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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, 1999          Commission File No. 0-27742



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

                                  California
                        (State or other jurisdiction of
                        incorporation or organization)

                                  95-3891600
                               (I.R.S. Employer
                              Identification No.)

                                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 24,
2000,   as   reported   by   the   Nasdaq  National  Market,  was  approximately
$191,355,000.  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 24,  2000,  there were  30,435,631  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  17,  2000,  are
incorporated  by  reference  in  Part III of this Form 10-K to the extent stated
herein.

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                                    PART I

     This  Report  on  Form  10-K  includes  statements  that reflect our belief
concerning  future  events  and  financial performance. Statements which are not
purely  historical  in nature are called "forward-looking statements" within the
meaning  of  Section  27A  of  the Securities Act of 1933 and Section 21E of the
Securities   Exchange  Act  of  1934.  We  sometimes  identify  forward  looking
statements  with  such  words as "expects", "anticipates", "intends", "believes"
or similar words concerning future events.

     You  should  not rely too heavily on these forward-looking statements. They
are  subject to certain risks and uncertainties that may cause actual results to
differ  materially  from  past  results or our predictions. For a description of
these  risks  see "Risk Factors" and other sections of this Report on Form 10-K.
You  should  also  consult the risk factors listed from time to time in Cylink's
Reports on Form 10-Q, 10-Q/A, and 8-K.

     All  forward-looking  statements  included  in  this  document are based on
information  available  to us as of the date of this Report on Form 10-K, and we
assume no obligation to update any such forward-looking   statements,   or   to
update  the  reasons why actual results could differ from those projected in the
forward-looking statements.


ITEM 1. BUSINESS

     We  develop, market and support a comprehensive family of secure e-business
solutions.  We  believe  our  cryptographically-based  products provide the most
secure,  flexible  and  easily  managed  solutions  for expanding our customers'
businesses.

     Our  solutions provide competitive advantages for our customers by building
trust  into  their  communications  networks.  We  create  trust  in  customers'
networks  by  securing  the access, privacy and integrity of information when it
is  transmitted  over  their  local  area networks ("LANs"), as well as globally
over  wide  area  networks  ("WANs"), and public networks, such as the Internet.
These  trusted  solutions  enable  our  customers  to merge their operations and
transactions  onto their existing networks, maximize their use, reduce the costs
of  their operations, and expand their businesses. Our customers include leading
Fortune  500  corporations,  multinational  financial  institutions and numerous
agencies within the United States Government.



                              INDUSTRY BACKGROUND


     The  introduction  of new data services for enterprise WANs, the use of the
Internet  for  enterprise  communications  and  transactions  and  the continued
growth  in LANs, have increased the demand for reliable, easily managed security
solutions.  Until  recently,  corporate communication networks within the United
States  typically  relied  on  private  lines  leased  from  telephone carriers.
Competing   services   based  on  shared  networks,  such  as  frame  relay  and
Assynchronous  Transfer  Mode ("ATM"), and public networks such as the Internet,
now  offer  alternatives  for  ever  increasing  communications. Enterprises are
adopting  these  varied  network  services  to  communicate  and  conduct  their
transactions  with  business  partners  and  customers.  However,  this  growing
dependence  on diverse, non-private networks magnifies both the risk of exposing
highly   valuable   enterprise  information  to  unauthorized  parties  and  the
complexity  of  managing  reliable  security  solutions. Our customers' needs to
expand  their  e-business  services  without jeopardizing the integrity of their
electronic   information,   and  to  easily  manage  their  e-business  security
solutions, create a market for our products and services.

     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 large financial
institutions.  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. By incorporating public key cryptography into our
products,  we  can  satisfy  customers'  demands  for  reliable,  easily managed
security solutions for their e-businesses.


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     We  provide a comprehensive portfolio of integrated security solutions. Our
public  key based solutions create a secure, virtual private network ("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  services,  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
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.  Today,  we  offer  software  solutions  for  managing  access to the
network  over  the  Internet  and  we expect by the middle of this year to begin
production  of our latest Internet security appliance. Our solutions include our
public  key  infrastructure  ("PKI")  for  managing  the  digital identities and
privileges  of  all  correspondents  on  the  customer's  network. We also offer
professional  services  to  integrate  and  support  our  solutions  within  the
customer's  enterprise,  and product-independent consulting to assess customers'
network security risks and policies.



                                COMPANY HISTORY


     Founded  in  1983,  we  are  the first company created to market public key
based  security  solutions for high value networks. By 1985 we introduced to the
market  our  first  line  of link encryptors to secure private leased lines. Ten
years  later, we began introducing our first security appliances for frame relay
services  and  the  Internet.  In 1997, we merged with Algorithmic Research Ltd.
("ARL"),  and  introduced  to  our  customers  ARL's  services and solutions for
remote  access  over  the  Internet,  smart  cards and readers. In July 1999, we
acquired   Security   Design  International,  Inc.  ("SDI"),  and  its  security
consulting services for our customers.

     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 comprise research and
development  in  Israel, as well as sales and service offices located in Israel,
the  United  Kingdom and several other countries in Europe and the Far East. See
Note  10  of  the Notes to Consolidated Financial Statements for geographic area
information.

     The following table sets forth our principal products and services:



Products and Services                              Description
-------------------------------   ----------------------------------------------
       Internet Security--VPNs

       NetHawk                    Site-to-Site VPN Appliance for ISPs Providing
                                  VPN Services

       NetConneXion               Security Appliance For Internet Connections
                                  Between Routers

       PrivateWire                Software Solution For Internet Communications

       PKI

       NetAuthority               Highly Scalable Software For Trusted
                                  Authentication
       Management

       PrivaCy Manager            Software For Managing Numerous
                                  Security Devices

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Products and Services                            Description
-----------------------------   -----------------------------------------------
       WAN Security

       Cylink Link              High Speed Appliance For Point-To-Point
        Encryptor               Communications

       Frame Relay              High Speed Appliance for Frame Relay Networks

       ATM Encryptors           High Speed Appliances For ATM Networks

       Smart Cards

       PrivateCard and          Embedded Cryptographic Processors and Secure
        PrivateSafe             PIN Readers

       Consulting Services

       Security Design          Product Independent Security Assessments
        International Group     and Policies

       Integration And Custom Development

       Algorithmic              Over 10 Years Of Experience Designing and
        Research Ltd.           Implementing Security Solutions

Internet Security--VPNs

     NetHawk. NetHawk   is   our  latest  security  appliance  for  site-to-site
communications   over   the   Internet.   NetHawk   will  encrypt  thousands  of
simultaneous  connections  at speeds of from 10 to 100 Mbps using strong, triple
DES  encryption.  Like all of our products, NetHawk uses public key cryptography
for  fully  automated  key management. We announced NetHawk on January 14, 2000,
and  began beta testing units at customer sites in the first quarter of 2000. We
expect to begin delivering production units to customers by mid 2000.

     NetConneXion. NetConneXion  is  a  security appliance that allows companies
using the Cisco High-Level  Data  Link Control (C-HDLC) protocol to interconnect
securely  over  an  Internet  Protocol  (IP)  backbone  network. NetConneXion is
targeted  at  ISPs  and  other IP carriers that wish to offer outsourcing of VPN
services  as  a  value-added service. NetConneXion is offered in two models, the
HC,  a  high-speed (4 Mbps clock rate) encryptor, and the LC, a low-speed device
with  rates  up to 256 Kbps. We began delivering NetConneXion in the second half
of 1999.

     PrivateWire. PrivateWire  gateways  and clients, including SecureSource and
SecureDestination  clients, are a family of bundled security services, which can
be   integrated   into  almost  any  network  environment,  with  little  or  no
application,  system,  or  network  modifications. PrivateWire security services
include  authorization  management  and  remote  access  control,  as  well as a
comprehensive  security  infrastructure, over TCP/IP communications. Security is
provided   at   the   application   as   well   as   the  communications  level.
Application-level   security   allows   for   digital   signing   of   sensitive
transactions,   reciprocal   authentication  is  established  using  public  key
cryptography and communications are encrypted using one-time session keys.


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, virtual private networking or VPN
and  e-commerce.  NetAuthority consists of a Certificate Authority, Registration
Server,  Registration  Authority  and  a  PKI  Toolkit  that  provides  all  the
components  necessary  to  make applications and devices PKI-aware. NetAuthority
is  based  on  our  PKI  delivered  to  the  United  States  Post Office under a
development  agreement  to  support delivery of postage over the Internet which,
based


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on  certificate  count  to  date,  is  one  of  the  largest  PKIs  currently in
operation.  Cylink  began demonstrating NetAuthority in January 2000 and expects
to begin delivering this product by mid 2000.

Management

     PrivaCy  Manager. PrivaCy  Manager  provides a single, Java-based, security
management   platform  for  all  of  our  Internet  Security  and  WAN  Security
appliances.   PrivaCy   Manger's   graphical  representation  of  the  network's
topology,   and   its   point-and-click   interface,  simplifies  the  tasks  of
configuring,   modifying  and  managing  the  network's  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 the customer's network.
PrivaCy  Manager's  ease  of  management is one of our competitive advantages in
lowering the customer's total cost of network security.

WAN Security

     Cylink  Link Encryptors. The Cylink Link Encryptor and its predecessor, the
CIDEC  product  families,  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 Link Encryptors secure data
communications  at  speeds  up  to  2  Mbps over private and public networks and
support most widely used data link protocols.

     Cylink  Frame  Encryptor. The  Frame  Encryptor is a network appliance that
provides  high-speed  high-level  security for frame relay networks. It encrypts
data  at  speeds of up to 4 Mbps and is 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.

     Cylink  ATM  Encryptor. The  ATM Encryptor is a family of security gateways
for  ATM  networks  operating  at  varying  speeds. It 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.

Smart Cards

     PrivateCard. PrivateCard  is  an  advanced,  electronic  smart card with an
on-board  Public  Key  processor.  PrivateCard serves as a secure personal token
for authenticated and encrypted transactions.

     PrivateSafe. PrivateSafe  is a highly portable secure PIN smart card reader
that  is  easily installed by merely plugging in two cables between the keyboard
and the client computer.

Consulting Services

     Security  Design  International  Group. Acquired  by  us  in July 1999, SDI
consultants are product-independent  security professionals who provide security
assessments,  risk  management  analysis,  policy  guidance  and implementation,
penetration  testing of customers' networks, PKI policies and security awareness
programs.

Integration And Custom Development

     Algorithmic  Research  Ltd. Acquired  by us in 1997, ARL has over ten years
of  experience  in  developing  and integrating security components and products
within  customers'  networks.  ARL  is  responsible  for  developing a number of
Cylink's  products, including NetHawk, PrivateWire, PrivateCard and PrivateSafe.


Market Acceptance of Our Latest Products

     Our   future  results  of  operations  will  be  highly  dependent  on  the
successful  marketing  and customer acceptance of our latest products, including
both   NetHawk   and   NetAuthority.  These  newly  developed  products  require
additional  work, enhancement, testing and further refinement before they can be
made  commercially available by us or achieve market acceptance. If such new and
recently introduced products


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have   performance,  reliability,  quality  or  other  shortcomings,  then  such
products  could  fail to achieve market acceptance and we may 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 financial condition and results of operations.

Sales, Marketing and Customer Support

     We  market our products primarily through our direct sales force and, to an
increasing  extent,  through  distributors. Our direct sales force operates from
our  headquarters  in  Santa  Clara,  California, ARL's offices in Petach Tikva,
Israel,  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  in  order  to  determine  system  security and network
configurations that meet the customers' needs.

     International  sales  are  made primarily through our headquarters in Santa
Clara,  CA,  five  foreign  sales  offices, and numerous distributors. We do not
have  long-term  contractual  relationships  with  any  of our distributors and,
therefore,  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, Israel and
Singapore.  Telephone support is 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 a number of hostile countries. Similar export
control  laws  also  apply  to  our  products and technology developed by ARL in
Israel, and exported to customers outside of Israel.

     Although  to date we have been able to secure the necessary export licenses
to  compete effectively in the international market we may not be able to secure
such  licenses  in  a timely manner in the future, or at all. In certain foreign
countries,   our   distributors  are  required  to  secure  licenses  or  formal
permission  before  encryption  products  can  be  imported. To date, except for
certain  limited  cases,  our  distributors  have  not been denied permission to
import  our  products. For more information on our sales, marketing and customer
support activities, see "Risk Factors."

Backlog

     Orders  for  our  products  are usually placed by customers on an as-needed
basis  and  we  have typically been able to ship products within thirty to sixty
days  after  the customer submits a 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  do  not  generally maintain
long-term  contracts  with  our  customers  that  require  them  to purchase our
products.  Our  backlog  for  continuing  operations as of December 31, 1998 and
1999  was  approximately  $3.1  million and $7.3 million, respectively. For more
information on our product sales cycle, see "Risk Factors."

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


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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 Atmel Corp., Motorola,
Inc.  and  Chip  Express.  Certain  other  components are presently 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,  such  as  NetHawk,  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, the delay in receiving supplies and in production of
our  finished  goods, may be material. For more information on our manufacturing
dependencies, see "Risk Factors."


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. We regularly 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.  For  more  information  on  our  intellectual
property and other proprietary rights, see "Risk Factors."


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  1998 and 1999 we incurred $17.7 million in
each year in 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  and  our  integrated  management  platform  for  our network
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, easily managed solution
for  our  customers'  networks  than  other  vendors'  security  solutions.  Our
consulting  and integration services provide an opportunity for our customers to
learn  more  about  network  security issues, and for us to learn more about the
market's  requirements  for  improvements to our solutions. We also believe that
we  can  increase  the  demand  for  our products and services by increasing the
market's  awareness  of  network  security  and  its  contribution to customers'
e-businesses.

     Our  competitors  in  the network security market, including companies that
offer  products  similar  to  or  perceived  as  an alternative to our products,
include  Axent  Technologies,  Inc.,  Checkpoint  Software  Technologies,  Ltd.,
Information   Resource  Engineering,  Inc.,  Network  Associates,  Inc.,  Secure
Computing  Corporation,  Racal  Corporation  and  RSA  Security,  Inc.  Our  PKI
product, NetAuthority, will be


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competing   with   products   offered  by  other  vendors,  including  Baltimore
Technologies,  Entrust  Technologies,  Inc. and VeriSign Inc., that already have
numerous   customers   and   significantly   greater   market  recognition.  Our
professional   services   business   competes   with   very   large   consulting
organizations   such   as  Arthur  Andersen,  PricewaterhouseCoopers  and  other
entities  which  have  formidable resources to market and support their security
consulting  businesses.  Our  OEM  supplier  for  our ATM Encryptor product also
competes  with  us  through other channels, for sales of this product. Our smart
cards  compete  with  numerous  vendors, including Gemplus, S.A and Schlumberger
Ltd.  A  number of significant vendors, including Microsoft, America On Line and
Cisco  Systems,  have  embedded  security  solutions in their software. For more
information on our competition see "Risk Factors."

Employees

     As  of  December 31, 1999, we had 377 employees, of whom 103 were primarily
engaged  in  research  and  development,  174  in  sales,  marketing and related
customer  support  services,  56  in  administration and 44 in manufacturing. Of
these  employees approximately 39 were located in Europe, 72 in Israel, and 8 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 facts that could affect our
future  financial  performance.  The  price may also be affected by factors that
influence  the overall market for stocks, or stocks of high technology companies
in  particular.  For  more  information  on  factors  affecting the price of our
Common Stock, see "Risk Factors."



                                 RISK FACTORS


We  have  a  history  of  losses and expect this to continue for the foreseeable
future.

     We  incurred  losses from continuing operations in 1999 and for each of the
prior  four  years.  We  expect to continue to incur net losses through 2000. We
might  not  increase  or maintain our revenue or be profitable on a quarterly or
an annual basis in the future.


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  operating  results  are  affected  by a number of factors, many of
which are outside of our control, including the following:

     * 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  or  resulting  from  uncertainty  relating to  intellectual
       property claims;

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

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

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

     * expenses  incurred in seeking to obtain,  enforce and defend  claims with
       respect to intellectual property rights;

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

                                       7


<PAGE>

     * 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; and

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

     We  expect  to  introduce  a number of new products during the remainder of
2000.  The  failure  of  any  such  products  to  achieve market acceptance when
anticipated,  or  at  all,  would  materially and adversely affect our financial
condition and results of operations.


Revisions  in accounting estimates could adversely affect the calculation of our
future operating results.

     In  connection  with the acquisition of ARL in September 1997, we allocated
$63.9  million  of  the  purchase  price  to in-process research and development
("IPR&D"),  and  in  accordance  with  generally  accepted accounting principles
recorded  an immediate charge off of that amount on the date of acquisition. The
amount  allocated  to  IPR&D  was  determined in a manner consistent with widely
recognized appraisal practices.

     In  a  letter  dated  September  15,  1998,  to  the  American Institute of
Certified  Public  Accountants,  the  Chief  Accountant  of  the  Securities and
Exchange  Commission  ("SEC")  indicated  the  SEC  Staff's  concerns related to
certain  appraisal practices generally employed in determining the fair value of
IPR&D.  As  a  result,  it  is  possible that the SEC staff may require that any
enterprise  that  recorded  an  IPR&D charge revise its estimate of the value of
the  IPR&D.  To  the  extent  we  are required by the SEC Staff to retroactively
revise  our  estimate  of  the value of IPR&D, such revision could result in the
capitalization  of  additional  goodwill, the amortization of which would reduce
future operating results.


Pending Litigation

     See Item 3. "Legal Proceedings."


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

     Sales  of  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 and, 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. As a
result,  product  revenue  in  any  period  is substantially dependent on orders
booked  and  shipped  in  that  period.  Although  we  recently have experienced
changes  in  our  customers'  delivery  requirements, resulting in significantly
greater  backlog  in  the  last  two quarters of 1999 than in prior periods, our
product  revenue  will  continue to be heavily dependent on orders booked in the
current  quarter. We typically plan our production and inventory levels based on
internal  forecasts  of  customer demand, which are highly unpredictable and can
fluctuate  substantially.  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, 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.


                                       8


<PAGE>

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

     Our   future  results  of  operations  will  be  highly  dependent  on  the
successful  completion  of  the design, development, introduction, marketing and
manufacture  of  the  NetAuthority  and  NetHawk products, as well as successful
marketing  and  manufacture  of  the  Cylink  Link  Encryptors, PrivaCy Manager,
PrivateWire  and  Cylink  Frame  Encryptor  products. To date, we have made only
limited  commercial shipments of certain of such products and, in some cases, no
commercial  shipments  of  certain  of  such products. Our development engineers
employed  by  ARL  in  Israel delivered NetHawk in January for beta testing with
customers  in  the  United States, and our ability to commence production at our
Santa  Clara  facilities  depends on the availability and delivery schedules for
components,   or  suitable  alternatives,  selected  by  our  design  engineers.
NetAuthority  is  based  on  a  pilot  system  delivered  for  the first time in
mid-1999  under  a  development  contract with the United States Postal Service.
These  products  may  require  additional  development  work,  enhancement,  and
testing   or   further  refinement  before  they  can  be  introduced  and  made
commercially  available  by  us or achieve market acceptance. If such new and/or
other  recently  introduced  products  have performance, reliability, quality or
other  shortcomings,  such products could fail to achieve market acceptance. The
failure  by  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.   Furthermore,   we   rely  on  a  third  party  original  equipment
manufacturer  to supply our ATM Encryptor product, and we have no assurance this
contract will be renewed.


Competition

     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;

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

     * product price;

     * name recognition; and

     * perception of our stability and long-term viability.

     Many of these factors are beyond our control.

     Our  competitors  in  the information security markets, including companies
that  offer  products similar to or as an alternative to the Company's products,
include  Axent  Technologies,  Inc.,  Checkpoint  Software  Technologies,  Ltd.,
Information   Resource   Engineering,  Inc.  Network  Associates,  Inc.,  Secure
Computing  Corporation,  Racal-Guardata,  Inc.,  and  RSA Security, Inc. Our PKI
product,  NetAuthority,  will be competing with numerous PKI products offered by
other  vendors,  including  Baltimore  Technologies, Entrust Technologies, Inc.,
and  VeriSign  Inc.,  that  already  have  numerous  customers and significantly
greater  market  recognition.  Our  professional services business competes with
very    large    consulting    organizations    such    as    Arthur   Andersen,
PricewaterhouseCoopers  and  other  entities  which have formidable resources to
market  and support their security consulting businesses. Our original equipment
manufacturer  ("OEM")  supplier  of its ATM Encryptor product also competes with
us  through  other  channels, for sales of this product. Our smart cards compete
with  numerous vendors, including Gemplus, S.A and Schlumberger Ltd. A number of
significant  vendors, including Microsoft Corporation, America On Line, Inc. 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.

     Certicom  Corporation  and  RSA  Security, Inc., license various methods of
implementing  public  key  cryptography,  including some that are different from
(and  incompatible  with)  the  method  of  implementing public key cryptography
currently used in most of our products. Although we have a license to use all


                                       9


<PAGE>

of  the  public  key  methods  promoted  by  Certicom and RSA DSI, to the extent
significant  segments  of  the network security market adopt technical standards
different  from  those  currently  used  by us, to the exclusion of our methods,
sales  of  our  existing  and  planned  products  in  that market segment may be
adversely  impacted, which could have a material adverse effect on our financial
condition and results of operations.

     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.  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
its   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 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.


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

     On  November  4,  1998  Mr.  William C. Crowell, formerly Vice President of
Product  Strategy, was promoted to President and Chief Executive Officer, and on
November  16,  1998  Mr. Roger A. Barnes became our Chief Financial Officer. Our
future   success   will   depend  on  the  abilities  of  Mr.  Crowell  and  the
contributions  by  our  other  executive  officers, key management and technical
personnel.  The loss of the services of one or more of our executive officers or
key  personnel,  or  the  inability  to continue to attract and retain 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 in high demand.

     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  in  high  demand.  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  hire,  train,  motivate and manage our employees.
Competition  is  intense  for  qualified  technical,  marketing  and  management
personnel.  In  particular,  the  current availability of qualified engineers is
quite   limited,   and   competition  among  companies,  academic  institutions,
government   entities  and  other  organizations  for  skilled  and  experienced
engineering  personnel  is  very  intense. We have experienced delays in filling
positions   for   engineering  personnel  and  expect  to  experience  continued
difficulty  in  filling  our  need  for qualified engineers and other personnel.
There


                                       10


<PAGE>

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,  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 aspects 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  or  design  around  the patents owned by us. We may be subject to or
may  initiate  interference  proceedings  in  the  U.S. Patent Office, which can
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.  From time to time, 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 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.


If  we  are  unable  to adapt our services to rapidly changing technology, or if
the  market  for  network  security fails to develop, 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  and  security  consulting  services.  We  believe  that many potential
customers  do  not  appreciate  the  need for 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


                                       11


<PAGE>

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. Also, 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  make 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 which
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 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 price competitive in countries in which local
currencies  decline  in  value  relative  to the U.S. dollar. The uncertainty of
monetary  exchange  values has 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
relationships  with  any  of  our  value  added  resellers and distributors and,
therefore,  have  no  assurance  of  a  continuing  relationship  within a given
market.

     Due  to  U.S.  and Israeli government regulations restricting the export of
cryptographic  devices  and  software, including sales to foreign governments of
certain  of  our  network  security  products, we are often at a disadvantage in
competing  for  international  sales  compared  to companies located outside the
United  States  and  Israel  that are not subject to such restrictions. Although
the  Department  of  Commerce  recently  relaxed the export control laws as they
apply  to  sales  of  our  products  to  our commercial customers, we still face
considerable  export  controls  on sales to foreign governments and transfers of
our  technology  to  foreign  partners. In particular, these controls frequently
hinder   the   close  cooperation  between  our  engineering  departments,  with
resulting  delays  in  product  developments  and  releases of products, such as
NetHawk, for manufacturing in the United States.


                                       12


<PAGE>

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  single,  or  a  limited  number of, sources. We rely on a
single  OEM supplier for our ATM Encryptor, which we offer to our customers with
our  own  management  solution.  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.

                     EXECUTIVE OFFICERS OF THE REGISTRANT

     The   following   table  sets  forth  certain  information  concerning  our
executive officers as of December 31, 1999:

            Name              Age                      Position
----------------------------- -----   ------------------------------------------
         William P. Crowell    59     Chief Executive Officer and President
         Roger A. Barnes       51     Vice President and Chief Financial Officer
         Robert B. Fougner     47     Secretary and General Counsel
         Sarah L. Engel        56     Vice President, Professional Services
         Theresa Marcroft      41     Vice President, Marketing
         Paul Massie           45     Vice President, Information Systems
         Peter J. Slocum       44     Vice President, Engineering
         Michael Stewart       51     Vice President, Sales

     Mr.  Crowell  joined  Cylink  as  Vice  President,  Product Development and
Strategy  in  January  1998.  Prior to joining Cylink, Mr. Crowell served as the
Deputy  Director  at  the  National Security Agency, and has also served as Vice
President of the Atlantic Aerospace Electronics Corporation.

     Mr.  Barnes  joined  Cylink  as  Vice President Finance and Chief Financial
Officer  in  November 1998. Prior to joining Cylink, Mr. Barnes served as Senior
Vice  President  and  Chief Financial Officer, for Evolving Systems, Inc. He has
held  various senior executive financial and general management positions in the
technology  sector  for  over  twenty  years,  and  began  his  career with Peat
Marwick,  Mitchell  &  Co.  (KPMG)  where he was employed on the audit staff for
eight years.

     Ms.  Engel joined Cylink in February 1997. Before joining Cylink she was an
independent  consultant  specializing in strategic planning, human resources and
organizational  development  with  such  clients  as  Ford  Motor  Company,  The
Coca-Cola Company, Exxon Corporation and Harcourt General, Inc., among others.

     Mr.  Fougner has been Secretary and General Counsel since joining Cylink in
December  1989.  Prior  to  joining Cylink, he was a partner in the New York law
firm of Hill, Betts & Nash.

     Ms.  Marcroft  joined Cylink in 1999. Prior to joining Cylink, Ms. Marcroft
served  as  Vice President of Marketing for Accure Software. Ms. Marcroft has 20
years  of  experience  in  marketing high technology products to Fortune 500 and
enterprise-level  MIS departments in the U.S. and abroad. Ms. Marcroft, who also
brings  to Cylink extensive knowledge of Internet software, previously served as
head  of worldwide marketing at SurfWatch Software, a division of Spyglass, Inc.


     Mr.  Massie  joined Cylink in 1997. Prior to joining Cylink, Mr. Massie was
employed  by  Bay Networks where he was the director of information systems. Mr.
Massie resigned on February 29, 2000.

     Mr.  Slocum joined Cylink in February 1997. From July 1993 to February 1997
he   served   as   Vice   President  of  Engineering  for  Octel  Communications
Corporation,  a  provider  of  voice  messaging systems and services. Mr. Slocum
also  served  as  Director  of  Engineering for Silicon Graphics, Inc., and MIPS
Computer Systems, Inc.


                                       13


<PAGE>

     Mr.  Stewart  joined  Cylink in February 1999. Prior to joining Cylink, Mr.
Stewart  was  President  and  Chief Executive Officer of Escalate Networks, Inc.
Prior  to  that  he  was  Vice  President  of Worldwide Systems Products Sales &
Marketing  for  A.T.M.L.  and  Director  of  The Advanced Technology Team at Bay
Networks.


ITEM 2. PROPERTIES

     Cylink's   headquarters   occupy   118,000  square  feet  in  Santa  Clara,
California,  the  lease  for  which  expires  in August 2009. As a result of the
acquisition  of  ARL,  Cylink  owns, subject to an outstanding mortgage, a 7,500
square  foot  office  building  in  Petach Tikva, Israel and leases a production
facility  of  2,000  square  feet. Cylink leases facilities for sales offices in
New  Jersey,  Virginia,  North Carolina, Belgium, the United Kingdom, Singapore,
and  Germany.  Cylink  believes  that its current facilities are well maintained
and  are  adequate  for  the  foreseeable future and that suitable additional or
alternative  space  will  be  available in the future on commercially reasonable
terms as needed.


ITEM 3. LEGAL PROCEEDINGS

     On  September  14,  1998,  Cylink announced that its earnings for the third
quarter  would  be  below  consensus  estimates.  On  November  5,  1998, Cylink
announced  that,  with  the  assistance  of  its independent accountants, it was
reviewing  its  revenue  recognition  practices,  and  Cylink announced that its
first  and  second  quarter earnings would have to be restated and that it would
have  operating  losses  for  each  of  the  three quarters for the period ended
September  27,  1998.  During  the review, certain facts became known indicating
errors  had  been  made in the application of revenue recognition policies which
also  impacted  the  fourth  quarter  of  1997,  and as a result, 1997 full-year
results  have  been  restated  along with first and second quarter 1998 results.
Cylink  has  filed  amended Forms 10-Q for the first and second quarters of 1998
and  an  amended  Form  10-K for 1997. Between November 6, 1998 and December 14,
1998,  several  securities class action complaints were filed against Cylink and
certain  of  its  current and former directors and officers in federal courts in
California.   These   complaints  allege,  among  other  things,  that  Cylink's
previously  issued financial statements were materially false and misleading and
that  the  defendants  knew or should have known that these financial statements
caused  Cylink's  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).   Plaintiffs  have  not  yet  filed  an  amended  consolidated
complaint.

     Cylink  believes  it  has meritorious defenses to these actions and intends
to  defend  itself  vigorously.  However,  it  is  not  feasible  to  predict or
determine  the final outcome of these proceedings, and if the outcome were to be
unfavorable,  Cylink's  business, financial condition, cash flows and results of
operations could be materially adversely affected.


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.


                                       14


<PAGE>

                                    PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER 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:


                              First        Second        Third        Fourth
                              Quarter      Quarter       Quarter      Quarter
                             ----------   -----------   ----------   -----------
Year Ended December 31, 1999
   High   ..................  5-3/8       4-15/16      8-3/16     14-15/16
   Low    ..................  3-3/8       3-3/8        3-3/8       6-1/4
Year Ended December 31, 1998
   High   .................. 15-1/16     15-5/8       13-1/16      8-1/16
   Low    ..................  9-3/16      8-1/2        5-1/8       3-1/16

     As  of  March 24, 2000, we had approximately 112 shareholders of record. 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.

     Our  Registration  Statement  on  Form  S-1  was  declared effective by the
Securities  and Exchange Commission on February 15, 1996 (Reg. No. 33-80719). In
February  and  March  1996 we issued 5,750,000 shares of our common stock to the
public  at a price of $15 per share. We received approximately $78.9 million net
of  underwriting  discounts  and  commissions of $6.0 million and other offering
expenses  of  $1.4  million. Through the period ended December 31, 1999, the net
proceeds have been used as follows (in thousands):


         Purchase and installation of equipment    ............    $  6,601
         Acquisition of Algorithmic Research, Ltd.    .........      45,913
         Repayment of indebtedness  ...........................       1,000
         Working capital   ....................................      12,673
         Temporary investment in money market accounts   ......      12,677
                                                                   ---------
                                                                   $ 78,864
                                                                   =========

     None  of  the  net proceeds or expenses of issuance and distribution of the
securities  have  been,  either directly or indirectly, paid to or invested with
any related party or shareholder.


                                       15


<PAGE>

<TABLE>
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 herein.

<CAPTION>
                                                                 Year ended December 31,
                                           --------------------------------------------------------------------
                                             1999          1998          1997          1996          1995
                                           -----------   -----------   -----------   ----------   -------------
                                                         (in thousands, except per share amounts)
<S>                                        <C>           <C>           <C>           <C>          <C>
Revenue   ..............................   $ 59,655      $ 42,760      $ 47,690      $ 25,793       $ 21,534
Gross Profit    ........................     40,496        25,862        33,704       16,062          14,644
Total operating expenses    ............     59,289        54,720       101,673       24,270          18,776
Loss from continuing operations   ......    (16,877)      (17,356)      (64,955)      (5,522)         (4,260)
Loss from continuing operations per
 share--basic and diluted   ............      (0.58)        (0.60)        (2.43)       (0.23)          (0.24)
</TABLE>


<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                   --------------------------------------------------------------
                                     1999         1998         1997         1996         1995
                                   ----------   ----------   ----------   ----------   ----------
                                                           (in thousands)
<S>                                <C>          <C>          <C>          <C>          <C>
Cash, cash equivalents and
 short-term investments   ......    $ 33,170     $ 46,575     $ 22,977    $ 78,849      $  6,098
Working capital  ...............      42,862       60,587       47,985      93,518        12,604
Total assets  ..................      81,289       94,318       76,555     107,088        22,725
Long-term obligations  .........         112          147          256         241           291
Shareholders' equity   .........    $ 61,979     $ 75,221     $ 66,134    $ 97,211      $ 14,605
</TABLE>

     On  March  28,  1998,  we sold our Wireless Communications 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.


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

     The   following   discussion   should  be  read  in  conjunction  with  the
Consolidated Financial Statements and Notes thereto.


Discontinued Operations

     On  March  28, 1998, we sold our Wireless Communications Group ("Wireless")
to  P-Com for $46.0 million in cash and an unsecured note in the amount of $12.1
million  due  100  days  after closing, subject to closing adjustments. The sale
resulted  in  an  after-tax  gain  of approximately $22.8 million. See Note 2 of
Notes to Consolidated Financial Statements.

     As   a   result,  the  operations  of  Wireless  have  been  classified  as
discontinued  operations  in  the accompanying Consolidated Financial Statements
and related Notes.


                                       16


<PAGE>

<TABLE>
Results of Continuing Operations

     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:

<CAPTION>
                                                                                 Year ended December 31,
                                                               -----------------------------------------------------------
                                                                    1999                1998                 1997
                                                               -----------------   -----------------   -------------------
                                                                                                          (restated)
<S>                                                            <C>                 <C>                 <C>
Revenue  ...................................................         100.0%              100.0%                100.0%
Cost of revenue   ..........................................          32.1                39.5                  29.3
                                                                   -------             -------              --------
Gross profit   .............................................          67.9                60.5                  70.7
Operating expenses:
 Research and development, net   ...........................          27.1                37.0                  26.2
 Selling and marketing  ....................................          44.1                56.4                  33.6
 General and administrative   ..............................          23.5                28.2                  17.7
 Amortization of purchased intangibles .....................           4.7                 6.4                   1.7
 Purchased in-process technology    ........................            --                  --                 134.0
                                                                   -------             -------              --------
   Total operating expenses   ..............................          99.4               128.0                 213.2
                                                                   -------             -------              --------
Loss from operations    ....................................         (31.5)              (67.5)               (142.5)
Other income, net    .......................................           3.5                 5.5                   6.3
                                                                   -------             -------              --------
Loss from continuing operations before income taxes   ......         (28.0)              (62.0)               (136.2)
Income tax expense (benefit)  ..............................           0.3               (21.4)                   --
                                                                   -------             -------              --------
Loss from continuing operations  ...........................         (28.3)%             (40.6)%              (136.2)%
                                                                   =======             =======              ========
</TABLE>

     Revenue. Revenue  increased  40%  from  $42.7  million  for  the year ended
December  31,  1998  to $59.7 million for the year ended December 31, 1999. This
increase  was  attributable 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.

     Revenues  decreased  10% from $47.7 million for the year ended December 31,
1997  to  $42.8  million  for  the  year  ended December 31, 1998. The decreased
revenue  was  primarily  due  to  the  disruption  caused  by the fourth quarter
turnover  of  management, which encompassed both executive management as well as
the  turnover  of  the  mid-level sales staff, and continued integration of ARL.
Overall average selling prices decreased marginally.

     International  product  revenue  was 44%, 41%, and 43% of revenue for 1999,
1998, and 1997, respectively.

     Gross  Profit. Gross  profit  increased  57%  from $25.9 million in 1998 to
$40.5  million  in 1999, and increased as a percentage of sales from 61% to 68%.
The  dollar  increase  was  due  to  increased revenues and better absorption of
manufacturing  overhead. The increase in gross profit as a percentage of revenue
resulted  from  better  absorption  of  manufacturing  overhead  due  to  better
manufacturing utilization, offset by reduced profit margins from OEM products.

     Gross  profit  decreased 23% from $33.7 million in 1997 to $25.9 million in
1998,  and  decreased  as  a  percentage  of  sales  from 71% to 61%. The dollar
decrease  resulted from a combination of a decrease in revenue, the introduction
of  OEM  products  with  reduced  gross  profit  margins  and  unplanned  excess
manufacturing  capacity. The decrease in gross profit as a percentage of revenue
resulted  from  reduced  profit  margins  from  OEM  products  and manufacturing
variances generated by excess manufacturing capacity.

     Research   and   Development. Research  and  development  expenses  consist
primarily  of  salaries  and  other  personnel-related expenses, depreciation of
development equipment, facilities costs and supplies.


                                       17


<PAGE>

Gross  research  and development expenses remained unchanged at $17.7 million in
1998  and 1999, and increased 24% from $13.9 million in 1997 to $17.7 million in
1998.  The  decrease  in  expenses as a percent of sales for 1999 as compared to
1998  resulted  from a substantially increased revenue base and reduced contract
and   other   variable  expenses  related  to  externally  funded  research  and
development.  The  increase  in  dollars  and  as a percent of sales for 1998 as
compared  to  1997 was primarily a result of a one-time expense of $3.0 million,
which  represents  the  write-off  of  a minority investment in an unaffiliated,
emerging stage company.

     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  totaled  $1.4  million, $1.9 million, and
$1.5 million in 1997, 1998 and 1999, respectively.

     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 increased
9%  from  $24.1  million  in  1998  to  $26.3 million in 1999 and 51% from $16.0
million  in  1997  to  $24.1  million  in  1998. The increases 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,   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, and audit, legal and other professional service fees. General and
administrative  expenses  increased  16%  from  $12.1  million  in 1998 to $14.0
million  in  1999 and 44% from $8.4 million to $12.1 million in 1998. The dollar
increases  in  1999  over  1998  resulted  from training and post-implementation
customization  costs  associated  with  our  new  Enterprise  Resource  Planning
system,  relocation  and  excess  facilities  costs, an additional provision for
doubtful  accounts, accounting and consulting expenses from the restatement, and
legal  fees  for  litigation defense. The decrease as a percentage of revenue in
1999  was due the allocation of costs over a wider revenue base. The increase in
dollars  and  as  a percentage of revenue in 1998 over 1997 was primarily due to
general  and  administrative expenses allocated over a smaller revenue base, and
one-time  charges  of approximately $3.6 million incurred in connection with the
executive and sales management turnover in the fourth quarter of 1998.

     Amortization  of  Purchased  Intangibles. The  amortization  of  intangible
assets,  which  resulted  from the acquisition of ARL in 1997 and S.D.I. in 1999
(see  Note  3  to  the  Financial Statements) was $2.8 million, $2.7 million and
$0.8 million in 1999, 1998 and 1997, respectively.

     Purchased  In-Process  Technology. Approximately $63.9 million of the total
purchase  price  for  the acquisition of ARL 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   September  26,  1997.  See  further  discussion  under  Note  3  to  the
Consolidated 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 $2.1 million in 1999, $2.3 million in
1998,  and  $3.0  million  in  1997.  In 1997, we recorded a benefit of $632,000
primarily  related  to  the  reversal of an allowance provided on the receivable
related to our interest in a former partnership known as Public Key Partners

     Other  income  decreased from $2.3 million in 1998 to $2.1 million in 1999,
and  decreased  from  $3.0 million in 1997 to $2.3 million in 1998. Royalty, and
other  income, net decreased from $.3 million in 1997 to $.1 million in 1998 due
to  the  expiration  of  certain  patents  we  controlled.  Interest income, net
decreased  from  $2.7 million in 1997 to $2.3 million in 1998 to $2.1 million on
1999  due  to  the  decrease  in average balances of cash, cash equivalents, and
marketable  securities  after  the  September  8,  1997  acquisition of ARL. The
decrease  in  interest  income  would have been more significant, if not for the
cash  proceeds  arising  from  the  March  28th 1998 divestiture of our Wireless
Communications Group to P-Com.

     Benefit  from  Income  Taxes. No  provision or benefit for income taxes for
continuing  operations  was recorded in 1999 or 1997. Our effective tax rate for
1998  was approximately 35%. Net deferred tax assets of $4.4 million at December
31, 1999, were based on available carryback capacity.


                                       18


<PAGE>

     Loss  from  Continuing Operations. We had losses from continuing operations
of  $16.9  million in 1999, $17.4 million in 1998, and $65.0 million in 1997. In
1994,  the  Company  began a strategic research and development program designed
to  create  new  products  and enhance existing products which continued through
1999.  In  1999, we incurred a decreased net loss due to an increase in revenues
versus  1998 levels, offset by continued high levels of research and development
expenses  related  to  our  strategic  research  and  development projects, high
levels  of  sales  and marketing expenses associated with continued expansion of
our  direct  field  operations,  product line management, marketing, channel and
distribution  development, and international operations, amortization related to
the   acquisition   of  Algorithmic  Research  Ltd  and  SDI  Ltd,  as  well  as
non-capitalized  information  technology costs, relocation and excess facilities
costs, expenses from the restatement, and legal fees for litigation defense.


Liquidity and Capital Resources

     At  December  31,  1999,  we had working capital of $42.9 million including
cash  and  cash  equivalents of $33.2 million and minimal long-term obligations.
We  have  reported  net  losses from continuing operations each year since 1994.
Net  cash  used  by  operating activities for the years ended December 31, 1999,
1998,  and 1997 was $8.4 million, $25.7 million, and $4.3 million, respectively.
Net  cash used in operating activities decreased in 1999 from 1998 primarily due
to  reduced  operating  losses  from  continuing  operations, reduced income tax
payments,  better  inventory  management,  but  offset  by increases in accounts
receivable  to  fund  revenue  growth.  Net cash used in operating activities in
1997  was  primarily  to  fund increases in accounts receivable and inventory in
order to support increased revenue.

     Net  cash  used  in  investing activities in 1999 was $5.8 million, arising
principally  from  investments in restricted cash related to our new facility of
$1.4  million,  acquisition  of  property,  plant  and  equipment related to our
investment  in  leasehold  improvements,  computer  equipment  and an Enterprise
Planning  and  Reporting  System  totaling $4.9 million, and the cash portion of
our  acquisition  of  S.D.I. of $.6 million, long-term loans to employees of $.6
million,  offset  in  part  by  a  $3.3  million collection of a note receivable
related  to the sale of our Wireless Division and a $.9 million collection of an
employee  note  receivable.  In  1998, net cash provided by investing activities
consisted  of  cash  proceeds  of  $54.9  million  from the sale of the Wireless
Communications  Group  offset  in  part  by  the  acquisition  of  property  and
equipment  of  $2.0 million, long-term loans to employees of $2.1 million and an
investment  of $3.0 million for a minority interest in an unaffiliated, emerging
stage  company.  Cash used in investing activities in 1997 was $52.1 million, of
which  $44.9  million  was  used  for  the  acquisition  of  ARL.  We  also made
expenditures  for  property and equipment of $3.8 million and provided long-term
loans  to employees of $3.5 million. 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 $.8 million, $1.6 million, and
$0.6  million for the years ended December 31, 1999, 1998 and 1997. For the year
ended  December  31,  1999,  cash  provided  by  financing  activities  resulted
primarily  from  the  proceeds from the issuance of common stock under our stock
option plans.

     We  believe that existing cash balances and cash generated from operations,
if  any, will be sufficient to fund necessary purchases of capital equipment and
to  provide  working  capital  through  2000. However, we may require additional
funds  to support our working capital requirements or for other purposes and may
seek  to  raise such additional funds through public or private equity financing
or  from other sources. No assurance can be given that additional financing will
be  available  or that, if available, will be available on terms favorable to us
or our shareholders.


                                       19


<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As  of December 31, 1999, we held a total of $33.1 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  percent  from  levels as of December 31, 1999, 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, 1999, we had no
fixed  rate  obligations  except  for  capitalized  leases and long-term debt of
approximately  $136,000.  As  such, the fair value of our fixed rate obligations
is not subject to a material adverse impact from changes in interest rates.


                                       20


<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Index to Consolidated Financial Statements and Financial Statement Schedule


                                                                Page
                                                               ------
Financial Statements:

     Report of Independent Accountants    ..................    22

     Consolidated Balance Sheets at December 31, 1999
     and 1998  .............................................    24

     Consolidated Statements of Operations for the years
     ended December 31, 1999, 1998 and 1997  ...............    25

     Consolidated Statements of Shareholders' Equity for the
     years ended December 31, 1999, 1998 and 1997  .........    26

     Consolidated Statements of Cash Flows for the years
     ended December 31, 1999, 1998 and 1997  ...............    27

     Notes to Consolidated Financial Statements    .........    28

Financial Statement Schedule:
     Schedule II--Valuation and Qualifying Accounts for the
     years ended December 31, 1999, 1998 and 1997  .........    44

     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.


                                       21


<PAGE>

                       Report of Independent Accountants


To the Board of Directors and Stockholders of Cylink Corporation:

     We  have  audited  the  accompanying  consolidated  balance sheet of Cylink
Corporation  and  subsidiaries  ("Company")  as  of  December  31, 1999, and the
related  consolidated  statements  of  operations, stockholders' equity and cash
flows  for  the  year  then  ended.  Our  audit  also  included the consolidated
financial  statement  schedule  listed  in Item 14. (a) 2 as of and for the year
ended  December 31, 1999. 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 audit.

     We  conducted  our  audit  in  accordance  with generally accepted auditing
standards.  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 audit provides a reasonable basis
for our opinion.

     In  our  opinion,  such  consolidated  1999  financial  statements  present
fairly,  in  all  material  respects,  the  financial position of the Company at
December  31, 1999, and the results of its operations and its cash flows for the
year  then  ended  in  conformity with generally accepted accounting principles.
Also,  in  our  opinion,  such  consolidated  financial statement schedule, 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.



/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP

San Jose, California
February 10, 2000


                                       22


<PAGE>

To the Board of Directors and Shareholders of Cylink Corporation


     In  our  opinion, the consolidated financial statements listed in the above
index  present  fairly,  in  all  material  respects,  the financial position of
Cylink  Corporation  and  its subsidiaries at December 31, 1998, and the results
of  their  operations  and  their  cash  flows  for each of the two years in the
period   ended   December  31,  1998,  in  conformity  with  generally  accepted
accounting  principles. These financial statements are the responsibility of the
Company's  management;  our  responsibility  is  to  express an opinion on these
financial  statements  based  on  our  audits.  We conducted our audits of these
statements  in  accordance  with  generally  accepted  auditing  standards which
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, assessing the accounting principles
used  and  significant  estimates made by management, and evaluating the overall
financial   statement  presentation.  We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP
San Jose, California
February 26, 1999


                                       23


<PAGE>
<TABLE>

                              Cylink Corporation
                          Consolidated Balance Sheets

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


<CAPTION>
                                                                              December 31,
                                                                       ---------------------------
                                                                         1999           1998
                                                                       -----------   -------------
<S>                                                                    <C>           <C>
Assets
Current assets:
   Cash and cash equivalents    ....................................   $ 33,170       $  46,575
   Accounts receivable, net of allowances of $941 and $1,251  ......     16,130           7,958
   Note receivable  ................................................        --            3,545
   Inventories   ...................................................      6,745          10,289
   Deferred income taxes  ..........................................      4,367           4,495
   Other current assets   ..........................................      1,648           6,675
                                                                       ---------      ---------
      Total current assets   .......................................     62,060          79,537
Restricted cash  ...................................................      1,400             --
Property and equipment, net  .......................................     10,038           5,731
Acquired technology, goodwill and other intangibles  ...............      3,188           5,341
Notes receivable from employees or former employees  ...............      3,165           2,558
Other assets  ......................................................      1,438           1,151
                                                                       ---------      ---------
                                                                       $ 81,289       $  94,318
                                                                       =========      =========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and long-term debt    ......   $     24       $     120
   Accounts payable    .............................................      6,635           3,656
   Accrued liabilities    ..........................................      9,082           8,230
   Accrued liabilities related to discontinued operations  .........        --            3,878
   Income taxes payable   ..........................................      1,062           1,091
   Deferred revenue    .............................................      2,395           1,975
                                                                       ---------      ---------
      Total current liabilities    .................................     19,198          18,950
                                                                       ---------      ---------
Capital lease obligations and long-term debt   .....................        112             147
                                                                       ---------      ---------
Commitments and contingencies (Notes 9 and 11)    ..................
Shareholders' equity:
   Preferred stock, $0.01 par value; 5,000,000 shares authorized;
    none issued and outstanding    .................................        --              --
   Common stock, $0.01 par value; 40,000,000 shares authorized;
    29,877,000 and 29,115,000 shares issued and outstanding   ......        299             291
   Additional paid-in capital   ....................................    126,896         123,929
   Deferred compensation  ..........................................     (1,790)           (167)
   Accumulated other comprehensive loss  ...........................        (82)            (61)
   Accumulated deficit    ..........................................    (63,344)        (48,771)
                                                                       ---------      ---------
      Total shareholders' equity   .................................     61,979          75,221
                                                                       ---------      ---------
                                                                       $ 81,289       $  94,318
                                                                       =========      =========
<FN>

   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       24


<PAGE>
<TABLE>

                              Cylink Corporation
                     Consolidated Statements of Operations

                     (in thousands, except per share data)

<CAPTION>
                                                                   Year ended December 31,
                                                         -------------------------------------------
                                                             1999           1998           1997
                                                         --------------   -----------   ------------
<S>                                                      <C>              <C>           <C>
Revenue  .............................................    $   59,655      $ 42,760      $  47,690
Cost of revenue   ....................................        19,159        16,898         13,986
                                                          ----------      ---------     ----------
Gross profit   .......................................        40,496        25,862         33,704
                                                          ----------      ---------     ----------
Operating expenses:
   Research and development, net    ..................        16,176        15,809         12,488
   Selling and marketing   ...........................        26,316        24,111         16,036
   General and administrative    .....................        13,998        12,082          8,422
   Amortization of purchased intangibles  ............         2,799         2,718            807
   Purchased in-process technology  ..................           --            --          63,920
                                                          ----------      ---------     ----------
      Total operating expenses   .....................        59,289        54,720        101,673
                                                          ----------      ---------     ----------
Loss from operations    ..............................       (18,793)      (28,858)       (67,969)
Other income (expense):
   Interest income, net    ...........................         1,858         2,281          2,697
   Other income, net    ..............................           232            66            317
                                                          ----------      ---------     ----------
Loss from continuing operations before
 income taxes  .......................................       (16,703)      (26,511)       (64,955)
Income tax expense (benefit)  ........................           174        (9,155)           --
                                                          ----------      ---------     ----------
Loss from continuing operations  .....................       (16,877)      (17,356)       (64,955)
Income (loss) from discontinued operations, net of
 income tax expense (benefit) of $0, ($139),
 and $1,439 ..........................................           --           (259)         3,210
Gain on disposal of discontinued operations, net
 of income tax expense of $0, $12,358 and $0 .........         2,304        22,776            --
                                                          ----------      ---------     ----------
Net income (loss)    .................................    $  (14,573)     $  5,161      $ (61,745)
                                                          ==========      =========     ==========
Earnings (loss) per share--basic:
   Continuing operations   ...........................    $    (0.58)     $  (0.60)     $   (2.43)
   Discontinued operations    ........................          0.08          0.78           0.12
                                                          ----------      ---------     ----------
   Net income (loss)    ..............................    $    (0.50)     $   0.18      $   (2.31)
                                                          ==========      =========     ==========
Earnings (loss) per share--diluted:
   Continuing operations   ...........................    $    (0.58)     $  (0.60)     $   (2.43)
   Discontinued operations    ........................          0.08          0.78           0.12
                                                          ----------      ---------     ----------
   Net income (loss)    ..............................    $    (0.50)     $   0.18      $   (2.31)
                                                          ==========      =========     ==========
Shares used in per share calculation--basic  .........        29,217        29,009         26,703
                                                          ==========      =========     ==========
Shares used in per share calculation--diluted   ......        29,217        29,009         26,703
                                                          ==========      =========     ==========
<FN>

  The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       25


<PAGE>
<TABLE>

                              Cylink Corporation
                Consolidated Statements of Shareholders' Equity

                             (dollars in thousands)

<CAPTION>
                                                                                             Notes
                                                                             Additional    Receivable
                                                          Common Stock
                                                      ---------------------   Paid-in         from
                                                         Shares     Amount    Capital     Shareholders
                                                      ------------ -------- ------------ --------------
<S>                                                   <C>          <C>      <C>          <C>
Balance at January 1, 1997   ........................  25,597,000    $ 257    $  89,772     $  (301)
Issuance of common stock under stock option plans         505,000        4          525          --
Issuance of common stock for acquisition of
 Algorithmic Research  ..............................   2,593,000       26       29,499          --
Tax benefit from stock options  .....................         --        --          296          --
Payments on notes receivable from shareholders    ...         --        --          --          301
Amortization of deferred compensation    ............         --        --          --           --
Translation adjustment ..............................         --        --          --           --
Net loss   ..........................................         --        --          --           --
 Comprehensive loss    ..............................         --        --          --           --
                                                       -----------  ------   ----------     -------
Balance at December 31, 1997    .....................  28,695,000      287      120,092          --
Issuance of common stock under stock option plans         420,000        4        1,813          --
Charge due to acceleration of options upon
 disposal of Wireless Group  ........................         --        --          725          --
Tax benefit from stock options  .....................         --        --        1,299          --
Amortization of deferred compensation    ............         --        --          --           --
Translation adjustment    ...........................         --        --          --           --
Net income    .......................................         --        --          --           --
 Comprehensive income  ..............................         --        --          --           --
                                                       -----------  ------   ----------     -------
Balance at December 31, 1998    .....................  29,115,000      291      123,929          --
Issuance of common stock under stock option plans         456,000        5          936          --
Issuance of common stock and options for
 S.D.I. Acquisition    ..............................     306,000        3        2,031          --
Amortization of deferred compensation    ............         --        --          --           --
Translation adjustment    ...........................         --        --          --           --
Net loss   ..........................................         --        --          --           --
 Comprehensive loss    ..............................         --        --          --           --
                                                       -----------  ------   ----------     -------
Balance at December 31, 1999    .....................  29,877,000    $ 299    $ 126,896     $    --
                                                       ===========  ======   ==========     =======

</TABLE>

<TABLE>
<CAPTION>
                                                         Deferred
                                                       Compensation    Accumulated      Retained
                                                        Related to        Other         Earnings                  Comprehensive
                                                          Stock       Comprehensive   (Accumulated                   Income
                                                         Options      Income (Loss)     Deficit)       Total         (Loss)
                                                      -------------- --------------- -------------- ------------ ---------------
<S>                                                   <C>            <C>             <C>            <C>          <C>
Balance at January 1, 1997   ........................   $    (334)       $    4       $    7,813    $  97,211
Issuance of common stock under stock option plans              --            --              --           529
Issuance of common stock for acquisition of
 Algorithmic Research  ..............................          --            --              --        29,525
Tax benefit from stock options  .....................          --            --              --           296
Payments on notes receivable from shareholders    ...          --            --              --           301
Amortization of deferred compensation    ............          84            --              --            84
Translation adjustment ..............................          --           (67)             --           (67)     $      (67)
Net loss   ..........................................          --            --          (61,745)     (61,745)        (61,745)
                                                                                                                   ----------
 Comprehensive loss    ..............................          --            --              --           --       $  (61,812)
                                                        ---------        ------       ----------    ----------     ==========
Balance at December 31, 1997    .....................        (250)          (63)         (53,932)      66,134
Issuance of common stock under stock option plans              --            --              --         1,817
Charge due to acceleration of options upon
 disposal of Wireless Group  ........................          --            --              --           725
Tax benefit from stock options  .....................          --            --              --         1,299
Amortization of deferred compensation    ............          83            --              --            83
Translation adjustment    ...........................          --             2              --             2      $        2
Net income    .......................................          --            --            5,161        5,161           5,161
                                                                                                                   ----------
 Comprehensive income  ..............................          --            --              --           --       $    5,163
                                                        ---------        ------       ----------    ----------     ==========
Balance at December 31, 1998    .....................        (167)          (61)         (48,771)      75,221
Issuance of common stock under stock option plans              --            --              --           941
Issuance of common stock and options for
 S.D.I. Acquisition    ..............................      (2,034)           --              --           --
Amortization of deferred compensation    ............         411            --              --           411
Translation adjustment    ...........................          --           (21)                          (21)     $      (21)
Net loss   ..........................................          --            --          (14,573)     (14,573)        (14,573)
                                                                                                                   ----------
 Comprehensive loss    ..............................          --            --              --           --       $  (14,594)
                                                        ---------        ------       ----------    ----------     ==========
Balance at December 31, 1999    .....................   $  (1,790)       $  (82)      $  (63,344)   $  61,979
                                                        =========        ======       ==========    ==========
<FN>

   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       26


<PAGE>
<TABLE>

                              Cylink Corporation
                     Consolidated Statements of Cash Flows

                            (dollars in thousands)

<CAPTION>
                                                                                             Year Ended
                                                                           -----------------------------------------------
                                                                               1999            1998            1997
                                                                           --------------   ------------   ---------------
<S>                                                                        <C>              <C>            <C>
Cash flows from operating activities:
 Net income (loss)   ...................................................    $  (14,573)      $   5,161       $  (61,745)
 Adjustments to reconcile net income (loss) to net cash used in
  operating activities:
  Write-off of investment in unaffiliated company  .....................           --            3,000              --
  Gain on disposal of discontinued operations   ........................        (2,304)        (22,776)             --
  Purchased in-process technology   ....................................           --              --            63,920
  Loss on Disposition of Fixed Assets  .................................           337             --               --
  Depreciation    ......................................................         2,657           2,630            2,107
  Amortization    ......................................................         2,799           2,676              807
  Bonuses applied against employee notes receivable   ..................           --            1,253              --
  Deferred income taxes    .............................................           128          (2,975)            (100)
  Amortization of imputed interest on Note Receivable    ...............          (250)           (301)             --
  Deferred compensation related to stock options   .....................           411              83               84
  Tax benefit from stock options    ....................................           --            1,299              296
  Changes in assets and liabilities (net of effects of acquisitions):
   Accounts receivable  ................................................        (7,927)          7,455           (7,627)
   Inventories    ......................................................         3,544          (6,134)          (2,662)
   Other assets   ......................................................         3,036          (3,063)            (376)
   Accounts payable  ...................................................         2,937             653              (22)
   Accrued liabilities  ................................................           381          (3,892)              90
   Income taxes payable    .............................................           (29)        (12,571)           1,244
   Deferred revenue  ...................................................           420           1,769             (332)
                                                                            ----------       ---------       ----------
     Net cash used in operating activities   ...........................        (8,433)        (25,733)          (4,316)
                                                                            ----------       ---------       ----------
Cash flows from investing activities:
 Investment of restricted cash   .......................................        (1,400)            --               --
 Acquisition of property and equipment    ..............................        (7,339)         (2,060)          (3,786)
 Purchase of ARL, net of cash acquired    ..............................           --              --           (44,890)
 Loans to employees in exchange for notes receivable  ..................          (570)         (2,108)          (3,473)
 Collections of employee notes receivable    ...........................           870             --               --
 Proceeds from sale of discontinued operations  ........................           --           54,879              --
 Collection of note receivable   .......................................         3,250             --               --
 Acquisition of S.D.I.  ................................................          (572)            --               --
 Acquisition of preferred stock of unaffiliated company  ...............           --           (3,000)             --
                                                                            ----------       ---------       ----------
     Net cash provided by (used in) investing activities    ............        (5,761)         47,711          (52,149)
                                                                            ----------       ---------       ----------
Cash flows from financing activities:
 Proceeds from issuance of common stock, net    ........................           941           1,817              529
 Other   ...............................................................          (131)           (199)             131
                                                                            ----------       ---------       ----------
     Net cash provided by financing activities  ........................           810           1,618              660
                                                                            ----------       ---------       ----------
Effect of exchange rate changes on cash and cash equivalents   .........           (21)              2              (67)
                                                                            ----------       ---------       ----------
Net increase (decrease) in cash and cash equivalents  ..................       (13,405)         23,598          (55,872)
Cash and cash equivalents at beginning of year  ........................        46,575          22,977           78,849
                                                                            ----------       ---------       ----------
Cash and cash equivalents at end of year  ..............................    $   33,170       $  46,575       $   22,977
                                                                            ==========       =========       ==========
Supplemental disclosures:
 Cash paid for income taxes   ..........................................    $      --        $   8,117       $       31
 Cash paid for interest    .............................................             3              60              159
 Equity issued for purchase of ARL  ....................................           --              --            29,525
 Note receivable from disposition of Wireless Communications Group   ...           --           12,424              --
 Equity issued for purchase of SDI  ....................................         2,034             --               --

<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       27


<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,  markets  and  supports  a
comprehensive  family of secure electronic commerce and communications solutions
used  by  organizations  worldwide to protect and manage the access, privacy and
integrity  of  information  transmitted  globally.  The  Company's  products are
incorporated  into  local  area  networks (LANs), wide area networks (WANs), and
packet switched networks, such as 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  preparation  of  financial  statements  in  conformity  with generally
accepted  accounting  principles  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.

Foreign currency

     The  functional  currency  of  the Company's Israeli operations 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 equivalents

     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.

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).

Restricted cash

     Restricted  cash  consists  of certificates of deposit which are restricted
from use pursuant to an operating lease obligation. (Note 11)


                                       28


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

Amortization of goodwill and other intangibles

     Goodwill  related  to the acquisition of ARL (Note 3) is being amortized on
a  straight-line  basis over seven years. Goodwill related to the acquisition of
SDI  (Note  3)  is  amortized on a straight-line basis over three years. Amounts
allocated  to  capitalized  intangibles  other than goodwill are being amortized
over  three  years.  Accumulated  amortization  relating  to  goodwill and other
intangibles  was  $6.3  million,  $3.5 million, and $0.8 million at December 31,
1999, 1998 and 1997, respectively.

Impairment of long-lived assets

     The  Company  periodically  reviews  the  recoverability  of  all long-term
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 fair value which is either determined based on discounted cash
flows or appraised values, depending on the nature of the asset.

Revenue recognition

     Revenues  derived  from  sale  or license of the Company's network security
products  are recognized in accordance with the applicable accounting standards,
including  Statement  of  Position  No.  97-2,  "Software  Revenue Recognition."
Revenue  is  recognized when a purchase order has been received, 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,  usually twelve months.
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, depending
on the contract.

Research and development

     Research and development costs are charged to operations as incurred.

     During  the  years  ended December 31, 1998 and 1997, the Company performed
research   and   development   under   several  government  funded  arrangements
aggregating  $445,000,  and  $1,201,000, respectively. There were no such funded
arrangements  in  1999.  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 1999, 1998 and 1997 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  $1.5 million, $1.5 million, and $.2 million under such arrangements in
the years ended December 31, 1999, 1998 and 1997, 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,


                                       29


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

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 Statement
of  Financial Accounting Standards No. ("SFAS") 123, "Accounting for Stock-Based
Compensation" (See Note 7).

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  used  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 S.D.I. (Note
3).  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 7). 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
limits  the  amount  of investment exposure to any one financial institution and
financial  instrument.  The  Company  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 accounts receivable at December
31,  1999 and 1998. One customer accounted for 11% of revenue for the year ended
December  31,  1999  and  one  customer  for  14%  of revenue for the year ended
December  31,  1998.  No customer accounted for more than 10% of revenue for the
year ended December 31, 1997.

Fair value of financial instruments

     The  carrying  amount  of  cash, cash equivalents, and other current assets
and  liabilities  such  as  accounts  receivable,  accounts  payable and accrued
liabilities,  as  presented in the financial statements, 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


                                       30


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

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 Shareholder's Equity.

Recently issued accounting standards

     In  June  1998, the Financial Accounting Standards Board (FASB) issued SFAS
No.  133,  "Accounting for Derivative Instruments and Hedging Activities," which
defines  derivatives,  requires  that  all derivatives be carried at fair value,
and  provides  hedge  accounting  when  certain  conditions are met. SFAS 133 is
effective  for  the  Company  in  fiscal 2001. The Company does not believe that
adoption  of  this  statement  will  have  a  material  impact  on the Company's
financial position or results of operations.

Reclassifications

     Certain  reclassifications  have  been  made to the financial statements in
order to conform to the 1999 presentation.


2. Discontinued Operations

     On  March  28,  1998,  the  Company  sold its Wireless Communications Group
("Wireless")  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. As a result, the operations of Wireless
have   been   classified   as   discontinued   operations  in  the  accompanying
Consolidated  Financial  Statements  and  related Notes. Accrued expenses in the
amount  of  approximately  $6.8  million,  primarily  for professional services,
anticipated  excess  facilities  expenses, and certain other transaction-related
accruals  were  charged  to  discontinued  operations  in  computing the gain on
disposal.  On July 14, 1998, P-Com made a partial payment of $8.9 million on its
promissory  note.  In  August  1999,  P-Com  paid  the  Company $3.25 million in
settlement  of  the  entire  remaining  balance  of  the  promissory  note and a
complete  settlement  of  all  outstanding  claims  and counterclaims. 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.  Wireless
revenues  were  $28.0  million in 1997 and $4.4 million in 1998 through the date
of disposal.


3. Acquisitions

     Algorithmic Research

     On  September  8,  1997, the Company acquired all of the outstanding shares
of  Algorithmic  Research, Ltd. and Algart Holdings, Ltd. (hereafter referred to
on  a combined basis as "ARL"), both limited liability companies organized under
the  laws  of  the  State  of  Israel.  ARL  is  an information security company
providing  remote access software products and smart-card technology focusing on
the  market  for  Internet-based  (TCP/IP)  communications.  ARL  also  provides
security  products  to  broadcast  networks. Consideration for this purchase was
$44.9  million  in cash, net of cash acquired, including transaction expenses of
$3.5  million;  and  2,593,169  shares of the Company's common stock and 409,641
fully  vested  options  to  purchase  common  stock of the Company for $0.01 per
share. The total value placed on


                                       31


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

the  common  stock  and  options  issued  by  the Company was $29.5 million. The
common  stock  and  options  issued  are  subject  to decreasing restrictions on
trading  and  exercise, respectively, for three years from the transaction date.
The  acquisition  was  recorded  under  the  purchase  method of accounting; and
accordingly,  the  results of operations of ARL are included in the consolidated
financial  statements  from  the  date  of  acquisition.  The purchase price was
allocated  to  the  assets  acquired  and  liabilities  assumed  based  upon the
estimated  fair  market  values  at the date of acquisition, as summarized below
(in thousands):

         Current assets (including cash and cash equivalents
          of $1,857) .......................................    $  4,380
         Property and equipment  ...........................       1,261
         In-process technology   ...........................      63,920
         Developed technology and other intangibles   ......       7,498
         Goodwill    .......................................       1,326
         Other non-current assets   ........................          96
         Current liabilities assumed   .....................      (2,021)
         Long-term debt assumed  ...........................        (188)
                                                                --------
                                                                $ 76,272
                                                                ========

     The  amounts  allocated  to technology were estimated using a risk adjusted
income  approach  applied  to  specifically  identified technologies. In-process
technology  was  expensed upon acquisition because technological feasibility had
not  been  established and no alternative future uses existed. Amounts allocated
to  capitalized  intangibles  other  than  goodwill  are  being  amortized  on a
straight-line  basis  over  three  years.  Goodwill  is  being  amortized  on  a
straight-line basis over seven years.


     Security Design International

     On   July   21,   1999,  Cylink  acquired  Virginia-based  Security  Design
International,  Inc.  (SDI),  a  security  consulting  and professional services
company  which  provides  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  next  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 sharholders' 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. Revenues from SDI were insignificant
in  comparison  to Cylink's consolidated revenues during 1999. Pro forma results
of  operations of SDI, assuming the acquisition had occurred as of the beginning
of 1998, are not presented as the pro forma effects are insignificant.


                                       32


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

4. Details of Balance Sheet Components

                                                         December 31,
                                                  ---------------------------
                                                    1999           1998
                                                  -----------   -------------
                                                        (in thousands)
Inventories:
     Raw materials  ...........................    $  2,412       $  2,813
     Work in process and subassemblies   ......       1,610          1,877
     Finished goods    ........................       2,723          5,599
                                                   --------       --------
                                                   $  6,745       $ 10,289
                                                   ========       ========
Property and equipment:
     Machinery and equipment    ...............    $ 10,262       $  8,563
     Software    ..............................       2,414          1,111
     Furniture and fixtures  ..................       2,327          1,478
     Land and building    .....................         814            814
     Leasehold improvements  ..................       3,252            821
                                                   --------       --------
                                                     19,069         12,787
     Less: accumulated depreciation
       and amortization  ......................      (9,031)        (7,056)
                                                   --------       --------
                                                   $ 10,038       $  5,731
                                                   ========       ========
Accrued liabilities:
     Compensation and benefits  ...............    $  3,623       $  2,341
     Royalties   ..............................         124            768
     Employee severance costs   ...............         852          1,556
     Distributor commissions    ...............         362            636
     Legal and Accounting costs    ............       1,270          1,215
     Warranty costs    ........................         759            562
     Other    .................................       2,092          1,152
                                                   --------       --------
                                                   $  9,082       $  8,230
                                                   ========       ========


                                       33


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

5. Income Taxes

     No  provision  or  benefit  was  recorded  for 1997. The Company recorded a
provision  for income taxes on discontinued operations of $1.4 million for 1997.
Income  tax  provision  (benefit) for income from continuing operations consists
of the following:

                                 Year ended December 31,
                           -----------------------------------
                             1999          1998         1997
                           ----------   -------------   ------
                                     (in thousands)
Current:
     Federal   .........   $   36        $  (4,506)     $ --
     State  ............        6           (1,722)       --
     Foreign   .........        4               48        --
                           -------       ---------      -----
                           $   46        $  (6,180)     $ --
                           =======       =========      =====
Deferred:
     Federal   .........   $  (34)       $  (3,233)     $ --
     State  ............       (6)             258        --
     Foreign   .........      168              --         --
                           -------       ---------      -----
                              128           (2,975)       --
                           -------       ---------      -----
                           $  174        $  (9,155)     $ --
                           =======       =========      =====

<TABLE>

     Deferred tax assets (liabilities) comprise the following:

<CAPTION>

                                                                      December 31,
                                                                -------------------------
                                                                  1999          1998
                                                                ----------   ------------
                                                                     (in thousands)
<S>                                                             <C>          <C>
         Assets:
         Net operating loss and credit carryforwards   ......   $ 8,000       $    --
         Unrealized capital loss  ...........................     1,160          1,057
         Bad debt reserve   .................................       --             172
         Inventory reserves and basis differences   .........       --           1,563
         Accrued expenses   .................................       820          1,508
         Warranty reserve   .................................       270            218
         Reserve for discontinued operations  ...............       --           1,504
         Other  .............................................       736          1,073
                                                                --------      --------
               Total deferred tax assets   ..................    10,986          7,095
                                                                --------      --------
         Liabilities:    ....................................
         Depreciation    ....................................      (150)           --
         Other liabilities  .................................      (140)           --
                                                                --------      --------
               Total deferred tax liabilities    ............      (290)           --
                                                                --------      --------
         Valuation allowance   ..............................    (6,329)        (2,600)
                                                                --------      --------
         Net deferred tax assets  ...........................   $ 4,367       $  4,495
                                                                ========      ========
</TABLE>

     Net  deferred  tax  assets of $4,367,000 at December 31, 1999 were based on
the  Company's  available  carryback  capacity.  The  Company recorded a partial
valuation allowance against the remainder of its deferred tax assets.


                                       34


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

     At   December   31,   1999,  the  Company  has  net  operating  loss  (NOL)
carryforwards  of  approximately  $10,000,000  and  $14,800,000  for federal and
state  income  tax  purposes, respectively. The federal NOL carryforwards expire
through 2019, while the state NOL carryforwards expire through 2004.

     At  December  31,  1999,  the Company has federal and state research credit
carryforwards  of  approximately  $630,000  and  $2,100,000,  respectively.  The
federal credits expire through 2019 and the state credits have no expiration.

<TABLE>
     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:

<CAPTION>
                                                               Year ended December 31,
                                                   ------------------------------------------------
                                                        1999               1998            1997
                                                   ----------------   ----------------   ----------
<S>                                                <C>                <C>                <C>
         U.S. federal statutory income tax rate          (35.0)%            (35.0)%          -- %
         State taxes, net of federal tax benefit          (4.7)              (3.2)           --
         Research and development tax credits  ...        (4.4)             (10.1)           --
         Change in valuation allowance   .........        23.8                2.4            --
         Foreign losses not benefitted   .........        15.2                5.2            --
         Other   .................................         6.1                6.2            --
                                                      --------           ----------        -----
         Effective Tax Rate  .....................         1.0%             (34.5)%          -- %
                                                      ========           ==========        =====
</TABLE>

6. 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, 1999.


7. Stock option plans

     The  Company  has two stock option plans: the 1994 Flexible Stock Incentive
Plan  which  was  the  successor  plan  to  the  1987 plan ("1994 Plan") and the
Cylink/ARL  1997 Stock Option Plan ("1997 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, 1999, all nonqualified stock options
have  been  granted at 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 1997 Plan in conjunction with the acquisition of
ARL.  The  1997 Plan provides for the grant of nonqualified stock options to the
employees  and  consultants  of  ARL  to purchase up to 410,000 of Cylink common
shares.  On  September  8, 1997, the Company issued 409,641 fully vested options
to  purchase  common  stock  for  $0.01  per  share.  The options are subject to
decreasing  restrictions  on  exercise  for  three years from the grant date and
expire in ten years.


                                       35


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

<TABLE>
   Option activity is summarized as follows:

<CAPTION>
                                                                                              Weighted
                                                                 Shares                        Average
                                                                Available       Options       Exercise
                                                                for Grant     Outstanding      Price
                                                                -----------   -------------   ----------
                                                                   (thousands of shares)
<S>                                                             <C>           <C>             <C>
Balance at January 1, 1997    .................................    1,982          3,377         $  7.72
   Approved    ................................................      410            --              --
   Granted at market price    .................................   (2,519)         2,519           10.38
   Granted below market price    ..............................     (410)           410             .01
   Exercised   ................................................      --            (504)           1.64
   Canceled ...................................................      537           (537)          12.17
                                                                 -------        -------
Balance at December 31, 1997 (1,443,000 shares exercisable at a
 weighted average exercise price of $4.50 at 12/31/97)   ......      --           5,265            8.52
Approved    ...................................................    2,100            --              --
Granted at market price    ....................................   (4,974)         4,975            5.55
Exercised   ...................................................      --            (420)           4.27
Canceled    ...................................................    3,720         (3,720)          10.25
                                                                 -------        -------
Balance at December 31, 1998 (1,746,000 shares exercisable at a
 weighted average exercise price of $6.49 at 12/31/98)   ......      846          6,100            5.58
Approved    ...................................................    1,200            --              --
Granted at market price    ....................................   (2,848)         2,847            6.35
Granted below market price    .................................     (150)           150            3.84
Exercised   ...................................................      --            (446)           2.03
Canceled    ...................................................    1,752         (1,752)           8.36
                                                                 -------        -------
Balance at December 31, 1999  .................................      800          6,899         $  5.19
                                                                 =======        =======
</TABLE>

     On  December  11  and  14,  1998,  the Company canceled options to purchase
2,346,999  shares  of  common  stock  with exercise prices ranging from $2.00 to
$23.50  per share previously granted to employees, and reissued all such options
at  prices  ranging from $4.25 to $4.625 per share, representing the fair market
values  on  the dates of reissuance. The issued options have a six-year term and
vest  over  three  years  from  the  date  of  reissuance. In February 1997, the
Company  canceled  options  to  purchase  225,100  shares  of  common stock with
exercise  prices  ranging  from $13.13 to $23.50 per share previously granted to
employees,  and  reissued  all  such  options  at  $11.00  to  $11.63 per share,
representing  the  fair market value of the stock on the date of reissuance. The
reissued  options have a ten-year term and vest over five years from the date of
reissuance.


                                       36


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

<TABLE>

     Significant  option  groups  outstanding  at December 31, 1999, and related
weighted  average  exercise  price  and  contractual  life  information  are  as
follows:

<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 $ 3.75       1,433,017           5.2                $  2.60            646,628         $  1.78
$3.81 to $ 4.06         963,306           5.1                   3.97            104,413            3.95
$4.25 to $ 4.25       1,957,581           5.0                   4.25            669,278            4.25
$4.31 to $ 7.50       1,350,053           5.4                   5.70            291,165            5.11
$7.69 to $15.81       1,195,138           7.1                  10.34            557,086           10.18
                      ----------                                              ----------
                      6,899,095           5.5                $  5.20          2,268,570         $  5.10
                      ==========                                              ==========
</TABLE>

Pro forma stock compensation disclosures

     The  weighted  average  estimated grant date fair value, as defined by SFAS
123,  for  options granted at market price during 1999, 1998 and 1997 was $3.01,
$3.80,  and  $4.70,  respectively. 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
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.

<TABLE>
     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:

<CAPTION>
                                              1999                1998                1997
                                         -----------------   -----------------   -----------------
<S>                                      <C>                 <C>                 <C>
         Expected life (years)    ......        2.90                3.10                3.10
         Risk-free interest rate  ......        5.39%               4.55%               5.98%
         Volatility   ..................       80.00%              80.00%              64.16%
         Dividend yield  ...............        0.00%               0.00%               0.00%
</TABLE>

<TABLE>
     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
income  (loss)  and  net  income  (loss)  per  share  would  have  been  reduced
(increased)  to  the  pro  forma  amounts below for the years ended December 31,
1999, 1998 and 1997 (in thousands, except for per share amounts):

<CAPTION>
                                                                   Year ended December 31,
                                                         ------------------------------------------
                                                             1999          1998            1997
                                                         --------------   ---------   ---------------
                                                                                        (restated)
<S>                                      <C>             <C>              <C>         <C>
         Net income (loss)               As reported      $  (14,573)     $ 5,161       $  (61,745)
                                         Pro forma           (21,568)       1,714          (65,243)

         Net income (loss) per share     As reported      $    (0.50)     $  0.18       $    (2.31)
          --(basic and diluted)          Pro forma             (0.74)        0.06            (2.44)
</TABLE>



                                       37


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

     The  estimated grant date fair value for options granted in connection with
the  ARL  acquisition  under  the  1997  Plan  was $9.82 based on an independent
appraisal.  The  aggregate  value  of  the  options  issued  was  included  as a
component  of the purchase price of ARL and has been excluded from the above pro
forma disclosures.


8. 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  imputed interest on the notes based on an assumed interest rate of
8%  per  annum. The notes are carried at their discounted value which aggregated
$3.2  million  at  December  31,  1999.  As  of December 31, 1999, the remaining
unamortized  discount on the notes was $.9 million. The notes mature as follows:
$1.0 million in 2002; $2.5 million in 2003; and $.6 million in 2004.


9. Contingencies

     On  September  14,  1998,  Cylink announced that its earnings for the third
quarter  of  1998  would  be below consensus estimates. In November 1998, Cylink
announced  that,  with  the  assistance  of  its independent accountants, it was
reviewing  its  revenue  recognition  practices,  and  Cylink announced that its
first  and second quarter earnings of 1998 would have to be restated and that it
would  have operating losses for each of the three quarters for the period ended
September  27,  1998.  During  the review, certain facts became known indicating
errors  had  been  made in the application of revenue recognition policies which
also  impacted  the  fourth  quarter  of  1997,  and as a result, 1997 full-year
results  have  been  restated  along with first and second quarter 1998 results.
Cylink  filed  amended  Forms 10-Q for the first and second quarters of 1998 and
an  amended  Form  10-K  for  1997.  Between  November  6 and November 25, 1998,
several  securities  class  action  complaints  were  filed  against  Cylink and
certain  of  its  current and former directors and officers in federal courts in
California.   These   complaints  allege,  among  other  things,  that  Cylink's
previously  issued financial statements were materially false and misleading and
that  the  defendants  knew or should have known that these financial statements
caused  Cylink's  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.

     Cylink  believes  it  has meritorious defenses to these actions and intends
to  defend  itself  vigorously. Cylink believes its insurance coverage for these
disputes  is  adequate.  However, it is not feasible to predict or determine the
final  outcome  of these proceedings, and if the outcome were to be unfavorable,
Cylink's  business,  financial  condition,  cash flows and results of operations
could be materially adversely affected.


                                       38


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

<TABLE>
10. 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:

<CAPTION>
                                                              Year ended December 31,
                                                      ---------------------------------------
                                                        1999         1998          1997
                                                      ----------   ----------   -------------
                                                                                (restated--
                                                                                See Note 2)
                                                                  (in thousands)
<S>                                                   <C>          <C>          <C>
Revenue:
 Sales to unaffiliated customers:
   From United States to:
    Customers in United States   ..................    $ 33,375     $ 25,334      $ 26,970
    Customers in Central and South America   ......       2,883        1,752         2,340
    Customers in Europe    ........................       6,612        3,855         7,996
    Customers in Asia   ...........................       4,925        1,303         2,326
   From Europe to customers in Europe  ............       5,662        6,855         5,113
   From Israel to:
    Customers in North America   ..................         112          --            --
    Customers in Central and South America   ......         828          --            --
    Customers in Europe    ........................       3,759        1,710           530
    Customers in Asia   ...........................       1,499        1,194         2,332
    Other   .......................................         --           757            83
                                                       ---------    ---------     ---------
                                                       $ 59,655     $ 42,760      $ 47,690
                                                       =========    =========     =========
</TABLE>


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


                                               December 31,
                                            1999        1998
                                           ---------   ---------
                                              (in thousands)
                    Long-lived assets:
                    United States   ......  $ 8,456     $ 3,759
                    Europe    ............      510         254
                    Israel    ............    4,260       7,059
                                            --------    --------
                                             13,226      11,072
                                            ========    ========

     Long-lived   assets  attributed  to  Israel  include  acquired  technology,
goodwill  and other intangibles of $2.6 million and $5.3 million at December 31,
1999  and  1998,  respectively,  related  to the Company's acquisition of ARL in
September 1997.

11. 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.


                                       39


<PAGE>

                              Cylink Corporation

           Notes to Consolidated Financial Statements -- (Continued)

   Future  minimum  lease  payments under all noncancelable operating leases are
as follows:



                   Year ending December 31,           Leases
                   ------------------------------ ----------------
                                                  (in thousands)
                   2000  ........................   $  3,902,447
                   2001  ........................      3,660,353
                   2002  ........................      3,384,041
                   2003  ........................      3,293,526
                   2004  ........................      3,235,905
                   Subsequent to 2004   .........     16,095,119
                                                    -------------
                   Total minimum payments  ......   $ 33,571,391
                                                    =============

     Rent  expense  under  operating  leases  totaled $3,347,000, $1,473,000 and
$1,720,000 for the years ended December 31, 1999, 1998 and 1997, respectively.


12. Subsequent Events


Employee Stock Purchase Plan

     In  January  2000,  Cylink  adopted  an  Employee  Stock Purchase Plan that
allows  full  time employees of the Company to purchase Cylink common stock at a
discount  to  the  open market price through a payroll deduction plan. This Plan
is  subject  to  shareholder  approval  at the annual shareholder meeting in May
2000.  Employee  contributions  are  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.


401(k) Matching

     In  October 1999, the Board of Directors approved a 401(k) matching program
effective  January  2000.  Under  the  program,  Cylink will match each enrolled
employee's  contributions to his or her 401(k) plan on a dollar-for-dollar basis
up  to  a  maximum contribution of $1,000 per employee. This program will impact
future  operating results to the extent of the number of employees participating
in the 401(k) plan and the level of their contributions to the Plan.


Stock Option Plans

     In  January 2000, Cylink increased the number of shares available for award
under the Company's 1994 stock incentive plan by 1,200,000 shares.


13. Related Party Transactions

     S.D.I.  performed  consulting  services  during  1999  totaling $80,000 for
Pittway Corporation, a 28% shareholder in Cylink.


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

     Not applicable

                                       40


<PAGE>

                                   PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information required by this Item with respect to directors, appearing
under  the  caption  "Election  of  Directors" including subcaptions thereof, in
Cylink's  Proxy Statement for the 2000 annual meeting of shareholders to be held
on  or  about  May  17,  2000 (the "Proxy Statement") and which will be filed in
definitive  form  pursuant  to Regulation 14a before the meeting date and within
120  days  after  the  end  of  fiscal  year  1999,  is  incorporated  herein by
reference.  The  information required by this Item concerning Cylink's executive
officers  is set forth in Part I hereof under the caption "Executive Officers of
the Registrant."


ITEM 11. EXECUTIVE COMPENSATION

     The   information  required  by  this  Item  appearing  under  the  caption
"Executive  Compensation  and  Other Information" in Cylink's Proxy Statement is
incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

     The   information  required  by  this  Item  appearing  under  the  caption
"Security  Ownership  of  Certain  Beneficial Owners and Management" in Cylink's
Proxy Statement is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information required by this Item appearing under the caption "Certain
Transactions" in Cylink's Proxy Statement is incorporated herein by reference.



                                    PART IV


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

       (a) 1. Financial   Statements--See   index  to   Consolidated   Financial
              Statements  and  Financial  Statement  Schedule at page 21 of this
              Form 10-K.

           2. Financial Statement  Schedule--See Index to Consolidated Financial
              Statements and Financial Statement Schedule at page 21 of this For
              10-K.

           3. Exhibits Index:


<TABLE>
<CAPTION>
Exhibit
Number                                    Description of Exhibit
--------   --------------------------------------------------------------------------------------
<S>        <C>
   2.1     Stock Purchase Agreement, dated as of September 7, 1997, between Registrant,
           A.R. Data Security Ltd. And Algorithmic Research Ltd. (4)

   2.2     Seller's Agreement, dated as of September 8, 1997, among Registrant, A.R. Data
           Security Ltd., Algorithmic Research Ltd., Amos Fiat, Yossi Cohen, Yossi Tulpan,
           Koor Capital Markets, and Telrad Holdings Ltd. (4)

   3.1     Amended and Restated Articles of Incorporation of the Registrant (1) and Certificate
           of Amendment thereto dated March 5, 1996.

   3.2     Bylaws, as amended. (1)

   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.
</TABLE>

                                       41


<PAGE>


<TABLE>
<CAPTION>
Exhibit
Number                                  Description of Exhibit
--------   -----------------------------------------------------------------------------------
<S>        <C>
   4.2     Specimen certificate for Common Stock. (1)

  10.1     Form of Indemnification Agreement between the Company and each of its executive
           officers and directors. (1)

  10.4     Employment Agreement between the Company and Fernand B. Sarrat, dated as of
           November 6, 1996, and Severance and Consulting Agreement entered into
           November 3, 1998. (2)(3)

  10.5     Employment Agreement between the Company and William C. Crowell dated
           December 18, 1997 (2)

  10.6     Employment Agreement between the Company and Sarah Engel dated
           February 14, 1997 (2)

  10.8     Company's 1987 Non-Qualified Stock Option Plan, including forms of agreements
           thereunder. (1) (2)

  10.9     Company's 1994 Flexible Stock Incentive Plan, including forms of agreements
           thereunder, and amendments thereto. (1) (2)

  21.1     Subsidiaries of the Company.

  23.1     Consent of Deloitte and Touche LLP.

  23.2     Consent of PricewaterhouseCoopers LLP.

  24.1     Power of Attorney. Reference is made to Page IV-2.

  27.1     Financial Data Schedule. (5)

  27.2     Employment Agreement between the Company and Roger Barnes dated as of
           October 14, 1999, and as amended August 9, 2000.

  27.3     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.

  27.4     Agreement and Plan of Reorganization by and among Cylink Corporation,
           Star Acquisition Corporation and Security Design International, Inc., dated as of
           June 25, 1999.
<FN>
------------
(1) Incorporated  by reference from the Company's Registration Statement on Form
    S-1 Registration No. 33-80719, which became effective February 15, 1996.
(2) 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).
(3) 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.
(4) Incorporated  by reference from the Company's report on Form 8-K filed as of
    September  23,  1997,  and  report  on  Form  8-K/A filed as of November 24,
    1997.
(5) To be filed by amendment to this report on Form 10-K.
</FN>
</TABLE>


(b) On  November 24, 1997, the Company filed a report on Form 8-K/A amending the
     report  on  Form  8-K filed as of September 23, 1997, reporting under Items
     2,  7,  and  9  the Company's acquisition of ARL, by reporting under Item 7
     the  consolidated  financial  statements of A.R. Data Security Ltd. and pro
     forma financial information for the Company and ARL.


                                       42

<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 27, 2000                 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 Roger A. Barnes 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.

<TABLE>
     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.

<CAPTION>
         Signature                            Title                         Date
-----------------------------   ------------------------------------   ----------------
<S>                             <C>                                    <C>
   /s/ WILLIAM P. CROWELL       President, Chief executive Officer     March 27, 2000
---------------------------     (Principal Executive Officer) and
        William P. Crowell      Director

     /s/ ROGER A. BARNES        Vice President of Finance and          March 27, 2000
---------------------------     Administration and Chief Financial
         Roger A. Barnes        Officer (Principal Financial and
                                Accounting Officer)

      /s/ LEO A. GUTHART        Chairman of the Board                  March 27, 2000
---------------------------
          Leo A. Guthart

     /s/ ELWYN BERLEKAMP        Director                               March 27, 2000
---------------------------
         Elwyn Berlekamp

    /s/ WILLIAM W. HARRIS       Director                               March 27, 2000
---------------------------
        William W. Harris

    /s/ HOWARD L. MORGAN        Director                               March 27, 2000
---------------------------
        Howard L. Morgan
</TABLE>




                                       43


<PAGE>

                                  SCHEDULE II

                              CYLINK CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS
                 Years ended December 31, 1997, 1998 and 1999
                                (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, 1997   ......    $  644         $  (211)          $ --         $  433
   Year ended December 31, 1998   ......    $  433         $   874           $ 56         $1,251
   Year ended December 31, 1999   ......    $1,251         $   525           $835         $  941
</TABLE>



                                       44