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 MARCH 31, 2001 Commission file number: 0-16641

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

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

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

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

Yes [X] No [ ]

The number of shares of common stock, $.001 par value, outstanding as of May 10,
2001 was 26,065,985.

RAINBOW TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets at March 31, 2001 (unaudited) and December 31, 2000................. 4

Condensed Consolidated Statements of Operations for the three months ended March 31, 2001
and 2000 (unaudited)...................................................................................... 5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended
March 31, 2001 and 2000 (unaudited)....................................................................... 6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2001 and 2000 (unaudited)................................................................................. 7

Notes to Condensed Consolidated Financial Statements...................................................... 8

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

PART II - OTHER INFORMATION

Item 1 to 5 - Not applicable

Item 6. Exhibits and reports on Form 8K................................................................... 13

SIGNATURES............................................................................................................ 15

2
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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
such forward-looking statements be subject to the safe harbors created thereby.
These forward-looking statements include (i) the existence and development of
the Company's technical and manufacturing capabilities, (ii) anticipated
competition, (iii) potential future growth in revenues and income, (iv)
potential future decreases in costs, and (v) the need for, and availability of
additional financing.

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

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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(UNAUDITED)

ASSETS

Current assets:
Cash and cash equivalents.............................................. $ 15,739,000 $ 19,458,000
Marketable securities available-for-sale............................... 1,532,000 1,582,000
Marketable securities trading.......................................... 1,080,000 3,669,000
Accounts receivable, net of allowance for doubtful accounts of
$1,311,000 and $1,460,000 in 2001 and 2000, respectively.............. 30,121,000 40,710,000
Inventories............................................................ 28,880,000 30,395,000
Income tax receivable.................................................. 9,322,000 7,444,000
Deferred income taxes.................................................. 5,881,000 5,862,000
Unbilled costs and fees................................................ 2,007,000 1,039,000
Prepaid expenses and other current assets.............................. 3,283,000 3,325,000
--------------- ---------------
Total current assets................................................. 97,845,000 113,484,000
Property, plant and equipment, at cost:
Buildings.............................................................. 6,551,000 7,005,000
Furniture.............................................................. 2,418,000 1,645,000
Equipment.............................................................. 18,970,000 18,467,000
Leasehold improvements................................................. 2,886,000 1,837,000
--------------- ---------------
30,825,000 28,954,000
Less accumulated depreciation and amortization......................... 13,905,000 13,266,000
--------------- ---------------
Net property, plant and equipment.................................... 16,920,000 15,688,000
Goodwill, net of accumulated amortization of $15,763,000 and
$15,549,000 in 2001 and 2000, respectively............................ 20,713,000 21,524,000
Software development costs, net of accumulated amortization of
$5,013,000 and $4,411,000 in 2001 and 2000, respectively.............. 13,787,000 12,833,000
Product licenses, net of accumulated amortization of $2,468,000 and
$2,267,000 in 2001 and 2000, respectively............................. 4,699,000 4,900,000
Other assets........................................................... 3,317,000 2,780,000
--------------- -----------------
$ 157,281,000 $ 171,209,000
=============== ===============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable....................................................... $ 6,263,000 $ 8,579,000
Accrued payroll and related expenses................................... 6,590,000 8,671,000
Other accrued liabilities.............................................. 3,758,000 6,713,000
Long-term debt, due within one year.................................... 208,000 223,000
Line of credit......................................................... -- 3,129,000
--------------- ---------------
Total current liabilities............................................ 16,819,000 27,315,000
Long-term debt, net of current portion................................. 626,000 726,000
Deferred income taxes.................................................. 2,501,000 2,718,000
Other liabilities...................................................... 703,000 702,000
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value, 55,000,000 shares authorized,
26,049,633 and 25,980,252 shares issued and outstanding in
2001 and 2000, respectively........................................... 26,000 26,000
Additional paid-in capital............................................. 56,230,000 55,689,000
Accumulated other comprehensive loss................................... (1,937,000) (851,000)
Retained earnings...................................................... 82,313,000 84,884,000
--------------- ---------------
Total shareholders' equity........................................... 136,632,000 139,748,000
--------------- ---------------
$ 157,281,000 $ 171,209,000
=============== ===============

See accompanying notes.

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

THREE MONTHS ENDED
-------------------------------------
MARCH 31, MARCH 31,
2001 2000
------------------ ---------------

Revenues:
Digital Rights Management................................................... $ 12,662,000 $ 15,097,000
Secure Communications....................................................... 18,648,000 11,532,000
iVEA........................................................................ 4,585,000 4,980,000
Spectria.................................................................... 4,305,000 4,836,000
-------------- --------------
Total revenues............................................................ 40,200,000 36,445,000
Operating expenses:
Cost of Digital Rights Management Revenues.................................. 5,487,000 4,627,000
Cost of Secure Communications Revenues...................................... 15,178,000 9,371,000
Cost of iVEA Revenues....................................................... 2,044,000 1,254,000
Cost of Spectria Revenues................................................... 2,635,000 2,506,000
Selling, general and administrative......................................... 13,021,000 10,755,000
Research and development.................................................... 3,028,000 2,814,000
Goodwill amortization....................................................... 763,000 726,000
-------------- --------------
Total operating expenses.................................................. 42,156,000 32,053,000
-------------- --------------
Operating income (loss)....................................................... (1,956,000) 4,392,000
Unrealized loss on marketable trading securities.............................. (2,589,000) --
Interest income............................................................... 226,000 191,000
Interest expense.............................................................. (31,000) (37,000)
Other income, net............................................................. 203,000 510,000
-------------- --------------
Income (loss) before income taxes............................................. (4,147,000) 5,056,000
Benefit (provision) for income taxes.......................................... 1,576,000 (1,925,000)
-------------- --------------
Net income (loss)............................................................. $ (2,571,000) $ 3,131,000
============== ==============
Net income (loss) per share:

Basic...................................................................... $ (0.10) $ 0.13
============== ==============
Diluted.................................................................... $ (0.10) $ 0.12
============== ==============
Shares used in computing net income (loss) per share:

Basic...................................................................... 26,022,000 24,074,000
============== ==============
Diluted.................................................................... 26,022,000 27,312,000
============== ==============

See accompanying notes.

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

THREE MONTHS ENDED
------------------------------------
MARCH 31, 2001 MARCH 31, 2000
----------------- ----------------

Net income (loss)........................................................... $ (2,571,000) $ 3,131,000
Other comprehensive loss:
Foreign currency translation adjustment................................... (1,702,000) (319,000)
Unrealized loss on securities............................................. (50,000) (295,000)
-------------- --------------
Other comprehensive loss, before income taxes............................. (1,752,000) (614,000)
Benefit for income taxes related to other comprehensive loss.............. 666,000 233,000
-------------- --------------
Other comprehensive loss, net of taxes (1,086,000) (381,000)
-------------- --------------
Comprehensive income (loss)................................................. $ (3,657,000) $ 2,750,000
============== ==============

See accompanying notes.

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

THREE MONTHS ENDED
-----------------------------------
MARCH 31, 2001 MARCH 31, 2000
---------------- ---------------

Cash flows from operating activities:

Net income (loss) ...................................................... $ (2,571,000) $ 3,131,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization............................................................ 1,818,000 1,244,000
Depreciation............................................................ 874,000 953,000
Change in deferred income taxes......................................... (175,000) (7,898,000)
Unrealized loss on marketable trading securities........................ 2,589,000 --
Tax benefit of exercise of common stock options......................... 137,000 4,540,000
Reversal of allowance for doubtful accounts............................. (131,000) (42,000)
Changes in operating assets and liabilities:
Accounts receivable................................................... 9,599,000 (2,873,000)
Inventories........................................................... 918,000 (3,190,000)
Unbilled costs and fees............................................... (968,000) (112,000)
Prepaid expenses and other current assets............................. 19,000 (961,000)
Accounts payable...................................................... (2,155,000) (1,730,000)
Accrued liabilities................................................... (3,945,000) (1,681,000)
Billings in excess of costs and fees.................................. (935,000) 2,000
Income taxes.......................................................... (1,636,000) 4,088,000
Other................................................................. (11,000) (419,000)
-------------- -------------
Net cash provided by (used in) operating activities................. 3,427,000 (4,948,000)

Cash flows from investing activities:
Purchases of property, plant, and equipment............................. (2,490,000) (966,000)
Net cash paid for acquisition of Systematic Systems Integration, Inc. -- (1,763,000)
Other non-current assets................................................ (655,000) (525,000)
Capitalized software development costs.................................. (2,153,000) (852,000)
-------------- --------------
Net cash used in investing activities............................... (5,298,000) (4,106,000)

Cash flows from financing activities:
Exercise of Rainbow common stock options................................ 404,000 6,239,000
Payment on line of credit............................................... (3,129,000) (6,000,000)
Repayment of long-term debt............................................. (51,000) (45,000)
-------------- --------------
Net cash provided by (used in) financing activities................. (2,776,000) 194,000
Effect of exchange rate changes on cash................................... 928,000 130,000
-------------- --------------
Net decrease in cash and cash equivalents................................. (3,719,000) (8,730,000)
Cash and cash equivalents at beginning of period.......................... 19,458,000 26,709,000
-------------- --------------
Cash and cash equivalents at end of period................................ $ 15,739,000 $ 17,979,000
============== ==============

See accompanying notes.

RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)

1. Basis of presentation

Rainbow Technologies, Inc. (the Company) develops, manufactures, programs and
markets secure software distribution products which prevent the unauthorized use
of intellectual property, including software programs; develops and manufactures
secure communications products for satellite communications; develops and
manufactures internet performance and security products to provide privacy and
security for network communications; and provides customized eBusiness
consulting services. The accompanying financial statements consolidate the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain amounts
previously reported have been reclassified to conform to the 2001 presentation.

Financial information related to the ikey authentication tokens line of business
was reclassified from the iVEA segment to the Digital Rights Management segment
(DRM) effective January 1, 2001. All prior year information has been
reclassified to conform with the new 2001 segment presentation.

The preparation of financial statements in conformity with generally accepted
accounting principles 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 inventory obsolescence, accrued warranty costs, the
allowance for deferred tax assets, total estimated contract costs associated
with billed and unbilled contract revenue and the fair value of marketable
securities.

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

In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position at March 31, 2001 and results of operations for the three months ended
March 31, 2001 and 2000. The condensed consolidated financial statements do not
include footnotes and certain financial information normally presented annually
under generally accepted accounting principles and, therefore, should be read in
conjunction with the Company's December 31, 2000 Annual Report on Form 10-K.
Results of operations for the three months ended March 31, 2001 are not
necessarily indicative of results to be expected for the full year.

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

2. Earnings per share

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

3. Government Contracts

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

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

8
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4. Inventories

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

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

INVENTORIES MARCH 31, 2001 DECEMBER 31, 2000
(dollars in thousands) ------------------ -------------------

Finished goods $ 8,170 $ 10,699
Raw materials 13,485 11,659
Inventoried costs relating to long-term contracts, net of
amounts attributed to revenues recognized to date 3,778 5,499
Work in process 3,447 2,538
--------- ---------
$ 28,880 $ 30,395
========= =========

5. Other assets

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

6. Software development costs

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

7. Industry segments

The Company operates in four industry segments. The first segment includes the
development and sale of devices, which protect data and software from
unauthorized use and products that provide access control to computer networks,
Internet Websites and virtual private networks (Digital Rights Management
segment). The second segment is the development and sale of information security
products to provide privacy and security for voice communication and data
transmission (Secure Communications segment). The third segment includes the
development and sale of products which accelerate performance of security
servers and network equipment (iVEA segment). The fourth segment provides
services that enable companies to integrate diverse software and hardware
platforms (Spectria segment). The identifiable assets, after applicable
eliminations, for each segment as of March 31, 2001 were $77,963,000,
$30,924,000, $24,433,000, and $23,961,000, respectively, compared with
$81,167,000, $32,909,000, $32,547,000 and $24,586,000 as of December 31, 2000.

Intercompany revenues for the three months ended March 31, 2001 and 2000 were
$175,000 and $615,000, respectively. Intercompany revenues are generated by the
secure communications segment.

8. Stock split

On September 19, 2000 the Company announced that its Board of Directors approved
a 2-for-1 split of its common stock. The effective date was October 9, 2000 and
the payout date was October 23, 2000. These financial statements have been
adjusted to reflect the impact of the stock split.

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

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

RESULTS OF OPERATIONS
(dollars in thousands)

THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
---------- ----------

Revenues

Digital Rights Management $ 12,662 $ 15,097
Secure Communications 18,648 11,532
iVEA 4,585 4,980
Spectria 4,305 4,836
--------- ---------
Total revenues $ 40,200 $ 36,445
========= =========
Operating Income (Loss)

Digital Rights Management $ (2,670) $ 3,267
Secure Communications 3,193 2,061
iVEA (2,019) (271)
Spectria (460) (665)
--------- ----------
Total operating income (loss) $ (1,956) $ 4,392
========== =========

REVENUES

On a consolidated basis, revenues for the three months ended March 31, 2001
increased by 10% to $40,200,000 from the same period in the prior year. The
increase is due to higher revenues in the Secure Communications segment.
Revenues from international markets for the three months ended March 31, 2001
increased 2% to $7,527,000 from the same period in the prior year. Domestic
sales for the three months ended March 31, 2001 increased 12% to $32,673,000
from the prior year. The increase in domestic sales was due to the
aforementioned increase in the Secure Communications segment.

Revenues from DRM for the three months ended March 31, 2001 decreased by 16% to
$12,662,000 when compared to the same period in 2000. The decrease in revenues
was primarily due to decreased demand in North America and Europe for business
software applications. For the three months ended March 31, 2001 and 2000, DRM
international revenues were 54% and 47%, respectively, of total DRM revenues.

Secure Communications revenues for the three months ended March 31, 2001
increased 62% to $18,648,000 when compared to the same period in 2000. The
revenue growth was primarily due to higher demand for network security products.

iVEA revenues for the three months ended March 31, 2001 decreased 8% to
$4,585,000 when compared to the same period in 2000. The decrease in revenues
was primarily due to less demand for performance enhancement products in the
server and network appliance markets. For the three months ended March 31, 2001
and 2000 iVEA international revenues were 14% and 5%, respectively, of total
iVEA revenues.

Spectria revenues for the three months ended March 31, 2001 decreased 11% to
$4,305,000 when compared to the same period in 2000 due to decline in demand
from the Company's customers.

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GROSS PROFIT

Gross profit from DRM for the three months ended March 31, 2001 decreased to 57%
of revenues compared to 69% of revenues for the corresponding period in 2000.
The decrease was primarily due to increased inventory reserves, increases in
certain component costs and increased overhead in the Company's manufacturing
operations.

Gross profit from Secure Communications for the three months ended March 31,
2001 and for the corresponding period in 2000 was 19% of revenues.

Gross profit from iVEA for the three months ended March 31, 2001 decreased to
55% of revenues compared to 75% of revenues for the corresponding period in
2000. The decrease was due to higher sales to several large customers at lower
prices, and an increase in inventory reserves.

Gross profit from Spectria for the three months ended March 31, 2001 decreased
to 39% of revenues compared to 48% of revenues for the corresponding period in
2000. The decrease in gross profit was primarily due to a decrease in high
margin projects.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses consist primarily of
personnel-related expenses, sales commission, promotional activities, and
professional fees. Selling, general and administrative expenses for the three
months ended March 31, 2001 were $13,021,000 or 32% of revenues as compared to
$10,755,000 or 30% of revenues for the three months ended March 31, 2000. The
increase reflected higher personnel related expenses resulting from the hiring
of sales, marketing, management and administrative personnel, and higher legal
and other professional fees.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of salaries and other
personnel-related expenses, costs related to engineering development tools, and
subcontracting costs. Research and development expenses for the three months
ended March 31, 2001 were $3,028,000 or 8% of revenues, as compared with
research and development expense of $2,814,000 or 8% of revenues for the three
months ended March 31, 2000. The dollar increase in research and development
expenses was primarily due to increased staffing for the development of new
products.

MARKETABLE TRADING SECURITIES

During the second quarter and third quarter of fiscal 2000, the Company acquired
securities and classified them as trading securities, as defined by SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." At March 31,
2001, the difference between the estimated fair value and the cost of the
securities acquired resulted in an unrealized loss of $2,589,000, which was
recognized in earnings for the three months ended March 31, 2001.

PROVISION FOR INCOME TAXES

The effective tax rate was 38% for the three months ended March 31, 2001 and
2000.

ACCOUNTS RECEIVABLE

Accounts receivable at March 31, 2001 decreased by approximately $10,589,000 to
$30,121,000 as compared with $40,710,000 at December 31, 2000. This decrease was
due to increased collection activities.

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INVENTORIES

Finished goods decreased approximately $2,529,000 to $8,170,000 at March 31,
2001 as compared with $10,699,000 at December 31, 2000. The decrease was
primarily due to the Company's reduced production activities because of adequate
inventory levels.

Raw materials increased approximately $1,826,000 to $13,485,000 at March 31,
2001 as compared with $11,659,000 at December 31, 2000. The increase was due
primarily to the abrupt decline in demand for the Company's internet
infrastructure products.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of operating funds have been from operations.
Net cash provided by operations for the three months ended March 31, 2001 was
$3,427,000 while net cash used in operations for the three months ended March
31, 2000 was $4,948,000. Operating activities in 2001 included decreases in
inventory of $918,000, in accounts receivable of $9,599,000, in accounts payable
of $2,155,000 and in accrued liabilities of $3,945,000.

Net cash used in investing activities for the three months ended March 31, 2001
and 2000 was $5,298,000 and $4,106,000, respectively. Investing activities in
2001 included $2,490,000 on capital expenditures and $2,153,000 on development
of new products. Investing activities in 2000 included $1,763,000 for the
acquisition of Systematic.

Net cash used in financing activities for the three months ended March 31, 2001
was $2,776,000 while net cash provided by financing activities for the three
months ended March 31, 2000 was $194,000. Financing activities included in 2001
and 2000 were payments to the line of credit of $3,129,000 and $6,000,000,
respectively, and approximately $405,000 and $6,239,000 received from common
stock options exercised.

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 March 31, 2001, the Company's subsidiaries in France, The United Kingdom,
Germany and The Netherlands carried approximately $1,764,000, $2,551,000,
$640,000 and $3,381,000, 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 $81,026,000 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.

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PART II OTHER INFORMATION

Item 6 Exhibits and Reports on Form 8-K

(a) Exhibits

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

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

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

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

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

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

4(a) See Exhibit 3(i).

4(b) See Exhibit 3(ii).

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

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

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

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

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

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

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

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

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

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

13
14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(b) Reports on Form 8-K

None

SIGNATURES

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

Dated: May 14, 2001

RAINBOW TECHNOLOGIES, INC.

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