 2003, the Company acquired all of the outstanding shares of
Chrysalis-ITS, Inc. (Chrysalis) for a total purchase
price of $20.1 million, which consisted of $20.0 million in
cash and $0.1 million in direct and incremental costs for the acquisition. The results of operations of Chrysalis have been included
in the Companys consolidated financial statements since the date of acquisition. Chrysalis, based in Ottawa, Canada, is a leading vendor of hardware
security modules, servers and appliances to secure and accelerate
applications including electronic financial transactions, SSL-based Web
applications, smart card issuance, online credit card validation, electronic
document security, digital identity and XML transactions. The Company
believes that its product lines and Chrysalis, while focused on different
security needs, will make complex security easy to implement, deploy and
use. The Chrysalis products are focused on the PKI and SSL-based web
application markets and represent a complementary fit with the Companys
products.

In accordance with SFAS No. 141, Business Combinations (SFAS 141), this
acquisition was accounted for using the purchase method of accounting.
The total purchase price has been allocated to the acquired tangible and intangible assets, and liabilities, based on their estimated fair values with the balance allocated to goodwill. Accordingly, the Company recorded goodwill of $6.3 million, which represents
the excess of the purchase price over the fair value of the tangible and
identifiable intangible assets acquired and liabilities assumed. The
goodwill was assigned to the eSecurity segment.

The amount allocated to the intangible assets was
determined using discounted cash flows for the contract and maintenance relationships,
an average of the resultant value from applying the cost and income approach for the
developed technology, and the relief from royalty method for the acquired tradename/trademark.
The estimated useful lives for each of the acquired intangible assets is provided below:

|                               |         
|------------------------------ | --------
|Developed technology           | 7 years 
|Maintenance relationships      | 5 years 
|Tradename/trademark            | 5 years 
|Existing maintenance contracts | 6 months

The following table summarizes the estimated fair value of the assets and
liabilities assumed at the date of the acquisition:

(in thousands)

|                                               |                       |   |        |        | 
|---------------------------------------------- | --------------------- | - | ------ | ------ | 
|Cash and cash equivalents                      |                       | $ | 4,332  |       
|Accounts receivable                            |                       |   | 1,872  |       
|Inventories                                    |                       |   | 486    |       
|Prepaid expenses and other current assets      |                       |   | 2,050  |       
|Property, plant and equipment                  |                       |   | 890    |       
|Goodwill                                       |                       |   | 6,290  |       
|Intangible assets, subject to amortization     |                       |   | 9,650  |       
|                                               |                       |   |        |       
|                                               | Total assets acquired |   |        | 25,570 | 
|                                               |                       |   |        |       
|Accounts payable                               |                       |   | (328   | )     
|Accrued payroll and related expenses           |                       |   | (539   | )     
|Accrued expenses and other current liabilities |                       |   | (3,481 | )     
|Other long-term liabilities                    |                       |   | (1,126 | )     
|                                               |                       |   |        |       
|Total liabilities assumed                      |                       |   | (5,474 | )     
|                                               |                       |   |        |       
|                                               | Net assets acquired   |   | $      | 20,096 | 
|                                               |                       |   |        |       

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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

The following unaudited consolidated pro forma information presents the combined
results of operations as if Chrysalis acquisition had occurred at the beginning
of the respective periods presented and include the estimated amortization of
intangibles. The unaudited pro forma information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred at the beginning of the periods presented, nor is it necessarily
indicative of future results of operations of the combined entities.

(in thousands, except per share amounts)

|                                         |                         |   |                    |       |                    |   |                    |       |                    |   |         |       |   |   |         |       |  
|---------------------------------------- | ----------------------- | - | ------------------ | ----- | ------------------ | - | ------------------ | ----- | ------------------ | - | ------- | ----- | - | - | ------- | ----- | -
|                                         |                         |   | Three Months Ended |       | Nine Months Ended 
|                                         |                         |   |                    |       |                   
|                                         |                         |   | September 30, 2003 |       | September 30, 2002 |   | September 30, 2003 |       | September 30, 2002
|                                         |                         |   |                    |       |                    |   |                    |       |                   
|Revenues                                 |                         | $ | 36,992             |       |                    | $ | 32,269             |       |                    | $ | 108,919 |       |   | $ | 98,349  |      
|Income (loss) from continuing operations |                         |   | (515               | )     |                    |   | 1,621              |       |                    |   | 1,419   |       |   |   | (27,188 | )    
|Net income (loss)                        |                         |   | (683               | )     |                    |   | 982                |       |                    |   | 1,165   |       |   |   | (44,495 | )    
|Basic income (loss) per share:           |                         |   |                    |       |                    |   |                    |       |                    |   |         |       |   |   |         |      
|                                         | Continuing operations   |   | $                  | (0.02 | )                  |   | $                  | 0.06  |                    |   | $       | 0.05  |   |   | $       | (1.02 | )
|                                         | Discontinued operations |   |                    | (0.01 | )                  |   |                    | (0.02 | )                  |   |         | (0.01 | ) |   |         | (0.66 | )
|                                         |                         |   |                    |       |                    |   |                    |       |                    |   |         |       |   |   |         |      
|Net income (loss)                        |                         | $ | (0.03              | )     |                    | $ | 0.04               |       |                    | $ | 0.04    |       |   | $ | (1.68   | )    
|                                         |                         |   |                    |       |                    |   |                    |       |                    |   |         |       |   |   |         |      
|Diluted income (loss) per share:         |                         |   |                    |       |                    |   |                    |       |                    |   |         |       |   |   |         |      
|                                         | Continuing operations   |   | $                  | (0.02 | )                  |   | $                  | 0.06  |                    |   | $       | 0.05  |   |   | $       | (1.02 | )
|                                         | Discontinued operations |   |                    | (0.01 | )                  |   |                    | (0.02 | )                  |   |         | (0.01 | ) |   |         | (0.66 | )
|                                         |                         |   |                    |       |                    |   |                    |       |                    |   |         |       |   |   |         |      
|Net income (loss)                        |                         | $ | (0.03              | )     |                    | $ | 0.04               |       |                    | $ | 0.04    |       |   | $ | (1.68   | )    
|                                         |                         |   |                    |       |                    |   |                    |       |                    |   |         |       |   |   |         |      

On April 28, 2003, the Company acquired all products, manufacturing and
distribution facilities of Proteq Ltda., Sao Paulo (Proteq) for an estimated
purchase price of $0.9 million in cash. Proteq, based in Sao Paulo, Brazil, is
a leading provider of software security tokens in Brazil and the southern cone
of South America. This acquisition expands the Companys presence in Latin
America and with Proteqs manufacturing facility. In connection with this acquisition, the Company recorded
goodwill of $0.7 million that was assigned to the Companys eSecurity segment.
The results of operations of Proteq are included in the Companys consolidated
financial statements from the date of acquisition. Pro forma results of
operations have not been presented for this acquisition because the effects of
this acquisition were not material to the Companys results.

5. 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:
(in thousands)

|                                                                                                            |  |                    |        |                   |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | - | ------ | -
|                                                                                                            |  | September 30, 2003 |        | December 31, 2002
|                                                                                                            |  |                    |        |                  
|Raw materials                                                                                               |  | $                  | 7,738  |                   |  | $ | 8,095  |  
|Work in process                                                                                             |  |                    | 814    |                   |  |   | 1,662  |  
|Finished goods                                                                                              |  |                    | 2,735  |                   |  |   | 3,573  |  
|Inventoried costs relating to long-term contracts, net of
amounts attributed to revenues recognized to date |  |                    | 8,594  |                   |  |   | 5,158  |  
|Reserve for excess and obsolete inventory                                                                   |  |                    | (7,780 | )                 |  |   | (9,180 | )
|                                                                                                            |  |                    |        |                   |  |   |        |  
|                                                                                                            |  | $                  | 12,101 |                   |  | $ | 9,308  |  
|                                                                                                            |  |                    |        |                   |  |   |        |  

6. Goodwill

Goodwill represents the excess of purchase price over the estimated fair value
of assets acquired. Goodwill is tested for impairment annually and whenever
events or circumstances occur which might indicate that goodwill is impaired.
The first step of the impairment test, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying value, including
goodwill. If the fair value of a reporting unit exceeds its carrying value,
goodwill of the reporting unit is considered not impaired. If the carrying
amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test shall be performed to measure the

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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

amount of impairment loss. The second step of goodwill impairment test, used
to measure the amount of impairment loss, compares the implied fair value of
the reporting unit goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting unit goodwill exceeds the implied fair value
of that goodwill, an impairment loss will be recognized in an amount equal to
that excess. The Company has completed its annual impairment testing during
the quarter ended September 30, 2003 and no changes to the carrying value of
goodwill were made in accordance with SFAS 142, Goodwill and Other Intangible
Assets. The Company intends to perform its annual goodwill impairment test in
subsequent years during the third quarter of each respective year.

In September 2003, the Company acquired Chrysalis, a leading vendor of
hardware security modules, servers and appliances to secure and accelerate
applications including electronic financial transactions, SSL-based Web
applications, smart card issuance, online credit card validation, electronic
document security, digital identity and XML transactions. The Chrysalis
business is reported as part of the eSecurity segment.

The following table presents changes in the carrying amount of goodwill for the
nine months ended September 30, 2003:

(in thousands)

|                              |  |           |       |                |  |        |       |  |  |   |       | 
|----------------------------- |  | --------- | ----- | -------------- |  | ------ | ----- |  |  | - | ----- | 
|                              |  |           |       |                |  | Secure |       |  |  |  
|                              |  | eSecurity |       | Communications |  | Total 
|                              |  |           |       |                |  |       
|Balance at December 31, 2002  |  | $         | 1,555 |                |  | $      | 1,125 |  |  | $ | 2,680 | 
|Acquisitions                  |  |           | 7,002 |                |  |        |      |  |  |   | 7,002 | 
|Translation adjustment        |  |           | 161   |                |  |        |      |  |  |   | 161   | 
|                              |  |           |       |                |  |        |       |  |  |   |       | 
|Balance at September 30, 2003 |  | $         | 8,718 |                |  | $      | 1,125 |  |  | $ | 9,843 | 
|                              |  |           |       |                |  |        |       |  |  |   |       | 

7. Intangible assets

Intangible assets are recorded
at estimated fair values and amortized
using the straight-line method. It
includes developed technology, trademark and customer-related intangible
assets, which were mainly acquired through the acquisition of Chrysalis and IAS
investment (see Notes 4 and 11). Total amortization expense for
the three and nine months ended September 30, 2003 for intangible assets
subject to amortization, were $0.2 million and
$1.0 million, respectively. Total amortization expense for the
three and nine months ended September 30, 2002 for intangible
assets subject to amortization, were $0.8 million and
$1.5 million, respectively.

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

(in thousands)

|                   |                                |   |                    |        |                   |   |             |        |       |   |              |        |     |   |       |       |             |   |        |        |   |   |       |       | 
|------------------ | ------------------------------ | - | ------------------ | ------ | ----------------- | - | ----------- | ------ | ----- | - | ------------ | ------ | --- | - | ----- | ----- | ----------- | - | ------ | ------ | - | - | ----- | ----- | 
|                   |                                |   | September 30, 2003 |        | December 31, 2002
|                   |                                |   |                    |        |                  
|                   |                                |   |                    |        |                   |   | Accumulated |        |       |   |              |        |     |   |       |       | Accumulated |   |        |        |  
|                   |                                |   | Gross              |        | Amortization      |   | Net         |        | Gross |   | Amortization |        | Net
|                   |                                |   |                    |        |                   |   |             |        |       |   |              |        |    
|Product licenses   |                                | $ | 8,567              |        |                   | $ | (6,764      | )      |       | $ | 1,803        |        |     | $ | 8,511 |       |             | $ | (5,567 | )      |   | $ | 2,944 |      
|Intangible
assets: |                                |   |                    |        |                   |   |             |        |       |   |              |        |     |   |       |       |             |   |        |        |   |   |       |      
|                   | Developed
technology           |   | 8,300              |        |                   |   |            |        |       |   | 8,300        |        |     |   |      |       |             |   |       |        |   |   |      |      
|                   | Maintenance
relationships      |   | 1,000              |        |                   |   |            |        |       |   | 1,000        |        |     |   |      |       |             |   |       |        |   |   |      |      
|                   | Tradename/trademark            |   | 848                |        |                   |   | (37         | )      |       |   | 811          |        |     |   | 48    |       |             |   | (30    | )      |   |   | 18    |      
|                   | Existing
maintenance contracts |   | 350                |        |                   |   |            |        |       |   | 350          |        |     |   |      |       |             |   |       |        |   |   |      |      
|                   | Other
intangible assets        |   | 83                 |        |                   |   | (7          | )      |       |   | 76           |        |     |   | 87    |       |             |   | (4     | )      |   |   | 83    |      
|                   |                                |   |                    |        |                   |   |             |        |       |   |              |        |     |   |       |       |             |   |        |        |   |   |       |      
|                   | Total                          |   | $                  | 19,148 |                   |   | $           | (6,808 | )     |   | $            | 12,340 |     |   | $     | 8,646 |             |   | $      | (5,601 | ) |   | $     | 3,045 | 
|                   |                                |   |                    |        |                   |   |             |        |       |   |              |        |     |   |       |       |             |   |        |        |   |   |       |      

At September 30, 2003, the
amortization of the remaining balance of intangible assets of
$12.3 million will be $0.9 million for the remainder of
2003. The amortization for each of the fiscal years 2004, 2005, 2006, 2007,
2008 and thereafter will be $2.9 million, $1.6 million, $1.6 million, $1.5 million, $1.5 million and $2.3 million, respectively.

SFAS 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 are determined using the straight-line method over the
expected useful lives of the respective products. Software
development costs are written-off when projects are abandoned or when
the estimated cash flows from a product are not expected to be
sufficient to recover the capitalized software development costs.
Total amortization expense for the three and nine months ended
September 30, 2003 for software development costs were
$0.8 million and $1.7 million, respectively. Total
amortization expense for the three and nine months ended
September 30, 2002 for software development costs were
$0.2 million and $1.8 million, respectively.

The following table presents details
of the Companys software development costs that are subject to
amortization:

(in thousands)

|                           |  |   |                    |  |                   |   |             |   |       |   |              |  |     |   |        |  |             |   |        |   |  |   |       |  | 
|-------------------------- |  | - | ------------------ |  | ----------------- | - | ----------- | - | ----- | - | ------------ |  | --- | - | ------ |  | ----------- | - | ------ | - |  | - | ----- |  | 
|                           |  |   | September 30, 2003 |  | December 31, 2002
|                           |  |   |                    |  |                  
|                           |  |   |                    |  |                   |   | Accumulated |   |       |   |              |  |     |   |        |  | Accumulated |   |        |   | 
|                           |  |   | Gross              |  | Amortization      |   | Net         |   | Gross |   | Amortization |  | Net
|                           |  |   |                    |  |                   |   |             |   |       |   |              |  |    
|Software
development costs |  | $ | 7,911              |  |                   | $ | (4,828      | ) |       | $ | 3,083        |  |     | $ | 11,931 |  |             | $ | (8,156 | ) |  | $ | 3,775 | 

At September 30, 2003, the
amortization of the remaining balance of software development costs
of $3.1 million will be $0.4 million for the remainder of
2003. The amortization for each of the fiscal years 2004, 2005 and
2006 will be $1.7 million, $0.5 million and
$0.1 million, respectively. At September 30, 2003, the
Company had $0.4 million of unamortized software development
costs for which amortization had not commenced. Amortization of
software development costs commences when the products are available
for general release to customers.

8. Income taxes

The effective tax rates from continuing operations for the three and nine months
ended September 30, 2003 were 20% and 19%, respectively. The effective tax rate for 2003 was
different from the statutory rate of 35% primarily due to the release of the
Companys federal valuation allowance which reduced income tax expense for the
three and nine months ended September 30, 2003. During 2002, the Company
recorded income tax expense from continuing operations of $13.7 million, which
included a valuation allowance of $11.6 million in accordance with SFAS 109,
Accounting for Income Taxes.

The Company records a valuation allowance to reduce its deferred tax assets to
the amount that it believes is more likely than not to be realized. In
assessing the need for a valuation allowance, the Company considers all
positive and negative evidence, including reversals of existing deferred tax
liabilities, estimated future taxable income, prudent and feasible tax planning
strategies, and recent

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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

financial performance. As a result of recent cumulative losses and the full
utilization of the Companys loss carryback potential, the Company had
concluded that a full valuation allowance against its net deferred tax assets
at December 31, 2002 was appropriate.

9. Warranty

The Company warrants its products for periods of ninety days to two years. The
standard warranties require the Company to repair or replace defective products
returned at no cost to the customer. The Company records an estimate for
warranty related costs based on amounts required to cover warranty expense on
products sold and actual historical return rates at the time revenue is
recognized. While warranty costs have historically been within managements
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same warranty return rates as in the past.
A significant increase in product return rates could have a material adverse
effect on the Companys operating results for the period in which such returns
materialize. During the third quarter ended September 30, 2003,
the Company recorded $0.7 million change in estimate for its
warranty accrual.

The following details the
Companys warranty reserve:
(in thousands)

|     |  |            |       |                  |  |           |     |              |  |                  |      |            |  |            |      |   |  |   |       | 
|---- |  | ---------- | ----- | ---------------- |  | --------- | --- | ------------ |  | ---------------- | ---- | ---------- |  | ---------- | ---- | - |  | - | ----- | 
|     |  |            |       |                  |  |           |     |              |  |                  |      |            |  | Changes in |      |   |  |  
|     |  |            |       |                  |  | Additions |     |              |  |                  |      | Estimate   |  |            |      |  
|     |  | Balance at |       | Charged to Costs |  |           |     |              |  | Charged to Costs |      | Balance at
|     |  | January 1, |       | and Expenses     |  | Payments  |     | and Expenses |  | September 30,   
|     |  |            |       |                  |  |           |     |              |  |                 
|2003 |  | $          | 1,844 |                  |  | $         | 617 |              |  | $                | (356 | )          |  | $          | (584 | ) |  | $ | 1,521 | 
|2002 |  | $          | 2,417 |                  |  | $         | 311 |              |  | $                | (565 | )          |  | $          | 98   |   |  | $ | 2,261 | 

10. Industry segments

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 and easy to deploy Web security
solutions (eSecurity segment). 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 authentification for government and defense applications, and custom
design services for enterprises, government and defense applications requiring
either extraordinary performance and/or security (Secure Communications
segment).

The following table presents identifiable assets and operating income (loss)
for each of the Companys operating segments:

(in thousands)

|                                                    |                       |              |   |                    |         |                   |   |        |         | 
|--------------------------------------------------- | --------------------- | ------------ | - | ------------------ | ------- | ----------------- | - | ------ | ------- | 
|                                                    |                       |              |   | September 30, 2003 |         | December 31, 2002
|                                                    |                       |              |   |                    |         |                  
|Identifiable assets,
after applicable
eliminations: |                       |              |   |                    |         |                   |   |       
|                                                    | eSecurity             |              | $ | 113,289            |         |                   | $ | 90,699 |        
|                                                    | Secure Communications |              |   | 21,221             |         |                   |   | 20,890 |        
|                                                    |                       |              |   |                    |         |                   |   |       
|                                                    |                       | Consolidated |   | $                  | 134,510 |                   |   | $      | 111,589 | 
|                                                    |                       |              |   |                    |         |                   |   |       

|                         |                       |                                      |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |         |         |  
|------------------------ | --------------------- | ------------------------------------ | - | ------------------ | ------ | ------------------ | - | ------------------ | ------ | ------------------ | - | ------ | ------- |  | - | ------- | ------- | -
|                         |                       |                                      |   | Three Months Ended |        | Nine Months Ended 
|                         |                       |                                      |   |                    |        |                   
|                         |                       |                                      |   | September 30, 2003 |        | September 30, 2002 |   | September 30, 2003 |        | September 30, 2002
|                         |                       |                                      |   |                    |        |                    |   |                    |        |                   
|Revenues:                |                       |                                      |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|                         | eSecurity             |                                      | $ | 12,534             |        |                    | $ | 11,417             |        |                    | $ | 37,844 |         |  | $ | 35,750  |        
|                         | Secure Communications |                                      |   | 22,907             |        |                    |   | 18,926             |        |                    |   | 64,770 |         |  |   | 56,758  |        
|                         |                       |                                      |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|                         |                       | Consolidated revenues                |   | $                  | 35,441 |                    |   | $                  | 30,343 |                    |   | $      | 102,614 |  |   | $       | 92,508  |  
|                         |                       |                                      |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|Operating income (loss): |                       |                                      |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|                         | eSecurity             |                                      | $ | 414                |        |                    | $ | (1,203             | )      |                    | $ | (1,883 | )       |  | $ | (21,026 | )      
|                         | Secure Communications |                                      |   | 3,577              |        |                    |   | 3,551              |        |                    |   | 9,233  |         |  |   | 9,106   |        
|                         |                       |                                      |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |         |        
|                         |                       | Consolidated
operating income (loss) |   | $                  | 3,991  |                    |   | $                  | 2,348  |                    |   | $      | 7,350   |  |   | $       | (11,920 | )
|                         |                       |                                      |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |         |        

There were no intercompany revenues for the three and nine months ended
September 30, 2003 while intercompany revenues for the three and nine months
ended September 30, 2002 were $1,000 and $18,000, respectively. Intercompany
revenues are generated by the Secure Communications segment.

11. Recent accounting pronouncements

In May 2003, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) finalized revisions to EITF 00-21, Revenue Arrangements
with Multiple Deliverables, on which it had reached a consensus in November
2002. EITF 00-21 addresses certain aspects of the accounting for arrangements
that involve the delivery or performance of multiple products, services and/or
rights to use assets. Under EITF 00-21, revenue arrangements with multiple
deliverables should be divided into separate units
of accounting if the deliverables meet certain criteria, including whether the
fair value of the delivered items can be determined and whether there is
evidence of fair value of the undelivered items. In addition, the
consideration should be allocated among the separate units of accounting based
on their fair values, and the applicable revenue recognition criteria should be
considered separately for each

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\

RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

of the separate units of accounting. EITF 00-21
is effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not have a material impact
on the Companys consolidated financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities (or an asset in some circumstances). The financial instruments
affected include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period after June 15, 2003. The adoption of
SFAS 150 did not have a material impact on the Companys consolidated financial
condition or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 requires the primary beneficiary
of a variable interest entity (VIE) to consolidate the entity and also requires
majority and significant variable interest investors to provide certain
disclosures. A VIE is an entity in which the equity investors do not have a
controlling interest, equity investors participate in losses or residual
interests of the entity on a basis that differs from its ownership interest, or
the equity investment at risk is insufficient to finance the entitys
activities without receiving additional subordinated financial support from the
other parties. For arrangements entered into with VIEs created prior to
January 31, 2003, the provisions of FIN 46 are required to be adopted at the
beginning of the first interim or annual period beginning after
December 15, 2003.
For all arrangements entered into with new VIEs created after January 31, 2003,
the provisions of FIN 46 were effective July 1, 2003. Pursuant to the
requirements of this interpretation, the Company consolidated the following
entity:



| |  |  | On August 1, 2003, the Companys Secure Communications business and
Trusted Ware Systems, Inc. formed a Limited Liability Corporation
called IAS, L.L.C. The IAS, L.L.C. charter was created to develop
emerging trusted computing technologies and products for the US
Government. Since inception, the Company made cash contribution of
$0.3 million for a 30% interest. Profits and losses are allocated to
both companies based upon each companys interest. At September
30, 2003, the carrying value of $0.8 million is included in intangible assets, on the accompanying condensed consolidated
balance sheet of the Company.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12. Legal proceedings

In July 1998, a patent infringement claim was filed against the Company. The
complaint sought unspecified monetary damages. The Company filed a motion for
summary judgment of non-infringement that was decided by the District Court in
favor of the Company in December 2000. That decision was appealed and on April
3, 2002, the United States Court of Appeals issued an opinion that modified the
trial courts construction of the patent claims in certain respects, revised
the summary judgment and remanded the case to the trial court for further
proceedings. On May 1, 2003, after remand, the District Court granted another
motion for summary judgment of non-infringement brought by the Company, thereby
removing half of the products at issue from litigation and granted a motion for
summary judgment re: damages, thereby limiting any recovery by the plaintiff to
a reasonable royalty. The patent-in-suit expired in June 30, 2003, thereby
removing the threat of any injunction against the Company from the litigation.
On July 15, 2003, pursuant to court order, the Company entered into a
Settlement Agreement. The settlement expense of $3.6 million was included in
the results of operations during the quarter ended June 30,
2003 (See Note 1).

The Company is also involved in other legal proceedings and claims arising in
the ordinary course of business. The Company believes that the outcome of all
current litigation will not have a material adverse effect on its business,
financial condition, cash flows or results of operations.

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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(unaudited)

13. Restructuring

In the third quarter of 2001, the Company restructured and consolidated its
Digital Rights Management and iVEA operations (eSecurity segment), resulting in
a net staff reduction of 97 employees across all employee groups, primarily in
the U.S. and recorded restructuring charges of $5.8 million. In the third
quarter of 2003, the Company recorded additional liability of $0.2 million, as a
result of revised estimates due to the amendment to a lease agreement of one of its Irvine
facilities.

The following table summarizes the Companys restructuring costs and activities
in the restructuring reserves:

(in thousands)

|                                                    |  |            |        |           |  |       |       |   |  |   |        |  
|--------------------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ----- | - |  | - | ------ | -
|                                                    |  | Facilities |        |           |  |       |       |   |  |  
|                                                    |  | and        |        |           |  |       |       |   |  |  
|                                                    |  | Equipment  |        | Severance |  | Total
|                                                    |  |            |        |           |  |      
|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                                       |  |            | (1,348 | )         |  |       | (200  | ) |  |   | (1,548 | )
|                                                    |  |            |        |           |  |       |       |   |  |   |        |  
|Restructuring balance, December 31, 2002            |  |            | 2,813  |           |  |       |      |   |  |   | 2,813  |  
|Cash payments                                       |  |            | (446   | )         |  |       |      |   |  |   | (446   | )
|Additions                                           |  |            | 160    |           |  |       |      |   |  |   | 160    |  
|                                                    |  |            |        |           |  |       |       |   |  |   |        |  
|Restructuring balance, September 30, 2003           |  | $          | 2,527  |           |  | $     |      |   |  | $ | 2,527  |  
|                                                    |  |            |        |           |  |       |       |   |  |   |        |  

The current portion of the restructuring reserve of $0.4 million relating to
office space reduction is recorded in accrued expenses and other
current liabilities while the
long-term portion of the reserve of $2.1 million is shown separately as
long-term accrued restructuring costs, on the accompanying condensed
consolidated balance sheets. The remaining balance of the
restructuring liability relates to a certain lease obligation expiring in December 2005.

14. Discontinued operations

The revenues and loss from discontinued operations for the three and nine
months ended September 30, 2003 and 2002 related to the disposal of Spectria
are as follows:

(in thousands)

|                                  |  |                    |      |                    |  |                    |      |                    |  |   |      |   |  |   |         |  
|--------------------------------- |  | ------------------ | ---- | ------------------ |  | ------------------ | ---- | ------------------ |  | - | ---- | - |  | - | ------- | -
|                                  |  | Three Months Ended |      | Nine Months Ended 
|                                  |  |                    |      |                   
|                                  |  | September 30, 2003 |      | September 30, 2002 |  | September 30, 2003 |      | September 30, 2002
|                                  |  |                    |      |                    |  |                    |      |                   
|Revenues                          |  | $                  |     |                    |  | $                  | 434  |                    |  | $ | 19   |   |  | $ | 3,179   |  
|Loss from discontinued operations |  | $                  | (168 | )                  |  | $                  | (639 | )                  |  | $ | (254 | ) |  | $ | (17,307 | )

The loss from discontinued operations
for the three months ended September 30, 2003 was due to
additional expense incurred by the Company as a result of its Long
Beach facility lease buyout.

The assets and liabilities of Spectria at September 30, 2003 and December 31,
2002 consisted of the following:

(in thousands)

|                                             |  |                    |     |                   |  |   |       | 
|-------------------------------------------- |  | ------------------ | --- | ----------------- |  | - | ----- | 
|                                             |  | September 30, 2003 |     | December 31, 2002
|                                             |  |                    |     |                  
|Cash and accounts receivable                 |  | $                  | 103 |                   |  | $ | 98    | 
|Other assets                                 |  |                    | 4   |                   |  |   | 40    | 
|                                             |  |                    |     |                   |  |   |       | 
|Total assets of discontinued operations      |  | $                  | 107 |                   |  | $ | 138   | 
|                                             |  |                    |     |                   |  |   |       | 
|Other liabilities                            |  | $                  | 195 |                   |  | $ | 1,156 | 
|Accrued payroll and related expenses         |  |                    |    |                   |  |   | 2     | 
|                                             |  |                    |     |                   |  |   |       | 
|Total liabilities of discontinued operations |  | $                  | 195 |                   |  | $ | 1,158 | 
|                                             |  |                    |     |                   |  |   |       | 

15. Subsequent Events

On October 22, 2003, the Company and SafeNet, Inc. (SafeNet), issued a joint
press release announcing the execution of an Agreement and Plan of
Reorganization (the Merger Agreement). In accordance with the Merger
Agreement, a wholly-owned subsidiary of SafeNet will merge with and into the Company and each issued and
outstanding share of the Companys common stock will be exchanged for 0.374
shares of SafeNet common stock, or approximately 11.1 million shares on a fully
diluted basis, which will represent approximately 43% of the outstanding stock
of the combined company after closing of the transaction. The consummation of the merger is subject to stockholders approval by both
companies and appropriate regulatory review and approval.

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

FORWARD-LOOKING STATEMENTS

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
certain matters discussed in this report are forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified by the context of the statement which
may include words such as the Company believes, anticipates, expects,
forecasts, estimates, or other words of similar meaning and context.
Similarly, statements that describe future plans, objectives, outlooks,
targets, models or goals are also deemed forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those forecasted or
anticipated as of the date of this report. Certain of such risks and
uncertainties are described in close proximity to such statements and elsewhere
in this report, including Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations. Stakeholders, potential
investors and other readers are urged to consider these factors in evaluating
the forward-looking statements and are cautioned not to place undue reliance on
such forward-looking statements or construe such statements to be a
representation by the Company that the objectives or plans of the Company will
be achieved. The forward-looking statements included in this report are made
only as of the date of this report, and the Company undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.

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 accompanying 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 when persuasive evidence of
an arrangement exists, delivery has occurred, the fee is fixed and
determinable, and collectibility is probable. Revenues from maintenance
contracts are recognized ratably over the period the customer support
services are provided, which is generally one year. 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. The estimated contract revenues are
recognized based on percentage-of-completion as determined by the
cost-to-cost basis whereby revenues are recognized as contract costs are
incurred.

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. The Company has
recorded charges in required reserves in prior periods and it is possible
that changes in required reserves may continue to 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. The Company has recorded charges
for required reserves in prior periods and it is possible that changes in
required inventory reserves may continue to occur in the future due to
market conditions.

15



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##### Table of Contents



Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets
to the amount that it believes is more likely than not to be realized. In
assessing the need for a valuation allowance, the Company considers all
positive and negative evidence, including reversals of existing deferred tax
liabilities, estimated future taxable income, prudent and feasible tax
planning strategies, and recent financial performance. As a result of
recent cumulative losses and the full utilization of the Companys loss
carryback potential, the Company had concluded that a full valuation
allowance against its net deferred tax assets at December 31, 2002 was
appropriate. For the quarter ended March 31, 2003, the Company realized
certain deferred tax assets which resulted in a reduction in the Companys
valuation allowance and the effective tax rate for the three and nine months
ended September 30, 2003.

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. SFAS 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. Software development costs are
written-off when projects are abandoned or when the estimated cash flows
from a product are not expected to be sufficient to recover the capitalized
software development costs.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the EITF of the FASB finalized revisions to EITF 00-21,
Revenue Arrangements with Multiple Deliverables, on which it had reached a
consensus in November 2002. EITF 00-21 addresses certain aspects of the
accounting for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. Under EITF 00-21,
revenue arrangements with multiple deliverables should be divided into
separate units of accounting if the deliverables meet certain criteria,
including whether the fair value of the delivered items can be determined
and whether there is evidence of fair value of the undelivered items. In
addition, the consideration should be allocated among the separate units of
accounting based on their fair values, and the applicable revenue
recognition criteria should be considered separately for each of the
separate units of accounting. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
The adoption of EITF 00-21 did not have a material impact on the Companys
consolidated financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity,
must now be accounted for as liabilities (or an asset in some
circumstances). The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may require
the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock.
SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period after June 15, 2003. The adoption of SFAS 150 did not have a
material impact on the Companys consolidated financial condition or results
of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 requires the primary
beneficiary of a variable interest entity (VIE) to consolidate the entity
and also requires majority and significant variable interest investors to
provide certain disclosures. A VIE is an entity in which the equity
investors do not have a controlling interest, equity investors participate
in losses or residual interests of the entity on a basis that differs from
its ownership interest, or the equity investment at risk is insufficient to
finance the entitys activities without receiving additional subordinated
financial support from the other parties. For arrangements entered into
with VIEs created prior to January 31, 2003, the provisions of FIN 46 are
required to be adopted at the beginning of the first interim or annual
period beginning after December 15,
2003. For all arrangements entered into with new VIEs created after January
31, 2003, the provisions of FIN 46 were effective July 1, 2003. Pursuant to
the requirements of this interpretation, the Company consolidated the
following entity:

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| |  |  | On August 1, 2003, the Companys Secure Communications business and
Trusted Ware Systems, Inc. formed a Limited Liability Corporation
called IAS, L.L.C. The IAS, L.L.C. charter was created to develop
emerging trusted computing technologies and products for the US
Government. Since inception, the Company made cash contribution of
$0.3 million for a 30% interest. Profits and losses are allocated to
both companies based upon each companys interest. At September
30, 2003, the carrying value of $0.8 million is included in intangible assets, on the accompanying condensed consolidated
balance sheet of the Company.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS
(in thousands)

|                         |                       |                               |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |         |         |  
|------------------------ | --------------------- | ----------------------------- | - | ------------------ | ------ | ------------------ | - | ------------------ | ------ | ------------------ | - | ------ | ------- |  | - | ------- | ------- | -
|                         |                       |                               |   | Three Months Ended |        | Nine Months Ended 
|                         |                       |                               |   |                    |        |                   
|                         |                       |                               |   | September 30, 2003 |        | September 30, 2002 |   | September 30, 2003 |        | September 30, 2002
|                         |                       |                               |   |                    |        |                    |   |                    |        |                   
|                         |                       |                               |   | (unaudited)       
|Revenues:                |                       |                               |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|                         | eSecurity             |                               | $ | 12,534             |        |                    | $ | 11,417             |        |                    | $ | 37,844 |         |  | $ | 35,750  |        
|                         | Secure Communications |                               |   | 22,907             |        |                    |   | 18,926             |        |                    |   | 64,770 |         |  |   | 56,758  |        
|                         |                       |                               |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|                         |                       | Total revenues                |   | $                  | 35,441 |                    |   | $                  | 30,343 |                    |   | $      | 102,614 |  |   | $       | 92,508  |  
|                         |                       |                               |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|Operating Income (Loss): |                       |                               |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|                         | eSecurity             |                               | $ | 414                |        |                    | $ | (1,203             | )      |                    | $ | (1,883 | )       |  | $ | (21,026 | )      
|                         | Secure Communications |                               |   | 3,577              |        |                    |   | 3,551              |        |                    |   | 9,233  |         |  |   | 9,106   |        
|                         |                       |                               |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |        
|                         |                       | Total operating
income (loss) |   | $                  | 3,991  |                    |   | $                  | 2,348  |                    |   | $      | 7,350   |  |   | $       | (11,920 | )
|                         |                       |                               |   |                    |        |                    |   |                    |        |                    |   |        |         |  |   |         |        

REVENUES

On a consolidated basis, revenues from continuing operations for the three
and nine months ended September 30, 2003 increased by 17% to $35.4 million
and 11% to $102.6 million, respectively, as compared to the same periods in
the prior year. Revenues from both segments increased for the quarter and
nine months ended September 30, 2003 as compared to the same periods in 2002.
Revenues from international markets for the three and nine months ended
September 30, 2003 increased 20% to $6.8 million and 19% to $20.6 million,
respectively, as compared to the same periods in the prior year. The
increase in revenues from international markets for the three months ended
September 30, 2003 was primarily due to additional revenues from the
Chrysalis acquisition, which was completed during the third quarter of 2003,
and increase in revenues from Europe which was partially offset by a decrease
in revenues from Asia Pacific. The increase in revenues from Europe was due
to improved sales of the iKey product and stronger conversion rates of euros
to the US dollar experienced during the current year while the decrease in
revenues from Asia Pacific was primarily due to a slowdown in the economy of
Asia, as affected by the SARS disease, which had moderately affected revenues
from the Companys Hong Kong operations. Overall, revenues from international
markets for the nine months ended September 30, 2003 increased for both
Europe and Asia Pacific, as compared to the same period in the prior
year. Revenues from domestic markets for the three and
nine months ended September 30, 2003 also increased by 16% to $28.6 million
and 9% to $82.0 million, respectively, as compared to the same periods in the
prior year. The increase in domestic revenues was primarily due to strong
increase in revenues in the Secure Communications segment slightly offset by
a decrease in revenues in eSecurity North America. The decrease in revenues
in eSecurity North America was primarily due to the decline in OEM markets
for Cryptoswift SSL acceleration devices and the ongoing softness in IT
spending.

eSecurity revenues for the three and nine months ended September 30, 2003
increased by 10% to $12.5 million and increased by 6% to $37.8 million,
respectively, when compared to the same periods in 2002. The increase in
revenues for the three and nine months ended September 30, 2003 was primarily
due to improved sales for software protection and authentication products
particularly the iKey product and revenues from Luna products sold by
Chrysalis, which was acquired by the Company in September 2003. This
increase was partially offset by the decline in OEM
markets for Cryptoswift SSL acceleration devices.

Secure Communications revenues for the three and nine months ended September
30, 2003 increased 21% to $22.9 million and 14% to $64.8 million,
respectively, when compared to the same periods in 2002. The increase in
revenues was primarily attributable to continued strong demand for voice and
data security solutions and link encryption products.

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GROSS PROFIT

Gross profit from eSecurity products for the three months ended September 30,
2003 increased to 77% of revenues compared to 65% of revenues for the
corresponding period in 2002. Gross profit for the nine months ended
September 30, 2003 increased to 68% of revenues compared to 18% of revenues
for the corresponding period in 2002. The increase in gross profit for the
three months ended September 30, 2003 was primarily due to a
$0.7 million change in estimate for warranty accruals. Cost of revenues for the nine months
ended September 30, 2002 included a $10.2 million increase in the reserve for excess and
obsolete products and a $5.4 million write-off of capitalized and developed software.
Excluding these charges recorded in the current and prior year, gross profit
increased which was primarily attributable to increased efficiencies in
manufacturing operations and lower overhead costs.

Gross profit from Secure Communications for the three months ended September
30, 2003 decreased to 22% of revenues as compared to 27% of revenues for the
corresponding period in 2002. Gross profit for the nine months ended
September 30, 2003 increased to 24% of revenues compared to 22% of revenues
for the corresponding period in 2002. The decrease in gross profit for the
three months ended September 30, 2003 was primarily due to an increase in
investments in new products while the increase in gross profit for the nine
months ended September 30, 2003 was primarily due to a change in product mix,
as higher margin products were sold during the current year.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses consist primarily of
personnel-related expenses, sales commissions, promotional activities, and
professional fees. Selling, general and administrative expenses from
continuing operations for the three months ended September 30, 2003 were $8.6
million or 24% of revenues as compared to $7.8 million or 26% of revenues for
the corresponding period in 2002. Selling, general and administrative
expenses from continuing operations for the nine months ended September 30,
2003 were $24.5 million or 24% of revenues as compared to $23.9 million or
26% of revenues for the corresponding period in 2002. The increase in
selling, general and administrative expenses was primarily attributable to
higher legal and other professional fees and the inclusion of
Chrysalis selling, general and administrative expenses.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of engineering 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 September 30,
2003 were $2.0 million or 6% of revenues, as compared with research and
development expenses of $2.4 million or 8% of revenues for the corresponding
period in 2002. Research and development expenses from continuing operations
for the nine months ended September 30, 2003 were $6.0 million or 6% of
revenues, as compared with research and development expenses of $7.1 million
or 8% of revenues for the corresponding period in 2002. The decrease in
research and development expenses was primarily due to a decrease in
engineering salaries as a result of greater use of research and development
personnel in India and China.

LITIGATION SETTLEMENT

Subsequent to June 30, 2003, pursuant to court order, the Company entered
into a Settlement Agreement relating to a litigation matter for which it had
been incurring substantial legal expenses. The settlement of $3.6 million was
included in the results of operations for the quarter ended June 30, 2003
(see Note 12 to Notes to Condensed Consolidated Financial Statements).

INCOME (LOSS) ON LONG-TERM INVESTMENTS
AND MARKETABLE SECURITIES

The Company periodically reviews
investments in early stage companies that are accounted for on the
cost basis 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. During the nine months ended
September 30, 2003, it was
determined by the Company that certain of its investments had incurred an
other-than-temporary decline in fair value which resulted in realized losses
of $1.2 million that were recognized in
the statement of income.

CHANGE IN VALUE FOR COMMON STOCK TO BE ISSUED

In the third quarter of 2003, in accordance with EITF 00-19, the Company
revalued its obligation to issue common stock to fair market value.
Accordingly, the Company recorded a non-cash charge of $0.3 million for the
three and nine months ended September 30, 2003.

OTHER INCOME (EXPENSE), NET

Other income (expense) consists
primarily of transaction gains and losses resulting from intercompany balances between foreign subsidiaries and
the U.S. subsidiary.

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PROVISION FOR INCOME TAXES

The effective tax rates from continuing operations for the three and nine
months ended September 30, 2003 were 20% and 19%, respectively. The reduction in the Companys
effective tax rate was primarily due to the release of the Companys federal
valuation allowance, which resulted in a reduction of income tax expense for
the three and nine months ended September 30, 2003. During 2002, the Company
recorded income tax expense from continuing operations of $13.7 million,
which included a valuation allowance of $11.6 million in accordance with SFAS
109, Accounting for Income Taxes.

RESULTS OF DISCONTINUED OPERATIONS

Discontinued operations for the three and nine months ended September 30,
2003 reported operating results and net losses of $0.2 million and $0.3
million, respectively. The Company recorded additional expense during the
third quarter of 2003, as a result of its Long Beach facility lease buyout.
Operating results and net losses for the three and nine months ended
September 30, 2002 were $0.6 million and $17.3 million, respectively, which
included $12.8 million of write-off of goodwill and $2.4 million provision
for impairment of assets.

LIQUIDITY AND CAPITAL RESOURCES

The Companys principal sources of operating funds have been from operations
and proceeds from exercises of the Companys common stock options. Net cash
provided by operating activities for the nine months ended September 30, 2003
and 2002 were $25.2 million and $14.7 million, respectively. Operating
activities in 2003 included a $1.2 million loss on long-term investments and
marketable securities, $3.6 million litigation settlement and a decrease in
income taxes of $6.2 million primarily due to a tax refund of $5.4 million
collected during the third quarter. Operating activities in 2002 included a
decrease in accounts receivable of $8.8 million, $10.2 million increase in
the provision for excess and obsolete inventory, $5.4 million write-off of
capitalized and developed software, $15.2 million 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.

Net cash used in investing activities for the nine months ended September 30,
2003 and 2002 were $19.1 million and $1.9 million, respectively. Investing
activities in 2003 included $15.8 million of net cash paid for acquisition of
Chrysalis-ITS in Canada and $0.7 million of net cash paid for acquisition of
Proteq, Ltda in Brazil.

Net cash provided by financing activities for the nine months ended September
30, 2003 and 2002 were $0.9 million and $0.2 million, respectively.
Financing activities in 2003 primarily included
$3.8 million proceeds from
exercises of common stock options and $2.8 million in retirement of common
stock. Financing activities in 2002 included $3.1 million
proceeds from exercises of common stock options and $2.4 million
in repurchase of the Companys common stock.

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 September 30, 2003, the Companys subsidiaries in the United Kingdom,
Germany, France, Netherlands, Switzerland and Japan carry approximately $1.8
million, $0.8 million, $5.7 million, $4.0 million, $3.8 million and $1.1
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 also has $6.8
million of interest earning deposits in Canada which is subject to foreign
currency gains or losses, as it is denominated in Canadian dollars.

The Company had $58.9 million of
cash and cash equivalents at September 30, 2003. The Company believes that its current working capital of $56.9 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 and for the foreseeable future. The foregoing is a
forward-looking statement.




Item 4. Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the
participation of the Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this quarterly report on
Form 10-Q. Based on that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that the
information required to be disclosed in reports that the Company
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

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(b) Changes in Internal Control
Over Financial Reporting

There have been no significant changes
in internal control over financial reporting during the period
covered by this quarterly report on Form 10-Q that has
materially affected or is reasonably likely to materially affect, our
internal control over financial reporting.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

In July 1998, a patent infringement claim was filed against the Company. The
complaint sought unspecified monetary damages. The Company filed a motion for
summary judgment of non-infringement that was decided by the District Court in
favor of the Company in December 2000. That decision was appealed and on April
3, 2002, the United States Court of Appeals issued an opinion that modified the
trial courts construction of the patent claims in certain respects, revised
the summary judgment and remanded the case to the trial court for further
proceedings. On May 1, 2003, after remand, the District Court granted another
motion for summary judgment of non-infringement brought by the Company, thereby
removing half of the products at issue from litigation and granted a motion for
summary judgment re: damages, thereby limiting any recovery by the plaintiff to
a reasonable royalty. The patent-in-suit expired in June 30, 2003, thereby
removing the threat of any injunction against the Company from the litigation.
On July 15, 2003, pursuant to court order, the Company entered into a
Settlement Agreement. The settlement expense of $3.6 million was included in
the results of operations during the quarter ended June 30, 2003.

The Company is also involved in other legal proceedings and claims arising in
the ordinary course of business. The Company believes that the outcome of all
current litigation will not have a material adverse effect on its business,
financial condition, cash flows or results of operations.




Item 4. Submission of Matters to a Vote of Security Holders

None.




Item 5. Other Information

On October 22, 2003, the Company
and SafeNet, Inc. (SafeNet), issued a joint press release
announcing the execution of an Agreement and Plan of Reorganization
(the Merger Agreement). In accordance with the Merger
Agreement, a wholly-owned subsidiary of SafeNet will merge with and
into the Company and each issued and outstanding share of the
Companys common stock will be exchanged for 0.374 shares
of SafeNet common stock, or approximately 11.1 million shares on a fully diluted basis, which will represent approximately 43% of the outstanding stock of the combined company after closing of the transaction. The consummation of the merger is subject to stockholders approval by both companies and appropriate regulatory review and approval.




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 the Company, 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 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)).                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2(iii)  |  | Business Combination Agreement, dated September 5, 2003, by and among the Company, RTI Acquisition Corp.,
an Ontario corporation and a wholly owned subsidiary of the Company, Chrysalis-ITS, Inc. (Chrysalis),
an Ontario corporation and Capital Alliance Ventures, Inc. (incorporated by reference to Exhibit 2(i) of
the Companys Current Report on Form 8-K, filed on September 16, 2003).                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2(iv)   |  | Agreement and Plan of Reorganization dated October 22, 2003, by
and between the Company, SafeNet, Inc. and Ravens Acquisition Corp.
(incorporated by reference to Exhibit 2.1 of the Companys
Current Report on Form 8-K, filed on October 24, 2003).                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|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).                                                                                                                                                                                                                                            

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|        |  |                                                                                                                                                                                                                                                                                   |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                   |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                       |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                   |  |  |  | 
|10(a)   |  | 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(b)   |  | 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(c)   |  | 1990 Incentive Stock Option Plan as amended (incorporated by reference to Exhibit 10(j) of the 1991 10-K).                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                  
|10(d)   |  | 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(e)   |  | 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(f)   |  | 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(g)   |  | 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(h)   |  | 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(i)   |  | Lease for premises at 371 Van Ness Way, Torrance, California, dated October 2, 1997, 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(j)   |  | 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(k)   |  | 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(l)   |  | 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(m)   |  | 2001 Nonstatutory Stock Option Plan (incorporated by reference to Rainbows Registration Statement on
Form S-8 filed under Securities Act of 1933).                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                  
|10(n)   |  | Lease for premises at 50 Technology Drive, Irvine, California, dated April 14, 2000, between The Irvine
Company, a California Corporation, and the Company (incorporated by reference to Exhibit 10(o) of the
September 2002 10-Q).                                              
|        |  |                                                                                                                                                                                                                                                                                  
|10(o)   |  | Leases for premises at 357 and 359 Van Ness Way, Torrance, California, dated May 1, 2002, between Surf
Management Associates, a California limited partnership, and Mykotronx, Inc., a California Corporation
(incorporated by reference to Exhibit 10(o) of the 2002 Form 10-K).
|        |  |                                                                                                                                                                                                                                                                                  
|10(p)   |  | Employment Agreement, dated April 1, 2000, between the Company and Cheryl Baffa (incorporated by
reference to Exhibit 10(p) of the 2002 Form 10-K).                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                  
|10(q)   |  | Change of Control Agreement, dated April 1, 2000, between the Company and Cheryl Baffa (incorporated by
reference to Exhibit 10(q) of the 2002 Form 10-K).                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                  
|10(r)   |  | Employment Agreement, dated April 1, 2000, between the Company and James Kopycki (incorporated by
reference to Exhibit 10(r) of the 2002 Form 10-K).                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                  
|10(s)   |  | Change of Control Agreement, dated April 1, 2000, between the Company and James Kopycki (incorporated by
reference to Exhibit 10(s) of the 2002 Form 10-K).                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                  
|10(t)   |  | Consultant Agreement, dated January 1, 2000, between the Company and Abbott Investments (incorporated by
reference to Exhibit 10(t) of the 2002 Form 10-K).                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                  
|10(u)   |  | Employment Agreement, dated December 20, 2002, between the
Company and Wang Chan.                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                  
|10(v)   |  | Employment Agreement, dated July 1, 2003, between the Company and Shawn Abbott.                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                  
|10(w)   |  | Change of Control Agreement, dated July 1, 2003, between the Company and Shawn Abbott.                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                  
|10(x)   |  | Manufacturing Agreement, dated June 24, 2003, between Mykotronx,
Inc. and SCI Technology, Inc.                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                  
|10(y)   |  | Manufacturing Agreement, dated October 28, 2003, between
Mykotronx, Inc. and Bulova Technologies L.L.C.                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                  
|31(a)   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Walter W. Straub, President and
Chief Executive Officer                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                  
|31(b)   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Patrick E. Fevery, Vice
President and Chief Financial Officer.                                                                                                                                         

21



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                     |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                     |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                         |  |  |  | 
|        |  |                                                                                                                                                                                                                                                     |  |  |  | 
|32(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

Current
report on Form 8-K, furnished July 1, 2003.

Current report on Form 8-K, furnished July 23, 2003.

Current report on Form 8-K, furnished August 15, 2003.

Current report on Form 8-K, furnished September 9, 2003.

Current
report on Form 8-K, filed September 17, 2003.

Current
report on Form 8-K, filed September 29, 2003.

The
Company filed a current report on Form 8-K/A to correct the reporting
on the original 8-K filed on September 26, 2003.

23



---



##### Table of Contents






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: November 14, 2003

| |  |                            |  |     |  |                        
| |  | -------------------------- |  | --- |  | -----------------------
| |  | RAINBOW TECHNOLOGIES, INC.
| |  |                            |  |     |  |                        
| |  | By:                        |  | /s/ |  | Patrick E. Fevery      
| |  |                            |  |    
| |  |                            |  |     |  | Vice President and     
| |  |                            |  |     |  | Chief Financial Officer

24



---



##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|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 the Company, 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 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)).                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2(iii)  |  | Business Combination Agreement, dated September 5, 2003, by and among the Company, RTI Acquisition Corp.,
an Ontario corporation and a wholly owned subsidiary of the Company, Chrysalis-ITS, Inc. (Chrysalis),
an Ontario corporation and Capital Alliance Ventures, Inc. (incorporated by reference to Exhibit 2(i) of
the Companys Current Report on Form 8-K, filed on September 16, 2003).                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2(iv)   |  | Agreement and Plan
of Reorganization, dated October 22, 2003, by and between the
Company, SafeNet, Inc. and Ravens Acquisition Corp. (incorporated by
reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K, filed on October 24, 2003).                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|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).                                                                                                                                                                                                                                            



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                   |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                   |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                       |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                   |  |  |  | 
|10(a)   |  | 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(b)   |  | 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(c)   |  | 1990 Incentive Stock Option Plan as amended (incorporated by reference to Exhibit 10(j) of the 1991 10-K).                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                  
|10(d)   |  | 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(e)   |  | 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(f)   |  | 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(g)   |  | 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(h)   |  | 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(i)   |  | Lease for premises at 371 Van Ness Way, Torrance, California, dated October 2, 1997, 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(j)   |  | 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(k)   |  | 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(l)   |  | 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(m)   |  | 2001 Nonstatutory Stock Option Plan (incorporated by reference to Rainbows Registration Statement on
Form S-8 filed under Securities Act of 1933).                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                  
|10(n)   |  | Lease for premises at 50 Technology Drive, Irvine, California, dated April 14, 2000, between The Irvine
Company, a California Corporation, and the Company (incorporated by reference to Exhibit 10(o) of the
September 2002 10-Q).                                              
|        |  |                                                                                                                                                                                                                                                                                  
|10(o)   |  | Leases for premises at 357 and 359 Van Ness Way, Torrance, California, dated May 1, 2002, between Surf
Management Associates, a California limited partnership, and Mykotronx, Inc., a California Corporation
(incorporated by reference to Exhibit 10(o) of the 2002 Form 10-K).
|        |  |                                                                                                                                                                                                                                                                                  
|10(p)   |  | Employment Agreement, dated April 1, 2000, between the Company and Cheryl Baffa (incorporated by
reference to Exhibit 10(p) of the 2002 Form 10-K).                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                  
|10(q)   |  | Change of Control Agreement, dated April 1, 2000, between the Company and Cheryl Baffa (incorporated by
reference to Exhibit 10(q) of the 2002 Form 10-K).                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                  
|10(r)   |  | Employment Agreement, dated April 1, 2000, between the Company and James Kopycki (incorporated by
reference to Exhibit 10(r) of the 2002 Form 10-K).                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                  
|10(s)   |  | Change of Control Agreement, dated April 1, 2000, between the Company and James Kopycki (incorporated by
reference to Exhibit 10(s) of the 2002 Form 10-K).                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                  
|10(t)   |  | Consultant Agreement, dated January 1, 2000, between the Company and Abbott Investments (incorporated by
reference to Exhibit 10(t) of the 2002 Form 10-K).                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                  
|10(u)   |  | Employment
Agreement, dated December 20, 2002, between the Company and Wang
Chan.                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                  
|10(v)   |  | Employment Agreement, dated July 1, 2003, between the Company and Shawn Abbott.                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                  
|10(w)   |  | Change of Control Agreement, dated July 1, 2003, between the Company and Shawn Abbott.                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                  
|10(x)   |  | Manufacturing Agreement, dated June 24, 2003, between Mykotronx,
Inc. and SCI Technology, Inc.                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                  
|10(y)   |  | Manufacturing Agreement, dated October 28, 2003, between
Mykotronx, Inc. and Bulova Technologies L.L.C.                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                  
|31(a)   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Walter W. Straub, President and
Chief Executive Officer                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                  
|31(b)   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Patrick E. Fevery, Vice
President and Chief Financial Officer.                                                                                                                                         



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                     |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                     |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                         |  |  |  | 
|        |  |                                                                                                                                                                                                                                                     |  |  |  | 
|32(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

Current
report on Form 8-K, furnished July 1, 2003.

Current report on Form 8-K, furnished July 23, 2003.

Current report on Form 8-K, furnished August 15, 2003.

Current report on Form 8-K, furnished September 9, 2003.

Current
report on Form 8-K, filed September 17, 2003.

Current
report on Form 8-K, filed September 29, 2003.

The Company filed a current report on Form 8-K/A to correct the reporting
on the original 8-K filed on September 26, 2003.