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

                               ----------------

                                    FORM 10-K

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31, 2001Commission File No. 0-27742


                              CYLINK CORPORATION
             (Exact name of registrant as specified in its charter)


               California                                95-3891600
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

                                 3131 Jay Street
                             Santa Clara, CA 95054
                   (Address of principal executive offices)

                                (408) 855-6000
             (Registrant's telephone number, including area code)

                               ----------------

          Securities registered pursuant to Section 12(b) of the Act:
                                      None

          Securities registered pursuant to Section 12(g) of the Act:
                                  Common Stock

                               ----------------

     Indicate  by check mark  whether the  registrant  (1) 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 (2) has been subject to such
filing requirements for the past 90 days.

                                 YES _X__ NO ___

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

     The aggregate  market value of voting stock held by  non-affiliates  of the
Registrant,  based upon the closing  sale price of the Common Stock on March 27,
2002, as reported by the Nasdaq National Market, was approximately $36,828,000.


     Shares of Common Stock held by each officer and director and by each person
who owns 5% or more of the  outstanding  Common  Stock,  based on  Schedule  13G
filings,  have been  excluded from the  computation  in that such persons may be
deemed  to be  affiliates.  This  determination  of  affiliate  status  is not a
conclusive determination for other purposes.

     As of March 27,  2002,  there were  33,035,017  shares of the  Registrant's
Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Parts  of the  Registrant's  Proxy  Statement  for its  Annual  Meeting  of
Shareholders  (the  "Proxy   Statement")  to  be  held  on  May  15,  2002,  are
incorporated  by  reference  in Part III of this Form 10-K to the extent  stated
herein.
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<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>       <C>                                                                  <C>
FORWARD LOOKING STATEMENTS .................................................     1
PART I .....................................................................     2
ITEM 1.   BUSINESS .........................................................     2
ITEM 2.   PROPERTIES .......................................................    16
ITEM 3.   LEGAL PROCEEDINGS ................................................    16
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..............    17
PART II ....................................................................    18
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          SHAREHOLDER MATTERS ..............................................    18
ITEM 6.   SELECTED FINANCIAL DATA ..........................................    18
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS ..............................    19
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
          RISK .............................................................    24
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................    25
   Independent Auditors' Report ............................................    26
   Consolidated Balance Sheets .............................................    27
   Consolidated Statements of Operations ...................................    28
   Consolidated Statements of Shareholders' Equity and Comprehensive Loss ..    29
   Consolidated Statements of Cash Flows ...................................    30
   Notes to Consolidated Financial Statements ..............................    31
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE ..............................    47
PART III ...................................................................    48
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...............    48
ITEM 11.  EXECUTIVE COMPENSATION ...........................................    48
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT ...................................................    48
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................    48
PART IV ....................................................................    48
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
          REPORTS ON FORM 8-K ..............................................    48
SIGNATURES .................................................................    50
SCHEDULE II ................................................................    51
INDEPENDENT AUDITORS' CONSENT ..............................................    52
</TABLE>

                                        i


<PAGE>

                           FORWARD LOOKING STATEMENTS

     This Annual Report on Form 10-K and certain information incorporated herein
by  reference  contain  forward-looking  statements  within  the  "safe  harbor"
provisions  of  the  Private  Securities  Litigation  Reform  Act of  1995.  All
statements  included or incorporated  by reference in this Annual Report,  other
than statements that are purely historical are forward-looking statements. Words
such as  "anticipates,"  "expects,"  "intends,"  "plans,"  "believes,"  "seeks,"
"estimates" and similar  expressions also identify  forward-looking  statements.
These forward-looking  statements,  which include statements about the growth of
the network security  industry;  future demand;  product  performance;  Cylink's
expectations, objectives, anticipations, intentions and strategies regarding the
future,  expected  operating  results,  revenues  and  earnings  and current and
potential litigation are not guarantees of future performance and are subject to
risks and  uncertainties  that could cause actual  results to differ  materially
from the results contemplated by the forward-looking statements. Forward-looking
statements in this Annual Report on Form 10-K include, without limitation:

   * belief that large  enterprises  will continue to use their private networks
     and  shared  data  services  rather  than  migrate  all  of  their  network
     operations to the Internet

   * statements  regarding  release of a major upgrade to the NetHawk, including
     numerous networking features in Q2 2002

   * belief that PrivaCy Manager's ease of management is a competitive advantage

   * expectations regarding license and revenue with the USPS

   * belief that, if necessary, Cylink will be able to locate another source for
     components and subsystems for products the Company  manufactures at our own
     facilities

   * plans to cut costs in accordance  with its lower revenue will be sufficient
     to fund operations for 2002

   * belief that the  Company's  principal  sources of liquidity may satisfy the
     Company's  current  anticipated  working  capital and  capital  expenditure
     requirements through at least the next twelve months

   * belief that cost reductions are sustainable for the rest of 2002

   * belief  that  Cylink's  current  facilities  are  well  maintained  and are
     adequate for the foreseeable future

   * belief that the Company has meritorious defenses and adequate insurance for
     the damages  claimed in  shareholder  litigation  actions and the Company's
     intentions to defend itself vigorously

   * belief  that  existing  cash  balances  and  prospective  borrowing  may be
     sufficient to fund operations through 2002

   * belief that the Company will satisfy the financial  covenant or renegotiate
     that covenant to which its line of credit is subject during the term of the
     loan


     The above  forward-looking  statements and any  expectations  based on such
forward-looking  statements  are  subject to risks and  uncertainties  and other
important  factors.  Any of Cylink's actual results could differ materially from
those included in such  forward-looking  statements.  The above  forward-looking
statements are subject to the risks and  uncertainties  further  discussed under
"Item 1, Business -- Risk Factors" beginning on page 9.

     All  forward-looking  statements  included  in this  document  are based on
information  available  to Cylink on the date  hereof,  and  Cylink  assumes  no
obligation  to update  any such  forward-looking  statements.  Shareholders  are
cautioned not to place undue reliance on such statements, which speak only as of
the date of this Annual  Report.  The reader should also consult the  cautionary
statements  and risk  factors  listed from time to time in  Cylink's  Reports on
Forms 10-Q, 8-K, 10-K and its Annual Reports to  Shareholders  for other trends,
risks or  uncertainties  which could cause the Company's  results to differ from
those expressed in such forward looking statements.

                                        1
<PAGE>
                                     PART I


ITEM 1. BUSINESS

     We develop,  manufacture,  market and support a comprehensive  portfolio of
hardware and software  security products for  mission-critical  private networks
and business  communications  over the  Internet.  We believe our  cryptographic
products  provide the most secure,  flexible and easily  managed  solutions  for
expanding our customers' private and public commercial networks.

     Our solutions offer competitive advantages to our customers by lowering the
cost of deploying and managing secure, reliable private networks, while enabling
use  of the  Internet  for  trusted  transactions  with  business  partners  and
customers.  We provide "drop-in"  hardware  encryption  products that are easily
deployed within customers existing  high-speed data networks known as Local Area
Networks  ("LANs") and Wide Area Networks  ("WANs"),  including  Virtual Private
Networks  ("VPNs")  that  use  the  Internet.   Our  products  are  designed  as
"appliances"  that can be  connected  quickly  and easily to  customer  networks
without costly changes in their networks' configuration.

     Our products are centrally managed by our proprietary  software  management
system,  PrivaCy Manager, that allows the customer's network security manager to
remotely  configure and operate all of our products without risk of tampering by
other  network  operations   personnel.   We  also  believe  the  separation  of
responsibility   for  security   management   from  other   network   operations
differentiates   our  solutions  from  vendors  of  general  purpose  networking
equipment by allowing our customers to carefully control access to their network
security policies.

     We create trust in our customers' networks by securing the access,  privacy
and integrity of information  when it is transmitted  over their LANs, WANs, and
the  Internet.  These  trusted  solutions  enable our  customers  to merge their
operations and transactions onto existing networks, maximize network use, reduce
the costs of operations,  and expand  businesses.  Our customers include leading
Fortune 500 corporations, multinational corporations, financial institutions and
numerous  agencies  within the United States  Government.  We estimate that more
than $7.0 trillion worth of financial transactions are transmitted each business
day over networks secured by our encryption appliances and management software.


Industry Background

     The need for  dependable  data  services  such as T1, T3,  frame  relay and
Asynchronous  Transfer Mode ("ATM") for WANs,  the explosive use of the Internet
for business  communications,  and the continued  growth in LANs create a demand
for  reliable,  easily  managed  security  solutions.  All  of  these  services,
including  switched  private  networks  as  well  as the  public  Internet,  are
essential  to modern  network  operations.  Although  some  vendors  of  network
security products focus exclusively on VPNs for the Internet, we believe network
security  solutions  for large  enterprises  must  address all of these  network
services.

     We believe  that  large  enterprises  will  continue  to use their  private
networks  and shared  data  services  rather than  migrate all of their  network
operations  to the  Internet.  Although VPN services over the Internet are ideal
for intermittent  communications with third parties, businesses continue to rely
on more dependable,  switched services for their mission-critical infrastructure
such as finance,  engineering and  manufacturing  operations.  Businesses do not
want to  expose  their  more  critical  communications  to  additional  risks of
interrupted  communications,  lost  connections  and denial of  service  attacks
inherent to the  Internet.  Money  center  financial  institutions,  Fortune 500
companies  that transmit  highly valued  intellectual  property,  and Government
departments  and their  agencies,  cannot and will not rely  exclusively  on the
Internet for all of their networking architecture.

     Competing vendors of data security products typically emphasize one form of
communications  service or a specific  defense to a common threat.  For example,
firewall  vendors use filtering  technology to control  external access from the
Internet.  Intrusion  detection,  or intrusion  prevention  as some products are
known,  are  intended  to alert  network  operators  of  attempts  to  penetrate
customers'  networks.  Similarly,  anti-virus products address the prevalence of
virus attacks that proliferate through the Internet, and


                                        2
<PAGE>

migrate into private  networks  through  their users'  computers.  Each of these
products  provides a  valuable,  but  incomplete,  answer to meeting  the varied
threats to network communications.

     Today,  large  networks  contain  hundreds,  if not  thousands of points of
vulnerability,  which can make passwords,  routing tables,  network architecture
and  other  attack  information  available.  Corporate  communications  may pass
through dozens of countries,  over  satellites,  numerous  operating  systems in
computers and routers,  and through a variety of organizations or communications
providers and their premises. Consequently, multiple parties have access, or can
acquire access, to proprietary data within these networks.

     Because of this exposure to  unauthorized  access and data  tampering,  all
communications  paths must be  considered  either  "trusted or  un-trusted."  We
believe that encryption, by protecting the privacy of the information,  ensuring
the integrity of the data and  authenticating  the source and destination of the
communication,  is the most reliable  technology for ensuring a trusted network.
We  further  believe  encryption  should be the  first  line of  defense  in the
network's security strategy, with firewalls,  intrusion detection and anti-virus
solutions  providing  additional defense "in-depth" for communications  received
from remaining, un-trusted sources.

     Another  advantage  to  using  our  encryption  appliances  and  management
software is our unrivaled  experience with implementing public key technology to
support  unlimited  deployment of our products with the growth of our customers'
networks.  Prior  to the  invention  of  public  key  cryptography  at  Stanford
University   in  1976,   the  expense  of  managing  and   distributing   unique
cryptographic  "keys" limited the use of cryptographic  solutions to governments
and very large financial  institutions  that could afford the cumbersome  manual
methods for handling keying material.  Public key cryptography offered the first
economical method for  electronically  automating  cryptographic key management,
drastically reducing the cost of owning and operating  cryptographic devices. In
addition,  public key cryptography enables the use of "digital  certificates" to
establish correspondents'  identities,  the authenticity of their communications
and their privileges within a network. Public key technology is now the industry
standard for managing and authenticating  encryption devices, and we were one of
the first companies to recognize its value and create products to implement it.

Company History

     Founded in 1983, we were the first company to focus  exclusively  on public
key-based security solutions for high value networks.  By 1985 we introduced our
first line of high-speed link encryptors to secure private leased lines.  During
the next ten years we  marketed  a variety  of public  key  encryption  devices,
including fax encryptors and secure phones. In the mid `90s we began introducing
our first security appliances for frame relay services and the Internet.  In the
summer of 2000 we released  NetHawk,  our first VPN  appliance for the Internet.
Later that summer, we acquired Celotek Corporation, the premier supplier for the
ATM encryption market.

     In February and March of 1996, we completed our initial public offering and
our Common Stock began  trading on the NASDAQ  National  Market under the symbol
CYLK.

     We operate in one industry reportable segment -- network security products.
Our  principal  operations  outside  of the United  States  consist of sales and
service  offices  located in the United  Kingdom and several other  countries in
Europe  and the Far  East.  See Note 15 of the Notes to  Consolidated  Financial
Statements for geographic area information.

Our Products and Services

     We provide a comprehensive portfolio of integrated security solutions.  Our
public key-based  solutions include the NetHawk,  which creates a secure virtual
private network,  or VPN, for  transmitting  high-value  information.  Our link,
frame relay and ATM security  appliances can be deployed  easily  throughout the
network to assure the  integrity  and privacy of  information  transmitted  over
private  leased  lines or  shared  network  resources.  These  network  security
appliances are designed to secure existing networks without reducing performance
or requiring  modifications to customers' existing network hardware or software.
This  ease of  "drop  in"  integration  is  accomplished  with a broad  range of
hardware and


                                        3

<PAGE>

software  implementations  of network  interfaces,  which  enable  our  security
appliances  to connect to most  networks in use  throughout  the world.  We also
offer a  unified  management  platform  for all of our  security  appliances  to
authenticate  these  devices,  configure  their use and  centrally  manage their
operation.  Our  solutions  include our public key  infrastructure,  or PKI, for
managing the digital  identities  and  privileges of all  correspondents  on the
customer's network.

     The following table sets forth our principal products and services:




<TABLE>
<CAPTION>
Products and Services                                Description
----------------------------   -------------------------------------------------------
<S>                            <C>
Internet Security--VPNs
   NetHawk                     High-Performance, Highly Scalable IPSec VPN Solution
WAN Security
   Cylink Link Encryptor       High-Speed Appliance For Point-To-Point Communications
   Cylink Frame Relay          High-Speed Appliance for Frame Relay Networks
   Cylink ATM Encryptors       High-Speed Appliance for ATM Networks
Security Network Management
   PrivaCy Manager             Software For Managing Cylink Security Devices
Public Key Infrastructure
   NetAuthority                Highly Scalable Software For Trusted Authentication
</TABLE>

Internet Security -- VPNs

     NetHawk. The NetHawk VPN is our latest security solution for communications
over the Internet. NetHawk is a dedicated,  standalone IPSec device that enables
encryption of thousands of simultaneous  connections at full line speeds from 10
to 100 Mbps, using strong,  Triple-DES encryption.  As with all of our products,
NetHawk uses public key cryptography for fully automated key management. NetHawk
began  shipping  to  customers  in June 2000.  A major  upgrade to the  NetHawk,
including  numerous  networking  features is scheduled for release in the second
quarter of 2002.


WAN Security

     Cylink  Link  Encryptors.   The  Cylink  Link  Encryptor  ("CLE")  and  its
predecessor,  the CIDEC family of products,  are network  appliances that form a
complete line of link encryptors for securing  sensitive data  transmitted  over
high-speed, point-to-point or dial-up communication links. Our CLE's secure data
communications  at speeds up to 52 Mbps over  private  and public  networks  and
support  most  widely  used  data  link  protocols.  At the end of 2000,  Cylink
introduced the CLE-HSSI,  a link encryptor with high-speed  serial  integration,
which we believe to be the fastest link  encryptor on the market.  We introduced
the CLE-T3 in the fourth quarter of 2001 that provides speeds up to 45 Mbps.

     Cylink Frame  Encryptor.  The Cylink Frame  Encryptor  ("CFE") is a network
appliance  that  provides  high-speed,   high-level  security  for  frame  relay
networks. We offer three models that encrypt data at speeds of up to 45 Mbps and
are scalable  across a wide range of networks and  applications.  It  positively
identifies  other  Frame  Encryptor  units  and  will  not  accept  frames  from
unauthorized  sources.  Once a connection is made, data is encrypted as it flows
between nodes and different  encryption keys are used for each virtual  circuit.
In the fourth  quarter of 2001,  we introduced  the CFE-HSSI,  the fastest frame
relay encryption device in the industry with speeds up to 52 Mbps.

     Cylink ATM  Encryptor.  The ATM Encryptor is a family of security  gateways
for ATM networks and can be deployed in T1, E1, T3, E3, OC3c and OC12c networks.
The Cylink ATM Encryptor  creates a virtual  trusted  network that provides data
privacy  and access  control  for  connections  between  trusted  ATM local area
networks across public ATM wide area networks.  Cylink's ATM Technology  Center,
located in Raleigh,  North  Carolina,  is devoted  exclusively to the design and
production of ATM encryptor equipment.


                                        4
<PAGE>

Security Network Management

     PrivaCy Manager. PrivaCy Manager provides a Java-based, security management
platform for all of our Internet Security and WAN Security  appliances.  PrivaCy
Manager's   graphical   representation   of  the  network's   topology  and  its
point-and-click  interface  simplifies the tasks of  configuring,  modifying and
managing network  security.  Furthermore,  PrivaCy Manager can implement a broad
range of security  policies for determining  access to network security devices,
while preventing  unauthorized  devices from masquerading as legitimate  devices
within a user's network. We believe that PrivaCy Manager's ease of management is
one of our competitive  advantages in helping our customers to lower their total
cost of network security.

Public Key Infrastructure

     NetAuthority. NetAuthority is a highly scalable, standards-based public key
infrastructure,  or PKI,  system  that  enables a wide  variety of  applications
including secure email, secure web browsing,  VPN, and e-commerce.  NetAuthority
consists of a Certificate Authority, Registration Server, Registration Authority
and a PKI Toolkit,  that together  provide all the components  necessary to make
applications and devices PKI enabled.

Sales, Marketing and Customer Support

     We market our products  primarily  through our direct  sales  force,  value
added resellers and international distributors.  Our direct sales force operates
from our  headquarters  in Santa  Clara,  California  and other  regional  sales
offices located in the United States, Europe, and the Far East. Our sales force,
engineers  and  technical  personnel  work closely  with  customers to determine
system security and network configurations that meet the customers' needs.

     International  sales are made primarily  through our  headquarters in Santa
Clara,  California,  three foreign sales offices, and numerous distributors.  We
seldom have  long-term  contractual  relationships  with our  distributors  and,
therefore,  generally  have no assurance of a continuing  relationship  within a
given market.

     To date,  the majority of our customers for our network  security  products
have been Fortune 1000 companies,  financial  institutions,  government agencies
and telecommunication  carriers who rely on our WAN Security Products to encrypt
and secure their WANs operating  over private  leased lines and packet  switched
networks.

     We believe that customer support is essential to developing and maintaining
good relationships with our customers. Our support personnel are responsible for
providing installation,  technical training,  technical support, on-site support
and repair services. We offer end-users a number of different levels of support,
maintenance  and  service  options,  including  extended  warranties,  emergency
replacement services, product upgrades and on-site support. We offer service and
support  from our  headquarters  and from  service  and  support  centers in New
Jersey, the United Kingdom,  Brussels, and Singapore.  Telephone support is also
available  twenty-four  hours per day, seven days per week,  through a toll-free
hotline.

     Our products  developed or manufactured in the United States are subject to
the export control laws of the United States and regulations  promulgated by the
U.S.  Department  of  Commerce.  Certain  limitations  applied  by the  Commerce
Department  affect the  functionality of the products,  which may be exported to
foreign governments.  In addition,  these United States export laws prohibit the
export of encryption products to certain hostile countries.

Backlog

     Orders for our  products  are usually  placed by  customers on an as-needed
basis and we typically ship products within thirty to sixty days of receipt of a
customer's firm purchase  order.  Our backlog  consists of all orders  received,
where the  anticipated  shipping  date is within twelve  months.  Because of the
possibility of customer changes in delivery schedules or cancellation of orders,
our  backlog as of any  particular  date may not be  indicative  of sales in any
future period. We seldom maintain long-term

                                        5
<PAGE>

contracts  with our customers  that require them to purchase our  products.  Our
backlog  for  continuing  operations  as of  December  31,  2000  and  2001  was
approximately $2.3 million for both periods.

Manufacturing

     Our manufacturing  operations  consist primarily of component  procurement,
final assembly and test, and quality control of subassemblies  and systems.  Our
standalone software products are replicated at our facilities.  We generally use
domestic  independent  contractors to manufacture  and assemble  printed circuit
boards and the metal packaging for our hardware  appliances.  The  manufacturing
process  enables us to configure  the hardware and software in  combinations  to
meet a wide variety of customer  requirements.  We install our software into the
electronically programmable read-only memory of our products to maintain quality
control and security,  and perform "burn-in" procedures and functional tests, as
well as  comprehensive  inspections to ensure the quality and reliability of our
products.

     Our   product   designs   are   proprietary   but   generally   incorporate
industry-standard   algorithms  and  hardware   components.   However,   certain
semiconductor  devices,  electronic  components and  subassemblies are currently
purchased from sole source suppliers.  Specifically, each of our custom designed
integrated circuits,  including our encryption circuits, are manufactured by one
supplier at a time. Our sole source  suppliers  include  American  Microsystems,
Inc.,  Atmel Corp.,  National  Semiconductor  and Chip  Express.  Certain  other
components  are currently  available or acquired  from only a limited  number of
suppliers.  Our ability to timely deliver our products is highly  dependent upon
the availability of quality  components and subsystems from these suppliers.  We
also depend in part upon subcontractors to manufacture,  assemble and deliver in
a timely and satisfactory manner. A failure to find an adequate source of supply
for  components  selected  by  our  design  engineers  for  new  products  or  a
significant  interruption  in the  delivery of sole source  items from  existing
suppliers  could have a material  adverse  effect on our results of  operations.
Although we believe, if necessary, that we will be able to locate another source
for components and subsystems for products we manufacture at our own facilities,
the delay in receiving supplies and in production of our finished goods could be
significant.

     In the third  quarter of 2001,  we entered  into a  development  and supply
agreement  with Biodata  Information  Technology AG  ("Biodata")  to replace our
previous OEM supplier of ISDN  encryption  products,  DICA  Technologies,  Inc.,
following  DICA's  declaration  of  insolvency  in the  first  half of 2001.  In
February of 2002, Biodata also declared  insolvency,  and we notified Biodata of
our  decision  to  terminate  the  agreement.  Due to the failure of both of our
suppliers,  we decided to  discontinue  all further  sales of and support for an
ISDN product line.

Intellectual Property and Other Proprietary Rights

     We rely on patents, trademarks,  copyrights,  licenses and trade secret law
to establish and preserve our intellectual  property rights.  We own a number of
U.S.  patents  covering certain aspects of our network security product designs,
and have  additional  U.S.  patent  applications  pending.  From time to time we
evaluate the applicability of our patents to other products of third parties. We
also seek to protect our  proprietary  rights  through a combination of employee
and third party nondisclosure agreements.

Research and Development

     The  market  for  our  products  is   characterized   by  rapidly  changing
technologies,  extensive research and new product introductions. We believe that
our future  success  will depend in part upon our ability to continue to enhance
our existing products and to develop,  manufacture and market new products. As a
result,  we expect to continue to make a significant  investment in  engineering
and research and development.  In 1999, 2000 and 2001 we incurred $17.7 million,
$22.2 million, and $17.3 million, respectively, for research and development.

Competition

     We  compete  in the  market for  network  security  solutions  based on our
portfolio of products and services,  their ease of deployment  within customers'
existing  networks,  the  reliability  of  encryption  hardware to protect  data
communications and our software management platform for our network


                                        6
<PAGE>

security  appliances.  We believe  that our offering of network  appliances  and
software  solutions is the optimum  selection  for  customers who are seeking to
expand their  e-businesses with various network  services.  We also believe that
our  cryptography-based  products  offer a more  flexible  and,  easily  managed
solution for our customers' networks than other vendors' security solutions.

     Our  competitors  in  the network security market, including companies that
offer  products  similar  to  or  perceived  as  an alternative to our products,
include  Checkpoint  Software  Technologies, Ltd., Network Associates, Inc., RSA
Security,   Inc.,   SafeNet,   Inc.,   Secure  Computing  Corporation,  Symantec
Corporation,  and  Thales, Inc. Our NetHawk VPN appliance competes with numerous
other  products,  including those offered or under development by Cisco Systems,
Inc.,  Newbridge Networks Corporation, Netscreen Technologies, Inc., Sonic Wall,
Inc.,  and  Nokia  Corp.  A  number of significant vendors, including Microsoft,
America  On  Line  and  Cisco Systems, have embedded security solutions in their
software.

The Divestiture of Algorithmic Research, Ltd. ("ARL")

     On June 22,  2001,  the Company  announced  that it would close or sell its
wholly owned  Israeli  subsidiary,  ARL. On August 9, 2001,  Cylink  executed an
Allotment and Conversion  Agreement and various related documents  (collectively
the "ARL Divestiture"), under which Cylink transferred majority ownership in ARL
to ARL's existing  employees,  and converted its remaining minority interest and
its intercompany debt to preferred stock having certain rights and privileges in
the event of ARL's sale or liquidation.  As part of the ARL Divestiture,  Cylink
retained  ownership of ARL's virtual private  networking  technology,  a royalty
free,  irrevocable  license to ARL's  remaining  base of  existing  intellectual
property solely for incorporating into Cylink Products, and a release and waiver
from all of ARL's  existing  employees.  Cylink  also  agreed to assign  certain
contracts to ARL  concerning  licenses of ARL's  products,  and to wind up ARL's
subsidiaries'  operations in Germany and Singapore.  Under the ARL  Divestiture,
ARL will retain  ownership  and  responsibility  for all of its other assets and
liabilities.

Employees

     As of December 31, 2001, we had 213  employees,  of whom 65 were  primarily
engaged in research and development, 83 in sales, marketing and related customer
support  services,  29 in  administration  and  36 in  manufacturing.  Of  these
employees,  approximately  21 were located in Europe and 5 in Asia.  None of our
employees is  represented by a collective  bargaining  agreement with respect to
his or her  employment  by us,  nor  have  we  experienced  any  organized  work
stoppage. We consider our relations with our existing employees to be good.

Factors Affecting Stock Price

     The market price of our stock may fluctuate  substantially  over short time
periods  due to a number of factors,  including  factors  that could  affect our
future  financial  performance.  Our stock price may also be affected by factors
that  influence  the  overall  market for stocks,  or stocks of high  technology
companies in particular.

Environmental Matters

     Neither  compliance  with federal,  state and local  provisions  regulating
discharge of materials into the  environment,  nor remedial  agreements or other
actions relating to the environment, has had, or is expected to have, a material
effect on our capital expenditures,  financial condition,  results of operations
or competitive position.


                                  RISK FACTORS

     Set forth below and elsewhere in this Annual  Report,  including in Item 7,
Management's  Discussion and Analysis,  and in other  documents we file with the
Securities and Exchange  Commission are risks and uncertainties that could cause
actual  results  to  differ  materially  from the  results  contemplated  by the
forward-looking statements contained in this Annual Report.


                                        7
<PAGE>

We have a history of losses,  and may not be able to meet our needs for  working
capital.

     We have incurred  significant net losses in 2001 and in prior years. We had
an accumulated  deficit of $118.8  million as of December 31, 2001.  Although we
plan to  operate at cash flow  break  even for 2002 on an annual  basis,  we may
experience  shortfalls in revenue and continue to incur losses. Our prior losses
may also adversely impact our ability to raise additional capital if required to
sustain our operations.

     As of the date of filing of this Annual  Report on Form 10K, the  Company's
revenue  to date for 2002 is  significantly  below  its plan  upon  which it had
projected  a positive  operating  cashflow  for the year.  The Company is in the
process  of  revising  its  plan  and  will  initiate  actions  to cut  costs in
accordance with its lowered revenue. However, there can be no assurance that the
Company will be able to achieve its revised plan,  or our  principal  sources of
liquidity,  which  include  cash  and cash  equivalents  of $9.6  million  as of
December 31, 2001 and  prospective  borrowing via our working capital loan, will
satisfy  our  current   anticipated  working  capital  and  capital  expenditure
requirements  through at least the next twelve  months.  The  Company's  working
capital loan matures in June 2002.  Although we renegotiated our credit facility
in order to obtain more favorable  covenants,  we breached a certain covenant in
February  2002.  There is no  guarantee  that we will meet that  covenant in the
future, and there is no guarantee that the loan will be renewed in June 2002. If
we fail to meet our financial covenant or the facility is not renewed,  the line
of credit will not be available to fund our operations if it is needed.

     In 2001,  we began to realize  the  benefits  of the  actions  taken in the
fourth  quarter of 2000,  and the second  and third  quarters  of 2001 to reduce
operating costs in our core business. However, there can be no assurance that we
will be able to  continue  reducing  costs at a pace that  reflects  any further
reduction in revenues,  or that we will not need to raise additional  capital to
fund  operations  within  this  period  or that  additional  financing  could be
obtained  on  acceptable  terms,  or at all. If  additional  funds are raised by
issuing equity  securities,  dilution to  shareholders  may result.  If adequate
funds are not  available,  we, our  business,  and the price of our Common Stock
will be adversely affected.


Our quarterly  operating  results may vary in the future,  which could cause our
stock price to drop.

     We have historically  experienced significant fluctuations in our operating
results on a  quarterly  basis and could  experience  such  fluctuations  in the
future.  Our revenues  and  operating  results  could be affected by a number of
factors outside of our control, including the following:

   * our  inability  to  accurately  forecast  revenues  and respond in a timely
     manner to changes in revenue levels;

   * the  timing  of  the  introduction  by us or by our  competitors  of new or
     enhanced products;

   * market acceptance of our new products and those of our competitors;

   * the   timing,   cancellation   or   delay  of  customer  orders,  including
     cancellation  or  delay  in  anticipation  of  new product introductions or
     enhancements;

   * changes in our pricing policies or those of our competitors;

   * changes in operating  costs and expenses,  including  those  resulting from
     changes in available production capacity of independent foundries and other
     suppliers and the availability of raw materials;

   * changes in the revenue mix from products or services sold;

   * changes in the percentage of products sold through our direct sales force;

   * loss of an important customer;

   * failure to grow our customer base in accordance with market expectations;

   * customer discounts and credits;

   * our limited ability to reduce  expenses to offset any unexpected  shortfall
     in revenue growth or decrease in revenue;

   * delays in  manufacturing  due to shortages in components  or  unanticipated
     revisions in product design;


                                        8
<PAGE>

   * expenses  incurred in seeking to enforce or defend  claims with  respect to
     intellectual property rights;

   * changes  in  the  economy  that  affect  the  purchasing  decisions  of our
     customers; and

   * disruption in our operations caused by reductions in our workforce.


     Many of these factors are outside of our control.  Unforeseen reductions in
revenue can  materially  and  adversely  affect our ability to raise  capital or
sustain ongoing operations.

We are currently involved in litigation.

     Several  securities class action  complaints have been filed against us and
certain of our current and former  directors  and officers in federal  courts in
California.  These complaints  allege,  among other things,  that our previously
issued  financial  statements were materially  false and misleading and that the
defendants knew or should have known that these financial  statements caused our
common stock price to rise  artificially and allege  violations of Section 10(b)
of the Securities  Exchange Act of 1934, as amended,  and Rule 10b-5 promulgated
thereunder,  and Section 20 of the  Exchange  Act. The  securities  class action
lawsuits  have been ordered  consolidated  into a single  action  pending in the
United States District Court for the Northern District of California,  captioned
In Re Cylink Securities Litigation,  No. C98-4292 (VRW). For more information on
this lawsuit,  see Part I, Item 3. "Legal  Proceedings."  Although we believe we
have  meritorious  defenses and adequate  insurance  for the damages  claimed in
these  actions,  it is not feasible to predict or determine the final outcome of
these  proceedings,  and if the outcome  were to be  unfavorable  and exceed our
applicable insurance, our business,  financial condition, cash flows and results
of operations could be materially adversely affected.


Our  sales  cycles  are long and  unpredictable,  which  makes  period-to-period
revenues difficult to predict.

     Salesof our products generally involve a significant  commitment of capital
by customers, with the attendant delays frequently associated with large capital
expenditures.  For these and other reasons,  the sales cycle associated with our
products is typically  lengthy and subject to a number of significant risks over
which we have  little or no  control.  We are often  required  to ship  products
shortly after we receive orders. Consequently, order backlog at the beginning of
any period has, at times in the past,  represented  only a small portion of that
period's  expected  revenue.  Furthermore,  increases in backlog from quarter to
quarter may be due to placement of orders  calling for delivery  dates  extended
over a much longer period of time into future periods.  Consequently,  our order
backlog becomes more vulnerable to customer cancellations.  As a result of these
fluctuations in our sales cycle and order backlog, product revenue in any period
has been and will  continue to be  substantially  dependent on orders booked and
shipped in that period.  We typically plan our  production and inventory  levels
based on internal forecasts of customer demand,  which are highly  unpredictable
and can  fluctuate  substantially.  In  particular,  market  forces  beyond  our
control,  including recession,  and limits or changes in government spending may
have a material  affect on customer  demand for our  products.  If revenue falls
significantly  below  anticipated  levels,  as it has at times in the past,  our
financial  condition and results of operations would be materially and adversely
affected.  In addition,  our operating expenses are based on anticipated revenue
levels and a high  percentage of our expenses are  generally  fixed in the short
term.  Based on these  factors,  a small  fluctuation in the timing of sales can
cause  operating  results to vary  significantly  from  period to period.  It is
possible  that in the  future  our  operating  results  will  again be below the
expectations of securities  analysts and investors.  In such an event, or in the
event that adverse  conditions  prevail or are perceived to prevail generally or
with  respect to our  business,  or the market  sector in which we operate,  the
price of our Common Stock would likely be adversely affected. These factors make
it difficult to predict our  financial  performance.  As our  quarterly  results
fluctuate,  they may fall below the  expectations  of public market  analysts or
investors. If this occurs, the price of our Common Stock may drop.

The overall economic climate continues to be weak.

     Our  products  typically  represent   substantial  capital  commitments  by
customers,  involving a  potentially  long sales  cycle.  As a result,  customer
purchase decisions may be significantly affected by a variety


                                        9
<PAGE>

of factors  including  trends in capital  spending for  communication  networks,
market  competition,   and  the  availability  or  announcement  of  alternative
technologies.  Continued  recent  weakness in general  economic  conditions  has
resulted  in  many of our  customers  delaying  and/or  reducing  their  capital
spending related to information  systems.  If the economy  continues to be weak,
demand for our  products  could  decrease,  resulting  in lower  revenues  and a
decline in the overall rate of our revenue growth.

We are dependent on recently introduced and new network security products.

     Our   future  results  of  operations  will  be  highly  dependent  on  the
successful  marketing  and  manufacture  of the  NetHawk  product,  as  well  as
successful  marketing and  manufacture  of the Cylink Link  Encryptors,  PrivaCy
Manager,  Cylink ATM, and Cylink Frame Encryptor products. To date, we have made
only limited commercial  shipments of our NetHawk product,  which began shipping
in  mid-year  2000.  This  product   requires   additional   development   work,
enhancement,  and testing to achieve widespread  commercial  success. If this or
other new or recently introduced products have performance, reliability, quality
or other  shortcomings,  such  products  could fail to achieve  adequate  market
acceptance.  The  failure of our new or  existing  products  to achieve or enjoy
market  acceptance,  whether  for  these or  other  reasons,  could  cause us to
experience  reduced orders,  higher  manufacturing  costs,  delays in collecting
accounts receivable and additional warranty and service expenses,  which in each
case could have a material adverse effect on our business,  financial  condition
and results of operations.

     Due  to   insufficient   market   acceptance  of  stand  alone  public  key
infrastructure ("PKI") products,  such as our Net Authority and similar products
of our competitors, we revised our marketing approach in the second half of 2001
by  discontinuing  efforts to sell Net  Authority  as a stand alone  product and
focused our efforts on potential  customers  seeking to embed our PKI as part of
their  application  or service.  In addition,  on February 8, 2002,  we received
notice from the United States Postal  Service  ("USPS") that it was  terminating
its license to Cylink's Net Authority  product as of March 17, 2002, noting that
its decision was "not a reflection of the quality of work  performance  provided
by Cylink" but was due to "USPS' immediate need to reduce cost" and downsize its
non core businesses following the anthrax attack on its operations in October of
2001.  We recently  granted a  continuation  of USPS'  license,  at its request,
through May 30, 2002, but we expect this license and all further  revenue earned
under  Cylink's  contract with the USPS to expire in the second quarter of 2002.
Although  we  continue  to explore  alternative  sources of funding  for our PKI
development activity with other potential OEM customers,  any effort to continue
development  and  marketing  of  Cylink's  PKI  technology  may fail to generate
sufficient  revenue to cover its costs if we continue in this  business  for the
balance of 2002.

We  face  significant  competition  from  other  providers  of  network security
systems

     Competition is intense among providers of network security systems,  and we
expect such  competition  to increase  in the  future.  Significant  competitive
factors in these markets include:

   * the development of new products and features;

   * product quality and performance;

   * customer perception regarding the adequacy of security provided by existing
     software and routers;

   * adoption of embedded  security  solutions  in other  vendors'  hardware and
     software products;

   * the  quality  and   experience   of  our  sales,   marketing   and  service
     organizations;

   * product price;

   * name recognition; and

   * perception of our stability and long-term viability.


     Many of these competitive factors are beyond our control.

     Our  competitors  in  the information security markets, including companies
that  offer  products  similar  to,  or  are perceived as an alternative to, our
products,  are Checkpoint Software Technologies, Ltd., Network Associates, Inc.,
SafeNet, Inc., Secure Computing Corporation, RSA Security, Inc., Symantec


                                       10
<PAGE>

Corporation and Thales e-Security,  Inc. Our NetHawk VPN appliance competes with
numerous other products,  including those offered or under  development by Cisco
Systems,  Inc., Newbridge Networks Corporation,  Netscreen  Technologies,  Inc.,
Nokia Corp,  and Sonic Wall,  Inc. A number of  significant  vendors,  including
Microsoft Corporation,  and Cisco Systems, Inc. have embedded security solutions
in their  software.  To the extent  that these  embedded  or  optional  security
capabilities  provide  all or a portion  of the  functionality  provided  by our
products,  our products may no longer be required by customers to attain network
security.

     Many of our competitors have substantially  greater  financial,  technical,
marketing, distribution and other resources, greater name recognition and longer
standing relationships with customers than we possess.  Competitors with greater
financial  resources  are  better  able to engage in more  aggressive  marketing
campaigns and  sustained  price  reductions  in order to gain market share.  Any
period of sustained price reductions would have a material adverse effect on our
financial  condition  and results of  operations.  We may not be able to compete
successfully  in the  future  and  competitive  pressures  may  result  in price
reductions,  loss of market share or otherwise have a material adverse effect on
our financial condition and results of operations.

We face the risks from tort and warranty claims that may be made against us.

     We face the risks from tort and  warranty  claims that may be made  against
us.  Customers  rely on our network  security  products to prevent  unauthorized
access to their networks and data transmissions. A malfunction or the inadequate
design of our products  could result in tort or warranty  claims.  A breach of a
customer's network by an unauthorized party, which is attributable to an alleged
defect in our products,  may cause substantial damages due to loss or compromise
of the customer's valuable information.  Furthermore,  there is inadequate legal
precedent for allocating  responsibility  for such losses caused by the wrongful
acts of third  parties.  Although  we attempt to reduce the risk of such  losses
through warranty  disclaimers and liability  limitation clauses in our sales and
license agreements and by maintaining product liability insurance,  there can be
no assurance  that such measures will be effective in limiting our liability for
any such damages.  Any liability for damages resulting from security breaches or
other product  defects could be  substantial  and could have a material  adverse
effect on our business, financial condition and results of operations.

     In addition,  a well-publicized  actual or perceived  security breach could
adversely affect the market's perception of security products in general, or our
products in particular, regardless of whether such breach is attributable to our
products. This could result in a decline in demand for our products, which would
have a material adverse effect on our business,  financial condition and results
of operations.

     On August 2, 2001,  Cylink  determined that a hardware design could cause a
premature  failure of its the backup battery on its Cylink Frame Encryptor (CFE)
product.  Shortly  thereafter,  Cylink announced a program to give its customers
the option of updating  their CFE units by  returning  them to the  factory,  or
receiving an extended  warranty covering the battery through the end of December
2002.  Cylink  accrued  approximately  $1.0 million in warranty costs during the
second  quarter of 2001  associated  with this  program.  While we believe  this
reserve was based on reasonable  estimates based on information  available to us
at the time,  actual costs could exceed these  reserves.  Since  announcing this
program, two of our major customers stated their intention to submit substantial
claims related to their costs of avoiding product failures.  Although we believe
such  claims  may be barred or  significantly  reduced  by the  limitations  and
exclusions in the governing contracts of sale, there can be no assurance that we
will be found free from liability and any obligation to reimburse  customers may
have a material effect on our operations.

We may be unable to retain our  executive  officers and key  personnel  that are
critical to our business.

     Our  future  success  will  depend in large  part on the  abilities  of our
executive  officers,  key management and technical  personnel and our ability to
retain  qualified and  competent  individuals  following  our  reductions in the
employee workforce.  There is no guarantee that our present executive management
and  technical  staff  will  remain  with  the  Company,   particularly  if  our
performance is not up to expectations,


                                       11
<PAGE>

and  particularly  if general  economic  recovery leads to expanded  alternative
opportunities for such employees. The loss of the services of one or more of our
executive  officers or key  personnel,  or the  inability  to attract and retain
additional  executives  and  other  qualified  personnel,  could  delay  product
development  cycles or otherwise have a material  adverse effect on our business
and operating results.

We may not be able  to hire  and  retain  sufficient  technical,  marketing  and
management personnel that we need to succeed because these people are limited in
number and are in high demand.

     We may not be able to hire and retain sufficient  technical,  marketing and
management  personnel that we need to succeed because we have limited  resources
to  expand  our  work  force.  We  recently  experienced,  and may  continue  to
experience, substantial fluctuations in the number of employees and the scope of
our  operations  in  the  network  security  business,  resulting  in  increased
responsibilities  for management.  To manage our business  effectively,  we will
need  to  continue  to  improve  our   operational,   financial  and  management
information  systems and to retain,  motivate and manage our  employees.  In the
recent past, competition has been intense for qualified technical, marketing and
management personnel.  Furthermore,  the recent reductions in our workforce, and
fluctuation  in our stock  price,  may create  greater  uncertainty  amongst our
existing employees,  who may decide not to continue employment with the Company.
There can be no assurance that we will be able  effectively to achieve or manage
any future  growth,  and our  failure to do so could delay  product  development
cycles or otherwise have a material  adverse  effect on our financial  condition
and results of operations.

Any inability to protect our intellectual  property could reduce our competitive
advantage,  divert management  attention,  and require  additional  intellectual
property to be developed or cause us to incur expenses to enforce our rights.

     We rely on patents, trademarks,  copyrights,  licenses and trade secret law
to establish and preserve our intellectual  property rights.  We own a number of
U.S.  patents covering certain features of our network security product designs,
and have additional U.S. patent applications pending.  There can be no assurance
that any patent, trademark, copyright or license owned or held by us will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to us or that any of our pending or future patent
applications  will be issued  with the scope of the  claims  sought by us, if at
all.  Further,   there  can  be  no  assurance  that  others  will  not  develop
technologies  that are  similar or  superior to our  technology,  duplicate  our
technology, misappropriate our trade secrets, or design around the patents owned
by us.  Resorting  to the  courts to protect  our  intellectual  property  would
require significant financial and management resources. In addition, the laws of
certain countries in which our products are or may be developed, manufactured or
sold may not protect our products and  intellectual  property rights to the same
extent  as the  laws  of  the  United  States.  Our  inability  to  protect  our
intellectual  property  adequately  could have a material  adverse effect on our
financial condition and results of operations.

     The computer, communications,  software and network security industries are
characterized by substantial  litigation regarding patent and other intellectual
property rights. In the past, we have received communications from third parties
asserting  that our  patents,  features  or content  of certain of our  products
infringe upon the intellectual property rights held by third parties, and we may
receive such communications in the future.  There can be no assurance that third
parties  will not  assert  claims  against  us that  result in  litigation.  Any
litigation,  whether or not determined in our favor, could result in significant
expense to us and could divert  management and other resources.  In the event of
an adverse ruling in any litigation involving intellectual property, we might be
required to discontinue the use of certain processes, cease the manufacture, use
and  sale of  infringing  products,  expend  significant  resources  to  develop
non-infringing technology or obtain licenses to the infringing technology and we
may suffer  significant  monetary  damages,  which could include treble damages.
There can be no  assurance  that under  such  circumstances  a license  would be
available  to us on  reasonable  terms or at all.  In the event of a  successful
claim  against us and our failure to develop or license a substitute  technology
on  commercially  reasonable  terms,  our  financial  condition  and  results of
operations would be adversely affected.  There can be no assurance that existing
claims or any other assertions (or claims for indemnity from customers resulting
from infringement claims) will not materially and adversely affect our financial
condition and results of operations.


                                       12
<PAGE>

If we are unable to adapt our services to rapidly changing technology, or if the
market  for our  network  security  products  fails to grow,  our  business  and
operating results could suffer.

     The market for our network  security  products is  characterized by rapidly
changing technology,  emerging industry standards, new product introductions and
changes in customer requirements and preferences. Our future success will depend
in part upon end users'  demand for network  security  products in general,  and
upon our ability to enhance our existing  products and to develop and  introduce
new  products  and  technologies  that  meet  customer  requirements.   We  face
continuing  challenges  to  educate  customers  as to the value of our  security
products.  We believe that many  potential  customers do not appreciate the need
for our  security  products  unless and until  they have faced a major  security
breach.  Many potential  customers prefer not to disclose  significant  security
breaches of their  networks or are reluctant to invest in the  development  of a
professional  security  architecture  to protect  their  networks.  This  market
resistance  is  compounded  by our  limited  resources  to invest  in  marketing
campaigns for our products and services.

     If we are unable  successfully  to educate  potential  customers  as to the
value of, and thereby  obtain  broad  market  acceptance  for,  our products and
services,  we will  continue  to rely  primarily  on  selling  new and  existing
products to our base of existing  customers,  which will significantly limit any
opportunity for growth. In addition, any significant advance in technologies for
attacking cryptographic systems could render some or all of our existing and new
products  obsolete or  unmarketable.  To the extent that a specific method other
than ours is adopted as the standard for  implementing  network  security in any
segment of the  network  security  market,  sales of our  existing  and  planned
products in that market  segment may be adversely  impacted,  which could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.  The National  Institute of Standards and  Technology  has announced
that it will adopt a new Advanced Encryption  Standard,  or AES, which we expect
to integrate into our products. Our ability to timely implement the AES into our
products  may  materially  affect our  development  costs and  ability to timely
market  our  solutions.   Network  security-related   products  or  technologies
developed by others may adversely affect our competitive  position or render our
products or technologies noncompetitive or obsolete.

     In addition,  a portion of the sales of our network security  products will
depend upon a robust industry and  infrastructure for providing access to public
switched  networks,  such as the Internet.  The  infrastructure or complementary
products  necessary to turn these networks into viable  commercial  marketplaces
may not be fully  developed,  and once developed,  these networks may not become
viable commercial marketplaces.

If our research and development activities are unsuccessful, we will not be able
to market new products and services and our business  operations  and  financial
results could be harmed.

     The  markets  for  our  products  are  characterized  by  rapidly  changing
technologies,  extensive research and new product introductions. We believe that
our future  success  will depend in part upon our ability to continue to enhance
our existing products and to develop,  manufacture and market new products. As a
result,  we expect to continue to make a significant  investment in engineering,
research  and  development.  We may not be able to  develop  and  introduce  new
products  or  enhancements  to our  existing  products  in a timely  manner that
satisfy  customer  needs,  achieve  market  acceptance or address  technological
changes in our target markets. If we fail to develop products and introduce them
successfully and in a timely manner, this could adversely affect our competitive
position, financial condition and results of operations.

We face risks associated with our international operations.

     We plan to  continue  to expand our  foreign  sales  channels  and to enter
additional  international  markets,  both  of  which  will  require  significant
management attention and financial resources. International sales are subject to
a number of risks,  including  unexpected  changes in  regulatory  requirements,
export control laws,  tariffs and other trade  barriers,  political and economic
instability in foreign  markets,  difficulties  in the staffing,  management and
integration of foreign operations,  longer payment cycles, greater difficulty in
collecting accounts  receivable,  currency  fluctuations and potentially adverse
tax  consequences.  Since  most of our  foreign  sales are  denominated  in U.S.
dollars, our products become less


                                       13
<PAGE>

price  competitive  in  countries  in which  local  currencies  decline in value
relative to the U.S. dollar.  The uncertainties of monetary exchange values have
caused,  and may in the future cause, some foreign customers to delay new orders
or delay payment for existing orders.  The long-term impact of such devaluation,
including  any  possible  effect on the  business  outlook  in other  developing
countries, cannot be predicted.

     Our ability to compete  successfully  in foreign  countries is dependent in
part on our ability to obtain and retain  reliable  and  experienced  in-country
distributors and other strategic  partners.  We do not have long-term  contracts
with most of our value added resellers and distributors and, therefore,  have no
assurance of a continuing relationship within a given market.

     Due to U.S. government regulations  restricting the export of cryptographic
devices and software,  including our network  security  products to non-civilian
agencies of foreign governments, we are often at a disadvantage in competing for
international sales compared to companies located outside the United States that
are not subject to such restrictions. Furthermore, in certain foreign countries,
our  distributors  are required to secure licenses or formal  permission  before
encryption  products  can be  imported.  Although  the  Department  of  Commerce
continues  to  relax  the  export  control  laws as they  apply  to sales of our
products to our commercial customers,  we still face export controls on sales to
certain foreign governments and transfers of our technology to foreign partners.
To date, we have been able to secure the necessary export and import licenses to
compete effectively in the international market.  However, we may not be able to
secure such licenses in a timely manner in the future, or at all.

We may incur  additional  claims arising from the Algorithmic  Research  Limited
("ARL") Divestiture.

     Under the terms of the ARL  Divestiture,  ARL assumes  liability for all of
the tax  consequences of the  divestiture,  the forgiveness of debt, and for the
sale and licenses of ARL's intellectual property. ARL also retains liability for
its contractual  obligations,  including  those arising under certain  contracts
assigned to ARL. Although Cylink is indemnified by ARL under the ARL Divestiture
from such obligations,  third parties may seek to hold Cylink liable, instead of
or in addition to ARL, for ARL's legal  obligations  that arose or were incurred
prior to Cylink's divestiture of its wholly owned interest in ARL.

We face risks from our dependence on third party subcontractors and suppliers.

     Our ability to deliver our products in a timely  manner is  dependent  upon
the availability of quality components and subsystems used in these products. We
depend in part upon subcontractors to manufacture,  assemble and deliver certain
items in a timely and  satisfactory  manner.  We obtain  certain  components and
subsystems from a single,  or a limited number of, sources.  A significant delay
in obtaining a source of supply for components  selected by our design engineers
or  interruption  in the  delivery of such items  could have a material  adverse
effect on our financial condition and results of operations.

     On February 14, 2002,  we notified our OEM supplier of our ISDN  encryption
products,  Biodata  Information  Technology  AG  ("Biodata")  of our decision to
terminate our development and supply agreement following  Biodata's  declaration
of  insolvency.  Due to Biodata's  financial  failure,  and that of the previous
supplier of our ISDN  encryption  products,  Dica, in the first half of 2001, we
have discontinued all further sales and support for this product line.  Although
we  attempted to disclaim all  liability  for Biodata and Dica's  failure in our
supply contract with our principal customer for ISDN encryption products,  there
can be no assurance that the suppliers' failure,  and our discontinuance of this
ISDN product  line,  will not cause claims for breach of warranty and support by
our customer and end users.

Cylink Common Stock could be delisted  from the NASDAQ  National  Market,  which
could adversely affect Cylink and its shareholders.

     On July 25,  2001,  the  Company  received  a notice  from the staff of the
Nasdaq  National Market that its Common Stock had failed to maintain the minimum
bid price of $1.00  over the prior 30 trading  days as  required  for  continued
listing on the Nasdaq National  Market.  The notice stated that if during the 90
days  following  the date of the  notice  the bid price of Cylink  Common  Stock
failed to close at or above $1.00 for at least 10 consecutive trading days, then
Cylink Common Stock could be delisted.


                                       14
<PAGE>

     On September 27, 2001, NASDAQ suspended its minimum bid price  requirements
until January 2002. Since that date, our Common Stock has traded within NASDAQ's
minimum  requirements for maintaining our listing on the Nasdaq National Market.
However, there can be no assurance that we will satisfy such requirements in the
future,  or that we will be able to preserve our listing on the Nasdaq  National
Market. Prior to any actual delisting, we would have an opportunity to request a
hearing to present our plan to comply with the continued listing requirements.

     If Cylink Common Stock were to be delisted from the Nasdaq National Market,
we could apply for listing on the Nasdaq SmallCap Market, the OTC Bulletin Board
or another  quotation  system or exchange for which we could qualify.  We cannot
guarantee,  however, that we could apply for listing on another quotation system
or exchange if we are delisted from the Nasdaq  National Market or that if we do
apply for listing that we will be eligible initially for such listing or that if
we do become listed,  that we will be able to maintain  eligibility.  Listing on
another  quotation  system or exchange  may  negatively  affect the price of our
Common Stock because  stocks trading on  over-the-counter  markets are typically
less liquid and trade with larger variations  between the bid and ask prices. In
addition,  the  delisting  of our Common Stock from the Nasdaq  National  Market
would  adversely  affect or limit or restrict our ability to raise funds through
stock issuances.

     If the market price for our Common Stock were to fall below $1.00 per share
such that we were no longer  listed on the Nasdaq  National  Market,  our Common
Stock could be deemed to be penny  stock.  If our Common  Stock were  considered
penny stock, it would be subject to rules that impose additional sales practices
on broker-dealers who sell our securities. For example, broker-dealers must make
a special  suitability  determination  for the  purchaser  and have received the
purchaser's written consent to the transaction prior to sale. Also, a disclosure
schedule must be prepared prior to any  transaction  involving a penny stock and
disclosure is required about sales commissions payable to both the broker-dealer
and the registered  representative  and current  quotations for the  securities.
Monthly  statements  are  also  required  to be  sent  disclosing  recent  price
information  for the penny  stock held in the  account  and  information  on the
limited market in penny stock.  Because of these  additional  obligations,  some
brokers may be unwilling to effect transactions in penny stocks. This could have
an  adverse   effect  on  the   liquidity   of  our  Common  Stock  under  those
circumstances.

Terrorist attacks may negatively impact all aspects of our operations, revenues,
costs and stock price.

     Recent  terrorist  attacks in the United  States,  as well as future events
occurring in response or  connection  to them,  including,  without  limitation,
future  terrorist  attacks against United States  targets,  rumors or threats of
war, actual  conflicts  involving the United States or its allies or military or
trade  disruptions  impacting our domestic or foreign  suppliers of merchandise,
may impact our  operations,  including,  among other things,  causing  delays or
losses in the  delivery of goods and supplies to us and  decreased  sales of the
products we carry.  More generally,  any of these events may have affected,  and
may continue to affect,  the general  economy and customers'  demand for capital
equipment.  Any of these  occurrences  could  have a  significant  impact on our
operating  results,  revenues  and costs,  may result in the  volatility  of the
market  price for our Common  Stock,  and have an  adverse  impact on the future
price of our Common Stock.

Recent  Accounting  Pronouncements May Impact Our Financial Position and Results
of Operations.

     We must adopt the recent changes in financial accounting standards. In June
2001, the Financial  Accounting  Standards  Board ("FASB")  issued  Statement of
Financial  Accounting  Standards  No.  142  ("SFAS  142"),  "Goodwill  and Other
Intangible  Assets".  The  valuation of the  Company's  goodwill and  intangible
assets  under  SFAS 142  depends  on certain  factors  outside  of our  control,
including  our stock price,  and we may be required to write down some or all of
the $16.6M net carrying value of our  investment in  intangibles  reported as of
December 31, 2001.  Any  determination  under SFAS 142 of an  impairment  of our
investment in  intangibles  could have a material  impact on Cylink's  financial
position and results of operations.


                                       15
<PAGE>
     In June,  July and August  2001,  the FASB also issued  SFAS 141  "Business
Combinations", SFAS 143, "Accounting for Asset Retirement Obligations", and SFAS
144,  "Impairment  or Disposal of Long-Lived  Assets",  respectively,  which are
effective for fiscal years  beginning  after December 15, 2001. We are currently
assessing  the impact of these new  standards,  and as such, it is possible that
the  adoption of one or more of thse SFAS'  could have a material  effect on its
financial  condition or results of operations.  For a further  discussion of how
these  recent  accounting  pronouncements  may  affect  us,  please  see Item 7,
Management's Discussion and Analysis and the Notes to the Consolidated Financial
Statements.  There can be no assurances  that the issuance by FASB of additional
statements of financial  accounting  standards  would not  materially  adversely
affect our business,  financial condition, and results of operations if such are
required to be adopted by us in the future.

ITEM 2. PROPERTIES

     Our headquarters occupy 118,000 square feet in Santa Clara, California, the
lease for which  expires in August 2009.  Of this total,  22,000  square feet is
currently  subleased  to  other  outside  subtenants.  We  plan to  sublease  an
additional  24,500  square feet which  exceeds  our  current and planned  future
requirements  for a period  of  approximately  three  years.  As a result of the
acquisition  of  Celotek  in fiscal  2000,  we hold the lease to the  Cylink ATM
Center,  comprising approximately 10,000 square feet in Raleigh, North Carolina,
which  expires in June 2003. We also lease  facilities  for sales offices in New
Jersey, Virginia, North Carolina,  Belgium, the United Kingdom and Singapore. We
believe that our current facilities are well maintained and are adequate for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

     Securities Class Action.

     In 1998, we filed  amended Forms 10-Q for the first and second  quarters of
1998 and an amended Form 10K for 1997, reflecting restated financial results for
those quarters, and for the fourth quarter of 1997. Between November 6, 1998 and
December 14, 1998, several securities class action complaints were filed against
us and  certain of our  current  and former  directors  and  officers in federal
courts in California.  These  complaints  allege,  among other things,  that our
previously issued financial  statements were materially false and misleading and
that the defendants  knew or should have known that these  financial  statements
caused our common stock price to rise artificially. The actions variously allege
violations  of  Section  10(b)  of the  Securities  Exchange  Act of  1934  (the
"Exchange  Act"), as amended,  and SEC Rule 10b-5  promulgated  thereunder,  and
Section 20 of the Exchange Act.

     The securities class action lawsuits have been ordered  consolidated into a
single  action  pending in the United  States  District  Court for the  Northern
District  of  California,  captioned  In Re Cylink  Securities  Litigation,  No.
C98-4292 (VRW). The action is currently pending before the Court.

     We believe we have  meritorious  defenses  and adequate  insurance  for the
damages claimed in these actions and we intend to defend the Company vigorously.
However,  it is not feasible to predict or determine  the final outcome of these
proceedings, and if the outcome were to be unfavorable and exceed our applicable
insurance,  our  business,  financial  condition,  cash  flows  and  results  of
operations could be materially adversely affected.

     Other Litigation

     In  addition,  in the normal  course of  business,  we,  from time to time,
receive inquiries or other communication with regard to possible infringement of
third party  intellectual  property  rights by our  patents,  or the features or
content of certain of our  products.  We believe it is unlikely that the outcome
of these  infringement  inquiries  will have a  material  adverse  effect on our
financial position or results of operations,  however if litigation results from
any of these  inquires  and the  outcome is  unfavorable  to us, it could have a
material  adverse effect on our cash flows,  results of operations and financial
condition.

     There  has  been   substantial   litigation   regarding  patent  and  other
intellectual  property  rights in the  software  and  network  security  related
industries.  Further  commercialization  of our products could provoke claims of
infringement from third parties.  In the future,  litigation may be necessary to
enforce our

                                       16
<PAGE>

patents,  to protect our trade secrets or know-how or to defend against  claimed
infringement  of the rights of others and to determine the scope and validity of
the  proprietary   rights  of  others.  Any  such  litigation  could  result  in
substantial  cost and  diversion  of our  efforts,  which by itself could have a
material  adverse  effect on our  financial  condition  and  operating  results.
Further,  adverse  determinations  in such  litigation  could  result in loss of
proprietary  rights,  subject us to  significant  liabilities  to third parties,
require us to seek licenses from third parties or prevent us from  manufacturing
or selling our products,  any of which could have a material  adverse  effect on
our business, financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No  matters  were  submitted  to  a  vote  of  security  holders,   through
solicitation  of proxies or otherwise,  during the fourth  quarter of the fiscal
year covered by this report.


                                       17
<PAGE>

                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        SHAREHOLDER MATTERS

     Our Common Stock has been traded in the  over-the-counter  market under the
symbol  CYLK since our  initial  public  offering  on  February  15,  1996.  The
following  table sets forth the high and low  closing  prices as reported on the
Nasdaq National Market during the last two years:


<TABLE>
<CAPTION>
                                 First       Second      Third       Fourth
                                Quarter     Quarter     Quarter      Quarter
                               ---------   ---------   ---------   ----------
<S>                            <C>         <C>         <C>         <C>
Year Ended December 31, 2001
   High ....................   $  4.69     $  2.00     $  1.76      $  3.75
   Low .....................   $  1.63     $  0.54     $  0.37      $  0.75
Year Ended December 31, 2000
   High ....................   $ 22.75     $ 19.94     $ 19.38      $ 11.44
   Low .....................   $ 10.88     $  8.81     $  8.75      $  1.56
</TABLE>

     As of March 15, 2002, we had  approximately  450 shareholders of record and
7,300 beneficial owners. We have never declared or paid dividends on our capital
stock.  We currently  intend to reinvest any earnings in the  development of our
business and do not intend to pay dividends in the foreseeable future.


ITEM 6. SELECTED FINANCIAL DATA

     The  following  selected  financial  information  has been derived from our
audited consolidated  financial  statements.  The information set forth below is
not necessarily  indicative of results of future  operations and is qualified by
reference to and should be read in conjunction with the  consolidated  financial
statements and related notes thereto and Management's Discussion and Analysis of
Financial  Condition and Results of Operations included elsewhere in this Annual
Report.


<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                    ------------------------------------------------------------------------
                                        2001           2000           1999           1998           1997
                                    ------------   ------------   ------------   ------------   ------------
                                                    (in thousands, except per share amounts)
<S>                                 <C>            <C>            <C>            <C>            <C>
Revenue ...........................     48,566      $  68,107      $  59,655      $  42,760      $  47,690
Gross profit ......................     29,929         40,866         40,496         25,862         33,704
Total operating expenses ..........     51,645         76,925         59,289         54,720        101,673
Loss from continuing operations ...    (20,050)       (35,388)       (16,877)       (17,356)       (64,955)
Loss from continuing operations per
 share -- basic and diluted .......  $   (0.62)     $   (1.15)     $   (0.58)     $   (0.60)     $   (2.43)
</TABLE>

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                             ------------------------------------------------------------
                                               2001        2000         1999         1998         1997
                                             --------   ----------   ----------   ----------   ----------
                                                                    (in thousands)
<S>                                          <C>        <C>          <C>          <C>          <C>
Cash, cash equivalents and short-
 term investments ........................     9,606     $15,250      $33,170      $46,575      $22,977
Working capital ..........................    15,739      25,138       43,243       60,587       47,985
Total assets .............................    52,692      78,884       81,289       94,318       76,555
Capital lease and long term debt .........     1,927       1,454          112          147          256
Shareholders' equity .....................    39,888      59,153       61,979       75,221       66,134
</TABLE>

     On March 28, 1998, we sold our Wireless Communications Group (the "Wireless
Group"), which has been reported as discontinued operations and, therefore,  the
above consolidated  statements of operations  information excludes  discontinued
operations for all periods presented.

     The net loss for 1997  included  a charge of  approximately  $63.9  million
($2.39  per  share)  for  purchased  in-process  technology  resulting  from the
acquisition  of ARL. The results of  operations  of ARL are  included  until its
divestiture in August 2001.


                                       18
<PAGE>

ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     We develop,  market and support a  comprehensive  portfolio of hardware and
software  security products for  mission-critical  private networks and business
communications  over  the  Internet.  The  following  discussion  regarding  the
Company's  financial  condition  and  results  of  operations  should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.

Critical Accounting Policies and Estimates

     Cylink's  discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting  principles  generally accepted
in the United States.  The  preparation of these financial  statements  requires
Cylink to make  estimates  and  judgments  that affect the  reported  amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and  liabilities.  On an ongoing basis,  Cylink  evaluates its estimates,
including  those  related  to  allowance  for  doubtful  accounts,  inventories,
investments,  deferred tax assets,  intangible  assets,  income taxes,  warranty
obligations,  restructuring,  and contingencies and litigation. Cylink bases its
estimates on historical  experience  and on various other  assumptions  that are
believed to be reasonable under the circumstances, the results of which form the
basis for making  judgments  about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

     Cylink believes the following critical  accounting policies affect its more
significant  judgments and estimates used in the preparation of its consolidated
financial statements:

     Revenue Recognition.  Our revenue recognition policy is significant because
our revenue is a key component of our results of  operations.  In addition,  our
revenue recognition determines the timing of certain expenses, such as sales and
distributor  commissions.  We follow very  specific and detailed  guidelines  in
measuring  revenue,  which are outlined in Note 1 to the Consolidated  Financial
Statements,  and all material  contracts are routinely  reviewed for  compliance
with  revenue  recognition  criteria.  However,  certain  judgments  affect  the
application of our revenue policy. Revenue results are difficult to predict, and
any  shortfall  in  revenue  or delay in  recognizing  revenue  could  cause our
operating results to vary significantly from quarter to quarter and could result
in future operating losses.

     Accounts  Receivable  Reserves.  We record a provision for estimated  sales
returns and allowances in the same period as the related  revenues are recorded.
These estimates are based on historical  sales returns,  analysis of credit memo
data and  other  known  factors.  If the  historical  data the  Company  uses to
calculate  these  estimates  does not properly  reflect  future  sales  returns,
revenue could be overstated.  We maintain  allowances for doubtful  accounts for
estimated  losses resulting from the inability of our customers to make required
payments.  We  provide an  allowance  for  doubtful  accounts  for all  specific
receivables that we judge to be unlikely to be collected. In addition, we record
a reserve based on the size and age of all receivable  balances against which we
have  not  established   specific  reserves.   These  estimated  allowances  are
periodically reviewed,  analyzing the customer's payment history and information
regarding  customer's credit worthiness known to us. If the financial  condition
of our  customers  were to  deteriorate,  resulting  in an  impairment  of their
ability to make payments, additional allowances may be required.

     Inventory  Write-Down.  We write-down inventory cost to reflect slow-moving
and  obsolete  inventory  based on current  assessments  about  future  demands,
historical  trends,  and marketing  initiatives to end-of-life  certain  product
lines. If market conditions are less favorable than our assessments,  additional
inventory write-downs may be required.

     Warranty Reserves.  We provide for the estimated cost of product warranties
at the time revenue is recognized.  While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of our  component  suppliers,  our  warranty  obligation  is affected by product
failure rates,  material usage and service delivery costs incurred in correcting
a product  failure.  Should actual  product  failure  rates,  material  usage or
service  delivery  costs differ from our  estimates,  revisions to the estimated
warranty liability may be required.


                                       19
<PAGE>

     Restructuring  Charges.  We  recorded  a $1.4  million  charge to cover the
estimated costs of excess leased facilities and related furniture and equipment,
net of estimated  proceeds from planned subleasing of excess office space. These
charges are predicated on our  assumptions  regarding the prevailing  market for
sublease rental rates, the term of a sublease,  and the time necessary to market
the unoccupied space.  Actual market conditions or updated  assumptions based on
future market conditions could cause additional  restructuring charges in future
quarters.

Recently issued accounting standards

     In June 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  No. 141 ("SFAS  141"),  "Business
Combinations". In August 2001, the FASB issued SFAS 144, "Impairment or Disposal
of  Long-Lived  Assets",  which is effective  for fiscal years  beginning  after
December 15, 2001.  We do not expect the adoption of SFAS 141 or the adoption of
SFAS 144 to have a  material  effect on our  financial  condition  or results of
operations.

     In June 2001,  the FASB issued  SFAS 142,  "Goodwill  and Other  Intangible
Assets".  SFAS 142  requires  that  goodwill be tested for  impairment  at least
annually at the reporting  unit level.  The carrying  value of a reporting  unit
must be compared to the fair value of that  reporting  unit to assess whether an
impairment of value has occurred.  The fair value may be dependent on the future
valuation of the Company's  stock,  projected  future cashflows of the business,
and other factors that might affect the independent valuation of the Company.

     Cylink is required to complete the transitional goodwill impairment test by
June 30, 2002 and is not able to predict at this time whether the  determination
of fair value under this  statement  will result in an  impairment  of goodwill.
Given $16.6  million net carrying  value of its  investment  to  intangibles  at
December 31, 2001, an impairment  determination  could have a material impact on
Cylink's financial position and results of operations.

     In July 2001, the FASB issued SFAS 143,  "Accounting  for Asset  Retirement
Obligations". We have not assessed the impact of this new standard, and as such,
it is possible that its adoption  could have a material  effect on its financial
condition or results of operations.

Results of Continuing Operations

     We have  incurred  significant  net losses in 2001 and in prior years.  The
Company had an  accumulated  deficit of $118.8  million as of December 31, 2001.
Although we plan to operate at cash flow break even for 2002 on an annual basis,
we may experience  shortfalls in revenue and continue to incur losses. Our prior
losses may also  adversely  impact our  ability to raise  additional  capital if
required to sustain our operations.

     The Company believes that its principal sources of liquidity, which include
cash  and  cash  equivalents  of  $9.6  million  as of  December  31,  2001  and
prospective  borrowing via the Company's  working capital loan, will satisfy the
Company's   current   anticipated   working  capital  and  capital   expenditure
requirements  through at least the next twelve  months.  The  Company's  working
capital  loan  matures  in June  2002 and  provides  for up to $7.5  million  of
borrowings,  depending on the amount of eligible accounts receivable, as defined
in the agreement.  The Company has  renegotiated its credit facility in order to
obtain  more  favorable  covenants.  There is no  guarantee,  however,  that the
Company can continue to meet those covenants, and there is no guarantee that the
loan will be renewed in June 2002. If the Company  fails to do either,  the line
of credit will not be available to fund our operations if it is needed.

     Throughout  2001,  the Company began to realize the benefits of the actions
taken in the fourth  quarter of 2000,  and the second and third quarters of 2001
to  reduce  operating  costs  in its  core  business,  and  believes  such  cost
reductions  are  sustainable  for the rest of  2002.  However,  there  can be no
assurance  that the Company  will be able to continue  reducing  costs at a pace
that  reflects  any further  reduction in  revenues,  and no assurance  that the
Company will not need to raise additional capital to fund operations within this
period.  There can be no assurance that additional  financing can be obtained on
acceptable  terms,  or at all. If additional  funds are raised by issuing equity
securities,  dilution  to  shareholders  may result.  If adequate  funds are not
available,  the Company, its business, and the price of our Common Stock will be
adversely affected.


                                       20
<PAGE>

     Except where noted,  the comments herein are associated with the results of
our continuing  operations.  The following table sets forth certain consolidated
statement  of  operations  data as a  percentage  of  revenue  for  the  periods
indicated:

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                 ---------------------------------------
                                                                     2001          2000          1999
                                                                 -----------   -----------   -----------
<S>                                                              <C>           <C>           <C>
Revenue ......................................................      100.0%        100.0%        100.0%
Cost of revenue ..............................................       38.4          40.0          32.1
                                                                    -----         -----         -----
Gross profit .................................................       61.6          60.0          67.9
Operating expenses:
 Research and development, net ...............................       34.9          32.3          27.1
 Selling and marketing .......................................       33.5          49.4          44.1
 General and administrative ..................................       21.7          20.0          23.5
 Amortization of purchased intangibles .......................        6.6           4.6           4.7
 Loss from divestiture of Algorithmic Research, Ltd. .........        5.5            --            --
 Restructuring Charges .......................................        4.1           1.2            --
 Purchased in-process technology .............................         --           5.4            --
                                                                    -----         -----         -----
   Total operating expenses ..................................      106.3         112.9          99.4
                                                                    -----         -----         -----
   Loss from operations ......................................      (44.7)        (52.9)        (31.5)
   Other income, net .........................................        1.1           1.6           3.5
                                                                    -----         -----         -----
Loss from continuing operations before income taxes ..........      (43.6)        (51.3)        (28.0)
Income tax expense (benefit) .................................      ( 2.3)          0.6           0.3
                                                                    -----         -----         -----
Loss from continuing operations ..............................      (41.3)%       (51.9)%       (28.3)%
                                                                    =====         =====         =====
</TABLE>

     Revenue. Revenue was $48.6 million, $68.1 million and $59.7 million for the
years ended  December  31,  2001,  December  31,  2000 and  December  31,  1999,
respectively.  This  represents a 29%  decrease for the year ended  December 31,
2001  from the year  ended  December  31,  2000.  The  decrease  in 2001 was due
primarily  to  lower  unit  volumes  resulting  from a market  slowdown  and the
divestiture of ARL.

     Revenues  increased 14% from $59.7 million for the year ended  December 31,
1999 to $68.1 million for the year ended December 31, 2000. The increase in 2000
was  attributable to new revenue streams  contribute by new product releases for
the NetAuthority  Public Key  Infrastructure  software product,  the NetHawk VPN
Encryptors,  and the ISDN  Encryptors.  In addition,  revenue growth in 2000 was
also due to  increases  in unit  shipments  of existing  products,  shipments of
products with higher average selling prices, and increased  revenues  associated
with software maintenance and support services.

     International  product  revenue was 37%,  39%, and 44% of revenue for 2001,
2000, and 1999, respectively.

     Gross  Profit.  Gross profit  decreased  27% from $40.9  million in 2000 to
$29.9  million in 2001,  but increased as a percentage of sales from 60% to 62%.
The dollar decrease was due to decreased revenues.  The increase in gross profit
as a percentage of revenue in 2001 resulted from product margin  improvements in
our ATM encryptor product resulting from our acquisition of Celotek corporation,
disposition of lower margin professional  services and ARL subsidiaries,  offset
by higher provisions for inventory  write-downs related to discontinued products
and additional warranty reserves for Cylink's CFE product.

     Gross profit  increased 1% from $40.5  million in 1999 to $40.9  million in
2000,  and  decreased  as a  percentage  of sales  from 68% to 60%.  The  dollar
increase  was due to  increased  revenues.  The  decrease  in gross  profit as a
percentage of revenue resulted from inventory  valuation  adjustments related to
discontinued  products and overhead cost  adjustments  in addition to a shift in
product mix towards lower margin OEM products.

     Research  and  Development.   Research  and  development  expenses  consist
primarily  of salaries and other  personnel-related  expenses,  depreciation  of
development  equipment,  facilities  costs  and  supplies.  Gross  research  and
development  expenses  decreased 23% from $22.2 million in 2000 to $17.1 million
in


                                       21
<PAGE>

2001 and increased 25% from $17.7 million in 1999. The increase in expenses as a
percent of sales for 2001 as compared to 2000 resulted from a greater  reduction
in revenues  than could be realized in reduced  project  spending and  headcount
reductions  in the same  period.  The increase in expenses as a percent of sales
for  2000 as  compared  to 1999  resulted  from  increased  product  development
investments  in  NetAuthority,   our  Public  Key  Infrastructure  product,  ATM
Encryption technologies,  associated with the acquisition of Celotek Corporation
and next generation encryption technologies.

     From time to time, we receive engineering funding for development  projects
to apply or enhance our technology to a particular  customer's need. The amounts
recognized  under these  research and  development  contracts are offset against
research  and  development   expense.   Amounts  that  were   recognized   under
non-recurring  engineering  contracts  were not  material in 2001 and 2002,  and
totaled $1.5 million in 1999.

     Selling and Marketing.  Selling and marketing expenses consist primarily of
personnel costs, including sales commissions,  and costs of advertising,  public
relations,  seminars and trade shows.  Selling and marketing  expenses decreased
52% from $33.7  million in 2000 to $16.3  million in 2001 and increased 28% from
$26.3 million in 1999 to $33.7  million in 2000.  The decrease from 2000 to 2001
was the result of lower commission  spending caused by decreased revenue,  lower
headcount spending due to  reduction-in-workforce  actions,  and lower marketing
and bonus spending due to the  implementation of cost savings  initiatives.  The
increases in 2000 over 1999 were primarily to support the launch of new products
as well as the continued expansion of our direct field operations,  product line
management,  market  development,  advertising  via  the  "securing  e-business"
campaign, channel and distribution development, and international operations.

     General and  Administrative.  General and  administrative  expenses consist
primarily of personnel  and related  costs,  recruitment  expenses,  information
system costs,  audit,  legal and other  professional  service fees.  General and
administrative  expenses  decreased  23%  from  $13.6  million  in 2000 to $10.5
million in 2001 and  decreased 2% from $14.0 million in 1999 to $13.6 million in
2000.  The dollar  decrease  in 2001 over 2000  resulted  from  lower  headcount
spending driven by reduction-in-workforce actions taken in the fourth quarter of
2000 and during 2001, and lower bonus and other  administrative  spending due to
cost  savings  initiatives.  The  increase  as a  percentage  of revenue in 2001
resulted from a greater  reduction in revenues than could be realized in reduced
administrative  spending and headcount reductions in the same period. The dollar
decrease  in  2000  over  1999  resulted  from  lower  spending  related  to the
implementation  of the  Enterprise  Resource  Planning  system,  accounting  and
consulting expenses from the restatement, and legal fees for litigation defense.
The decrease as a  percentage  of revenue in 2000 was due to the  allocation  of
costs over a wider revenue base.

     Amortization  of Purchased  Intangibles.  The  amortization  of  intangible
assets,  which  resulted from the  acquisition of ARL in 1997,  Security  Design
International,  or SDI, in 1999, and Celotek  Corporation,  or Celotek,  in 2000
(see Note 4 to the Financial  Statements)  was $3.2 million,  $3.1 million,  and
$2.8  million in 2001,  2000,  and 1999,  respectively.  At December  31,  2001,
intangibles are primarily composed of goodwill,  developed technology, and other
intangibles  acquired in the Celotek  acquisition.  Upon adoption of SFAS 142 on
January 1, 2002, we discontinued the amortization of goodwill under the terms of
that pronouncement.

     Loss from  divestiture  of  Algorithmic  Research,  Ltd.  During 2001,  the
Company recorded a charge of $2.7 million  representing the write-down of assets
and other losses associated with the divestiture of that subsidiary. (See note 5
to the Consolidated Financial Statements.)

     Restructuring  Charges. In the fourth quarter of 2001, the Company recorded
a $1.4 million charge to cover the estimated  costs of excess leased  facilities
and related  furniture  and  equipment,  net of estimated  proceeds from planned
subleasing of excess office space.  In the second,  third and fourth quarters of
2001, the Company initiated  workforce  reductions  incurring an additional $0.6
million in  severance  charges.  In the  fourth  quarter  of 2000,  the  Company
incurred  total  pre-tax  charges  of  $0.8  million  related  to the  Company's
restructuring and reorganization efforts. The year 2000 actions were designed to
streamline the Company's  operations,  reduce  operating costs, and position the
Company for  profitability.  The  restructuring  actions in 2000  included  $0.5
million in severance charges related to


                                       22
<PAGE>

streamlining the Company's  operational,  sales,  marketing,  and administrative
functions,  and $0.3 million in building and equipment  lease charges related to
the  shut  down of  remote  offices.  As a result  of the  fourth  quarter  2000
restructuring, approximately 67 positions were eliminated. The restructuring was
completed by the end of the first quarter of 2001.

     Purchased  In-Process  Technology.  Approximately $3.7 million of the total
purchase  price  for  the  acquisition  of  Celotek  represented  the  value  of
in-process technology that had not yet reached technological feasibility, had no
alternative  future uses and was charged to our  operations in the third quarter
ended October 1, 2000 (see Note 4 to the Financial Statements).

     Other  Income  (Expense),  Net.  Other  income  (expense),  net,  primarily
consists of royalties,  interest  income,  interest expense and investment gains
and losses.  We generated  other income of $0.5 million in 2001, $1.1 million in
2000, and $2.1 million in 1999. Other income decreased from $1.1 million in 2000
to $0.5  million in 2001 due to the decrease in average  balances of cash,  cash
equivalents,  and marketable securities resulting from operational losses, and a
write-down of the Company's investment in an unaffiliated company.  Other income
decreased  from $2.1  million  in 1999 to $1.1  million  in 2000 due to  reduced
interest  income  on lower  average  balances  of cash,  cash  equivalents,  and
marketable securities resulting from operational losses.

     Income Taxes. In 2001, the Company recognized a tax benefit of $1.1 million
representing  the partial  recognition  of the Company's net operating  loss for
income tax purposes.  In 2000, the Company  recognized a $0.4 million  provision
for income taxes for continuing  operations.  No provision or benefit for income
taxes for continuing operations was recorded in 1999. Our effective tax rate for
2001, 2000 and 1999 was approximately (5.6%), 1%, and 1% respectively.

     Loss from Continuing  Operations.  We had losses from continuing operations
of $20.1 million in 2001,  $35.4 million in 2000,  and $16.9 million in 1999. In
1994, the Company began a strategic research and development program designed to
create new products and enhance existing products, which continued through 2001.
Late in 2000,  and  continuing  through 2001,  we recognized an economic  market
slowdown impacting our customers' capital spending plans, and took actions aimed
at reducing our workforce to levels consistent with expected  revenues,  as well
as divested  ourselves of  unprofitable  subsidiaries  not  supporting  our core
encryptor appliance business.  In 2000, we incurred an increased net loss due to
lower gross profit margins driven by inventory valuation  adjustments related to
discontinued  products, a shift in product mix toward lower margin OEM products,
continued  high  levels of  research  and  development  expenses  related to our
strategic  research  and  development  projects and the  acquisition  of Celotek
Corporation,  high levels of sales and marketing  expenses to support the launch
of new  products  as  well  as the  continued  expansion  of  our  direct  field
operations,  product line management,  market  development,  advertising via the
"securing  e-business"  campaign,  channel  and  distribution  development,  and
international operations, amortization related to the acquisition of Algorithmic
Research Ltd ,or ARL, and Celotek,  as well as Purchased  In-Process  Technology
charges partially offset by higher revenues.

Liquidity and Capital Resources

     At December 31, 2001, we had working  capital of $15.7  million,  including
cash and cash  equivalents of $9.6 million,  representing a 37% decrease  versus
working capital balances of $25.1 million in 2000 and a 38% decrease versus cash
and cash  equivalent  balances of $15.3 million in 2000.  These  decreases  were
largely  due to net losses from  operations.  We have  reported  net losses from
continuing  operations  each  year  since  1994.  Net  cash  used  by  operating
activities  for the years  ended  December  31,  2001,  2000,  and 1999 was $3.7
million,  $21.6  million,  and $8.4  million,  respectively.  Net  cash  used in
operating  activities  decreased  in 2001 from 2000  primarily  due to decreased
operating losses from continuing operations and reductions in receivables due to
improved  collections  and  reductions  in  inventory  balances  due  to  better
management  as well as the  recovery  of income  tax  refunds.  Net cash used in
operating  activities  increased  in 2000 from 1999  primarily  due to increased
operating  losses from continuing  operations and increases in inventory to fund
revenue  growth,  which  were  partially  offset by the  recovery  of income tax
refunds due to Cylink.

     Net cash used in investing  activities in 2001 was $2.0 million,  resulting
from acquisition of capital equipment totaling $0.7 million, cash transferred in
connection  with our  divestiture  of  Algorithmic  Research,  Ltd totaling $1.9
million,  offset  in part  by a $0.6  million  collection  of an  employee  note
receivable.


                                       23
<PAGE>

In 2000, net cash used in investing activities was $2.7 million,  resulting from
acquisition  of  property,  plant and  equipment  related to our  investment  in
leasehold  improvements and computer equipment  purchases totaling $3.0 million,
the cash  portion  of our  acquisition  of  Celotek  Corporation  totaling  $1.1
million,  offset  in part by $1.4  million  in  collections  of  employee  notes
receivable.  Expenditures  for property and equipment for all periods  presented
have generally consisted of computer workstations,  networking equipment, office
furniture and equipment, and leasehold additions and improvements.

     Cash provided by financing  activities was $0.1 million,  $6.3 million, and
$0.8  million  for  the  years  ended   December  31,  2001,   2000,  and  1999,
respectively.  For the years ended  December  31,  2001,  2000,  and 1999,  cash
provided by financing  activities  resulted primarily from the proceeds from the
issuance  of Common  Stock under our stock  option  plans and, in 2001 and 2000,
from the issuance of Common Stock under our stock purchase plan.

     As of the date of filing of this Annual  Report on Form 10K, the  Company's
revenue  to date for 2002 is  significantly  below  its plan  upon  which it had
projected  a positive  operating  cashflow  for the year.  The Company is in the
process  of  revising  its  plan  and  will  initiate  actions  to cut  costs in
accordance with its lowered revenue. However, there can be no assurance that the
Company will be able to achieve its revised plan, or that existing cash balances
and available  borrowing  will be sufficient  to fund  operations  through 2002.
Cylink has a $7.5  million  revolving  line of credit  with its bank  subject to
borrowing limits based on the amount of Company's eligible accounts  receivable.
The line of credit is intended to assist the Company,  if necessary,  in meeting
its working capital requirements. The line of credit is subject to the Company's
satisfaction  of a certain  financial  covenant during the term of the loan. The
Company was in compliance with its financial  covenant at December 31, 2001, but
breached  its covenant in February  2002.  There can be no  assurances  that the
Company will be able to meet its  financial  covenant in the future.  There have
been no advances under the Company's existing line since inception.

     In the  event  the  Company's  financial  plan  is  unsuccessful,  or it is
otherwise  unable to satisfy the  conditions  for use of this  revolving line of
credit,  the Company may  require  additional  funds in the near term to support
working  capital  requirements  or for other purposes and may seek to raise such
additional  funds through public or private equity or debt  financing,  sales of
assets,  or from  other  sources.  No  assurance  can be given  that  additional
financing will be available or that, if available, will be on terms favorable to
the Company or its shareholders. If it is unsuccessful in revising its financial
plan,  and cannot raise  additional  funds either  through its line of credit or
other  sources,  the  Company  may  not  have  the  resources  to  maintain  its
operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of December 31,  2001,  we held a total of $9.6 million of cash and cash
equivalents.  These  securities  consist  primarily  of money  market  funds and
high-grade,  short-term corporate  obligations.  Certain of these securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10 % from  levels as of  December  31,  2001,  the  decline in fair value of the
portfolio would not be material.

     We transact substantially all of our revenues and costs in U.S. dollars and
our results of operations  would not be materially  affected by  fluctuations in
foreign exchange rates. Accordingly,  to date, we have not used material amounts
of derivative  financial  instruments.  As of December 31, 2001, we had no fixed
rate   obligations   except  for  capitalized   leases  and  long-term  debt  of
approximately $139,000. As such, the fair value of our fixed rate obligations is
not subject to a material adverse impact from changes in interest rates.


                                       24
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedule

<TABLE>
<CAPTION>
                                                                            Page
                                                                           -----
<S>                                                                        <C>
         Financial Statements:
            Independent Auditors' Report .................................  26
            Consolidated Balance Sheets at December 31, 2001 and 2000 ....  27
            Consolidated Statements of Operations for the years ended
               December 31, 2001, 2000, and 1999 .........................  28
            Consolidated Statements of Shareholders' Equity and
               Comprehensive Loss for the years ended December 31, 2001,
               2000, and 1999 ............................................  29
            Consolidated Statements of Cash Flows for the years ended
               December 31, 2001, 2000, and 1999 .........................  30
            Notes to Consolidated Financial Statements ...................  31
         Financial Statement Schedule:
            Schedule II -- Valuation and Qualifying Accounts for the years
               ended December 31, 2001, 2000, and 1999 ...................  51
</TABLE>

     All other  schedules  are omitted  because they are not  required,  are not
applicable,  or  the  information  is  included  in the  consolidated  financial
statements or notes thereto.


                                       25
<PAGE>

                          Independent Auditors' Report


To the Board of Directors and Shareholders of Cylink Corporation:

     We have  audited the  accompanying  consolidated  balance  sheets of Cylink
Corporation and  subsidiaries  ("Company") as of December 31, 2001 and 2000, and
the related  consolidated  statements of  operations,  shareholders'  equity and
comprehensive  loss and of cash flows for each of the three  years in the period
ended  December 31, 2001.  Our audits also included the  consolidated  financial
statement  schedule  listed in Item  14(a)2  for each of the three  years in the
period ended  December 31, 2001.  These  financial  statements and the financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is to express an opinion on these  financial  statements and the
financial statement schedule based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  such consolidated  financial statements present fairly, in
all material  respects,  the  financial  position of the Company at December 31,
2001 and 2000,  and the results of its operations and its cash flows for each of
the three  years in the  period  ended  December  31,  2001 in  conformity  with
accounting principles generally accepted in the United States of America.  Also,
in our opinion,  such consolidated  financial  statement  schedule for the years
ended December 31, 2001 2000, and 1999, when considered in relation to the basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.

     The  accompanying  consolidated  financial  statements  for the year  ended
December 31, 2001 have been prepared  assuming that the Company will continue as
a going  concern.  As  discussed  in  Note 1 to the  financial  statements,  the
Company's  recurring  net losses  raise  substantial  doubt about its ability to
continue as a going concern.  Management's  plans  concerning  these matters are
also described in Note 1. The consolidated  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.



/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP


San Jose, California
February 8, 2002



                                       26
<PAGE>

                               Cylink Corporation
                           Consolidated Balance Sheets

            (Dollars in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                             --------------------------
                                                                                 2001           2000
                                                                             ------------   -----------
<S>                                                                          <C>            <C>
Assets
Current assets:
   Cash and cash equivalents .............................................    $    9,606     $  15,250
   Accounts receivable, net of allowances of $1,057 and $1,499 ...........        10,102        14,927
   Inventories ...........................................................         4,832        10,741
   Deferred income taxes .................................................            --           800
   Other current assets ..................................................         2,076         1,697
                                                                              ----------     ---------
      Total current assets ...............................................        26,616        43,415
Restricted cash ..........................................................         1,400         1,400
Property and equipment, net ..............................................         6,075        10,241
Acquired technology, goodwill and other intangibles ......................        16,648        20,707
Notes receivable from employees or former employees ......................         1,021         2,310
Other assets .............................................................           932           811
                                                                              ----------     ---------
                                                                              $   52,692     $  78,884
                                                                              ==========     =========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and equipment line of credit .....    $      139     $     288
   Accounts payable ......................................................         2,757         5,137
   Accrued liabilities ...................................................         5,439         9,346
   Income taxes payable ..................................................           412           359
   Deferred revenue ......................................................         2,130         3,147
                                                                              ----------     ---------
      Total current liabilities ..........................................        10,877        18,277
                                                                              ----------     ---------
Capital lease obligations ................................................            --            86
Deferred revenue and other accruals, less current portion ................         1,927         1,368
                                                                              ----------     ---------
                                                                                   1,927         1,454
Commitments and contingencies (Notes 14 and 16)

Shareholders' equity:
   Preferred stock, $0.01 par value; 5,000,000 shares authorized; none
    issued and outstanding                                                            --            --
   Common stock, $0.01 par value; 55,000,000 shares authorized;
    32,872,000 and 32,681,000 shares issued and outstanding ..............           329           327
   Additional paid-in capital ............................................       158,359       158,805
   Deferred compensation .................................................            --        (1,231)
   Accumulated other comprehensive loss ..................................           (18)          (16)
   Accumulated deficit ...................................................      (118,782)      (98,732)
                                                                              ----------     ---------
      Total shareholders' equity .........................................        39,888        59,153
                                                                              ----------     ---------
                                                                              $   52,692     $  78,884
                                                                              ==========     =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                       27
<PAGE>

                               Cylink Corporation
                      Consolidated Statements of Operations

                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                  Year ended December 31,
                                                                      ------------------------------------------------
                                                                           2001             2000             1999
                                                                      --------------   --------------   --------------
<S>                                                                   <C>              <C>              <C>
Revenue:
   Product Revenue ................................................     $   37,711       $   58,539       $   54,545
   Services Revenue ...............................................         10,855            9,568            5,110
                                                                        ----------       ----------       ----------
      Total Revenue ...............................................     $   48,566       $   68,107       $   59,655
Cost of revenue
   Cost of Product Revenue ........................................         14,739           21,483           15,883
   Cost of Services Revenue .......................................          3,898            5,758            3,276
                                                                        ----------       ----------       ----------
      Total Cost of revenue .......................................         18,637           27,241           19,159
                                                                        ----------       ----------       ----------
Gross profit ......................................................         29,929           40,866           40,496
                                                                        ----------       ----------       ----------
Operating expenses:
   Research and development, net ..................................         16,961           21,994           16,176
   Selling and marketing ..........................................         16,288           33,691           26,316
   General and administrative .....................................         10,528           13,626           13,998
   Amortization of purchased intangibles ..........................          3,215            3,115            2,799
   Loss from divestiture of Algorithmic Research, Ltd. ............          2,661               --               --
   Restructuring charges ..........................................          1,992              818               --
   Purchased in-process technology ................................             --            3,681               --
                                                                        ----------       ----------       ----------
      Total operating expenses ....................................         51,645           76,925           59,289
                                                                        ----------       ----------       ----------
Loss from operations ..............................................        (21,716)         (36,059)         (18,793)
Other income (expense):
   Interest income, net ...........................................            663            1,308            1,858
   Royalty and other income (expense), net ........................            200             (237)             232
   Write-down of investment in unaffiliated company ...............           (316)              --               --
                                                                        ----------       ----------       ----------
                                                                               547            1,071            2,090
                                                                        ----------       ----------       ----------
Loss from continuing operations before income taxes ...............        (21,169)         (34,988)         (16,703)
Income tax expense (benefit) ......................................         (1,119)             400              174
                                                                        ----------       ----------       ----------
Loss from continuing operations ...................................        (20,050)         (35,388)         (16,877)
Gain on disposal of discontinued operations .......................             --               --            2,304
                                                                        ----------       ----------       ----------
Net income (loss) .................................................     $  (20,050)      $  (35,388)      $  (14,573)
                                                                        ==========       ==========       ==========
Earnings (loss) per share -- basic and diluted
   Continuing operations ..........................................     $    (0.62)      $    (1.15)      $    (0.58)
   Discontinued operations ........................................             --               --             0.08
                                                                        ----------       ----------       ----------
   Net loss .......................................................     $    (0.62)      $    (1.15)      $    (0.50)
                                                                        ==========       ==========       ==========
Shares used in per share calculation -- basic and diluted .........         32,534           30,771           29,217
                                                                        ==========       ==========       ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.


                                       28
<PAGE>
                               Cylink Corporation
    Consolidated Statements of Shareholders' Equity and Comprehensive Loss

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                         Additional
                                                       Common Stock        Paid-in      Deferred
                                                    Shares      Amount     Capital    Compensation
                                                -------------- -------- ------------ --------------
<S>                                             <C>            <C>      <C>          <C>
Balance at January 1, 1999 ....................   29,115,000    $ 291    $ 123,929      $   (167)
Issuance of common stock under stock
 option plans .................................      456,000        5          936            --
Issuance of common stock and options for
 S.D.I. .......................................      306,000        3        2,031        (2,034)
Amortization of deferred compensation - .......           --       --           --           411
Translation adjustment ........................           --       --           --            --
Net loss ......................................           --       --           --            --
Comprehensive loss ............................           --       --           --            --
                                                  ----------    -----    ---------      --------
Balance at December 31, 1999 ..................   29,877,000      299      126,896        (1,790)
Issuance of common stock and options for
 Celotek acquisition ..........................    1,664,000       16       25,743          (545)
Issuance of common stock under stock
 option and stock purchase plans ..............    1,140,000       12        6,387
Adjustment due to employee termination ........                               (221)          221
Amortization of deferred compensation .........           --                                 883
Translation adjustment ........................           --
Net loss ......................................           --
Comprehensive loss ............................           --       --           --            --
                                                  ----------    -----    ---------      --------
Balance at December 31, 2000 ..................   32,681,000      327      158,805        (1,231)
Issuance of common stock under stock
 option and stock purchase plans ..............      299,000        2          197
Deferred compensation due to stock options                                      42
Amortization of deferred compensation .........                                              528
Reversal of unamortized deferred
 compensation due to sale of SDI ..............                               (157)          157
Transfer of unamortized deferred
 compensation related to escrowed shares ......     (121,000)                 (546)          546
Stock compensation ............................       13,000                    18
Translation adjustment ........................
Net loss ......................................
Comprehensive loss ............................           --       --           --            --
                                                  ----------    -----    ---------      --------
Balance at December 31, 2001 ..................   32,872,000    $ 329    $ 158,359      $     --
                                                  ==========    =====    =========      ========
</TABLE>
<TABLE>
<CAPTION>
                                                  Accumulated
                                                     Other                                       Comprehensive
                                                 Comprehensive    Accumulated                       Income
                                                 Income (Loss)      Deficit          Total          (Loss)
                                                --------------- --------------- -------------- ----------------
<S>                                             <C>             <C>             <C>            <C>
Balance at January 1, 1999 ....................     $ (61)        $   (48,771)    $ 75,221
Issuance of common stock under stock
 option plans .................................        --                  --          941
Issuance of common stock and options for
 S.D.I. .......................................        --                  --           --
Amortization of deferred compensation - .......        --                  --          411
Translation adjustment ........................       (21)                 --          (21)       $     (21)
Net loss ......................................        --             (14,573)     (14,573)         (14,573)
                                                                                                  ---------
Comprehensive loss ............................        --                  --           --        $ (14,594)
                                                    -----         -----------     ---------       =========
Balance at December 31, 1999 ..................       (82)            (63,344)      61,979
Issuance of common stock and options for
 Celotek acquisition ..........................                                     25,214
Issuance of common stock under stock
 option and stock purchase plans ..............                                      6,399
Adjustment due to employee termination ........                                         --
Amortization of deferred compensation .........                                        883
Translation adjustment ........................        66                               66        $      66
Net loss ......................................                       (35,388)     (35,388)         (35,388)
                                                                                                  ---------
Comprehensive loss ............................        --                  --           --        $ (35,322)
                                                    -----         -----------     ---------       =========
Balance at December 31, 2000 ..................       (16)            (98,732)      59,153
Issuance of common stock under stock
 option and stock purchase plans ..............                                        199
Deferred compensation due to stock options                                              42
Amortization of deferred compensation .........                                        528
Reversal of unamortized deferred
 compensation due to sale of SDI ..............                                         --
Transfer of unamortized deferred
 compensation related to escrowed shares ......                                         --
Stock compensation ............................                                         18
Translation adjustment ........................        (2)                              (2)              (2)
Net loss ......................................                       (20,050)     (20,050)         (20,050)
                                                                                                 ----------
Comprehensive loss ............................        --                  --           --        $ (20,052)
                                                    -----         -----------     ---------      ==========
Balance at December 31, 2001 ..................     $ (18)        $  (118,782)    $ 39,888
                                                    =====         ===========     =========
</TABLE>

  The accompanying notes are an integral part of these financial statements.


                                       29
<PAGE>

                               Cylink Corporation
                      Consolidated Statements of Cash Flows

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                    Twelve months ended
                                                                       ---------------------------------------------
                                                                         December 31,    December 31,   December 31,
                                                                             2001            2000           1999
                                                                       ---------------- -------------- -------------
<S>                                                                    <C>              <C>            <C>
Cash flows from operating activities:
   Net loss ..........................................................    $ (20,050)      $  (35,388)   $  (14,573)
   Adjustments to reconcile net loss to net cash used in operating
    activities:
    Write-down of investment in unaffiliated company .................          316               --            --
    Gain on disposal of discontinued operations ......................           --               --        (2,304)
    Loss on divestiture of ARL .......................................        2,661               --            --
    Loss on Disposition of Fixed Assets ..............................           76               68           337
    Depreciation .....................................................        3,369            3,782         2,657
    Amortization .....................................................        3,215            3,199         2,799
    Purchased in-process research & development ......................           --            3,681            --
    Deferred income taxes ............................................          800            3,567           128
    Amortization of imputed interest on note receivable ..............         (277)            (231)         (250)
    Deferred compensation related to stock options ...................          570              883           411
    Changes in operating assets and liabilities (net of effects of
     acquisition and divestitures) :
     Accounts receivable .............................................        3,964            1,654        (7,927)
     Inventories .....................................................        5,510           (2,367)        3,544
     Other assets ....................................................          375              390         3,036
     Accounts payable ................................................       (2,024)          (2,401)        2,937
     Accrued liabilities .............................................       (3,078)             500           381
     Income taxes payable ............................................           (8)            (703)          (29)
     Deferred revenue ................................................         (419)           1,754           420
     Restructuring reserves ..........................................        1,370               --            --
                                                                          -----------     ----------    ----------
    Net cash used in operating activities ............................       (3,630)         (21,612)       (8,433)
Cash flows from investing activities:
   Restricted Cash ...................................................           --               --        (1,400)
   Acquisition of property and equipment .............................         (694)          (2,994)       (7,339)
   Loans to employees in exchange for notes receivable ...............           (5)              --          (570)
   Collections of employee notes receivable ..........................          560            1,369           870
   Collection of note receivable .....................................           --               --         3,250
   Cash transferred with divestiture of ARL and Security Design
    International (SDI) ..............................................       (1,928)              --            --
   Acquisition of S.D.I. .............................................           --               --          (572)
   Acquisition of Celotek Corporation, net of cash acquired ..........           --           (1,062)           --
                                                                          -----------     ----------    ----------
     Net cash used in investing activities ...........................       (2,067)          (2,687)       (5,761)
                                                                          -----------     ----------    ----------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net .......................          199            6,399           941
   Other .............................................................         (144)             (86)         (131)
                                                                          -----------     ----------    ----------
     Net cash provided by financing activities .......................           55            6,313           810
                                                                          -----------     ----------    ----------
Effect of exchange rate changes on cash and cash equivalents .........           (2)              66           (21)
                                                                          ------------    ----------    ----------
Net decrease in cash and cash equivalents ............................       (5,644)         (17,920)      (13,405)
Cash and cash equivalents at beginning of year .......................       15,250           33,170        46,575
                                                                          -----------     ----------    ----------
Cash and cash equivalents at end of year .............................    $   9,606       $   15,250    $   33,170
                                                                          ===========     ==========    ==========
Supplemental disclosures
   Equity issued for purchase of Celotek .............................           --           25,759            --
   Equity issued for purchase of SDI .................................           --               --         2,034
   Cash refunds of income tax ........................................        1,963            2,541            --
   Cash paid for interest ............................................           --               --             3
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       30
<PAGE>

                               Cylink Corporation

                  Notes to Consolidated Financial Statements

1. The Company and a Summary of its Significant Accounting Policies

The Company

     Cylink  Corporation  (the "Company")  develops,  manufactures,  markets and
supports a comprehensive  portfolio of hardware and software  security  products
for  mission-critical  private  networks  and business  communications  over the
Internet.  The  Company's  products are  incorporated  into local area  networks
(LANs) and wide area networks (WANs),  including Virtual Private Networks (VPNs)
that use the Internet.

Basis of presentation

     The consolidated  financial  statements include the accounts of the Company
and its wholly owned  subsidiaries.  All significant  intercompany  accounts and
transactions have been eliminated.

     The accompanying financial statements have been prepared on a going concern
basis,  which  contemplates  the  realization of assets and the  satisfaction of
liablilities  in the  normal  course  of  business.  As shown  in the  financial
statements,  the Company has incurred losses from  continuing  operations of $20
million in 2001 and $35 million in 2000,  and its cash  balances  have  declined
from $15.3  million as of December  31, 2000 to $9.6  million as of December 31,
2001.  These  factors  among others  indicate  that the Company may be unable to
continue  as a going  concern for a  reasonable  period of time.  The  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of recorded asset amounts or the amounts and  classification  of
liabilities  that might be necessary should the Company be unable to continue as
a going concern. To address these issues, the Company effected  significant cost
cutting  measures  beginning in the fourth quarter of 2000, and continuing  into
2001, including staff reductions and field office consolidations, divestiture of
unprofitable  operations  and has planned to sublease a portion of its corporate
headquarters facility.  Management believes the Company will be able to continue
operations by the  successful  implementation  of its plan to increase  revenue,
continue  to  reduce  its cost  structure,  maximize  return on  investments  in
non-core areas of the business, and ultimately attain profitable operations.  In
addition, the Company may seek debt or equity financing if required, however, no
assurances  can be given that the Company will attain  profitable  operations or
that additional financing would be available.

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the  financial  statements,  and  reported  amounts of revenues  and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.   These  estimates  include  allowances  for  doubtful   receivables,
inventory  write-downs,  warranty  costs,  and  valuation  allowance on deferred
assets.

Foreign currency

     The  functional  currency of the Company's  Israeli  operations  which were
divested in 2001 is the U.S. dollar. The functional  currencies of the Company's
other foreign  operations are the local  currencies.  The effects of translating
the financial  position and results of operations of local  functional  currency
operations  are  included  as a component  of other  comprehensive  income.  The
effects  of foreign  currency  transactions  and of  remeasuring  the  financial
position  and results of Israeli  operations  into the  functional  currency are
included in the  statements  of  operations.  Net gains and losses from  foreign
currency transactions were not significant during any of the periods presented.

Cash and cash equivalents

     Cash and cash equivalents  consist of highly liquid investment  instruments
with a maturity at the time of purchase of three months or less.

Inventories

     Inventories  are stated at the lower of standard  cost (which  approximates
actual cost on a first-in, first-out basis) or market.


                                       31
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

Restricted cash

     Restricted cash consists of  certificates of deposit,  which are restricted
from use pursuant to an operating lease obligation (Note 16).

Property and equipment

     Property and equipment are recorded at cost. Depreciation is computed using
the  straight-line  method  over  the  estimated  useful  lives  of the  assets,
generally  three-to-five  years.   Amortization  of  leasehold  improvements  is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the  remaining  lease term.  Beginning in 1999,  computer
software for internal use is  capitalized  in accordance  with the guidelines of
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed  or Obtained for  Internal  Use" issued by the  American  Institute of
Certified Public Accountants (AICPA).

Amortization of goodwill and other intangibles

     Goodwill and other intangibles are being amortized on a straight-line basis
over three to seven  years.  Accumulated  amortization  relating to goodwill and
other  intangibles  was $4.3  million and $9.4  million at December 31, 2001 and
2000,  respectively.  Intangible  assets consist of acquired  technology of $9.8
million (net), goodwill of $5.9 million (net) and other intangibles $0.9 million
(net)  acquired in the Celotek  acquisition  (see Note 4).  Approximately,  $0.5
million in goodwill and other  intangibles was written off in the divestiture of
ARL (See Note 5).

Impairment of long-lived assets

     The Company  periodically  reviews  the  recoverability  of all  long-lived
assets, including the related amortization period, whenever events or changes in
circumstances  indicate  that  the  carrying  amount  of an asset  might  not be
recoverable.  The Company  determines  whether  there has been an  impairment by
comparing  the  anticipated  undiscounted  future net cash flows to the  related
asset's carrying value. If an asset is considered impaired, the asset is written
down to its estimated fair value.

Revenue recognition

     The Company's revenue is derived primarily from sales of commercial network
security products, and to a lesser extent, from the license of software products
and from professional services,  including customer support and consulting. Fees
for maintenance and support services of hardware products are charged separately
from product revenue. Revenues derived from the sale or license of the Company's
products are recognized in accordance with the applicable  accounting standards,
including  Statement of Position No. 97-2,  "Software Revenue  Recognition",  as
amended.  Revenue is recognized when persuasive  evidence of a sale  arrangement
exists,  such as receipt of a contract or purchase  order,  the product has been
shipped, the sales price is fixed and determinable,  collection is probable, and
vendor-specific objective evidence exists to allocate a portion of the total fee
to any  undelivered  elements  of the  arrangement.  Such  undelivered  elements
typically  consist of maintenance and support,  which are deferred and amortized
over the applicable  period.  Vendor specific objective evidence of the value of
maintenance  and  support  is  generally  based  on  the  annual  renewal  rate.
Concurrent  with sales,  a provision  is made for  estimated  costs to repair or
replace products under warranty arrangements. Consulting revenues, which to date
have been immaterial,  are recognized on a  time-and-materials  or percentage of
completion  basis in  accordance  with the  provisions  of  Accounting  Research
Bulletin-45,  "Long-Term Construction-Type Contracts," and Statement of Position
81-1,   "Accounting   for   Performance   of   Construction-type   and   Certain
Production-type Contracts" depending on the contract.

Research and development

     Research and development costs are charged to operations as incurred.

                                       32
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

     From  time-to-time,  the Company  performs  research and development  under
several government funded  arrangements.  There were no such funded arrangements
in 2001 and 2000. These contracts provide funding  (irrespective of the results)
for research and  development  of certain  cryptographic  technologies.  Amounts
received  under these  contracts  are offset  against  research and  development
expenses.

     The Company performed research and development under several other research
and development  contracts  during 2001,  2000, and 1999,  which provide for the
development and licensing of technology in exchange for development funding. The
Company  recorded  as a reduction  of research  and  development  expenses  $0.1
million,  $0.2 million and $1.5  million  under such  arrangements  in the years
ended December 31, 2001, 2000, and 1999, respectively.

Software Development Costs

     Software development costs are included in research and development and are
expensed as incurred.  Statement of Financial  Accounting Standards No. 86 (SFAS
86) requires the  capitalization of certain  development costs of software to be
sold once technological feasibility is established, which the Company defines as
completion  of a working  model.  The  capitalized  cost is then  amortized on a
straight-line  basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To date, the
period between achieving technological  feasibility and the general availability
of such software has been short and software  development  costs  qualifying for
capitalization  have  been  insignificant.  Accordingly,  the  Company  has  not
capitalized any software development costs under SFAS 86.

Stock-based compensation

     The Company accounts for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related  Interpretations.  The Company  provides
additional pro forma  disclosures as required  under SFAS 123,  "Accounting  for
Stock-Based Compensation" (See Note 10).

Income taxes

     Deferred tax assets and  liabilities  are  recognized  for the expected tax
consequences  of  temporary  differences  between  the tax bases of  assets  and
liabilities  and  their  financial   statement  reported  amounts.  A  valuation
allowance is required to reduce net deferred tax assets to amounts that are more
likely than not to be realized.

Earnings (loss) per share

     Basic earnings (loss) per share is based on the weighted-average  number of
common shares  outstanding,  excluding  shares in escrow related to acquisitions
(Note 4).  Diluted  earnings  (loss) per share is based on the  weighted-average
number of  common  shares  outstanding  and  dilutive  potential  common  shares
outstanding  excluding  contingent  shares held in escrow.  The  Company's  only
potentially dilutive securities are stock options (See Note 10). All potentially
dilutive  securities have been excluded from the computation of diluted earnings
per  share,  as  their  effect  is  anti-dilutive  on the loss  from  continuing
operations for all periods presented.

Concentrations of credit risk

     Financial  instruments  that potentially subject the Company to significant
concentration  of  credit  risk  consist primarily of cash and cash equivalents,
accounts  receivable,  and  to a lesser extent, currency fluctuation of balances
denominated in currencies other than the United States dollar. The Company


                                       33
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

performs  on-going  credit  evaluations  and  maintains  reserves for  estimated
potential credit losses.  The Company  minimizes the amount of cash it maintains
in local currencies by maintaining excess cash in United States dollars.

     No  customer  accounted  for more than 10% of  revenue  for the year  ended
December 31, 2001. One customer  accounted for 13% of revenue for the year ended
December  31,  2000 and one  customer  for 11% of  revenue  for the  year  ended
December 31, 1999.

Fair value of financial instruments

     The carrying amount of cash and cash  equivalents  approximates  fair value
based on the  short-term  nature of these  instruments.  The recorded  amount of
long-term debt  approximates fair value as the actual interest rates approximate
current competitive rates.

Dependence on suppliers

     The Company's  ability to timely deliver its products is dependent upon the
availability of quality  components and subsystems  used in these products.  The
Company depends in part upon subcontractors to manufacture, assemble and deliver
certain items in a timely and satisfactory  manner.  The Company obtains certain
components  and  subsystems  from  single,  or a limited  number of  sources.  A
significant  interruption  in the  delivery  of such items could have a material
adverse effect on the Company's financial condition and results of operations.

Comprehensive income (loss)

     Comprehensive  income  (loss)  includes  all changes in equity (net assets)
during a period  from  nonowner  sources.  Examples  of items to be  included in
comprehensive income, which are excluded from net income (loss), include foreign
currency translation  adjustments and unrealized gain/loss on available-for-sale
securities.  The  Company has  presented  comprehensive  income  (loss) for each
period presented within the Consolidated Statements of Shareholders' Equity.

Reclassifications

     Certain  reclassifications  have been made to the  financial  statements in
order to conform to the 2001 presentation.  These reclassifications did not have
any effect on net income (loss) or on shareholders' equity.

Recently issued accounting standards

     In June 2001, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 141, "Accounting for Business  Combinations"
("SFAS No.  141").  SFAS No. 141  requires  that all  business  combinations  be
accounted  for using  the  purchase  method  of  accounting  and  prohibits  the
pooling-of-interests  method for business combinations  initiated after June 30,
2001.  During 2000, the Company's sole business  combinations were accounted for
by using the  purchase  method of  accounting,  and there  were no  acquisitions
during 2001. In  accordance  with its adoption of SFAS No. 141, the Company will
use the purchase method of accounting for its business combinations. The Company
does  not  expect  this  statement  to  have  a  material   impact  on  Cylink's
consolidated financial position or results of operations.

     In  June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets."  SFAS  No. 142 changes the accounting for goodwill from an amortization
method  to  an  impairment-only  approach.  Amortization  of goodwill, including
goodwill  recorded  in  past  business combinations, will cease upon adoption of
this  statement.  In  addition,  this statement requires that goodwill be tested
for  impairment  at  least  annually  at  the  reporting unit level. The Company
implemented SFAS No. 142 on January 1, 2002.


                                       34
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

In  accordance  with  this  statement,   Cylink  is  required  to  complete  the
transitional  goodwill  impairment  test  by  June  30,  2002.  The  Company  is
evaluating  but has not yet determined  whether  adoption of this statement will
result in an  impairment  of goodwill.  Management  estimates  that goodwill and
indefinite  lived  intangible   asset   amortization   required  under  previous
accounting  standards of $1.0 million (pre- and post-tax) will not be charged to
the income statement in 2002.

     In  June 2001, the Financial Accounting Standards Board issued Statement of
Financial   Accounting  Standards  No.  143,  Accounting  for  Asset  Retirement
Obligations  ("SFAS  No.  143").  SFAS  No.  143  covers all legally enforceable
obligations  associated  with  the  retirement of tangible long-lived assets and
provides  the  accounting  and reporting requirements for such obligations. SFAS
No.  143  is effective for the Company beginning January 1, 2003. Management has
not  yet  determined  the  impact that the adoption of SFAS No. 143 will have on
the Company's consolidated financial statements.

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets  to Be  Disposed  Of." The  statement  retains  the  previously  existing
accounting  requirements  related  to the  recognition  and  measurement  of the
impairment  of  long-lived  assets  to be held  and  used  while  expanding  the
measurement  requirements  of  long-lived  assets to be  disposed  of by sale to
include  discontinued  operations.  It  also  expands  the  previously  existing
reporting requirements for discontinued  operations to include a component of an
entity that either has been disposed of or is classified as held for sale.  SFAS
No. 144 is effective for the company as of January 1, 2002 and  management  does
not  expect  this  statement  to  have a  material  impact  on its  consolidated
financial position or results of operations.

2. Gain on Disposal of Discontinued Operations

     On March 28, 1998,  the Company sold its Wireless  Group to P-Com for $58.1
million  ($46.0  million  in cash and an  unsecured  note in the amount of $12.1
million).  The sale resulted in an after tax gain of approximately $22.8 million
in 1998.  After the  elimination of other claims by Cylink against P-Com and the
offset of certain reserves  against those assets,  Cylink recorded an additional
$2.3 million after-tax gain on disposal of discontinued operations in 1999.

3. Restructuring Charges

     In the fourth quarter of 2001,  the Company  recorded a $1.4 million charge
to accrue for losses relative to the estimated costs of excess leased facilities
and related  furniture  and  equipment,  net of estimated  proceeds from planned
subleasing  of excess office space in Santa Clara.  The resulting  restructuring
reserve of $1.4 million is included in accrued liabilities and other accruals on
the  accompanying  balance  sheet  as none of the  reserve  was  paid  out as of
December 31, 2001. In the second, third and fourth quarters of 2001, the Company
initiated  workforce  reductions  affecting a total of 79 employees  incurring a
total of $0.6 million in severance charges which was fully paid during 2001.

     On October  30,  2000 the company  announced  a  restructuring  in order to
streamline   operations  and  reduce  costs.  The  Company  initiated  workforce
reductions  of 36 employees  incurring  severance  costs of $0.5 million  before
taxes  fully paid  during  2000 and  pre-tax  lease  cancellation  costs of $0.3
million accrued at December 31, 2000.

4. Acquisitions

     Celotek

     On August 30, 2000, Cylink acquired all the outstanding  shares of Celotek,
a developer of  high-performance  Asynchronous  Transfer  Mode network  security
appliances. The Company exchanged


                                       35
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

1,590,137  shares of common stock with a fair value of  $22,386,000  and cash of
$515,000 for all the  outstanding  shares of Celotek.  In addition,  the Company
converted  outstanding  options to purchase Celotek common stock into options to
purchase  307,500  shares of common stock of the Company with an aggregate  fair
value of $2,329,000.  The fair value of these options were determined  using the
Black-Scholes option pricing model with the following assumptions: expected life
of 2.9  years,  risk-free  interest  rate  of  6.00%,  volatility  of 80% and no
dividends  during the expected term.  The total purchase price was  $26,500,000,
which included transaction costs of $1,270,000, a portion of which was satisfied
through the issuance of 33,728 shares of Cylink's common stock.

     In addition,  during 2001, 40,913 shares were issued to former employees of
Celotek who were  employed  by Cylink for twelve  months  following  the date of
acquisition.  The  fair  value  ($545,000)  of these  shares  was  amortized  to
compensation   expense  over  the  twelve  month  vesting  term   following  the
acquisition date.

     Of the total shares issued under the  agreement,  241,572  shares of common
stock, held in escrow as collateral for general  representations  and warranties
made by Celotek under the  agreement,  were released  after a period of one year
from the closing.

     Assets acquired and liabilities  assumed in the acquisition were as follows
(in thousands):

   Current assets (including cash and cash equivalents of $253)      $  2,429
   Property and equipment ......................................        1,059
   Acquired technology .........................................       12,077
   In-process technology .......................................        3,681
   Goodwill ....................................................        7,225
   Other intangibles ...........................................        1,403
   Current liabilities .........................................       (1,189)
   Long-term debt assumed ......................................         (185)
                                                                     --------
                                                                     $ 26,500
                                                                     ========

     The allocation of the purchase price to the  respective  intangible  assets
was based on management's estimates of the after-tax cash flows. This allocation
gave explicit  consideration to the Securities and Exchange Commission's view on
purchased  in-process  research and development as set forth in its September 9,
1998  letter  to  the  American  Institute  of  Certified  Public   Accountants.
Management's  estimates gave consideration to the following:  (i) the employment
of a fair market value  premise  excluding any  Company-specific  considerations
that could result in estimates of investment value for the subject assets;  (ii)
comprehensive due diligence  concerning all potential  intangible assets;  (iii)
the determination that none of the technology  development had been completed at
the time of the acquisition;  and (iv) the allocation to in-process research and
development  based on a  calculation  that  considered  the present value of the
operating  income that would have been generated by the in process  research and
development   project  that  is  attributable  to  the  acquired  technology  if
successfully completed.

     The Company  allocated  $3.7  million to acquired  in-process  research and
development that had not reached technological feasibility as of the date of the
transaction.  The acquired in-process research and development was approximately
80% complete towards  development of a reduced cost  asynchronous  transfer mode
encryptor.  The primary remaining efforts associated with the development of the
technology  included  several  key  areas.  The key areas  were  completing  the
hardware and electronics  necessary to make the product functional and shock and
heat testing. The Company incurred  approximately 27 person months of additional
development  since  acquisition  and  completed the initial  development  of the
technology in November 2000.

     The values  assigned to acquired in process  research and  development  was
determined  by  estimating  the  costs  to  develop  the  purchased   in-process
technology into a commercially viable product, estimating


                                       36
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

the resulting net cash flows from the product and discounting the net cash flows
to their  present  value.  The revenue  projections  used to value the  acquired
in-process  research and  development  was based on estimates of relevant market
sizes,  growth  factors,  expected  trends  in  technology  and  other  factors.
Operating  expenses were estimated  based on historical  results and anticipated
profit margins.

     The rates  utilized to discount the net cash flows to their  present  value
were based on cost of capital  calculations.  Due to the nature of the  forecast
and  risks  associated  with  the  projected   growth,   profitability  and  the
developmental  nature of the product an after-tax  discount rate of 30% was used
to value the in process research and development.

     The discount rate was  commensurate  with the stage of development  and the
uncertainties  in the  economic  estimates  described  above.  If  the  acquired
in-process research and development product is not commercially successful,  the
Company's business,  operating results and financial condition may be materially
adversely affected in future periods. In addition, the value of other intangible
assets acquired may be impaired.

     The  following  unaudited  pro  forma  information  shows  the  results  of
operations for the years ended December 31, 2000 and 1999,  respectively,  as if
the Celotek  acquisition  had occurred at the  beginning of the earliest  period
presented and at the purchase  price  established in October 2000 (in thousands,
except per share amounts):

                                                   Year ended December 31,
                                                ------------------------------
                                                     2000             1999
                                                     ----             ----
   Total revenue ............................     $   69,567       $  60,647
   Net loss .................................     $  (39,791)      $ (22,372)
   Loss per share -- basic and diluted: .....     $    (1.25)      $   (0.73)


     Security Design International

     On July 21, 1999, Cylink acquired Virginia-based SDI, a security consulting
and   professional   services   company  that  provide   network   vulnerability
assessments.  Concurrent  with the  acquisition,  Cylink entered into employment
contracts with four SDI  shareholders.  In connection  with the  acquisition and
employment  agreements,  Cylink (1) paid cash of $572,000 (including $122,000 of
transaction  costs), (2) issued 306,402 shares of Cylink common shares valued at
$1.7 million into escrow,  to be released in annual  installments  as the shares
vest over a three-year employment period, (3) issued options to purchase 150,000
of Cylink  common  shares  at $3.84 per  share,  which  vest over four  years of
continued  employment,  and (4) agreed to pay  bonuses  of up to $1.925  million
contingent upon continued  employment and the  achievement of specified  revenue
and profitability goals during the following three years.  Deferred compensation
resulting from the issuance of the escrowed  common shares and the stock options
totaled $2.034 million and is reported as a reduction to  shareholders'  equity,
to be amortized over the applicable vesting period. The acquisition was recorded
using  the  purchase  method,  and the  goodwill  arising  from the  transaction
($436,000) is being amortized over three years. The results of operations of SDI
are included in the accompanying consolidated financial statements from the date
of acquisition through the date of sale. Revenues from SDI were insignificant in
comparison to Cylink's consolidated revenues during 1999.

     On April 9, 2001, Cylink Corporation sold SDI to a private company.  Of the
original  consideration  enumerated  above,  (1)  120,762  shares of the 306,402
shares issued to escrow were returned to the Company and  cancelled,  as SDI was
divested  prior to the three year holding  period  contemplated  by the original
purchase  agreement.  (2) 98,926  options  of the  original  150,000  options to
acquire  Cylink common shares were cancelled  unvested,  and (3) no bonuses were
paid  during  the  ownership  period due to the  failure  of SDI to achieve  its
financial goals. The remaining unamortized deferred compensation of


                                       37
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

$157,000  relating to the options  issued and $546,000  relating to the escrowed
shares was reversed to  additional  paid-in-capital  at the time of the sale, as
SDI was divested  prior to the three year  holding  period  contemplated  by the
original purchase agreement.

5. Divestitures

     On April 9, 2001, the Company sold SDI to a private company in exchange for
209,425 shares of Series C preferred stock  representing a minority  interest in
that company (see Note 4). No gain or loss was recorded on the transaction.  The
Company  evaluated the carrying value of its investment in the preferred  shares
of that  private  company  at  December  31,  2001,  and  recorded  a charge for
impairment of the value of that investment in the amount of $0.3 million.

     On June 22,  2001,  the Company  announced  that it would close or sell its
Israeli subsidiary,  Algorithmic Research,  Ltd. ("ARL"). The Company recorded a
$2.5  million  charge  during the second  quarter  of 2001,  resulting  from the
write-down of assets  associated with the wind-up of that subsidiary.  On August
9, 2001,  Cylink  executed an Allotment  and  Conversion  Agreement  and various
related  documents  (collectively  the "ARL  Divestiture"),  under which  Cylink
effectively  transferred  ownership  in ARL to ARL's  existing  employees.  More
specifically,  Cylink transferred an 81% ownership in ARL to a trustee acting on
behalf  of ARL's  existing  employees,  and  converted  its  remaining  minority
interest and its intercompany  debt of approximately  $13.1 million to preferred
stock of ARL having  certain rights and privileges in the event of ARL's sale or
liquidation.  The fair value of these preferred  shares was considered to be nil
and accordingly,  no value has been assigned to Cylink's  ownership  interest in
the preferred stock. As part of the ARL  Divestiture,  Cylink paid $1.5 million,
and forgave an additional $1.45 million in intercompany  debt, for sale of ARL's
virtual private networking  technology,  a royalty free,  irrevocable license to
ARL's remaining base of existing  intellectual property solely for incorporating
into  Cylink  Products,  and a release  and  waiver  from all of ARL's  existing
employees.  Cylink also agreed to assign  certain  contracts  to ARL  concerning
licenses of ARL's  products,  and to wind up ARL's  subsidiaries'  operations in
Germany and Singapore. Under the ARL Divestiture,  ARL will retain ownership and
responsibility for all of its other assets and liabilities. The Company incurred
an additional $0.3 million loss in connection  with the  divestiture  during the
third quarter of 2001.

6. Working Capital Loan

     On June 27, 2001, Cylink entered into a loan and security  agreement with a
bank under which it may borrow up to $7.5 million by way of revolving  advances.
The loan is secured by all of Cylink's  tangible  assets and contains a covenant
to maintain a minimum tangible net worth. The Company was in compliance with its
financial  covenant at December 31, 2001, but breached it's covenant in February
2002.  The  revolving  loan  provides  for loan  advances  up to 80% of Cylink's
eligible  accounts  receivable,  bears interest at a rate 1.75% above the Bank's
prime rate of interest (prime was 4.75% as of December 31, 2001) and is due June
27, 2002.  Cylink paid a commitment fee of $0.08 million at the inception of the
loan  which is being  amortized  over its  one-year  term.  There  have  been no
advances made under the loan since its inception.

     As a result of the  acquisition  of Celotek,  Cylink  acquired an equipment
line of credit for up to $2  million.  This line  matures  December  1, 2002 and
bears  interest at the prime rate plus 1%. As of December 31,  2001,  borrowings
under the equipment line were $139,000.  The equipment line requires the Company
to  maintain  certain  liquidity  and  profitability  covenants,  with which the
Company was not in compliance.  Accordingly all amounts  outstanding at December
31, 2001 have been classified as short term.


                                       38
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

7. Details of Balance Sheet Components

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                  ---------------------------
                                                                      2001           2000
                                                                  ------------   ------------
                                                                        (in thousands)
<S>                                                               <C>            <C>
         Inventories:
            Raw materials .....................................    $   2,482      $   5,708
            Work in process and subassemblies .................        1,171          2,768
            Finished goods ....................................        1,179          2,265
                                                                   ---------      ---------
                                                                   $   4,832      $  10,741
                                                                   =========      =========
         Property and equipment:
            Machinery and equipment ...........................    $   9,393      $  11,237
            Leasehold improvements ............................        3,525          3,618
            Software ..........................................        2,696          2,646
            Furniture and fixtures ............................        1,870          1,996
            Land and building .................................           --            814
                                                                   ---------      ---------
                                                                      17,484         20,311
            Less: accumulated depreciation and
               amortization ...................................      (11,409)       (10,070)
                                                                   ---------      ---------
                                                                   $   6,075      $  10,241
                                                                   =========      =========
         Accrued liabilities:
            Compensation and benefits .........................    $   2,310      $   5,411
            Legal and Accounting costs ........................        1,028            558
            Warranty costs ....................................          878            555
            Restructuring provisions, current portion .........          578             --
            Distributor commissions ...........................          117            140
            Employee severance costs ..........................           56            731
            Royalties .........................................           45            159
            Other .............................................          427          1,792
                                                                   ---------      ---------
                                                                   $   5,439      $   9,346
                                                                   =========      =========
</TABLE>

                                       39
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

8. Income Taxes

     Income tax  provision  (benefit)  for  income  from  continuing  operations
consists of the following:

                             Year ended December 31,
                      ------------------------------------------
                          2001           2000           1999
                          ----           ----           ----
                                    (in thousands)

  Current:
  Federal .........     $ (1,919)      $ (1,096)       $  36
  State ...........           --         (2,071)           6
  Foreign .........           --             --            4
                        --------       --------        -----
                        $ (1,919)      $ (3,167)       $  46
                        ========       ========        =====
  Deferred:
  Federal .........     $    800       $  1,496        $ (34)
  State ...........           --          2,071           (6)
  Foreign .........           --             --          168
                        --------       --------        -------
                             800          3,567          128
                        --------       --------        -------
                        $ (1,119)      $    400        $ 174
                        ========       ========        =======

     Deferred tax assets (liabilities) comprise the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                          ---------------------------
                                                              2001           2000
                                                              ----           ----
                                                                (in thousands)
<S>                                                        <C>            <C>
  Assets:
  Net operating loss and credit carryforwards .........    $  20,209      $  15,615
  Inventory reserves and basis differences ............        3,579          2,171
  Accrued expenses ....................................        1,761          1,870
  Product reserves ....................................        1,294            867
  Warranty reserve ....................................          481            285
  Bad debt reserve ....................................          197            132
  Unrealized capital loss .............................           --          1,315
  Other ...............................................           --            272
                                                           ---------      ---------
     Total deferred tax assets ........................       27,521         22,527
                                                           ---------      ---------
  Valuation allowance .................................      (27,521)       (21,727)
                                                           ---------      ---------
  Net deferred tax assets .............................    $      --      $     800
                                                           =========      =========
</TABLE>

     Net  deferred  tax assets at  December  31,  2001 and 2000 are based on the
Company's  estimated  available  carryback  capacity.  The  Company  recorded  a
valuation allowance against the remainder of its deferred tax assets.

     At  December  31,  2001,   the  Company  has  net   operating   loss  (NOL)
carryforwards of approximately $31,029,000 and $19,561,000 for federal and state
income tax purposes,  respectively. The federal NOL carryforwards expire through
2021, while the state NOL carryforwards expire through 2006.

     At December 31,  2001,  the Company has federal and state  research  credit
carryforwards  of  approximately  $4,448,000 and $2,735,000,  respectively.  The
federal credits expire through 2021 and the state credits have no expiration.

     In addition,  the Company has state manufacturing  credit  carryforwards of
approximately $358,000, which expire through 2011.


                                       40
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

     The  provision  (benefit)  for  income  taxes  for  continuing   operations
reconciles  to the  amount  computed  by  applying  the  United  States  federal
statutory rate to income before taxes as follows:

<TABLE>
<CAPTION>
                                                                   Year ended December 31,
                                                              --------------------------------
                                                               2001         2000         1999
                                                               ----         ----         ----
<S>                                                        <C>            <C>          <C>
         U.S. federal statutory income tax rate ..........    (35.0)%      (35.0)%      (35.0)%
         State taxes, net of federal tax benefit .........       --         (5.7)        (4.7)
         Research and development tax credits ............     (0.8)        (1.8)        (4.4)
         Change in valuation allowance ...................     20.3         37.6         23.8
         Foreign losses not benefitted ...................      5.5          7.6         15.2
         Other ...........................................      4.5         (1.7)         6.1
                                                              -----        -----        -----
         Effective Tax Rate ..............................     (5.5)%        1.0%         1.0%
                                                              =====        =====        =====
</TABLE>

9. Preferred stock

     In connection with the Company's initial public offering in 1996, the Board
of Directors  authorized the issuance of up to 5,000,000  shares of undesignated
preferred  stock  and the  Board has the  authority  to issue  the  undesignated
preferred  stock  in one or  more  series  and to fix the  rights,  preferences,
privileges and  restrictions  thereof.  No preferred stock had been issued as of
December 31, 2001.

10. Stock option plans

     The Company has three stock option plans: the 1994 Flexible Stock Incentive
Plan which was the successor plan to the 1987 plan ("1994 Plan"), the Cylink ATM
Technology  Center  2000  Stock  Option  Plan  ("2000  Plan"),  and  the  Cylink
Corporation 2001 Non-Qualified Stock Incentive Plan ("2001 Plan"). The 1994 Plan
provides for the grant of incentive stock options and nonqualified stock options
to  executives,  employees and  consultants  to purchase up to 8,050,000  Common
Shares.  Stock  options  may be granted at prices not less than 100% and 85% for
incentive and nonqualified stock options, respectively, of the fair market value
of the stock on the date of grant.  Through  December 31, 2001, all nonqualified
stock options have been granted at or above 100% of the fair market value of the
stock on the date of grant.  Options granted under the 1994 Plan are exercisable
at such times and under such conditions as determined by the Board of Directors,
and generally vest over four years.  Options generally expire six years from the
date of grant.

     The Company  adopted the 2000 Plan in conjunction  with the  acquisition of
Celotek  Corporation  in 2000. The 2000 Plan provides for the grant of incentive
stock  options and  nonqualified  stock  options to  executives,  employees  and
consultants to purchase up to 300,000 Cylink Common Shares.

     The Company adopted the 2001 Plan in September 2001. The 2001 Plan provides
for the  grant of  nonqualified  stock  options  to  executives,  employees  and
consultants to purchase up to 2,000,000 Cylink Common Shares.


                                       41
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

   Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                                                  Weighted
                                                                     Shares                       Average
                                                                   Available       Options        Exercise
                                                                   for grant     Outstanding       Price
                                                                  -----------   -------------   -----------
                                                                            (thousands of shares)
<S>                                                               <C>           <C>             <C>
Balance at December 31, 1998 (1,746,000 shares exercisable at a
 weighted average exercise price of $6.49 ) .....................     2,399          6,100       $   5.58
   Approved .....................................................        --
   Granted at market price (weighted average fair value of $3.01)    (2,848)         2,847           6.35
   Granted below market price (weighted average fair value
    of $2.96) ...................................................      (150)           150           3.84
   Exercised ....................................................        --           (456)          2.03
   Canceled .....................................................     1,752         (1,742)          8.36
                                                                     ------         ------
Balance at December 31, 1999 (2,269,000 shares exercisable at a
 weighted average exercise price of $5.10) ......................     1,153          6,899       $   5.19
   Approved .....................................................     1,200
   Granted at market price (weighted average fair value of $5.92)    (3,036)         3,036           8.61
   Granted above market price (weighted average fair value
    of $0.23) ...................................................       (59)            59          16.98
   Exercised ....................................................        --           (978)          5.63
   Canceled .....................................................     1,470         (1,470)          6.20
                                                                     ------         ------
Balance at December 31, 2000 (2,919,000 shares exercisable at a
 weighted average exercise price of $5.17) ......................       728          7,546       $   6.39
   Approved .....................................................     1,200
   Granted at market price (weighted average fair value of $0.62)    (2,484)         2,484           0.88
   Granted above market price (weighted average fair value
    of $0.17) ...................................................    (1,300)         1,300           0.54
   Exercised ....................................................        --            (38)          0.88
   Canceled .....................................................     3,689         (3,689)          5.80
                                                                     ------         ------
Balance at December 31, 2001 ....................................     1,833          7,603       $   3.88
                                                                     ======         ======       ========
</TABLE>

     Significant  option groups  outstanding  at December 31, 2001,  and related
weighted average exercise price and contractual life information are as follows:

<TABLE>
<CAPTION>
                                      Options Outstanding                          Options Exercisable
                     -----------------------------------------------------   -------------------------------
                                          Weighted
                                           Average
                                          Remaining           Weighted                           Weighted
     Range of            Number       Contractual Life         Average           Number          Average
  Exercise Prices     Outstanding        (in years)        Exercise Price     Outstanding     Exercise Price
------------------   -------------   ------------------   ----------------   -------------   ---------------
<S>                  <C>             <C>                  <C>                <C>             <C>
$ 0.01 to $ 0.54      2,741,000               5.7             $   0.52           480,000        $   0.41
$ 0.55 to $ 3.75      1,829,000               4.8                 2.28           717,000            2.87
$ 3.81 to $ 4.25      1,136,000               3.2                 4.19           922,000            4.19
$ 4.50 to $17.00      1,897,000               4.4                10.09         1,251,000            8.84
                      ---------                                                ---------
                      7,603,000               4.8             $   3.88         3,370,000        $   5.10
                      =========                                                =========
</TABLE>

Pro forma stock compensation disclosures

     The estimated  grant date fair value disclosed by the Company is calculated
using  the  Black-Scholes  model.  The  Black-Scholes  model,  as well as  other
currently accepted option valuation models, was


                                       42
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

developed  to estimate  the fair value of freely  tradable,  fully  transferable
options  without  vesting  restrictions,  which  significantly  differ  from the
Company's  stock option  awards.  These models also  require  highly  subjective
assumptions,  including  future stock price  volatility  and expected time until
exercise, which greatly affect the calculated grant date fair value.

     The following  weighted  average  assumptions are included in the estimated
grant date fair value  calculations  for the Company's stock option awards under
the 1994 Plan:

                                        2001         2000         1999
                                        ----         ----         ----
  Expected life (years) ............    2.26         2.54         2.90
  Risk-free interest rate ..........    3.97%        6.43%        5.39%
  Volatility .......................  134.00%      120.00%       80.00%
  Dividend yield ...................    0.00%        0.00%        0.00%

     Had the Company  recorded  compensation  costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards  granted,  the Company's net
loss and net loss per share  would have been  changed  to the pro forma  amounts
below for the years ended December 31, 2001, 2000 and 1999 (in thousands, except
for per share amounts):

<TABLE>
<CAPTION>
                                                             Years ended December 31
                                                 ------------------------------------------------
                                                      2001             2000             1999
                                                 --------------   --------------   --------------
<S>                              <C>             <C>              <C>              <C>
  Net loss                       As reported       $(20,050)        $(35,388)        $(14,573)
                                 Pro forma          (23,858)         (43,587)         (21,568)
  Net loss per share             As reported       $  (0.62)        $  (1.15)        $  (0.50)
  -- (basic and diluted)         Pro forma            (0.73)           (1.42)           (0.74)
</TABLE>

11. Employee Stock Purchase Plan

     In January 2000,  Cylink adopted an Employee Stock Purchase Plan that makes
available  shares of the Company's  common stock for full time  employees of the
Company to purchase at a discount  to the open  market  price  through a payroll
deduction plan. From its adoption through December 31, 2001, 526,800 shares have
been made available for purchase  under the Plan.  Employee  contributions  were
limited to 12% of their base compensation during the initial five-month offering
period and 10% of their  base  compensation  during  each  subsequent  six-month
offering period,  subject to an overall limitation of $25,000 per year. Employee
contributions  that are  accumulated  during  the  offering  period  are used to
purchase Cylink Common Stock at the end of the offering period at a 15% discount
to the lower of the  Cylink  market  prices at the first day and the last day of
the offering period.

12. 401K Plan

     U.S. employees may participate in the The Cylink Corporation 401(k) Savings
and Retirement Plan, which was established as a supplemental retirement program.
Beginning  May 1, 1987,  enrollment  in the 401k Plan is automatic for employees
who meet eligibility  requirements unless they decline participation.  Under the
401K Plan program,  Cylink matches  contributions by employees up at the rate of
100% of an employee's  annual compensation  to a maximum of $1,000.00  per year.
Cylink's expense related to the 401k Plan was $0.2 million in 2001, $0.3 million
in 2000 and nil in 1999.

13. Notes Receivable From Employees or Former Employees

     During  1997,  1998  and  1999,  the  Company  made loans to certain of its
officers  towards  the  purchase  of  their  principal residences. Some of these
officers  are  no  longer  employed  by  the  Company.  The  notes are generally
interest  free  and are secured by deeds of trust on the related residences. The
Company has


                                       43
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

imputed interest on the notes based on an assumed interest rate of 8% per annum.
One of the  notes,  with a face  value  of  $558,500  was  collected  in full on
September  20, 2001.  Another of the notes,  with a face amount of $1.4 million,
was collected in full in December 2000. The remaining notes are carried at their
discounted  value,  which  aggregated  $2.0 million at December 31, 2001.  As of
December  31, 2001,  the  remaining  unamortized  discount on the notes was $0.1
million. The notes mature as follows:  $1.0 million in 2002, and $1.1 million in
2004.

14. Contingencies

     Securities Class Action.

     In 1998, we filed  amended Forms 10-Q for the first and second  quarters of
1998 and an amended Form 10K for 1997, reflecting restated financial results for
those quarters, and for the fourth quarter of 1997. Between November 6, 1998 and
December 14, 1998, several securities class action complaints were filed against
us and  certain of our  current  and former  directors  and  officers in federal
courts in California.  These  complaints  allege,  among other things,  that our
previously issued financial  statements were materially false and misleading and
that the defendants  knew or should have known that these  financial  statements
caused our common stock price to rise artificially. The actions variously allege
violations  of  Section  10(b)  of the  Securities  Exchange  Act of  1934  (the
"Exchange  Act"), as amended,  and SEC Rule 10b-5  promulgated  thereunder,  and
Section 20 of the Exchange Act.

     The securities class action lawsuits have been ordered  consolidated into a
single  action  pending in the United  States  District  Court for the  Northern
District  of  California,  captioned  In Re Cylink  Securities  Litigation,  No.
C98-4292 (VRW). The action is currently pending before the Court.

     We believe we have  meritorious  defenses  and adequate  insurance  for the
damages claimed in these actions and we intend to defend the Company vigorously.
However,  it is not feasible to predict or determine  the final outcome of these
proceedings, and if the outcome were to be unfavorable and exceed our applicable
insurance,  our  business,  financial  condition,  cash  flows  and  results  of
operations could be materially adversely affected.

     Other Litigation

     In  addition,  in the normal  course of  business,  we,  from time to time,
receive inquiries or other communication with regard to possible infringement of
third party  intellectual  property  rights by our  patents,  or the features or
content of certain of our  products.  We believe it is unlikely that the outcome
of these  infringement  inquiries  will have a  material  adverse  effect on our
financial position or results of operations,  however if litigation results from
any of these  inquires  and the  outcome is  unfavorable  to us, it could have a
material  adverse effect on our cash flows,  results of operations and financial
condition.

     There  has  been   substantial   litigation   regarding  patent  and  other
intellectual  property  rights in the  software  and network  security  industry
related  industries.  Further  commercialization  of our products  could provoke
claims of  infringement  from third  parties.  In the future,  litigation may be
necessary to enforce our patents, to protect our trade secrets or know-how or to
defend against claimed infringement of the rights of others and to determine the
scope and  validity of the  proprietary  rights of others.  Any such  litigation
could result in substantial  cost and diversion of our efforts,  which by itself
could have a material  adverse  effect on our financial  condition and operating
results. Further, adverse determinations in such litigation could result in loss
of proprietary rights,  subject us to significant  liabilities to third parties,
require us to seek licenses from third parties or prevent us from  manufacturing
or selling our products,  any of which could have a material  adverse  effect on
our business, financial condition or results of operations.


                                       44
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

15. Geographic Information

     The Company operates in one reportable segment:  network security.  Revenue
from  continuing  operations  and  long-lived  assets,  classified  by the major
geographic areas in which the Company operates, were as follows:

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                         ---------------------------------------
                                                             2001          2000          1999
                                                             ----          ----          ----
                                                                     (in thousands)
<S>                                                      <C>           <C>           <C>
Revenue:
   Sales to unaffiliated customers:
    From United States to:
      Customers in United States .....................    $ 30,632      $ 41,567      $ 33,375
      Customers in Central and .......................
      South America ..................................         858         1,384         2,883
      Customers in Europe ............................       2,651         4,379         6,612
      Customers in Asia ..............................       4,643         5,537         4,925
    From Europe to customers in Europe ...............       7,332         7,758         5,662
    From Israel to:
      Customers in North America .....................          56           107           112
      Customers in Central and South America .........          --           314           828
      Customers in Europe ............................       1,825         3,544         3,759
      Customers in Asia ..............................         569         3,517         1,499
      Other ..........................................          --            --            --
                                                          --------      --------      --------
                                                          $ 48,566      $ 68,107      $ 59,655
                                                          ========      ========      ========
</TABLE>

     Net sales are attributable to countries based upon shipment destination and
service location.

                                  December 31,
                          -------------------------
                              2001          2000
                              ----          ----
                               (in thousands)
  Long-lived assets:
    United States .......  $ 25,755      $ 29,070
    Europe ..............       321           455
    Israel ..............        --         1,453
                           --------      --------
                             26,076        30,978
                           ========      ========

16. Lease Commitments

     The Company leases its  headquarters and  manufacturing  facility and sales
offices under various  noncancelable  operating  leases.  These leases expire at
various dates through August 2009 and certain of the leases are renewable for an
additional five years. In addition to the minimum lease payments, the Company is
responsible  for insurance,  repairs and certain other operating costs under the
terms of the leases.

     Under the terms of an operating  lease, the Company is required to maintain
a restricted cash deposit with a financial  institution to be used as collateral
against future minimum lease allocations, until the Company reaches some defined
profitability goals.


                                       45
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

     Future minimum lease payments under all noncancelable  operating leases are
as follows (in thousands):

                                                    Operating
                Year ending December 31,               Leases
                ----------------------------------   ----------
                  2002 ...........................    $  3,411
                  2003 ...........................       3,363
                  2004 ...........................       3,320
                  2005 ...........................       3,404
                  2006 ...........................       3,442
                  Subsequent to 2006 .............       9,374
                                                      --------
                  Total minimum payments .........    $ 26,314
                                                      ========

     Rent expense under  operating  leases  totaled  $4,702,000,  $4,553,000 and
$3,347,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

17. Selected Quarterly Financial Data (Unaudited)

     The following  table shows selected  unaudited  financial data for the four
quarters of 2000 and 2001.


                 Selected Quarterly Financial Data (Unaudited)
                    (in thousands except for share amounts)

<TABLE>
<CAPTION>
                                                          April 2,     July 2,     Oct 1,     Dec. 31,
                                                            2000        2000        2000        2000
                                                            ----        ----        ----        ----
<S>                                                      <C>         <C>         <C>         <C>
Total revenues .......................................   $ 17,738    $ 18,005    $ 17,192    $ 15,172
Gross profit .........................................     11,277      11,572      11,019       6,998
Operating loss .......................................     (6,561)     (6,540)    (10,818)    (12,140)
Net loss .............................................     (6,255)   $ (6,093)   $(10,708)   $(12,332)
Basic and diluted net loss per share .................   $  (0.21)   $  (0.20)   $  (0.35)   $  (0.39)
Shares used in computation of basic
 and diluted net loss per share ......................     30,051      30,511      31,007      31,515
</TABLE>

<TABLE>
<CAPTION>
                                                           April 1,    July 1,     Sep. 30,    Dec. 31,
                                                             2001        2001        2001        2001
                                                             ----        ----        ----        ----
<S>                                                      <C>         <C>         <C>         <C>
Total revenues .......................................   $ 12,612    $ 13,571    $ 10,345    $ 12,038
Gross profit .........................................      8,267       7,618       5,440       8,604
Operating loss .......................................     (7,303)     (8,634)     (5,309)       (470)
Net loss .............................................     (7,132)   $ (7,418)   $ (4,759)   $   (741)
Basic and diluted net loss per share .................   $  (0.22)   $  (0.23)   $  (0.15)   $  (0.02)
Shares used in computation of basic
 and diluted net loss per share ......................     32,262      32,384      32,623      32,859
</TABLE>

     The above quarterly data includes revenues and expenses of ARL up to August
9, 2001, the date of its divestiture.


18. Subsequent Events

     On February 8, 2002,  Cylink  received notice from the United States Postal
Service  ("USPS") that it was  terminating its license to Cylink's Net Authority
product as of March 17, 2002,  noting that its decision was "not a reflection of
the  quality  of work  performance  provided  by  Cylink"  but was due to "USPS'
immediate  need to reduce cost" and downsize its non core  businesses  following
the anthrax attack on its


                                       46
<PAGE>

                               Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

operations  in October of 2001.  Revenues  from USPS  during  2001  amounted  to
approximately $2.0 million. The Company recently granted a continuation of USPS'
license,  at its request,  through May 30, 2002,  but we expect this license and
all further  revenue earned under  Cylink's  contract with the USPS to expire in
the  second  quarter  of  2002.   Although  the  Company  continues  to  explore
alternative  sources  of funding  for our PKI  development  activity  with other
potential OEM  customers,  any effort to continue  development  and marketing of
Cylink's PKI  technology  may fail to generate  sufficient  revenue to cover its
costs if we continue in this business for the balance of 2002.


ITEM  9. CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE

   None.

                                       47
<PAGE>

                                    PART III

     Certain  information  required  by Part III is  omitted  from  this  report
because we filed a definitive  proxy statement  within 120 days after the end of
our  fiscal  year  pursuant  to  Regulation   14A  for  the  Annual  Meeting  of
Shareholders to be held on May 16, 2001, and the information included therein is
incorporated by reference herein to the extent detailed below.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  required by this item is included under  "Proposal No. 1:
Election  of  Directors,"   "Other   Information  --  Executive   Officers"  and
"Compliance with Section 16(a) of the Exchange Act" in our Proxy Statement to be
filed  in  connection  with our  2002  Annual  Meeting  of  Shareholders  and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The   information   required  by  this  item  is  included   under   "Other
Information--Executive  Compensation"  in our  Proxy  Statement  to be  filed in
connection  with our 2002 Annual  Meeting of  Shareholders  and is  incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The   information   required  by  this  item  is  included   under   "Other
Information--Security  Ownership of Certain Beneficial Owners and Management" in
our Proxy  Statement to be filed in connection  with our 2002 Annual  Meeting of
Shareholders and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The   information   required  by  this  item  is  included   under   "Other
Information--Certain  Transactions"  in  our  Proxy  Statement  to be  filed  in
connection  with our 2002 Annual  Meeting of  Shareholders  and is  incorporated
herein by reference.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

     (a) 1. Financial  Statements  --  Please  see  the  accompanying  Index  to
            Consolidated  Financial Statements and Financial Statement Schedule,
            which appear on page 25 of this Report on Form 10-K.

         2. Financial Statement Schedule -- Please see the accompanying Index to
            Consolidated  Financial  Statements and Financial Statement Schedule
            listed on page 25 of this Report on Form 10-K.

         3. Exhibits  Index:  The Exhibits listed in the  accompanying  Index to
            Exhibits  are filed or  incorporated  by  reference  as part of this
            Annual Report 10-K.

     (b) Reports  on Form 8-K.  None  filed  during  the  fourth  quarter  ended
         December 31, 2001.

                                                                               -

                                       48
<PAGE>

                                INDEX TO EXHIBITS

                       Item 14(a)) Description of Exhibit

<TABLE>
<CAPTION>
  Exhibit
-----------
<S>           <C>
   2.1        Agreement and Plan of Reorganization by and between Cylink Corporation and
              Celotek Corporation, dated as of July 27, 2000. (1)
   2.2        Agreement and Plan of Reorganization by and among Cylink Corporation, Star
              Acquisition Corporation and Security Design International, Inc., dated as of June
              25, 1999.
   3.1        Amended and Restated Articles of Incorporation of the Registrant and Certificate of
              Amendment thereto dated March 5, 1996. (2)
   3.2        Bylaws, as amended. (2)
   3.3        Certificates of Amendment of the Bylaws dated March 26, 1997. (3)
   4.1        Reference is made to Exhibits 3.1, 3.2, and 3.3.
   4.2        Specimen certificate for Common Stock. (2)
  10.1        Form of Indemnification Agreement between the Company and each of its executive
              officers and directors. (2)
  10.2        Severance Agreement between the Company and Fernand B. Sarrat, dated as of
              November 3, 1998. (3) (4)
  10.3        Employment Agreement between the Company and William C. Crowell dated
              December 18, 1997, and restated as of September 1, 2001. (3)
  10.4        Company's 1994 Flexible Stock Incentive Plan, including forms of agreements
              thereunder, and amendments thereto. (2) (3)
  10.5        Lease dated May 10, 1999 by and between Orchard Jay Investors, LLC
              and David Brown as Landlord and Cylink Corporation,  as tenant, as
              amended August 5, 1999.
  21.1        Subsidiaries of the Company.
  23.1        Consent of Deloitte & Touche LLP.
  24.1        Power of Attorney. Reference is made to Page IV-2.

</TABLE>

------------
(1) Incorporated by reference from the Company's reports on Form 8-K filed as of
    August 4, 2000 and September 11, 2000.

(2) Incorporated  by reference from the Company's Registration Statement on Form
    S-1 Registration No. 33-80719, which became effective February 15, 1996.

(3) Management contract or compensatory plan or arrangement required to be filed
    as an exhibit to this report on Form 10-K pursuant to Item 14(a).

(4) Incorporated by reference from the Company's report on Form 10-K filed as of
    March 31, 1997 for the fiscal year ended December 31, 1996.  Incorporated by
    reference from the Company's  report on Form 10-K filed as of March 31, 1997
    for the fiscal year ended December 31, 1996.


                                       49
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                     CYLINK CORPORATION


Date: March 28, 2002                 By: /s/ William P. Crowell
                                        ---------------------------------------
                                        William P. Crowell
                                        President and Chief Executive Officer


     KNOW ALL  PERSONS  BY THESE  PRESENTS,  that each  person  whose  signature
appears below  constitutes and appoints R. Christopher  Chillingworth and Robert
B.   Fougner,   and  each  of  them,   acting   individually,   as  his  or  her
attorney-in-fact,  each with full power of substitution and resubstitution,  for
him and in his name, place and stead, in any and all capacities, to sign any and
all  amendments  to this  Report on Form  10-K,  and to file the same,  with all
exhibits  thereto,  and  other  documents  in  connection  therewith,  with  the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  and each of them,  full power and  authority to do and perform each and
every act and thing  requisite and necessary to be done in connection  therewith
and about the  premises,  as fully to all  intents  and  purposes as he might or
could  do  in  person,   hereby   ratifying   and   confirming   all  that  said
attorneys-in-fact  and agents,  or any of them,  or their or his  substitute  or
substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                                 Title                       Date
              ---------                                 -----                       ----
<S>                                   <C>                                       <C>
        /s/ WILLIAM P. CROWELL        President, Chief executive Officer        March 28, 2002
-----------------------------------   (Principal Executive Officer)
            William P. Crowell        and Director


  /s/ R. CHRISTOPHER CHILLINGWORTH    Vice President of Finance and Chief       March 28, 2002
-----------------------------------   Financial Officer (Principal
      R. Christopher Chillingworth    Financial and Accounting Officer)


        /s/ LEO A. GUTHART            Chairman of the Board                     March 28, 2002
-----------------------------------
            Leo A. Guthart


        /s/ ELWYN BERLEKAMP           Director                                  March 28, 2002
-----------------------------------
            Elwyn Berlekamp


        /s/ PAUL GAUVREAU             Director                                  March 28, 2002
-----------------------------------
            Paul Gauvreau


        /s/ WILLIAM W. HARRIS         Director                                  March 28, 2002
-----------------------------------
            William W. Harris


        /s/ HOWARD L. MORGAN          Director                                  March 28, 2002
-----------------------------------
            Howard L. Morgan
</TABLE>

                                       50
<PAGE>

                                   SCHEDULE II

                               CYLINK CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS
                 Years ended December 31, 1999, 2000 and 2001
                                (in thousands)

<TABLE>
<CAPTION>
                                                            Additions
                                           Balance at      Charged to      Deductions     Balance
                                            Beginning     Statement of        from        at end
                                             of Year       Operations       Reserves      of Year
                                          ------------   --------------   ------------   --------
<S>                                       <C>            <C>              <C>            <C>
Allowance for doubtful accounts:
   Year ended December 31, 1999 .........    $ 1,251          $ 525           $ 835       $  941
   Year ended December 31, 2000 .........        941            874             316        1,499
   Year ended December 31, 2001 .........      1,499            268             710        1,057
</TABLE>



                                       51
<PAGE>

                                                                   EXHIBIT 23.1


                          INDEPENDENT AUDITORS' CONSENT


     We consent to the  incorporation  by reference in  Registration  Statements
Nos.  333-65746 and 333-70242 of Cylink  Corporation,  on Form S-8 of our report
dated February 8, 2002 (which  expresses an unqualified  opinion and includes an
explanatory  paragraph regarding a going concern uncertainty)  appearing in this
Annual Report on Form 10-K of Cylink Corporation for the year ended December 31,
2001.


/s/ DELOITTE & TOUCHE LLP


San Jose, California
March 28, 2002

                                       52