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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

|                                    |  |                                
|----------------------------------- |  | -------------------------------
|For the Quarter ended JUNE 30, 2003 |  | Commission file number: 0-16641

RAINBOW TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)


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

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

Yes x No o

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 o

The number of shares of common stock, $.001 par value, outstanding as of July
31, 2003, was 26,659,972.





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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 OPERATIONS                 
|                             |                                                                                               | 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 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  
|EXHIBIT INDEX               
|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                                           |                                                                                                                                 |    |      |  
|                                 |                                                                                               | Condensed Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002                                        |    |      | 4 | 
|                                 |                                                                                               | Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended
June 30, 2003 and 2002           |    |      | 5 | 
|                                 |                                                                                               | Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended
June 30, 2003 and 2002 |    |      | 6 | 
|                                 |                                                                                               | Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2003 and 2002                     |    |      | 7 | 
|                                 |                                                                                               | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                |    |      | 8 | 
|                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                 |    | 12   |  
|                                 | Item 3. Not applicable                                                                        |                                                                                                                                 |    |      |  
|                                 | Item 4. Controls and Procedures                                                               |                                                                                                                                 |    | 16   |  
|PART II  OTHER INFORMATION      |                                                                                               |                                                                                                                                 |    |     
|                                 | Item 1. Legal Proceedings                                                                     |                                                                                                                                 |    | 16   |  
|                                 | Item 2 and 3. Not applicable                                                                  |                                                                                                                                 |    |      |  
|                                 | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                 |    | 16   |  
|                                 | Item 5. Not applicable                                                                        |                                                                                                                                 |    |      |  
|                                 | Item 6. Exhibits and reports on Form 8-K                                                      |                                                                                                                                 |    | 16   |  
|SIGNATURES                       |                                                                                               |                                                                                                                                 | 19 |     

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INTRODUCTORY NOTE

The Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Company intends that
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.

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PART I. FINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements




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

|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |        |         |         | 
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ------ | ------------- | ------- | ----------------- | ------ | ------- | ------- | 
|                                        |                                                                                                                                                     |                                            |                                   |        | June 30, 2003 |         | December 31, 2002
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                  
|                                        |                                                                                                                                                     |                                            |                                   |        | (unaudited)   |         |                  
|ASSETS                                 
|Current assets:                         |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        | Cash and cash equivalents                                                                                                                           |                                            | $                                 | 58,973 |               |         | $                 | 50,922 |        
|                                        | Marketable available-for-sale and trading securities                                                                                                |                                            |                                   | 249    |               |         |                   | 301    |        
|                                        | Accounts receivable, net of allowance for doubtful accounts of $583 and
$626 in 2003 and 2002, respectively                                         |                                            |                                   | 18,327 |               |         |                   | 19,221 |        
|                                        | Inventories                                                                                                                                         |                                            |                                   | 9,549  |               |         |                   | 9,308  |        
|                                        | Income tax receivable                                                                                                                               |                                            |                                   | 5,967  |               |         |                   | 5,572  |        
|                                        | Prepaid expenses and other current assets                                                                                                           |                                            |                                   | 3,324  |               |         |                   | 1,765  |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     |                                            | Total current assets              |        |               | 96,389  |                   |        |         | 87,089  | 
|Property, plant and equipment, at cost: |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        | Equipment                                                                                                                                           |                                            |                                   | 22,806 |               |         |                   | 21,981 |        
|                                        | Buildings                                                                                                                                           |                                            |                                   | 8,449  |               |         |                   | 7,769  |        
|                                        | Furniture                                                                                                                                           |                                            |                                   | 3,038  |               |         |                   | 2,909  |        
|                                        | Leasehold improvements                                                                                                                              |                                            |                                   | 3,068  |               |         |                   | 2,889  |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     |                                            | 37,361                            |        |               |         | 35,548            |       
|                                        | Less accumulated depreciation and amortization                                                                                                      |                                            |                                   | 23,919 |               |         |                   | 21,628 |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     |                                            | Net property, plant and equipment |        |               | 13,442  |                   |        |         | 13,920  | 
|                                        | Software development costs, net of accumulated amortization of $9,190 and
$8,156 in 2003 and 2002, respectively                                     |                                            |                                   | 3,379  |               |         |                   | 3,775  |        
|                                        | Product licenses, net of accumulated amortization of $6,465 and $5,567 in
2003 and 2002, respectively                                               |                                            |                                   | 2,902  |               |         |                   | 3,726  |        
|                                        | Goodwill                                                                                                                                            |                                            |                                   | 2,724  |               |         |                   | 1,898  |        
|                                        | Other assets                                                                                                                                        |                                            |                                   | 692    |               |         |                   | 1,181  |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     |                                            | Total Assets                      |        | $             | 119,528 |                   |        | $       | 111,589 | 
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|LIABILITIES AND SHAREHOLDERS EQUITY   
|Current liabilities:                    |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        | Accounts payable                                                                                                                                    |                                            | $                                 | 7,673  |               |         | $                 | 8,138  |        
|                                        | Accrued payroll and related expenses                                                                                                                |                                            |                                   | 4,701  |               |         |                   | 6,602  |        
|                                        | Warranty reserve                                                                                                                                    |                                            |                                   | 2,185  |               |         |                   | 1,844  |        
|                                        | Income taxes payable                                                                                                                                |                                            |                                   | 2,075  |               |         |                   | 1,442  |        
|                                        | Other accrued liabilities                                                                                                                           |                                            |                                   | 8,148  |               |         |                   | 6,908  |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     | Total current liabilities                  |                                   |        | 24,782        |         |                   |        | 24,934  |        
|                                        | Long-term accrued restructuring costs                                                                                                               |                                            |                                   | 2,121  |               |         |                   | 2,349  |        
|                                        | Other liabilities                                                                                                                                   |                                            |                                   | 1,605  |               |         |                   | 1,926  |        
|                                        | Commitments and contingencies                                                                                                                       |                                            |                                   |        |               |         |                   |        |        
|                                        | Shareholders equity:                                                                                                                               |                                            |                                   |        |               |         |                   |        |        
|                                        | Common stock, $.001 par value, 55,000,000 shares authorized, 26,775,462 and
26,268,936 shares issued and outstanding in 2003 and 2002, respectively |                                            |                                   | 27     |               |         |                   | 26     |        
|                                        | Common stock to be issued                                                                                                                           |                                            |                                   | 1,632  |               |         |                   |       |        
|                                        | Additional paid-in capital                                                                                                                          |                                            |                                   | 61,515 |               |         |                   | 58,313 |        
|                                        | Accumulated other comprehensive income                                                                                                              |                                            |                                   | 2,762  |               |         |                   | 348    |        
|                                        | Retained earnings                                                                                                                                   |                                            |                                   | 25,969 |               |         |                   | 23,693 |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     |                                            | 91,905                            |        |               |         | 82,380            |       
|                                        | Less cost of treasury shares (102,973 shares)                                                                                                       |                                            |                                   | (885   | )             |         |                   |       |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     | Total shareholders equity                 |                                   |        | 91,020        |         |                   |        | 82,380  |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       
|                                        |                                                                                                                                                     | Total Liabilities and Shareholders Equity |                                   | $      | 119,528       |         |                   | $      | 111,589 |        
|                                        |                                                                                                                                                     |                                            |                                   |        |               |         |                   |       

See accompanying notes.

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

|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |        |        |        | 
|------------------------------------------------------------ | ----------------------- | ------------------------------ | -------------------------------------- | ------ | ------------------ | ------ | ---------------- | ------ | ------------- | ------ | ------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                                             |                         |                                |                                        |        | Three Months Ended |        | Six Months Ended
|                                                             |                         |                                |                                        |        |                    |        |                 
|                                                             |                         |                                |                                        |        | June 30, 2003      |        | June 30, 2002    |        | June 30, 2003 |        | June 30, 2002
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |              
|                                                             |                         |                                |                                        |        |                    |        |                  |        | (unaudited)   |        |               |        |       
|Revenues:                                                    |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             |                         | eSecurity Products             |                                        | $      | 12,053             |        |                  | $      | 12,280        |        |               | $      | 25,310 |        |         | $      | 24,333 |       
|                                                             |                         | Secure Communications Products |                                        |        | 21,251             |        |                  |        | 18,700        |        |               |        | 41,863 |        |         |        | 37,832 |       
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             |                         |                                | Total revenues                         |        |                    | 33,304 |                  |        |               | 30,980 |               |        |        | 67,173 |         |        |        | 62,165 | 
|Operating expenses:                                          |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             |                         |                                | Cost of eSecurity Products             |        |                    | 4,163  |                  |        |               | 19,225 |               |        |        | 9,144  |         |        |        | 25,362 | 
|                                                             |                         |                                | Cost of Secure Communications Products |        |                    | 15,620 |                  |        |               | 15,107 |               |        |        | 31,215 |         |        |        | 30,250 | 
|                                                             |                         |                                | Selling, general and administrative    |        |                    | 8,164  |                  |        |               | 9,400  |               |        |        | 15,882 |         |        |        | 16,091 | 
|                                                             |                         |                                | Research and development               |        |                    | 2,205  |                  |        |               | 2,881  |               |        |        | 3,941  |         |        |        | 4,730  | 
|                                                             |                         |                                | Litigation settlement                  |        |                    | 3,632  |                  |        |               |       |               |        |        | 3,632  |         |        |        |       | 
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             |                         |                                | Total operating expenses               |        |                    | 33,784 |                  |        |               | 46,613 |               |        |        | 63,814 |         |        |        | 76,433 | 
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Operating income (loss)                                      |                         |                                | (480                                   | )      |                    |        | (15,633          | )      |               |        | 3,359         |        |        |        | (14,268 | )     
|Loss on long-term investments and marketable securities      |                         |                                | (371                                   | )      |                    |        | (59              | )      |               |        | (1,207        | )      |        |        | (90     | )     
|Other income, net                                            |                         |                                | 136                                    |        |                    |        | 117              |        |               |        | 728           |        |        |        | 405     |       
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Income (loss) from continuing operations before income
taxes |                         |                                | (715                                   | )      |                    |        | (15,575          | )      |               |        | 2,880         |        |        |        | (13,953 | )     
|Benefit (provision) for income taxes                         |                         |                                | 22                                     |        |                    |        | (13,384          | )      |               |        | (518          | )      |        |        | (13,733 | )     
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Income (loss) from continuing operations                     |                         |                                | (693                                   | )      |                    |        | (28,959          | )      |               |        | 2,362         |        |        |        | (27,686 | )     
|Loss from discontinued operations, net of applicable taxes   |                         |                                |                                       |        |                    |        | (15,963          | )      |               |        | (86           | )      |        |        | (16,668 | )     
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Net income (loss)                                            |                         | $                              | (693                                   | )      |                    | $      | (44,922          | )      |               | $      | 2,276         |        |        | $      | (44,354 | )     
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Basic income (loss) per share:                               |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             | Continuing operations   |                                | $                                      | (0.03  | )                  |        | $                | (1.09  | )             |        | $             | 0.09   |        |        | $       | (1.05  | )     
|                                                             | Discontinued operations |                                |                                        |       |                    |        |                  | (0.60  | )             |        |               |       |        |        |         | (0.63  | )     
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Net income (loss)                                            |                         | $                              | (0.03                                  | )      |                    | $      | (1.69            | )      |               | $      | 0.09          |        |        | $      | (1.68   | )     
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Diluted income (loss) per share:                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             | Continuing operations   |                                | $                                      | (0.03  | )                  |        | $                | (1.09  | )             |        | $             | 0.08   |        |        | $       | (1.05  | )     
|                                                             | Discontinued operations |                                |                                        |       |                    |        |                  | (0.60  | )             |        |               |       |        |        |         | (0.63  | )     
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Net income (loss)                                            |                         | $                              | (0.03                                  | )      |                    | $      | (1.69            | )      |               | $      | 0.08          |        |        | $      | (1.68   | )     
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|Weighted average shares:                                     |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             | Basic                   |                                |                                        | 26,830 |                    |        |                  | 26,546 |               |        |               | 26,645 |        |        |         | 26,476 |       
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       
|                                                             | Diluted                 |                                |                                        | 26,830 |                    |        |                  | 26,546 |               |        |               | 27,919 |        |        |         | 26,476 |       
|                                                             |                         |                                |                                        |        |                    |        |                  |        |               |        |               |        |        |        |         |       

See accompanying notes.

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

|                                   |                                                                  |   |                    |       |                  |   |               |        |               |   |       |       |   |   |         |       |  
|---------------------------------- | ---------------------------------------------------------------- | - | ------------------ | ----- | ---------------- | - | ------------- | ------ | ------------- | - | ----- | ----- | - | - | ------- | ----- | -
|                                   |                                                                  |   | Three Months Ended |       | Six Months Ended
|                                   |                                                                  |   |                    |       |                 
|                                   |                                                                  |   | June 30, 2003      |       | June 30, 2002    |   | June 30, 2003 |        | June 30, 2002
|                                   |                                                                  |   |                    |       |                  |   |               |        |              
|                                   |                                                                  |   |                    |       |                  |   | (unaudited)   |        |               |   |      
|Net income (loss)                  |                                                                  | $ | (693               | )     |                  | $ | (44,922       | )      |               | $ | 2,276 |       |   | $ | (44,354 | )    
|Other comprehensive income (loss): |                                                                  |   |                    |       |                  |   |               |        |               |   |       |       |   |   |         |      
|                                   | Foreign currency translation adjustment                          |   |                    | 1,305 |                  |   |               | 2,917  |               |   |       | 1,869 |   |   |         | 2,394 |  
|                                   | Unrealized gain (loss) on securities                             |   |                    | 59    |                  |   |               | (86    | )             |   |       | 1,076 |   |   |         | (123  | )
|                                   |                                                                  |   |                    |       |                  |   |               |        |               |   |       |       |   |   |         |      
|                                   | Other comprehensive income, before income taxes                  |   |                    | 1,364 |                  |   |               | 2,831  |               |   |       | 2,945 |   |   |         | 2,271 |  
|                                   | Provision for income taxes related to other
comprehensive income |   |                    | (294  | )                |   |               | (1,075 | )             |   |       | (531  | ) |   |         | (863  | )
|                                   |                                                                  |   |                    |       |                  |   |               |        |               |   |       |       |   |   |         |      
|                                   | Other comprehensive income, net of taxes                         |   |                    | 1,070 |                  |   |               | 1,756  |               |   |       | 2,414 |   |   |         | 1,408 |  
|                                   |                                                                  |   |                    |       |                  |   |               |        |               |   |       |       |   |   |         |      
|Comprehensive income (loss)        |                                                                  | $ | 377                |       |                  | $ | (43,166       | )      |               | $ | 4,690 |       |   | $ | (42,946 | )    
|                                   |                                                                  |   |                    |       |                  |   |               |        |               |   |       |       |   |   |         |      

See accompanying notes.

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

|                                                 |                                                                                          |                                           |                                           |       |                  |       |               |         |        |       |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----- | ---------------- | ----- | ------------- | ------- | ------ | ----- | -
|                                                 |                                                                                          |                                           |                                           |       | Six Months Ended
|                                                 |                                                                                          |                                           |                                           |       |                 
|                                                 |                                                                                          |                                           |                                           |       | June 30, 2003    |       | June 30, 2002
|                                                 |                                                                                          |                                           |                                           |       |                  |       |              
|                                                 |                                                                                          |                                           |                                           |       | (unaudited)     
|Cash flows from operating activities:            |                                                                                          |                                           |                                           |       |                  |       |               |        
|                                                 | Net income (loss)                                                                        |                                           | $                                         | 2,276 |                  |       | $             | (44,354 | )     
|                                                 | Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                           |                                           |       |                  |       |               |         |       
|                                                 | Amortization                                                                             |                                           |                                           | 1,683 |                  |       |               | 2,285   |       
|                                                 | Depreciation                                                                             |                                           |                                           | 1,902 |                  |       |               | 1,808   |       
|                                                 | Provision (benefit) for doubtful accounts                                                |                                           |                                           | (27   | )                |       |               | (656    | )     
|                                                 | Loss on long-term investments and marketable securities                                  |                                           |                                           | 1,207 |                  |       |               | 350     |       
|                                                 | Provision (benefit) for excess and obsolete inventory                                    |                                           |                                           | (368  | )                |       |               | 9,619   |       
|                                                 | Warranty provision                                                                       |                                           |                                           | 634   |                  |       |               | 769     |       
|                                                 | Litigation settlement                                                                    |                                           |                                           | 3,632 |                  |       |               |        |       
|                                                 | Write-off of capitalized and developed software                                          |                                           |                                           |      |                  |       |               | 5,436   |       
|                                                 | Write-off of Spectria goodwill                                                           |                                           |                                           |      |                  |       |               | 12,840  |       
|                                                 | Provision for impairment of assets on discontinued operations                            |                                           |                                           |      |                  |       |               | 2,118   |       
|                                                 | Change in deferred income taxes                                                          |                                           |                                           |      |                  |       |               | 16,260  |       
|                                                 | Other                                                                                    |                                           |                                           | (109  | )                |       |               | 100     |       
|Changes in operating assets and liabilities:     |                                                                                          |                                           |                                           |       |                  |       |               |        
|                                                 |                                                                                          | Accounts receivable                       |                                           |       | 1,300            |       |               |         | 4,826  |      
|                                                 |                                                                                          | Inventories                               |                                           |       | 264              |       |               |         | 1,021  |      
|                                                 |                                                                                          | Prepaid expenses and other current assets |                                           |       | (1,543           | )     |               |         | 76     |      
|                                                 |                                                                                          | Accounts payable                          |                                           |       | (540             | )     |               |         | (2,709 | )    
|                                                 |                                                                                          | Accrued liabilities                       |                                           |       | (3,647           | )     |               |         | 152    |      
|                                                 |                                                                                          | Income taxes                              |                                           |       | 220              |       |               |         | (2,710 | )    
|                                                 |                                                                                          |                                           |                                           |       |                  |       |               |        
|                                                 |                                                                                          |                                           | Net cash provided by operating activities |       |                  | 6,884 |               |         |        | 7,231 |  
|Cash flows from investing activities:            |                                                                                          |                                           |                                           |       |                  |       |               |        
|                                                 | Capitalized software development costs                                                   |                                           |                                           | (275  | )                |       |               | (423    | )     
|                                                 | Purchases of property, plant and equipment                                               |                                           |                                           | (954  | )                |       |               | (737    | )     
|                                                 | Purchases of marketable securities                                                       |                                           |                                           | (489  | )                |       |               |        |       
|                                                 | Sale of marketable securities                                                            |                                           |                                           | 599   |                  |       |               |        |       
|                                                 | Net cash paid for investments and acquisitions                                           |                                           |                                           | (466  | )                |       |               | (522    | )     
|                                                 | Other                                                                                    |                                           |                                           | 780   |                  |       |               | 826     |       
|                                                 |                                                                                          |                                           |                                           |       |                  |       |               |         |       
|                                                 |                                                                                          |                                           | Net cash used in investing activities     |       |                  | (805  | )             |         |        | (856  | )
|Cash flows from financing activities:            |                                                                                          |                                           |                                           |       |                  |       |               |        
|                                                 | Exercise of common stock options                                                         |                                           |                                           | 3,203 |                  |       |               | 3,009   |       
|                                                 | Purchase of treasury stock                                                               |                                           |                                           | (885  | )                |       |               | (640    | )     
|                                                 | Other                                                                                    |                                           |                                           | (124  | )                |       |               | (110    | )     
|                                                 |                                                                                          |                                           |                                           |       |                  |       |               |        
|                                                 |                                                                                          |                                           | Net cash provided by financing activities |       |                  | 2,194 |               |         |        | 2,259 |  
|Effect of exchange rate changes on cash          |                                                                                          |                                           | (222                                      | )     |                  |       | 463           |        
|                                                 |                                                                                          |                                           |                                           |       |                  |       |               |        
|Net increase in cash and cash equivalents        |                                                                                          |                                           | 8,051                                     |       |                  |       | 9,097         |        
|Cash and cash equivalents at beginning of period |                                                                                          |                                           | 50,922                                    |       |                  |       | 28,778        |        
|                                                 |                                                                                          |                                           |                                           |       |                  |       |               |        
|Cash and cash equivalents at end of period       |                                                                                          | $                                         | 58,973                                    |       |                  | $     | 37,875        |        
|                                                 |                                                                                          |                                           |                                           |       |                  |       |               |         |       

See accompanying notes.

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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 2003
and results of operations for the three and six months ended June 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 six months ended June 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, Hong Kong and
Brazil. Excluding Hong Kong, 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 Shareholders 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 subsidiary, the Company utilizes the U.S. dollar
as the functional currency as the majority of its transactions are in U.S.
dollars.

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 operations for the three and six months ended
June 30, 2003 and 2002 (see Note 12). Certain amounts previously reported have
been reclassified to conform with the 2003 presentation. Unless otherwise
indicated, the Notes to Consolidated Financial Statements relate to continuing
operations.

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

Marketable Securities

All investment securities are considered to be either trading or
available-for-sale. 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

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unrealized gains and losses, net of tax, reported as a separate component of
Accumulated Other Comprehensive Income within Shareholders Equity.



|2. |  | Earnings per share
|-- |  | ------------------

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share for the six months ended June 30, 2003
assumes the conversion of stock options of 1,274,000. For the three months
ended June 30, 2003 and three and six months ended June 30, 2002, the Company
incurred losses and, therefore, all stock options were anti-dilutive and not
included in the computation of diluted earnings per share.



|3. |  | 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 |        | Six Months Ended
|                                                                                                                             |                                  |   |                    |        |                 
|                                                                                                                             |                                  |   | June 30, 2003      |        | June 30, 2002    |   | June 30, 2003 |         | June 30, 2002
|                                                                                                                             |                                  |   |                    |        |                  |   |               |         |              
|Net income (loss), as reported                                                                                               |                                  | $ | (693               | )      |                  | $ | (44,922       | )       |               | $ | 2,276  |       |   | $ | (44,354 | )      
|Deduct: total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects |                                  |   | (998               | )      |                  |   | (1,728        | )       |               |   | (2,448 | )     |   |   | (3,599  | )      
|                                                                                                                             |                                  |   |                    |        |                  |   |               |         |               |   |        |       |   |   |         |        
|                                                                                                                             | Net loss, as adjusted            |   | $                  | (1,691 | )                |   | $             | (46,650 | )             |   | $      | (172  | ) |   | $       | (47,953 | )
|                                                                                                                             |                                  |   |                    |        |                  |   |               |         |               |   |        |       |   |   |         |        
|                                                                                                                             | Basic income (loss) per share:   |   |                    |        |                  |   |               |         |               |   |        |       |   |   |         |         |  
|                                                                                                                             | As reported                      |   | $                  | (0.03  | )                |   | $             | (1.69   | )             |   | $      | 0.09  |   |   | $       | (1.68   | )
|                                                                                                                             | As adjusted                      |   | $                  | (0.06  | )                |   | $             | (1.76   | )             |   | $      | (0.01 | ) |   | $       | (1.81   | )
|                                                                                                                             | Diluted income (loss) per share: |   |                    |        |                  |   |               |         |               |   |        |       |   |   |         |         |  
|                                                                                                                             | As reported                      |   | $                  | (0.03  | )                |   | $             | (1.69   | )             |   | $      | 0.08  |   |   | $       | (1.68   | )
|                                                                                                                             | As adjusted                      |   | $                  | (0.06  | )                |   | $             | (1.76   | )             |   | $      | (0.01 | ) |   | $       | (1.81   | )



|4. |  | 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.



|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.

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Inventories consist of the following:
(in thousands)

|                                                                                                            |  |               |        |                   |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ----------------- |  | - | ------ | -
|                                                                                                            |  | June 30, 2003 |        | December 31, 2002
|                                                                                                            |  |               |        |                  
|Raw materials                                                                                               |  | $             | 7,729  |                   |  | $ | 8,095  |  
|Work in process                                                                                             |  |               | 1,179  |                   |  |   | 1,662  |  
|Finished goods                                                                                              |  |               | 3,245  |                   |  |   | 3,573  |  
|Inventoried costs relating to long-term contracts, net of
amounts attributed to revenues recognized to date |  |               | 5,661  |                   |  |   | 5,158  |  
|Reserve for excess and obsolete inventory                                                                   |  |               | (8,265 | )                 |  |   | (9,180 | )
|                                                                                                            |  |               |        |                   |  |   |        |  
|                                                                                                            |  | $             | 9,549  |                   |  | $ | 9,308  |  
|                                                                                                            |  |               |        |                   |  |   |        |  

6. Income taxes

The effective tax rates from continuing operations for the three and six months
ended June 30, 2003 were (3%) and 18%, 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 six months ended June 30, 2003. During 2002, the
Company recorded income tax expense from continuing operations of $13.4 million
and $13.7 million for the three and six months ended June 30, 2002, which
included a valuation allowance of $11.6 million in accordance with SFAS 109,
Accounting for Income Taxes.

7. Warranty

The Company generally 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.

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

| |  |                   |       |                  |  |           |     |              |  |                  |      |            |  |            |     |  |  |   |       | 
| |  | ----------------- | ----- | ---------------- |  | --------- | --- | ------------ |  | ---------------- | ---- | ---------- |  | ---------- | --- |  |  | - | ----- | 
| |  |                   |       |                  |  |           |     |              |  |                  |      |            |  | Changes in |     |  |  |  
| |  |                   |       |                  |  | Additions |     |              |  |                  |      | Estimate   |  |            |     | 
| |  | Balance at        |       | Charged to Costs |  |           |     |              |  | Charged to Costs |      | Balance at
| |  | December 31, 2002 |       | and Expenses     |  | Payments  |     | and Expenses |  | June 30, 2003   
| |  |                   |       |                  |  |           |     |              |  |                 
| |  | $                 | 1,844 |                  |  | $         | 412 |              |  | $                | (293 | )          |  | $          | 222 |  |  | $ | 2,185 | 

8. 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 identifiable assets, after applicable eliminations, for each
segment as of June 30, 2003 were $100.0 million and $19.5 million,
respectively, compared with $90.7 million and $20.9 million as of December 31,
2002. Operating loss for eSecurity segment for the three and six months ended
June 30, 2003 was ($2.4) million and ($2.3) million, respectively, compared
with ($17.8) million and ($19.8) million, respectively, for the corresponding
periods in the prior year. Operating income for Secure Communications segment
for the three and six months ended June 30, 2003 were $1.9 million and $5.7
million, respectively, compared with $2.2 million and $5.5 million,
respectively, for the corresponding periods in the prior year.

There were no intercompany revenues for the three and six months ended June 30,
2003 while intercompany revenues for the three and six months ended June 30,
2002 were $16,000 and $17,000, respectively. Intercompany revenues are
generated by the Secure Communications segment.

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9. Recent accounting pronouncements

In May 2003, the Financial Accounting Standards Board (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 Company does not expect the adoption of SFAS 150 to
have a material impact on its 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 June 15, 2003.
The Company is currently reviewing its investments and other arrangements to
determine whether any of its investee companies are VIEs. The Company does not
expect to identify any significant VIEs that would be consolidated, but may be
required to make additional disclosures. The provisions of FIN 46 are
effective immediately for all arrangements entered into with new VIEs created
after January 31, 2003. The Company has not invested in any new VIEs created
after January 31, 2003.

10. 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.
Subsequent to June 30, 2003, pursuant to court order, the
Company expects a settlement of this
litigation for which it had been incurring significant legal expenses. The
settlement expense of $3.6 million was included in the results of operations
for 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.

11. 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.

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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                                       |  |            | (299   | )         |  |       |      |   |  |   | (299   | )
|                                                    |  |            |        |           |  |       |       |   |  |   |        |  
|Restructuring balance, June 30, 2003                |  | $          | 2,514  |           |  | $     |      |   |  | $ | 2,514  |  
|                                                    |  |            |        |           |  |       |       |   |  |   |        |  

The current portion of the restructuring reserve of $0.4 million relating to
office space reduction is recorded in other accrued 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.

12. Discontinued operations

The revenues and loss from discontinued operations for the three and six months
ended June 30, 2003 and 2002 related to the disposal of Spectria are as
follows:
(in thousands)

|                                  |  |                    |   |                  |  |               |         |               |  |   |     |   |  |   |         |  
|--------------------------------- |  | ------------------ | - | ---------------- |  | ------------- | ------- | ------------- |  | - | --- | - |  | - | ------- | -
|                                  |  | Three Months Ended |   | Six Months Ended
|                                  |  |                    |   |                 
|                                  |  | June 30, 2003      |   | June 30, 2002    |  | June 30, 2003 |         | June 30, 2002
|                                  |  |                    |   |                  |  |               |         |              
|Revenues                          |  | $                  |  |                  |  | $             | 909     |               |  | $ | 19  |   |  | $ | 2,745   |  
|Loss from discontinued operations |  | $                  |  |                  |  | $             | (15,963 | )             |  | $ | (86 | ) |  | $ | (16,668 | )

The assets and liabilities of Spectria at June 30, 2003 and December 31, 2002
consisted of the following:
(in thousands)

|                                             |  |               |     |                   |  |   |       | 
|-------------------------------------------- |  | ------------- | --- | ----------------- |  | - | ----- | 
|                                             |  | June 30, 2003 |     | December 31, 2002
|                                             |  |               |     |                  
|Cash and accounts receivable                 |  | $             | 103 |                   |  | $ | 98    | 
|Other assets                                 |  |               | 40  |                   |  |   | 40    | 
|                                             |  |               |     |                   |  |   |       | 
|Total assets of discontinued operations      |  | $             | 143 |                   |  | $ | 138   | 
|                                             |  |               |     |                   |  |   |       | 
|Other liabilities                            |  | $             | 735 |                   |  | $ | 1,156 | 
|Accrued payroll and related expenses         |  |               |    |                   |  |   | 2     | 
|                                             |  |               |     |                   |  |   |       | 
|Total liabilities of discontinued operations |  | $             | 735 |                   |  | $ | 1,158 | 
|                                             |  |               |     |                   |  |   |       | 




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

The following is managements discussion and analysis of certain significant
factors, which have affected the consolidated results of operations, and the
consolidated financial position of the Company during the periods included in
the accompanying condensed consolidated financial statements. This discussion
should be read in conjunction with the related condensed consolidated financial
statements and 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 at the time of shipment.
Secure Communications recognizes revenue and profit as work progresses on
long-term contracts using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. Catalog product
revenues and revenues under certain fixed-price contracts calling for delivery
of a

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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. Significant changes in required reserves
have been recorded in prior periods and may occur in the future depending on
future market conditions.

Inventory

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

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 six months ended June 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.

RESULTS OF OPERATIONS
(in thousands)

|                         |                       |                               |   |                    |        |                  |   |               |         |               |   |        |        |  |   |         |         |  
|------------------------ | --------------------- | ----------------------------- | - | ------------------ | ------ | ---------------- | - | ------------- | ------- | ------------- | - | ------ | ------ |  | - | ------- | ------- | -
|                         |                       |                               |   | Three Months Ended |        | Six Months Ended
|                         |                       |                               |   |                    |        |                 
|                         |                       |                               |   | June 30, 2003      |        | June 30, 2002    |   | June 30, 2003 |         | June 30, 2002
|                         |                       |                               |   |                    |        |                  |   |               |         |              
|                         |                       |                               |   | (unaudited)       
|Revenues:                |                       |                               |   |                    |        |                  |   |               |         |               |   |        |        |  |   |        
|                         | eSecurity             |                               | $ | 12,053             |        |                  | $ | 12,280        |         |               | $ | 25,310 |        |  | $ | 24,333  |        
|                         | Secure Communications |                               |   | 21,251             |        |                  |   | 18,700        |         |               |   | 41,863 |        |  |   | 37,832  |        
|                         |                       |                               |   |                    |        |                  |   |               |         |               |   |        |        |  |   |        
|                         |                       | Total revenues                |   | $                  | 33,304 |                  |   | $             | 30,980  |               |   | $      | 67,173 |  |   | $       | 62,165  |  
|                         |                       |                               |   |                    |        |                  |   |               |         |               |   |        |        |  |   |        
|Operating Income (Loss): |                       |                               |   |                    |        |                  |   |               |         |               |   |        |        |  |   |        
|                         | eSecurity             |                               | $ | (2,349             | )      |                  | $ | (17,803       | )       |               | $ | (2,297 | )      |  | $ | (19,823 | )      
|                         | Secure Communications |                               |   | 1,869              |        |                  |   | 2,170         |         |               |   | 5,656  |        |  |   | 5,555   |        
|                         |                       |                               |   |                    |        |                  |   |               |         |               |   |        |        |  |   |        
|                         |                       | Total operating income (loss) |   | $                  | (480   | )                |   | $             | (15,633 | )             |   | $      | 3,359  |  |   | $       | (14,268 | )
|                         |                       |                               |   |                    |        |                  |   |               |         |               |   |        |        |  |   |        

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REVENUES

On a consolidated basis, revenues from continuing operations for the three and
six months ended June 30, 2003 increased by 8% for both periods to $33.3
million and $67.2 million from the same periods in the prior year. Revenues
from eSecurity segment decreased for the quarter ended June 30, 2003 as
compared to the same period in 2002, which was offset by increased revenues
from the Secure Communications segment. The increase in revenues for the six
months ended June 30, 2003 as compared to the same period in 2002 was due to
higher revenues in both eSecurity and Secure Communications segments. Revenues
from international markets for the three and six months ended June 30, 2003
increased 5% to $7.0 million and 20% to $14.3 million, respectively, as
compared to the same periods in the prior year. The increase in revenues from
international markets for the three months ended June 30, 2003 was primarily
due to additional revenues from acquisitions and increase in
revenues from Europe partially offset by a decrease in revenues from Asia
Pacific. The increase in revenues from Europe was brought by 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
slightly affected revenues from the Companys Hong Kong office. Overall,
revenues from international markets for the six months ended June 30, 2003
increased for both Europe and Asia Pacific. Revenues from domestic markets for
the three and six months ended June 30, 2003 also increased by 8% to $26.3
million and 5% to $52.8 million, respectively, as compared to the same periods
in the prior year. The increase in domestic revenues was primarily due to a
decrease in revenues in eSecurity North America being offset by an increase in
revenues in the Secure Communications segment. The decrease in revenues in
eSecurity North America was primarily due to a decline in OEM markets for
Cryptoswift SSL acceleration devices and the ongoing softness in IT spending
particularly in North America.

eSecurity revenues for the three and six months ended June 30, 2003 decreased
by 2% to $12.1 million and increased by 4% to $25.3 million, respectively, when
compared to the same periods in 2002. The decrease in revenues for the three
months ended June 30, 2003 was primarily due to planned attrition in OEM
product revenues while the increase in revenues for the six months ended June
30, 2003 was primarily attributable to solid demand for software protection and
authentication products from international markets, which was partially offset
by the decline in OEM markets for Cryptoswift SSL acceleration devices.

Secure Communications revenues for the three and six months ended June 30, 2003
increased 14% to $21.3 million and 11% to $41.9 million, respectively, when
compared to the same periods in 2002. The increase in revenues was primarily
due to strong demand for network link encryptors, voice and data security
solutions and high-assurance commercial security products. The Company expects
continued favorable performance for this segment, as a result of increased
product demand and strong backlog.

GROSS PROFIT

Gross profit from eSecurity products for the three months ended June 30, 2003
increased to 66% of revenues compared to (57%) of revenues for the
corresponding period in 2002. Gross profit for the six months ended June 30,
2003 increased to 64% of revenues compared to (4%) of revenues for the
corresponding period in 2002. Cost of revenues for the three and six months
ended June 30, 2002 included increases in the reserve for excess and obsolete
products and a write-off of capitalized and developed software. Excluding
these charges, gross profit for the three and six months ended June 30, 2002
were 60% of revenues and 54% of revenues, respectively, and the
fiscal 2003 improvement was primarily due
to increased efficiencies in manufacturing operations and lower overhead costs.

Gross profit from Secure Communications for the three months ended June 30,
2003 increased to 27% of revenues as compared to 19% of revenues for the
corresponding period in 2002. Gross profit for the six months ended June 30,
2003 increased to 25% of revenues compared to 20% of revenues for the
corresponding period in 2002. The increase in gross profit 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 June 30, 2003 were $8.2 million or 25% of
revenues as compared to $9.4 million or 30% of revenues for the corresponding
period in 2002. Selling, general and administrative expenses from continuing
operations for the six months ended June 30, 2003 were $15.9 million or 24% of
revenues as compared to $16.1 million or 26% of revenues for the corresponding
period in 2002. The decrease in selling, general and administrative expenses
was primarily attributable to lower marketing expenses partially offset by
higher legal and other professional fees.

14



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##### Table of Contents



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 June 30, 2003 were $2.2
million or 7% of revenues, as compared with research and development expenses
of $2.9 million or 9% of revenues for the corresponding period in 2002.
Research and development expenses from continuing operations for the six months
ended June 30, 2003 were $3.9 million or 6% of revenues, as compared with
research and development expenses of $4.7 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 expects a settlement relating to a
pending litigation matter for which it has 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 10 to Notes to Condensed Consolidated Financial Statements).

OTHER ASSETS

Other assets primarily represent investments in early stage companies that are
accounted for on the cost basis. The Company periodically reviews these
investments for other-than-temporary declines in fair value and writes down
investments to their fair value when an other-than-temporary decline has
occurred based on the specific identification method. The Company generally
believes an other-than-temporary decline has occurred when the fair value of
the investment is below the carrying value for two consecutive quarters, absent
evidence to the contrary. At June 30, 2003 and March 31, 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
$0.4 million and $0.8 million, respectively, and were recognized in earnings
during the corresponding periods in the current year.

PROVISION FOR INCOME TAXES

The effective tax rates from continuing operations for the three and six months
ended June 30, 2003 were (3%) and 18%, 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 six months ended June 30, 2003. During 2002, the
Company recorded income tax expense from continuing operations of $13.4 million
and $13.7 million for the three and six months ended June 30, 2002, 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 six months ended June 30, 2003 reported
operating results and net losses of $0.1 million. There were no reported
losses for the three months ended June 30, 2003. Operating results and net
losses for the three and six months ended June 30, 2002 were $16.0 million and
$16.7 million, respectively, which included $12.8 million of write-off of
goodwill and $2.1 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 six months ended June 30, 2003 and
2002 were $6.9 million and $7.2 million, respectively. Operating activities in
2003 included a $1.2 million loss on long-term investments and marketable
securities and a $3.6 million litigation settlement. Operating activities in
2002 included a decrease in accounts receivable of $4.8 million, $9.6 million
increase in the provision for excess and obsolete inventory, $5.4 million
write-off of capitalized and developed software, $14.9 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 six months ended June 30, 2003
and 2002 were $0.8 million and $0.9 million, respectively. Investing activities
in 2003 included $0.5 million of net cash paid for acquisitions of Proteq Ltda.
and Alladin Ltda. in Brazil.

Net cash provided by financing activities for the six months ended June 30,
2003 and 2002 were $2.2 million and $2.3 million, respectively. Financing
activities in 2003 and 2002 primarily included proceeds from exercises of
common stock options.

15



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##### Table of Contents



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

At June 30, 2003, the Companys subsidiaries in the United Kingdom, Germany,
France, Netherlands, Switzerland and Japan carry approximately $1.9 million,
$0.4 million, $5.5 million, $2.7 million, $3.7 million and $1.0 million,
respectively, in interest earning deposits which may result in foreign exchange
gains or losses due to the fact that the functional currency in those
subsidiaries is not the U.S. dollar.

The Company believes that its current working capital of $71.6 million and
anticipated working capital to be generated by future operations will be
sufficient to support the Companys working capital requirements for at least
the next twelve months and for the foreseeable future. The foregoing is a
forward-looking statement.




Item 4. Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer of the Company have
concluded, based on their evaluation as of the date within 90 days prior to the
date of the filing of this quarterly report on Form 10-Q, the effectiveness of
the Companys disclosure controls and procedures pursuant to Exchange Act Rule
13a-14 and 15d-14. Based on that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures were effective in ensuring that all material information required to
be filed in this quarterly report have been made known to them, to allow timely
decisions regarding required disclosure.

(b)  Changes in Internal Controls

There have been no significant changes in internal controls, or in other
factors that could significantly affect internal controls subsequent to the
date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.




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.
Subsequent to June 30, 2003, pursuant to court orders, the
Company expects a settlement of this
litigation for which it had been incurring significant legal expenses. The
settlement expense of $3.6 million was included in the results of operations
for 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

At the Companys Annual Meeting of Shareholders held on June 12, 2003, the
following actions were approved by the votes indicated:



|1. |  | Five directors were elected:
|-- |  | ----------------------------

|                   |  |                |  |                             
|------------------ |  | -------------- |  | ----------------------------
|Walter W. Straub   |  | 23,147,791 For |  | 645,713 Withhold Authority  
|Richard P. Abraham |  | 23,014,113 For |  | 779,391 Withhold Authority  
|Frederick M. Haney |  | 18,190,078 For |  | 5,603,426 Withhold Authority
|Marvin Hoffman     |  | 22,897,914 For |  | 895,590 Withhold Authority  
|Arthur L. Money    |  | 23,483,544 For |  | 309,960 Withhold Authority  



|2. |  | The Companys 2003 Stock Option Plan was approved:
|-- |  | --------------------------------------------------

|                 |  |                     |  |                       
|---------------- |  | ------------------- |  | ----------------------
|13,192,636   For |  | 8,672,640   Against |  | 1,046,716   Abstaining



|3. |  | The ratification of Ernst & Young, LLP as independent auditors of the
Company was approved:
|-- |  | -------------------------------------------------------------------------------------------

|                 |  |                   |  |                    
|---------------- |  | ----------------- |  | -------------------
|22,006,954   For |  | 890,871   Against |  | 14,168   Abstaining




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

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

16



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                       
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                       
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                       
|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)).
|3(i)    |  | Articles of Incorporation of Rainbow, as amended (incorporated by reference to Exhibit 3(a) to Rainbows
Registration Statement on Form S-18 under the Securities Act of 1933, as amended, filed on July 20, 1987
- File No. 33-15956-LA (the S-18 Registration Statement)).                                                                                                        
|3(ii)   |  | By-Laws of Rainbow (incorporated by reference to Exhibit 3(b) to the S-18 Registration Statement).                                                                                                                                                                                                                                                                                    
|4(a)    |  | See Exhibit 3(i).                                                                                                                                                                                                                                                                                                                                                                     
|4(b)    |  | See Exhibit 3(ii).                                                                                                                                                                                                                                                                                                                                                                    
|4(c)    |  | Rights Agreement, dated as of July 29, 1997, between the Company and U.S. Stock Transfer Corporation, as
Rights Agent (incorporated by reference to Exhibit 4(c) to the Companys 1997 10-K).                                                                                                                                                                                         
|10(a)   |  | 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).                                                                                                                                                                                                                                  

17



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|        |  |                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                    
|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).                                                                                        
|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.                                                                                                           
|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

The Company filed a current report on Form 8-K, dated April 23, 2003,
pursuant to Item 7  Financial Statements and
Exhibits and Item 9  Regulation FD Disclosure, announcing its financial results for the quarter
ended March 31, 2003.

18



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##### 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: August 12, 2003

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

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##### 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 Rainbow, and Mykotronx, Inc., a
California corporation (Mykotronx) (incorporated by reference to the Companys Registration Statement
on Form S-4 under the Securities Act of 1933, as amended, effective on April 20, 1995, Registration No.
33-89918).
|2(ii)   |  | Agreement and Plan of Merger, dated March 6, 1998, by and among the Company, WRS Acquisition Corp, a
California corporation and wholly owned subsidiary of the Company, and Wyatt River Software, Inc.
(incorporated by reference to Exhibit 2(iii) of the Companys 1997 Annual Report on Form 10-K under the
Securities Exchange Act of 1934 filed in March 1998 (the 1997 10-K)).                                              
|3(i)    |  | Articles of Incorporation of Rainbow, as amended (incorporated by reference to Exhibit 3(a) to Rainbows
Registration Statement on Form S-18 under the Securities Act of 1933, as amended, filed on July 20, 1987
- File No. 33-15956-LA (the S-18 Registration Statement)).                                                                                                                                                      
|3(ii)   |  | By-Laws of Rainbow (incorporated by reference to Exhibit 3(b) to the S-18 Registration Statement).                                                                                                                                                                                                                                                                                                                                  
|4(a)    |  | See Exhibit 3(i).                                                                                                                                                                                                                                                                                                                                                                                                                   
|4(b)    |  | See Exhibit 3(ii).                                                                                                                                                                                                                                                                                                                                                                                                                  
|4(c)    |  | Rights Agreement, dated as of July 29, 1997, between the Company and U.S. Stock Transfer Corporation, as
Rights Agent (incorporated by reference to Exhibit 4(c) to the Companys 1997 10-K).                                                                                                                                                                                                                                       
|10(a)   |  | 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).                                                                                                                                                                                                                                                                                

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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                    
|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).                                                                                        
|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.                                                                                                           
|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.

21