SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-K/A
                                   (restated)
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1997          Commission File No. 0-27742


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



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


                                910 Hermosa Court
                           Sunnyvale, California 94086
                    (Address of principal executive offices)

                                 (408) 735-5800
              (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. [ X ]

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 13,
1998, as reported by the Nasdaq National Market, was approximately $192,160,000.
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 13, 1998, there were 28,810,085  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  22,  1998,  are  incorporated  by
reference in Part III of this Form 10-K to the extent stated herein.


<PAGE>

                                     PART I

         The  statements  contained  in this  Report on Form 10-K/A that are not
purely historical are  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, including  statements  regarding Cylink Corporation's  ("Cylink" or the
"Company") expectations,  hopes, intentions, beliefs or strategies regarding the
future.  Forward-looking statements include: the Company's statements in Part I,
Item 1 "Business"  regarding (i) its strategies for being a leading  provider of
enterprise-wide  network  security  products and to establish  network  security
standards  for the secure  exchange  of  information,  (ii) its plans to develop
domestic  and  international   strategic   marketing  and  product   development
relationships  with key members of the  industries  addressed  by the  Company's
products,  (iii) its expected  research  and  development  expenditures  for the
enhancement of the Company's  existing  products,  including its PrivateWire and
PrivaCy  Manager  products,  and for the  development  and  introduction  of new
products,  and (iv) the Company's intention to expand foreign sales channels and
enter additional  international  markets,  and (v) the Company's belief that its
CIDEC-VHS/VHX  products are currently the fastest data link encryptors available
in the world  today for  commercial  use;  the  Company's  statements  in Item 2
"Properties"  that it believes its current  facilities  are and will be adequate
for the  foreseeable  future;  the Company's  statement in Item 7  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
regarding  (i) the  Company's  expectation  that it will  more  likely  than not
realize its net deferred  tax assets  based on future  income in the next twelve
months, and (ii) the sufficiency of the Company's existing liquidity and capital
resources;  and (iii) management's  belief that resolution of certain litigation
described in Note 10 of the Notes to Consolidated Financial Statements contained
in Item 8 "Financial Statements and Supplementary Data" will not have a material
adverse  effect  on  the  Company's  financial  position.   All  forward-looking
statements  included in this document are based on information  available to the
Company as of the date of this Report on Form 10-K,  and the Company  assumes 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.  It is important to note that the Company's  actual
results could differ  materially from those in such  forward-looking  statements
for the  reasons  detailed in Item 1 "Business  The Cylink  Strategy,  - Network
Security  Products,  - Research  and  Development,  and - Risk  Factors That May
Affect  Future  Results,"  and other  sections of this Report on Form 10-K.  You
should also consult the risk factors  listed from time to time in the  Company's
Reports on Form 10-Q, 10-Q/A, 8-K, 10-K and Annual Reports to the Shareholders.

         On November 5, 1998,  the Company  publicly  announced  that it and its
independent  accountants had initiated a review of revenue recognition practices
which  would  result in a  restatement  of  previously  issued  first and second
quarter 1998 results and that all three  quarters of 1998 were  expected to show
substantial  operating  losses.  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. These restated results were announced in a press release dated December
16, 1998 and  reported in a Form 8-K filed  January  29,  1999.  The Company has
filed amended Forms 10-Q/A for the first and second quarters of 1998.

         This  Annual  Report  on Form  10-K/A  amends  Items  6, 7 and 8 of the
Company's  Annual  Report  on Form  10-K  previously  filed  for the year  ended
December 31, 1997. This Annual Report on Form 10-K/A is filed in connection with
the  Company's  restatement  of its  financial  statements  for the  year  ended
December 31,  1997.  Financial  statement  information  and related  disclosures
included in this amended filing reflect, where appropriate,  changes as a result
of the  restatement.  Except as otherwise noted,  information  contained in this
Annual Report on form 10-K/A is stated as of December 31, 1997.


ITEM 1.  BUSINESS

         The Company  develops,  markets and supports network security  products
that enable and manage the secure transmission and authentication of information
over local area networks ("LANs"),  wide area networks  ("WANs"),  public packet
switched networks,  such as the Internet,  and broadcast networks. The Company's
products offer an integrated,  flexible solution for transforming any portion of
an  enterprise's  network into a virtual  private  network  ("VPN") by utilizing
public key encryption technologies to create and manage an enterprise's security
infrastructure,  and to provide  secure  access for local and remote  authorized
users  of its  proprietary  information  and  services.  The  Company's  network
security  portfolio  consists of hardware  and  software  encryption  platforms,
certificate  servers,  remote  access  gateways,   network  security  management
systems,  toolkits,  public key processors,  advanced  intelligent  smart cards,
smart card  operating  systems,  easily  deployed  card readers and  conditional
access  technology  for  broadcast  networks.  The  Company  

                                       1
<PAGE>


is also  conducting  advanced  research and  development in the field of digital
water marking for protection of intellectual property.

         The  Company  was  formed  in 1984 as a  partnership  and  subsequently
incorporated  in California in 1989. In February and March of 1996,  the Company
completed its initial public  offering and its Common Stock began trading on the
Nasdaq National Market under the symbol CYLK. Through the offering,  the Company
sold 5,750,000  shares of its Common Stock which generated  approximately  $78.9
million of cash, net of underwriting  discounts,  commissions and other offering
costs.

         On  September 8, 1997,  the Company  purchased  all of the  outstanding
shares of Algorithmic  Research Ltd., an Israeli company ("ARL"), as well as one
of its shareholders, Algart Holdings Ltd., an Israeli Company, in exchange for a
total  consideration of 3,002,810 shares,  including options to purchase shares,
of Cylink  Common  Stock and $46.7  million  in cash,  including  assumption  of
certain sellers' expenses.

         Cylink  further  offers a line of spread  spectrum  radio  products for
wireless  transmission  of voice and data  communications  which  operate in the
unlicenced  spread  spectrum  bands adopted by the U.S.  Federal  Communications
Commission  ("FCC") in 1985 and  subsequently  adopted  in many other  countries
throughout  the world.  The  Company's  spread  spectrum  radio  products  focus
primarily on the fixed location, outdoor, wireless communications infrastructure
market.  On March 28, 1998,  the Company sold all of the assets  comprising  its
Wireless  Communications  Group to P-Com Inc., a Delaware Corporation located in
Campbell, California, for total consideration of $60.5 million, subject to final
closing adjustments,  consisting of $46 million in cash and a promissory note in
the  amount  of  $14.5  million  due 100 days  after  closing.  Pursuant  to the
restatement  referenced above, the sales proceeds would have been  approximately
$58.4 million  resulting in a note receivable of approximately  $12.4 million (a
reduction of $2.1 million in the initial note receivable).

         The Company  operates in one industry  segment - secure  communications
products.  The  Company's  principal  operations  outside of the  United  States
comprise  research  and  development  in  Israel,  as well as sales and  service
offices  located in the United Kingdom and several other countries in Europe and
the Far East. See Note 11 of the "Notes to  Consolidated  Financial  Statements"
for geographic area information.

Industry Background

         The market for the Company's  network  security  products  continues to
expand due to the steady growth of private  leased  lines,  the growth of packet
switched networks, and the increasing deployment of applications and systems for
transmitting  proprietary  information and commercial  transactions over various
network  topologies.  Commercial and government  enterprises  continue to expose
increasing amounts of their proprietary  information to the security  weaknesses
inherent  to  their  electronic  communication  networks,  with  a  commensurate
escalation in the risk of misappropriation  of their enterprises'  resources and
the ensuing demand for verifiable  identification  of its authorized  users. The
Company believes that the rate of penetration for all network security  products
offered today lags well behind the growth in the addressable market.

         During the last twelve to eighteen  months,  the  consolidation  of the
network security industry has accelerated as the leading vendors seek to acquire
more  rapidly the core  technologies  required  for a  comprehensive  enterprise
security  solution.  This  consolidation  reflects the market's consensus that a
broad,  flexible portfolio of network security products from a limited number of
suppliers is preferable to the procurement and integration of products  supplied
by numerous vendors, each of which specializes only in partial solutions for the
customer's  data  communications  infrastructure.   Consequently,  vendors  whom
initially  entered  the market by  addressing  a specific  requirement,  are now
expanding  their product  lines by licensing  technologies  from third  parties,
enhancing  the   interoperability   of  their   products   through   cooperative
arrangements,  and acquiring  technology  through  mergers and  acquisitions  of
vendors having complementary offerings.

         Examples of such  partial  solutions  include  stand  alone  "Firewall"
products,  which offer access control  primarily by filtering packet  addresses,
virus   protection,   and  password  based  tokens  based  on  time-varying  and
challenge-response  protocols. These tokens and access control systems generally
provide some level of user  authentication,  but lack the capability of ensuring
privacy  of  communications,  integrity  of the data or  non-repudiation  of the
transaction.  Many other encryption products provide privacy, but do not perform
the other security functions, nor are they easily controlled or managed from one
central location. New techniques for auditing network security are also entering
the market,  such as 

                                       2
<PAGE>


intrusion  detection tools which,  by themselves,  do not enable security within
the enterprise.  Although several entities have commenced  offering  services as
certificate  authorities to verify the  authenticity of network  correspondents'
public  keys,  the  enterprise's  management  of its private  keys has  received
comparably  less attention.  As customers  demand greater ease of management for
their security solutions, a uniform method of key management for both private as
well as public keys, across applications, will be required.

         Along with this consolidation in the network security  industry,  major
participants  in the  networking,  computing  and operating  systems  industries
continue to make their presence felt by offering  security  related  products of
their own, by licensing and incorporating base encryption  technology into their
own core products,  and by promoting or endorsing various standards initiatives.
It remains to be seen whether these entities will make a significant,  strategic
investment in security  technologies,  or whether their  involvement  to date is
merely symptomatic of the increased  awareness of enterprise  security issues by
customers of these computing and networking participants.

The Cylink Solution

         Through  its  products  introduced  over the  last  five  years,  those
recently added by virtue of the Company's acquisition of ARL, and those products
presently under development, Cylink offers a comprehensive, system-wide solution
that  delivers the critical  services  for both  network  level and  application
security:  authentication,  authorization,  audit,  integrity  and privacy,  all
within a scaleable, centrally-managed system. For over twelve years, the Company
has pioneered the use of Public Key cryptography as one of its core technologies
by,  among other  accomplishments,  becoming the first  commercially  successful
supplier of network security encryption devices incorporating the Diffie-Hellman
automated key management  solution.  Today, the Company's  products  incorporate
state-of-the-art   commercial  security   technologies,   including  Public  Key
cryptography-based   digital   signatures,   certificates   and  key  management
techniques,  which enable the Company to offer  broad,  flexible  solutions  for
creating VPNs for local and remote users.

The Cylink Strategy

         The Company  intends to maintain its position as a leading  provider of
enterprise-wide  network  security  solutions  and to promote  standards for the
secure  exchange of information and  transactions  among users of LANs, WANs and
public networks.  The Company seeks to achieve these goals through the following
strategies:

o    Offer  Comprehensive   Enterprise-Wide  Network  Security  Solutions.   The
     Company's strategy is to offer a broad, centrally managed and flexible line
     of network  security  products to create VPNs within both  enterprises  and
     global  networks.  For  example,  the  Company  recently  introduced  ARL's
     PrivateWire  family of  components  for  securing  remote  access  over the
     Internet,  including both software and smart card tokens for clients, and a
     highly portable,  easily  installed card reader.  By offering a toolkit for
     integrating the customer's applications with the entire PrivateWire family,
     including a public key smart card and an ISO  compliant  card  reader,  the
     Company believes the PrivateWire family delivers a complete,  scalable, and
     expandable   public  key   security   solution  for   customers'   existing
     applications.  In  addition,  the Company  continues  to improve its Secure
     Manager by  consolidating  management  of all  Company  products  under one
     Java-based,  browser-enabled  platform,  branded  "PrivaCy  Manager".  When
     coupled with ARL's component  technologies,  PrivaCy Manager may be offered
     as a key management infrastructure for third party products, as well as the
     Company's own solutions.

o    Maintain and Leverage Its Expertise in Public Key  Technology.  The Company
     plans  to  maintain  its  expertise  in  the   application  of  Public  Key
     cryptography  through a combination  of internal  research and  development
     efforts.  On  occasion,  the Company  will also accept  funded  development
     contracts  when the Company  believes such  projects will yield  commercial
     applications   for  the  Company's  own   technologies.   With  the  recent
     acquisition  of  ARL,  the  Company  has  enhanced  its  expertise  in  the
     application  of Public Key  technology  to smart cards,  including on board
     operating systems and applications, remote access services and the emerging
     field of  conditional  access  encryption  for  broadcast  networks.  ARL's
     security  operating  system  is  incorporated  in one of  the  most  widely
     deployed  public key tokens in the world  today for  conditional  access to
     broadcast  networks.  In 1997, the Company had net research and development
     expenses of approximately $12.5 million.

o    Broaden   Acceptance  of  the  Company's  Public  Key  Technology   through
     Licensing.  The  Company  actively  seeds  the  computer,   networking  and
     telecommunications  industries  with its specific  methods of  implementing
     Public Key to ensure a compatible  market for the Company's  technology and
     products.  During 1997 the Company  licensed to 

                                       3
<PAGE>

     Microsoft  Corporation  the right to  incorporate  certain of the Company's
     core  Public Key  components  in  Microsoft's  products,  including  NT and
     Internet Explorer. In addition,  the Company licensed to JavaSoft the right
     to incorporate the Company's certificate technology in the Java development
     kit.  By  licensing  these   technologies  to  Microsoft  and  JavaSoft  on
     royalty-free  terms  the  Company  is  encouraging  the  broadest  possible
     dissemination of this base technology,  thereby creating  opportunities for
     greater acceptance of the Company's products.  Prior to their expiration in
     1997,  the  Company  also  held  exclusive   sublicensing   rights  to  the
     fundamental Public Key patents owned by Stanford  University (the "Stanford
     Patents").  Pursuant to its agreement with Stanford University, the Company
     successfully  sublicensed  over thirty other  companies to adopt methods of
     Public Key similar to those developed by the Company. In the meantime,  the
     Company  continues to offer developers a suite of  cryptographic  libraries
     and tools to utilize components of the Company's Public Key technology.

o    Continue  Expansion  into  Emerging  Public  Network  Markets.  The Company
     intends to leverage its expertise in securing  private networks by offering
     security  solutions  which address the emerging demand for both VPNs within
     public  networks and secure,  remote  access to  enterprise  networks.  The
     Company's acquisition of ARL and the introduction of its PrivateWire family
     of  products   demonstrate  the  Company's   commitment  to  meeting  these
     requirements.

o    Build and Foster Strategic  Relationships.  The Company intends to continue
     to develop strategic marketing and product  development  relationships with
     key members of the  industries it serves.  Applying its expertise in Public
     Key technology,  the Company has developed applications for parties such as
     AT&T, Cisco Systems,  Inc., the Society for Worldwide  Interbank  Financial
     Telecommunications   ("S.W.I.F.T."),  and  the  Federal  Reserve  Bank.  In
     addition,  the Company believes its open licensing of certain components to
     Microsoft  and  JavaSoft,  as well as the  Company's  offerings of software
     security  toolkits  and  developers'  libraries,  will  attract and enhance
     future development opportunities.  With its PrivateWire and PrivaCy Manager
     offerings,  the Company also believes it has an attractive  key  management
     solution for potential partners.

         Note,  however,  that the market  for the  Company's  network  security
products  is  continuing  to emerge.  This  market is  characterized  by rapidly
changing technology,  evolving industry standards, new product introductions and
changes in customer  requirements  and  preferences.  The Company's  future will
depend in part upon end users' demand for network security  products in general,
and upon the Company's  ability to enhance its existing  products and to develop
and introduce new products and technologies that meet customer requirements. Any
significant  advance in  techniques  for attacking  cryptographic  systems could
render  some or all of the  Company's  existing  and new  products  obsolete  or
unmarketable.  To the extent that the Company is unable to adopt and incorporate
emerging standards for implementing network security in a market segment,  sales
of the Company's  existing and planned  products in that market segment would be
significantly less than the levels currently  anticipated by the Company.  There
can be no  assurance  that  network  security-related  products or  technologies
developed by others will not adversely affect the Company's competitive position
or render its products or technologies noncompetitive or obsolete. See "Business
- Risk  Factors  That May Affect  Future  Results --  Competition,  --  Evolving
Network Security Market, and -- Rapid Technological Change."

Technology

         The  Company's  network  security  products  are  based on  Public  Key
cryptography  techniques,  which  were  first  developed  in  1976  at  Stanford
University  by Drs.  Diffie and  Hellman.  The Public Key  cryptography  methods
adopted by the Company require that each user be assigned both a private number,
which is confidential,  and a mathematically related public number, which can be
revealed  without  compromising  the user's private number.  Diffie-Hellman  key
exchange  provides  for two users in a data  network to  exchange  their  public
numbers and then  compute a shared  secret  number that is unique to them.  This
shared  secret  number  can  then  be  used as the  secret  encryption  key in a
conventional  encryption  system to maintain  the  privacy of the  communication
between two users.

         The Company has adopted advanced Public Key digital signature  methods.
An individual's  digital  signature is a set of unique binary numbers,  which is
derived from a combination of the message and the signer's  private number.  Any
user in the network can verify this digital signature by using only the sender's
public number. Digital signature methods which can scale to potentially millions
of users are recognized as an  indispensable  foundation  for secure  electronic
transactions.

                                       4
<PAGE>

         The  Company's  products  enable  network   administrators  to  act  as
certificate  authorities  that permit  each  authorized  device in the  network,
including individual's software and hardware tokens, to have the device's public
number validated for the purpose of establishing its authenticity to others. The
certification  authority  provides  each  authorized  user  with  an  electronic
message,  known as a certificate,  containing  that user's name,  public number,
unique privileges  within the network and expiration date. Such privileges,  for
example,  can define the portions of the network which the user is authorized to
enter,  the level of the user's authority to conduct  transactions  within those
portions of the  network,  and the  network  services  the user may enjoy.  This
message is digitally  signed by the network  administrator  to create the user's
certificate,  which in effect  serves to notarize the user's  public  number and
enable that user to conduct secure  communications  with other  certified  users
within the network.

         The Company's Public Key certificate  technology is incorporated in the
Company's  network  management  systems  for  its  products.   The  Company  has
consolidated its network  management  technologies into one Java-based  platform
which the Company intends to offer as a remote,  centralized  management  system
for its products,  as well as third party products which integrate the Company's
management solutions.

         The Company and its newly  acquired  subsidiary,  ARL,  have  developed
integrated  software  modules which are  incorporated  in the Company's  network
security   products.   These  software   libraries   implement  the  Public  Key
cryptography  techniques  for the  Company's  key  management  systems,  digital
signatures  and  certificates  to provide  complete,  scaleable  enterprise-wide
network security  solutions.  For example,  by combining ARL's software toolkits
with the Company's network  management system, the Company may offer a complete,
integrated key management infrastructure. In addition, ARL's software components
are compatible with most  off-the-shelf  third party applications which can then
utilize the security services of ARL's PrivateWire  family of software and smart
card tokens remote access.

         The Company  also  designs  application  specific  integrated  circuits
("ASICs") and custom integrated circuits to implement its encryption  algorithms
and Public Key techniques in order to provide  increased  performance,  security
and  functionality  in  its  products  at  reduced  cost.  Cylink's  significant
technical achievements in the area of proprietary ASIC design include encryption
chips  with  speeds up to 155  megabits  per  second  ("Mbps")  and  Public  Key
co-processor chips that have the capability of handling 1,024 bit numbers.

         The Company's network security products are designed to secure existing
networks without reducing  performance or requiring  modifications to customers'
existing network hardware or software.  This ease of integration is accomplished
with  a  broad  range  of  hardware  and  software  implementations  of  network
interfaces,  which  enable the  Company's  security  products to connect to most
networks  in use  today  throughout  the  world.  The  current  list of  network
interfaces used in Company  products  include:  T1 (1.5 Mbps), T2 (6.2 Mbps), T3
(45 Mbps),  E1 (2 Mbps), E3 (34 Mbps),  X.25,  V.35,  X.21,  Frame Relay (FRF.1,
FRF.3 and FRF.4), NTT T1 (Japan),  10 Base 2, 10 Base 5, 10 Base T, HSSI, RS-232
and RS-422.


Network Security Products

         The following  table sets forth  Cylink's  principal  network  security
products currently offered or under development:

                                                                         Year
   Product                           Description                      Introduced
-----------------            --------------------------------         ----------

                             Global Network Security
Cidec Line
CIDEC-HS                     High Speed T1 Link Encryption                  1986
CIDEC-MS                     Medium Speed Link Encryption                   1987
CIDEC-LS                     Low Speed Link Encryption                      1987
CIDEC-VHS                    Very High Speed T3 Encryption                  1990
CIDEC-MLS                    Integrated Link Cards                          1993
CED Card (AT&T)              Encryption Signaling System                    1997
SecureLink Line              Next Generation Link Encryptors                  *
                                                                            
X-25                                                                        


-----------------------------
* Indicates products under development and scheduled for introduction in 1998.

                                        5
<PAGE>

SecureX25L                   Low Speed X.25 Packet Encryption               1993
SecureX25H                   High Speed X.25 Packet Encryption              1994
                                                                            
SecureFrame                                                                 
SecureFrame                  Frame Relay Packet Encryption                  1996
SecureFrame - LS             Low Speed Frame Relay Encryption               1997
                                                                            
                               Enterprise Security
SecureLAN Family                                                            
SecureDomain                 Router Domain Packet Encryption/Access         1996
EPA Card (Cisco)             Encryption Processor for                       
                                 Cisco 7700 Series  Router                  1997
SecureAccess Family                                                         
SecureGate                   Dial Up Remote Access, PSTN                    1996
SecureTraveler               SecureGate Encryption Software Client          1997
                                                                            
PrivateWire Family                                                          
PrivateWire                  Remote Access, Secure TCP/IP                   
                                 Communications                             1997
                                                                            
                             Firewall, and Authorization Management          *
PrivateCard                  Full On Board Public Key Smart Card             *
PrivateSafe                  Portable Card Reader                             
                                                                            
                                  SecureManager
                                                                            
CSMS                         SecureX25 Network Management                   1994
SecureManager                Manager For SecureDomain                       1996
PrivaCy Manager              Unified Management Platform                    1997
                                                                            
                                       ARL
                                                                            
CryptoServer                 Cryptographic Security Server          As of 9/8/97
CryptoLAN                    Remote LAN access                      As of 9/8/97
CryptoKit                    Software Development Toolkit           As of 9/8/97
                                                                     
         Global  Network  Products  Family.  The  Company  entered  the  network
security market in 1986 to secure communications within WANs over private leased
lines.  The SecureWAN  product family is a complete line of link encryptors that
utilize  Diffie-Hellman Public Key management techniques to support conventional
encryption  algorithms,  such as the data  encryption  standard  ("DES") and its
improved version, known as Triple DES.

         Depending on the product  model,  the  Company's  CIDEC and  SecureLink
encryptors  operate at varying data rates over  private and public  networks and
support most widely used data link protocols.  The Company's original CIDEC line
of data  encryption  products is available in a number of models that range from
high speed T1 and T3 data transfer  rates (1.54 Mbps and 45 Mbps,  respectively)
to low speed  transfer  rates (1200 bits per second to 256  kilobits  per second
("kbps").  The Company believes that its CIDEC-VHS/VHX  products are the fastest
data link encryptors commercially available in the world today.

         To support its  customers  who deploy  their WANs over  shared,  public
networks,  the Company also  developed  packet  encryptors  which enable  secure
transmission of packets of data between two points in X.25 and Frame Relay based
networks.  The Company's high speed  SecureX25H and low speed  SecureX25L  offer
encryption for public switched packet networks based on X.25 packet transmission
technology and support data rates up to 64 kbps and up to 512 virtual  circuits.
The Company's  SecureFrame  product is designed to operate as a dedicated  Frame
Relay encryptor capable of operations on any public or private Frame Relay-based
network.  The  SecureFrame is designed to support data rates of up to 2.048 Mbps
and up to 1,024 user addresses.

         Enterprise  Security Products Family.  With the acquisition of ARL, the
Company broadened its remote access solutions to include the PrivateWire  family
of TCP/IP based software,  component  libraries,  smart card tokens,  and easily

                                       6
<PAGE>

deployed card readers.  The PrivateWire family of components  includes a toolkit
for  integrating  all of  the  PrivateWire  products  with  customers'  existing
applications.

         PrivateWire   provides  low  cost,   premium   security   services  for
authorization  management and remote access, as well as a comprehensive security
infrastructure,  over TCP/IP  communications  including WWW, FTP, Telnet, e-mail
and  any  TCP/IP  client/server   application.   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.

         PrivateWire  is transparent to the  organization  and the end-user.  No
specific  proxies need to be  configured,  defined or  publicized  and,  because
PrivateWire  supports  any Winsock  application,  no  integration  or changes to
applications  are  required.  Users are  controlled,  managed  and logged at the
network gateway. Changes to security policy can be easily configured and defined
from local or remote  locations by any  authorized  manager using a standard web
browser,  such as Microsoft IE,  Netscape  Navigator,  or the Company's  PrivaCy
Manager.

         PrivateCard,  developed by ARL, is the advanced,  electronic smart card
in the  PrivateWire  family which has a complete,  on-board Public Key processor
which, in combination with the remaining  PrivateWire  products,  can serve as a
fully  functional,   secure  personal  token  for  authenticated  and  encrypted
transactions.  PrivateSafe is ARL's latest smart card reader in the  PrivateWire
family which is highly  portable and simple to install by merely plugging in two
cables between the keyboard and the client computer.  This patented,  secure PIN
card reader  transfers all Public Key  operations  onto  PrivateCard's  on board
processor.

         The SecureDomain  encryption unit and its network management system are
designed to provide packet-based  security solutions which enable enterprises to
use the Internet as part of their own VPN by creating and controlling  access to
groups  within the network.  Pursuant to its license from the Company,  Cisco is
authorized to embed the SecureDomain  cryptographic  software modules in Cisco's
router products as part of Cisco's IOS operating system.

         The SecureDomain  product is a hardware device that resides between the
router and subnet in a LAN, and  supports  simultaneous  secured  TCP/IP and IPX
communications  among networks and subnets.  By securing the payload  portion of
network   traffic,   SecureDomain   is  transparent  to  the  network  and  user
applications.  In addition,  packet address information is left intact, allowing
traffic to flow over any public or private network without  compromising network
performance.

         The Company also developed its SecureGate and  SecureTraveler  products
to provide  secure  access  for  authorized  remote  and  mobile  users to their
corporate  computing  resources  over  the dial up,  public  switched  telephone
network ("PSTN").  The SecureGate  Server,  which physically resides between the
customer's  communications  server and modems, can monitor and protect corporate
information resources by controlling incoming and outgoing calls to and from the
network. SecureGate provides centralized management and tracking of remote users
and  their  individual  security  profiles,  with  audit  trails  of all  system
activities. SecureGate also acts as the certificate authority for its authorized
remote SecureTraveler clients.

         SecureManager  Family.  The  Company's  latest  SecureManager  product,
branded PrivaCy Manager, consolidates the Company's existing security management
tools with a Java-based  management  platform designed for enterprise and global
networks.  PrivaCy Manager remotely  configures,  monitors and performs firmware
downloads  for  some  of the  Company's  network  security  products,  including
SecureFrame,  and SecureDomain.  The Company intends to extend PrivaCy Manager's
management services to all of Cylink's enterprise security products,  as well as
third party products which integrate the Company's management tools.

         PrivaCy  Manager's  automated  Public  Key  authentication   procedures
prevent  unauthorized  products from  masquerading as legitimate  devices on the
network.  With its graphical  representation of the network's topology,  and its
point-and-click   interface,  the  network  security  structure  can  be  easily
visualized,  simplifying  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.  By
periodically  polling each secure  device,  PrivaCy  Manager  maintains an audit
trail of network security activities,  including administrator operations,  user
logins, logouts, traps and alarms.

                                       7

<PAGE>

         ARL's  Offerings.   CryptoKit  is  a  platform  independent,   software
development  security kit for integrating ARL's security modules into customers'
existing network applications.  CryptoKit serves either as a stand alone toolkit
for providing  cryptographic  services,  or as a tool to upgrade the  customer's
network  by  creating  interoperability  with the  Company's  products,  such as
PrivateWire. CryptoServer is a cryptographic security server which provides data
security services, such as certificate authorization, for networked environments
handling large volumes of transactions.  ARL also offers security  solutions for
LAN remote access  ("CryptoLAN"),  PC to mainframe  connections  ("Crypto3270"),
laptops  and PCs  ("Diskrete"),  e-mail  ("CryptoMail")  and files and  messages
("CryptoCom").  Following  the  addition of ARL's  products  into the  Company's
portfolio,  the  Company  has  realized  some  efficiencies  in its own  product
development by  discontinuing  development and support of certain other products
which are redundant with those of ARL.

         The Company's  future results of operations will be highly dependent on
the  successful  marketing  and  customer  acceptance  of the  Company's  latest
products,  including both PrivaCy Manager and PrivateWire.  To date, the Company
has made only modest shipments of such products.  No assurance can be given that
these  products  will not  require  additional  development  work,  enhancement,
testing  or  further   refinement   before  they  can  be  introduced  and  made
commercially  available  by  the  Company  or  that  they  will  achieve  market
acceptance.  If such new and  recently  introduced  products  have  performance,
reliability,  quality or other  shortcomings,  then such products  could fail to
achieve market acceptance and the Company 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 the  Company's  financial  condition  and results of  operations.  See
"Business  - Risk  Factors  That May  Affect  Future  Results --  Dependence  on
Recently  Introduced and New Network Security Products,  and - Product Liability
Risks."

Sales, Marketing and Customer Support

         The Company markets its network security products primarily through its
direct sales force and, to a lesser extent, through distributors.  The Company's
direct sales force for its network security products operates primarily from the
Company's headquarters in Sunnyvale,  California and from three sales offices in
the United States. The Company's sales force,  engineers and technical personnel
must work closely  with  customers  in order to  determine  system  security and
network configurations that meet the customers' needs.

         International  sales of network  security  products are made  primarily
through the Company's five foreign sales offices and numerous distributors.  The
Company  does  not  have  long-term  contractual  relationships  with any of its
distributors  and,  therefore,  has no assurance  of a  continuing  relationship
within a given market.

         To date,  the  majority  of the  Company's  customers  for its  network
security  products  have been Fortune 1000  companies,  financial  institutions,
government  agencies and  telecommunication  carriers who rely on the  Company's
Global Network  Products to encrypt and secure their WANs operating over private
leased lines.  From inception  through  December 31, 1997, the Company sold over
$173 million of network  security  products in the United States and abroad.  In
1997,  fifteen customers  accounted for approximately 56% of the Company's sales
of its network security products,  and two customers accounted for approximately
20% of such sales.

         A  representative  list  of the  end  users  of the  Company's  network
security products is set forth below:

   Fortune 1000         Financial          Government         Telecommunications
    Companies         Institutions          Agencies              Carriers
-----------------   ---------------   ---------------------     ---------------
Boeing              Bank of America   Department of Defense      AT&T
Caterpillar         Bank of China     Department of Justice      Bell Atlantic
Computer Sciences   Bankers Trust     Department of Treasury     MCI
IBM                 Citibank          Federal Reserve Bank       Pacific Bell
Lockeed Martin      Credit Suisse     Internal Revenue Service   Sprint
Motorola            Deutsche Bank
                    Lloyds Bank
                    S.W.I.F.T
                    Swiss Bank

         The Company  believes that customer  support is essential to developing
and  maintaining  good  relationships  with  its  customers.   Cylink's  support
personnel  are  responsible  for  providing  installation,  technical  training,
technical  support,

                                       8
<PAGE>

on-site  support and repair  services.  The Company  sells 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.

         The  Company  offers  service  and  support  for its  network  security
products  from its  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.

Wireless Communications Product Line

          During 1995, 1996, and 1997 sales of Wireless  products  accounted for
approximately  38%,  50%,  and  37%,  respectively,  of the  Company's  revenue,
including discontinued  operations.  The Wireless Communications Group completed
its formation of an independent  organization  in 1997,  including  order entry,
sales and marketing, engineering services and technical publications, as well as
opening service centers in Beijing and New Dehli. On March 28, 1998, the Company
sold all of the assets  comprising its Wireless  Communications  Group to P-Com,
Inc.,  a Delaware  Corporation  located  in  Campbell,  California,  for a total
consideration of $60.5 million, subject to final closing adjustments, consisting
of $46.0  million in cash and a promissory  note in the amount of $14.5  million
due 100 days after closing. Pursuant to the restatement referred to in Note 2 of
the Notes to Consolidated  Financial  Statements included elsewhere in this Form
10-K, certain revenues of Wireless  previously  recognized in the fourth quarter
of 1997 and the first quarter of 1998 were adjusted.  Based on the net assets of
Wireless as of March 28, 1998, after restatement,  the sales proceeds would have
been approximately $58.4 million resulting in a note receivable of approximately
$12.4 million (a reduction of $2.1 million in the initial note receivable).

Research and Development

         The  Company's   research  and  development   efforts  are  focused  on
developing  new  products,   core  technologies  and  enhancements  to  existing
products.  For  its  network  security  products,  the  Company's  research  and
development strategy has in recent periods focused on the development of modular
software and hardware products that can be readily integrated and adapted to the
changing standards and requirements of the  communications  and  internetworking
industries.  A focus of the Company's  research and development  efforts in 1997
has been the  development  of the  SecureLink  and PrivaCy  Manager,  as well as
integration  of  PrivateWire  and ARL  technologies  into the Company's  product
portfolio.  The Company  expects  that it will  continue  to devote  substantial
research and  development  resources to the  enhancement of PrivaCy  Manager and
ARL's products for the foreseeable future.

         In 1995,  1996 and 1997, the Company's  gross research and  development
expenses from continuing  operations were $9.2 million,  $14.3 million and $13.9
million,  respectively.  From time to time,  the  Company  receives  engineering
funding for development projects to apply or enhance the Company's technology to
a particular  customer's  need. The amount  recognized  under these research and
development  contracts  are offset  against  research and  development  expense.
Amounts  recognized  under  non-recurring  engineering  contracts  totaled  $1.1
million, $6.1 million and $1.4 million, in 1995, 1996 and 1997, respectively.

         The Company  believes that its ability to attract and retain  qualified
development personnel is essential to the success of its development programs in
the  United  States  and  Israel.  The  market  for  such  personnel  is  highly
competitive and the Company's development activities could be adversely affected
if the Company is  unsuccessful  in attracting and retaining  skilled  technical
personnel.  See  "Business  - Risk  Factors  That May Affect  Future  Results --
Dependence  on Key  Personnel,  and -- Management  of Growth." In addition,  the
markets  for the  Company's  products  are  characterized  by  rapidly  changing
technologies, extensive research and new product introductions.

         The Company  believes that its future  success will depend in part upon
its  ability to continue to enhance  its  existing  products  and to develop and
introduce new products.  As a result,  the Company expects to continue to make a
significant investment in engineering, research and development. There can be no
assurance that the Company will be able to develop and introduce new products or
enhancements to its existing  products in a timely manner which satisfy customer
needs, achieve market acceptance or address  technological changes in its target
markets.  The failure of the Company to develop products and introduce them in a
timely  manner  could  adversely  affect  the  Company's  competitive  position,
financial condition and results of operations. See "Business - Risk Factors That
May Affect Future Results -Competition, -- Dependence on Recently Introduced and
New Network Security  Products,  -Evolving  Network  Security  Market,  -- Rapid
Technological  Change,  and  --  Wireless   Communications  Industry  Regulatory
Environment."

                                        9
<PAGE>

Regulatory Matters

         The Company's  network security  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
technical  restrictions  applied by the Commerce  Department affect the type and
functionality of the products which may be exported. Furthermore, interpretation
of and compliance with these licensing  regulations are clouded by disagreements
within and between the United States  legislative  and  administrative  branches
concerning their application to encryption technology.  These disagreements tend
to delay and interfere with the  predictability of the licensing process for the
Company's  products.  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 the Company's products and technology  distributed by
ARL in Israel.

         Although  to date the  Company  has been able to secure  the  necessary
export licenses to compete effectively in the international market, there can be
no assurance  that the Company will  continue to be able to secure such licenses
in a timely manner in the future, or at all. In certain foreign  countries,  the
Company's  distributors  are  required to secure  licenses or formal  permission
before encryption products can be imported.  To date, except for certain limited
cases, the Company's  distributors have not been denied permission to import the
Company's products.  See "Business - Risk Factors That May Affect Future Results
-- Risks  Associated  with  International  Sales;  Reliance Upon Local Partners;
Restrictions on Export."

Backlog

         Orders for the Company's products are usually placed by customers on an
as-needed  basis and the Company has typically been able to ship products within
thirty days after the customer  submits a firm  purchase  order.  The  Company's
backlog consists of all orders received,  regardless of the anticipated shipping
date.  Because of the possibility of customer  changes in delivery  schedules or
cancellation of orders,  the Company's backlog as of any particular date may not
be  indicative  of sales in any future  period.  The Company does not  generally
maintain  long-term  contracts  with its  customers  that  require  customers to
purchase the Company's products. The Company's backlog for continuing operations
as of  December  31,  1996 and  1997 was  approximately  $4.1  million  and $5.7
million,  respectively.  See  "Business - Risk  Factors  That May Affect  Future
Results -- Lengthy Sales Cycle."

Manufacturing

         The Company's  manufacturing  operations consist primarily of component
procurement,  final assembly and test, and quality control of subassemblies  and
systems.  The  Company  generally  uses  domestic  independent   contractors  to
manufacture  and assemble  printed  circuit boards.  The  manufacturing  process
enables the Company to configure  the hardware and software in  combinations  to
meet a wide variety of customer requirements.  The Company installs its software
into the  electronically  programmable  read  only  memory  of its  products  to
maintain  quality control and security,  and performs  "burn-in"  procedures and
functional tests, as well as comprehensive inspections to assure the quality and
reliability of its products.

         The Company's product designs are proprietary but generally incorporate
industry-standard   algorithms  and  hardware   components.   However,   certain
semiconductor  devices,  electronic  components and  subassemblies are presently
purchased  from sole source  suppliers.  Certain other  components are presently
available or acquired from only a limited number of suppliers.

         The Company's  ability to timely deliver its products is dependent upon
the  availability  of quality  components and subsystems used in these products.
The Company depends in part upon  subcontractors  to  manufacture,  assemble and
deliver  certain  items in a  timely  and  satisfactory  manner.  A  significant
interruption in the delivery of such items could have a material  adverse effect
on the Company's  results of  operations.  See "Business - Risk Factors That May
Affect Future  Results -- Dependence  on Component  Availability,  Subcontractor
Performance and Key Suppliers."

Employees

         As of December 31,  1997,  the Company had 432  employees,  of whom 140
were primarily engaged in research and development,  165 in sales, marketing and
related customer support services, 42 in administration and 85 in manufacturing.
Of these employees approximately 23 were located in Europe, 55 in Israel, and 10
in  Asia.  None of the  

                                       10
<PAGE>

Company's  employees are represented by a collective  bargaining  agreement with
respect to his or her employment by the Company, nor has the Company experienced
any organized  work  stoppage.  The Company  considers  its  relations  with its
existing  employees  to be  good.  As part of the  March  28,  1998  sale of the
Company's  Wireless  Communications  Group to P-Com Inc.,  the  Company  expects
approximately 100 employees to terminate their employment with Cylink.

Year 2000

         The Company's  customer  service  organization is engaged in an ongoing
review of the Company's  products to determine which products are susceptible to
malfunction  when processing  dates which are later than December 31, 1999 ("Y2K
Errors").  With respect to those products which are no longer within the term of
the Company's  standard warranty and vulnerable to Y2K Errors,  the Company will
offer upgrade kits or trade-ins for comparable  products which are free from Y2K
Errors.  In the meantime,  with respect to products  which are vulnerable to Y2K
Errors,  the  Company is  reworking  its  products  to cure any Y2K  Errors,  or
declaring  such  products  at the end of life  ("EOL")  with  the  intention  of
discontinuing their sale prior to December 31, 1998.

                                       11
<PAGE>


RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

Recent Losses;  Potential  Fluctuations in Operating  Results,  Future Operating
Results Uncertain.

          The Company incurred losses from continuing  operations in 1994, 1995,
1996 and 1997.  There can be no  assurances  that the Company  will  increase or
maintain its revenue or be  profitable  on a quarterly or an annual basis in the
future.

         The Company has historically  experienced  significant  fluctuations in
its operating  results on an annual and a quarterly  basis and could  experience
such fluctuations in the future. The Company's operating results are affected by
a number  of  factors,  many of which  are  outside  of the  Company's  control,
including:  the timing of the  introduction  of new or enhanced  products by the
Company or its  competitors;  market  acceptance of new products of the Company,
its customers and its competitors; the timing, cancellation or delay of customer
orders,   including  cancellation  or  delay  in  anticipation  of  new  product
introduction   or  enhancement  or  resulting  from   uncertainty   relating  to
intellectual property claims;  competitive factors, including pricing pressures;
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; expenses associated with obtaining, enforcing
and defending claims with respect to intellectual  property  rights;  the mix of
products sold;  changes in the percentage of products sold through the Company's
direct  sales  force;  personnel  changes;  general  economic  conditions;   and
fluctuations  in  foreign  currency  exchange  rates.  The  Company  expects  to
introduce a number of new products in 1998.  The failure of such new products to
achieve market  acceptance at the time  anticipated  by the Company,  or at all,
would  materially  and adversely  affect the Company's  financial  condition and
results of operations.

Pending Litigation

See Item 3. "Legal Proceedings."

Dependence on Key Personnel

         On November 13, 1996, the Company  announced the appointment of Fernand
B. Sarrat as President and Chief Executive  Officer ("CEO") and during the first
half of 1997 the Company hired a number of executives to fill senior  management
positions within the Company.

         The Company's future success will depend on the abilities of Mr. Sarrat
and the  contributions by its executive  officers,  key management and technical
personnel.  The loss of the services of one or more of the  Company's  executive
officers or key  personnel,  or the  inability to continue to attract  qualified
personnel,  could delay product  development cycles or otherwise have a material
adverse effect on the Company's business and operating results.

Lengthy Sales Cycle

         Sales  of  the  Company's  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 the  Company's  products is typically  lengthy and
subject to a number of significant risks over which the Company has little or no
control.  The  Company  is often  required  to ship  products  shortly  after it
receives orders and  consequently,  order backlog at the beginning of any period
has 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.  The Company  typically  plans its
production and inventory levels based on internal  forecasts of customer demand,
which is highly unpredictable and can fluctuate substantially.  If revenue falls
significantly  below anticipated  levels, the Company's  financial condition and
results of operations would be materially and adversely  affected.  In addition,
the Company's  operating expenses are based on anticipated  revenue levels and a
high percentage of the Company's 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. In addition,  it
is possible that in the future the Company's operating results will 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 the Company's business,  the price of the Company's Common Stock
would likely be materially adversely affected.

                                       12
<PAGE>


Dependence on Recently Introduced and New Network Security Products

         The Company's  future results of operations will be highly dependent on
the successful completion of the design,  development,  introduction,  marketing
and manufacture of the PrivateWire  and PrivaCy  Manager  products,  portions of
which are under  development,  and the SecureLink,  SecureFrame and SecureDomain
products,  which were recently  introduced.  To date,  the Company has made only
limited  commercial  shipments  of certain of such  products  and no  commercial
shipments of the remainder of such products.  No assurance can be given that any
of such  products will not require  additional  development  work,  enhancement,
testing  or  further   refinement   before  they  can  be  introduced  and  made
commercially  available  by  the  Company  or  that  they  will  achieve  market
acceptance.  If such new and  recently  introduced  products  have  performance,
reliability,  quality or other  shortcomings,  then such products  could fail to
achieve market acceptance and the Company 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 the Company's financial condition and results of operations.

Competition

         Competition is intense among providers of network security systems, and
the Company  expects  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 and name recognition. Many of
these factors are beyond the Company's control.

         The Company's  competitors in the network security  markets,  including
companies which offer products  similar to or as an alternative to the Company's
products,  include Axent Technologies,  Inc., Checkpoint Software  Technologies,
Ltd., Network Associates, Inc., Secure Computing Corporation,  Security Dynamics
Technologies, Inc., Racal-Guardata,  Inc., and Information Resource Engineering,
Inc. In addition, Northern Telecom Limited, AT&T, Motorola Corporation,  Digital
Equipment Corporation and Sun Microsystems,  Inc. offer certain network security
products as part of their overall networking solutions.  A number of significant
vendors,  including Microsoft Corporation,  Netscape Communications  Corporation
and Cisco Systems,  Inc. have embedded security solutions in their software.  To
the extent that these embedded or optional security  capabilities provide all or
a portion of the functionality provided by the Company's products, the Company's
products may no longer be required by customers to attain network security.

         Certicom  Corporation  and RSA Data  Security,  Inc., a  subsidiary  of
Security  Dynamics,  ("RSA DSI") license various methods of implementing  Public
Key cryptography, including some that are different than (and incompatible with)
the  methods of  implementing  Public  Key  cryptography  currently  used by the
Company in most of its products. Although the Company has licenses to use all 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  than those  currently  used by the Company,  to the  exclusion of the
Company's methods,  sales of the Company's existing and planned products in that
market segment may be adversely  impacted,  which could have a material  adverse
effect on the Company's financial condition and results of operations.

         Many of the Company's competitors have substantially greater financial,
technical, marketing, distribution and other resources, greater name recognition
and longer standing  relationships with customers than the Company.  Competitors
with greater  financial  resources are better able to engage in sustained  price
reductions  in order  to gain  market  share.  Any  period  of  sustained  price
reductions  would  have a material  adverse  effect on the  Company's  financial
condition and results of operations.  There can be no assurance that the Company
will be able to compete successfully in the future or that competitive pressures
will not materially and adversely affect the Company's  financial  condition and
results of operations.

                                       13
<PAGE>

Product Liability Risks

         Customers rely on the Company's  network  security  products to prevent
unauthorized access to their networks and data  transmissions.  A malfunction or
the inadequate design of the Company's products could result in tort or warranty
claims.  Although the Company attempts 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  the  Company's
liability  for any such  damages.  Any  liability  for  damages  resulting  from
security  breaches could be substantial and could have a material adverse effect
on the Company's business 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 the Company's  products in  particular,  regardless of whether such breach is
attributable to the Company's products. This could result in a decline in demand
for the Company's  products,  which would have a material  adverse effect on the
Company's financial condition and results of operations.

Year 2000

         Although the Company believes it has identified all risks of Y2K Errors
in its  products,  and is taking  steps to repair,  replace or EOL all  products
which contain Y2K Errors,  there is a continuing  risk that some Y2K Errors will
go undetected  until after December 31, 1999. The Company  intends to attempt to
protect  itself from  liability  with  appropriate  disclaimers in its terms and
conditions of sale, by encouraging  customers to upgrade their products to those
which have proven to be Y2K  compliant,  and by  discouraging  continued  use of
those products known to have Y2K Errors. However, the Company may be met with an
unanticipated  liability for an undiscovered  Y2K Error which can not be limited
by any of the foregoing  preventive  actions,  and conceivably  could include an
allegation  of damages  which  exceeds the terms or the amount of the  Company's
policies of insurance covering product liability.

Management of Growth And Reduction In Employees

         The Company has recently  experienced  and may  continue to  experience
substantial  growth  in the  number  of  its  employees  and  the  scope  of its
operations,  resulting in increased  responsibilities for management.  To manage
growth   effectively,   the  Company  will  need  to  continue  to  improve  its
operational,  financial and management  information  systems and to hire, train,
motivate and manage a growing  number of employees.  Competition  is intense for
qualified  technical,  marketing and management  personnel,  particularly highly
skilled  engineers.  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. The Company has experienced
delays in filling positions for engineering personnel and the Company expects to
experience continued difficulty in filling its needs for qualified engineers and
other  personnel.  There can be no  assurance  that the Company  will be able to
effectively  achieve or manage any future growth, and its failure to do so could
delay product  development cycles or otherwise have a material adverse effect on
the Company's financial condition and results of operations.

         With the sale of its Wireless  Communications  Group,  the Company will
also  experience a significant  reduction in employees,  including the Company's
Chief  Technical  Officer,  Dr Jim  Omura.  The sale of the  Company's  Wireless
Communications  Group, along with occasional  reductions in specific engineering
programs  in the network  security  business,  may create a risk of  instability
within the existing employee population resulting in departures of key employees
critical  to  sustaining  growth in the  Company's  network  security  business.
Furthermore,  sudden reductions in the number of the Company's  employees places
greater  demands  on the  remaining  employees  which  may  distract  them  from
fulfilling  their  responsibilities  necessary to  accomplishing  the  Company's
financial goals.

         On   September   8,  1997,   the  Company   acquired  ARL  and  assumed
responsibility  for  management  of its  worldwide  operations  and  fifty-seven
employees.  The Company is heavily  dependent on ARL's  success in continuing to
develop  marketable  technology and products,  such as the  PrivateWire  family,
including  PrivateSafe  and  PrivateCard,  toolkits  and other  components.  Key
factors  which will  determine  ARL's  success  include  whether the Company can
integrate ARL's management,  employee culture and organizational  practices into
the Company,  whether the Company can provide ARL with  appropriate  guidance in
allocating its development  priorities,  whether the Company can adequately fund
ARL's  development   objectives,   whether  the  Company  can  provide  accurate
information for ARL to focus its technology on significant market opportunities,
and whether the Company can predict the most  attractive  features and functions
for ARL's finished products.  The Company's success in realizing the anticipated
return  from its  investment  in ARL also will 


                                       14
<PAGE>

be determined by the Company's  ability to position and introduce ARL's products
into the Company's  markets and channels,  and the Company's  ability to provide
adequate sales and customer support for ARL's products.  The Company's and ARL's
successful  working  relationship  may be hindered  significantly by differences
between the two organizations created by time, distance, language and culture.

         ARL operates from its principal  offices in Israel,  a country which is
vulnerable  to disruption  due to the sudden  outbreak of  hostilities  with its
neighbors  and  various  indigenous  factions.  Many  of  ARL's  employees  have
extensive commitments to the country's military  organizations which may require
a loss  of  their  services  on the  Company's  behalf  in  times  of  political
instability.

Intellectual Property and Other Proprietary Rights

         The Company  relies on patents,  trademarks,  copyrights,  licenses and
trade secret law to establish and preserve its intellectual property rights. The
Company owns six U.S.  patents  covering certain aspects of its network security
product designs, and has additional U.S. patent applications pending.  There can
be no assurance that any patent,  trademark,  copyright or license owned or held
by the Company will not be  invalidated,  circumvented  or challenged,  that the
rights granted thereunder will provide competitive  advantages to the Company or
that any of the Company's  pending or future patent  applications will be issued
with the scope of the claims sought by the Company,  if at all.  Further,  there
can be no assurance that others will not develop  technologies  that are similar
or superior to the Company's  technology,  duplicate the Company's technology or
design around the patents owned by the Company. The Company 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 the  Company's  products  are or may be  developed,
manufactured  or sold may not protect the  Company's  products and  intellectual
property  rights  to the same  extent  as the  laws of the  United  States.  The
inability of the Company to protect its intellectual  property  adequately could
have a  material  adverse  effect on its  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,  the  Company  has  received
communications from third parties asserting that the Company's patents, features
or content of certain of the Company's  products  infringe upon the intellectual
property  rights  held by  third  parties,  and the  Company  may  receive  such
communications in the future.  There can be no assurance that third parties will
not assert claims against the Company that result in litigation. Any litigation,
whether or not  determined in favor of the Company,  could result in significant
expense to the Company and could divert  management and other resources.  In the
event of an adverse ruling in any litigation  involving  intellectual  property,
the Company 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 the Company on  reasonable  terms or at all. In
the event of a successful claim against the Company and the Company's failure to
develop or license a substitute technology on commercially reasonable terms, the
Company's  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 the  Company's  financial  condition and
results of operations.

                                       15
<PAGE>

Evolving Network Security Market

         The  market  for the  Company's  network  security  products  is  still
emerging. This market is characterized by rapidly changing technology,  emerging
industry   standards,   new  product   introductions  and  changes  in  customer
requirements and  preferences.  The Company's future success will depend in part
upon end users' demand for network  security  products in general,  and upon the
Company's  ability to enhance its existing products and to develop and introduce
new products and technologies that meet customer  requirements.  Any significant
advance in technologies for attacking cryptographic systems could render some or
all of the Company's existing and new products obsolete or unmarketable.  To the
extent  that a  specific  method  other  than the  Company's  is  adopted as the
standard  for  implementing  network  security  in any  segment  of the  network
security  market,  sales of the Company's  existing and planned products in that
market segment may be adversely  impacted,  which could have a material  adverse
effect on the Company's financial condition and results of operations. There can
be no assurance that network security-related products or technologies developed
by others will not adversely affect the Company's competitive position or render
its products or technologies noncompetitive or obsolete.

         In addition,  a portion of the sales of the Company's  network security
products  will depend upon a robust  industry and  infrastructure  for providing
access  to  public  switched  networks,  such as the  Internet.  There can be no
assurance that the  infrastructure or complementary  products  necessary to make
these networks into viable  commercial  marketplaces  will be developed,  or, if
developed, that these networks will become viable commercial marketplaces.

Rapid Technological Change

         The markets for the  Company's  products are  characterized  by rapidly
changing  technologies,  extensive research and new product  introductions.  The
Company believes that its future success will depend in part upon its ability to
continue to enhance its existing products and to develop, manufacture and market
new products. As a result, the Company expects to continue to make a significant
investment in engineering,  research and development.  There can be no assurance
that  the  Company  will  be able to  develop  and  introduce  new  products  or
enhancements to its existing  products in a timely manner which satisfy customer
needs, achieve market acceptance or address  technological changes in its target
markets.  The  failure of the Company to develop  products  and  introduce  them
successfully  and in a  timely  manner  could  adversely  affect  the  Company's
competitive position, financial condition and results of operations.

Risks  Associated  with  International  Sales;  Reliance  Upon  Local  Partners;
Restrictions on Export

         The Company plans to continue to expand its 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,   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 the Company's foreign sales are denominated in
U.S. dollars,  the Company's 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.

         The Company's  ability to compete  successfully in foreign countries is
dependent  in part on the  Company's  ability to obtain and retain  reliable and
experienced  in-country  distributors and other strategic partners.  The Company
does  not  have  long-term  relationships  with  any  of its  distributors  and,
therefore, has no assurance of a continuing relationship within a given market.

         Due  to  U.  S.  government  regulations   restricting  the  export  of
cryptographic  devices,  including  certain of the  Company's  network  security
products,  the Company may be at a disadvantage  in competing for  international
sales  compared to  companies  located  outside  the United  States that are not
subject to such restrictions.

                                       16
<PAGE>

Dependence  on  Component  Availability,   Subcontractor   Performance  and  Key
Suppliers

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

ITEM 2.  PROPERTIES

         The Company's  headquarters  occupies  86,000 square feet in Sunnyvale,
California,  the lease for which expires in June 1999. During the second quarter
of 1996, the Company signed a five-year lease agreement for approximately 35,000
square feet of office and manufacturing space, also in Sunnyvale. As a result of
the  acquisition of ARL, the Company owns,  subject to outstanding  mortgage,  a
7,500  square  foot  office  building  in  Givat-Shmuel,  Israel  and  leases  a
production  facility of 2,000 square feet.  The Company  leases  facilities  for
sales  offices in New Jersey,  Virginia,  North  Carolina,  Belgium,  the United
Kingdom,   Singapore,  and  Germany.  The  Company  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  6, 1995,  the  Company  obtained  an  arbitration  award
dissolving a former partnership,  known as Public Key Partners ("PKP"),  between
the  Company's  wholly-owned  subsidiary,  Caro-Kann  Corporation,  and RSA DSI.
Although various claims between the Company and RSA DSI were settled on December
31, 1996, a third party  continues to pursue  various claims against PKP and RSA
DSI for wrongful  business  practices in action  C-94-20512 SW before the United
States  District  Court  for the  Northern  District  of  California.  A summary
judgement  favorable to PKP was entered on August 29,  1997,  and the matter has
been  appealed by the  plaintiff  to the United  States Court of Appeals for the
Federal  Circuit.  In the event the judgement of the district court is reversed,
an unfavorable outcome at trial might affect the residual value of the Company's
interest in PKP.

         On March 7, 1997,  ten former  employees  of the Company  filed suit in
action No. CV764647 in the Superior Court of California,  County of Santa Clara,
against the Company,  each of its Directors and its General  Counsel,  asserting
claims for wrongful  termination,  fraud,  libel,  slander,  age discrimination,
invasion of privacy,  and  violation  of the federal RICO  statute.  On July 11,
1997,  an eleventh  employee  filed suit in action No.  CV767448 in the Superior
Court of California,  County of Santa Clara, alleging similar claims against the
Company and its Chief Executive  Officer.  The Company  removed  CV764647 to the
Federal  District Court for the Northern  District of California  and, after the
Company  obtained  an  order  dismissing  certain  of  the  plaintiffs'  claims,
including the claims of libel and RICO violations, the Court remanded the action
back to Santa Clara  Superior  Court.  Following  the remand,  the Company  then
obtained an order consolidating CV764647 with CV767448 for purposes of discovery
and trial.  Both  matters  are  currently  in the  discovery  phase,  with trial
scheduled  for  December  1998.  Although the Company has placed its insurers on
notice of these  claims,  all of its  insurers  have  reserved  their rights and
defenses under their policies,  and the extent of the insurers'  liability under
their respective policies is undetermined. The Company believes the terminations
were  lawful,  in the best  interests  of the  Company and intends to defend the
matter  vigorously.  The defense of this matter may divert a material  amount of
management's attention and require the expenditure of significant legal fees and
costs. An unfavorable outcome which exceeds the Company's insurance coverage, if
any, may also result in a material  adverse  effect on the  Company's  financial
condition.

                                       17

<PAGE>


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.


EXECUTIVE OFFICERS OF THE REGISTRANT

The following  table sets forth  certain  information  concerning  the executive
officers of the Company as of December 31, 1997:

Name                        Age      Position
----                        ---      --------
Fernand Sarrat               46      Director, Chief Executive Officer and
                                     President
John H. Daws                 54      Vice President and Chief Financial Officer
Robert B. Fougner            45      Secretary and General Counsel
Thomas Butler                50      Senior Vice President Sales and Marketing
Sarah L. Engel               54      Vice President, Human Resources and
                                     Organizational Development
John Kalb                    50      Vice President, Business Development
Paul Massie                  43      Vice President, Information Systems
Peter J. Slocum              42      Vice President, Engineering
Reed B. Byrum                49      Vice President, Communications
William P. Crowell           57      Vice President, Product Development and
                                     Strategy

         Mr. Sarrat joined the Company as Chief Executive  Officer and President
in  November  1996.  Prior to  joining  the  Company,  Mr.  Sarrat  was with IBM
Corporation  for over 20 years,  most recently as General  Manager of Networking
Computing Marketing & Services, and held such other positions as General Manager
of the Networked Application Services Division, the Assistant General Manager of
Marketing and Business Development,  and General Manager of Marketing & Services
in the Midwest.

         Mr.  Daws  joined the  Company as Vice  President  and Chief  Financial
Officer in September 1995. From April 1992 to August 1995, he was Vice President
and Chief  Financial  Officer of  Crosspoint  Solutions,  Inc.,  a software  and
semiconductor  company,  and  from  June  1988  to  December  1991  he was  Vice
President, Finance of Rolm Computer Corporation, a software and computer company
and a subsidiary of Loral Corporation.

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

         Mr. Butler joined the Company in April 1997 as Senior Vice President of
Sales and  Marketing.  Prior to  joining  the  Company  he served as group  vice
president of sales and marketing for electronic  commerce for Sterling Software.
Prior to his work at  Sterling,  he was a senior  vice  president  of sales  and
marketing at Bank Automation Systems.

         Ms.  Engel  joined the Company in  February  1997.  Before  joining the
Company 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.  Kalb  joined the  Company in January  1997.  Prior to joining  the
Company,  he was with IBM Corporation  for over 25 years,  most recently as Vice
President of Electronic Commerce, Internet Division,  responsible for marketing,
software  development  and operations  relating to IBM's  offerings for enabling
commerce over the Internet.

         Mr. Massie joined Cylink in 1997. Prior to joining the Company in 1997,
he was the director of information  systems at Bay Networks.  He has also served
as director of computing for Sun Microsystems,  Inc. and as director of computer
systems and telecommunications for Sterling Software.

                                       18
<PAGE>

         Mr.  Slocum  joined the  Company 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  served as Director of  Engineering  for Silicon  Graphics,  Inc., a
computing  systems  company,  from  July  1992 to July  1993 and  MIPS  Computer
Systems, Inc. (merged with Silicon Graphics, Inc. in July 1992) from August 1990
to July 1992

         Mr.  Byrum  joined the  Company as Vice  President,  Communications  in
January 1998. Prior to joining the Company, Mr. Byrum held positions or provided
services to GE Capital, Measurex, Gannett, N.E.T., The Johns Hopkins University,
and Ruder Finn & Rotman..

         Mr. Crowell joined the company as Vice President,  Product  Development
and Strategy in January 1998. Prior to joining the Company, 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.


                                       19

<PAGE>

                                     PART II

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

         The  Company's  Common  Stock has been  traded in the  over-the-counter
market  under the symbol CYLK since the  Company's  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
                   -------         -------          -------           -------
Fiscal 1997
High               13 5/8          12 1/4           15 5/16           17 1/2
Low                 8 3/8           7 1/2            8 13/16           8 13/32

Fiscal 1996
High               26 1/4          23 1/2           17 1/2            15 1/16
Low                17              17                9 13/16          10 15/16

         As of March 13, 1998, the Company had approximately 136 shareholders of
record.  The Company has never  declared or paid dividends on its capital stock.
The Company currently intends to reinvest its earnings in the development of its
business and does not intend to pay dividends in the foreseeable future.

         The Company's Registration Statement 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 the Company  issued  5,750,000  shares of its common
stock  to the  public  at a  price  of  $15  per  share.  The  Company  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,  1997,  the net  proceeds  have  been used as  follows  (in
thousands):

      Purchase and installation of equipment            $ 6,601
      Acquisition of Algorithmic Research                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 of the Company.

                                       20
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
         The following selected financial  information has been derived from the
Company's 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,
                                                  --------------------------------------------------------
                                                  1997         1996         1995         1994         1993
                                                  ----         ----         ----         ----         ----
                                              (restated)
                                                          (in thousands, except per share amounts)
<S>                                          <C>          <C>          <C>          <C>          <C>      
Revenue                                      $  47,690    $  25,793    $  21,534    $  17,971    $  21,373
Research and development expense, net           12,488        8,198        8,142        7,275        4,611
Income (loss) from continuing operations       (64,955)      (5,522)      (4,260)      (4,143)       1,481
Income (loss) from continuing
   operations per share - basic                  (2.43)       (0.23)       (0.24)       (0.24)        0.08
Income (loss) from continuing
   operations per share - diluted            $   (2.43)   $   (0.23)   $   (0.24)   $   (0.24)   $    0.08

                                                                  Year ended December 31,
                                                  --------------------------------------------------------
                                                  1997         1996         1995         1994         1993
                                                  ----         ----         ----         ----         ----
                                              (restated)
                                                                       (in thousands)
Cash, cash equivalents and
  short-term investments                     $  22,977    $  78,849    $   6,098    $   6,626    $   7,193
Working capital                                 47,282       93,518       12,604       12,042       14,057
Total assets                                    79,031      107,088       22,725       20,663       19,777
Long-term obligations                              256          241          291         --           --  
Shareholders' equity                         $  66,134    $  97,211    $  14,605    $  14,149    $  15,481

</TABLE>

         On March 28, 1998, the Company sold its Wireless  Communications  Group
and,  therefore,  the above  consolidated  statements of operations  information
excludes this business for all periods.

         Net income 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. Net income for 1996 included a charge of approximately  $0.6
million ($0.02 per share) for employee severance costs.

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.

RESTATEMENT OF RESULTS FOR 1997

         On November 5, 1998,  the Company  publicly  announced  that it and its
independent  accountants had initiated a review of revenue recognition practices
which  would  result in a  restatement  of  previously  issued  first and second
quarter 1998 results and that all three  quarters of 1998 were  expected to show
substantial  operating  losses.  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.

                                       21
<PAGE>


BUSINESS ACQUISITION

         On September 8, 1997, the Company acquired ARL, an Israeli company. ARL
is an information  security  company  providing  remote access network  security
products and  smart-card  technology  focusing on the market for  Internet-based
(TCP/IP)  communications.  ARL also  provides  security  products  to  broadcast
networks.  See Note 3 of Notes to Consolidated  Financial Statements.  The total
acquisition  price of approximately  $76.3 million was funded from a combination
of the Company's existing working capital, newly issued common stock and options
to purchase  common stock.  Approximately  $63.9  million of the total  purchase
price  represented  the value of in-process  technology that had not yet reached
technological feasibility, had no alternative future uses and was charged to the
Company's  operations  in the  third  quarter  ended  September  26,  1997.  The
amortization  of capitalized  intangibles of $0.8 million in 1997 and the charge
resulting from in-process technology are not deductible for income tax purposes.
The acquisition  was accounted for 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.

DISCONTINUED OPERATION

         On March 28, 1998, the Company sold its Wireless  Communications  Group
("Wireless") for total consideration of $60.5 million,  subject to final closing
adjustments,  consisting of $46.0 million in cash and a $14.5 million  unsecured
note  receivable.  Pursuant to the  restatement  referred to in Note 2,  certain
revenues of Wireless previously recognized in the fourth quarter of 1997 and the
first quarter of 1998 were  adjusted.  Based on the net assets of Wireless as of
March  28,  1998,  after  restatement,   the  sales  proceeds  would  have  been
approximately  $58.4 million  resulting in a note  receivable  of  approximately
$12.4 million (a reduction of $2.1 million in the initial note receivable).  See
Note 13 of Notes to Consolidated  Financial Statements.  The sale resulted in an
after tax gain of approximately $22.8 million.

RESULTS OF CONTINUING OPERATIONS

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

                                               Year ended December 31,
                                           ---------------------------
                                             1997      1996       1995
                                             ----      ----       ----
                                          (restated)

Revenue                                     100.0%    100.0%     100.0%
Cost of revenue                              29.3      37.7       32.0
                                           ------     -----      -----  
Gross profit                                 70.7      62.3       68.0
                                                               
Operating expenses:                                            
  Research and development, net              26.2      31.8       37.8
  Selling and marketing                      33.6      36.7       26.5
  General and administrative                 17.7      23.1       22.9
  Amortization of purchased intangibles       1.7       --         --
  Purchased in-process technology           134.0       --         --
  Employee severance costs                    --        2.5        --
                                           ------     -----      -----  
     Total operating expenses               213.2      94.1       87.2
                                                               
Loss from operations                       (142.5)    (31.8)     (19.2)
                                                               
Other income, net                             6.3      10.4       (0.6)
                                           ------     -----      -----  
 Loss from continuing operations                               
     before income taxes                   (136.2)    (21.4)     (19.8)
Provision (benefit) for income taxes          --        --        --
                                           ------     -----      -----  
Loss from Continuing Operations            (136.2)%   (21.4)%    (19.8)%
                                           ======     =====      =====  


                                       22
<PAGE>

         Revenue. The Company's revenue increased 85% from $25.8 million in 1996
to $ 47.7 million in 1997. The increased  revenue was primarily due to increased
unit  sales of the  Company's  SecureWAN,  including  the  Company's  core  link
encryption  products,  and SecureLAN encryption product lines, which are used in
public and private linked  networks.  Overall average  selling prices  decreased
marginally.  Information security product revenue for 1997 includes $2.9 million
attributable to ARL.

         The Company's revenue increased 20% from $21.5 million in 1995 to $25.8
million in 1996. The increased revenue was primarily due to increased unit sales
of the Company's SecureWAN, SecureLAN and SecureAccess encryption product lines.
Unit sales of the Company's core link encryption  product line were  essentially
flat in comparison with 1995.

         International product revenue was 36%, 42% and 41% of revenue for 1995,
1996 and 1997, respectively.

         Gross Profit. Gross profit increased 109% from $16.1 million in 1996 to
$ 33.7million  in 1997,  and increased as a percentage of sales from 62% to 71%.
The increase in dollars was primarily the result of the significant  increase in
revenue. The increase in gross margin resulted from lower average unit costs and
a decrease in expenses for maintenance and support services.

         Gross profit  increased 10% from $14.6 million in 1995 to $16.1 million
in 1996,  but decreased as a percentage  of sales from 68% to 62%.  Gross margin
declined as some of the newly introduced  products have lower gross margins than
the Company's core link encryption  products and these new products  represented
an increased percentage of revenue.

         Research and  Development.  Research and development  expenses  consist
primarily  of salaries and other  personnel-related  expenses,  depreciation  of
development equipment,  facilities and supplies.  Gross research and development
expenses  increased  55% from $9.2 million in 1995 to $14.3  million in 1996 and
decreased 3% to $13.9 million in 1997.  The decrease in dollars and as a percent
of sales for 1997 as compared to 1996 resulted  from reduced  contract and other
variable expenses related to externally funded research and development and to a
substantially  increased  revenue base. From time to time, the Company  receives
engineering  funding for development  projects to apply or enhance the Company's
technology to a particular  customer's need. The amounts  recognized under these
research and development  contracts are offset against  research and development
expense.  Amounts recognized under non-recurring  engineering  contracts totaled
$1.1  million,   $6.1  million  and  $1.4  million  in  1995,   1996  and  1997,
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 66% from $5.7 million in 1995 to $9.5 million in 1996 and 69% to $16.0
million in 1997. The increases were  primarily due to expenses  associated  with
expansion  of the  Company's  direct  sales  force,  personnel  increases in the
marketing  group,  and  increased  costs  associated  with  advertising,  public
relations and trade shows.

         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 21% from $4.9 million in 1995 to $6.0 million
in 1996 and 41% to $8.4 million in 1997. The dollar  increases are primarily due
to increased  staffing and professional fees necessary to manage and support the
Company's  recent  growth.  The decrease as a percentage  of revenue in 1997 was
primarily due to general and  administrative  expenses  allocated  over a larger
revenue base.

         Employee  Severance  Costs.  During  the fourth  quarter  of 1996,  the
Company recorded a $634,000  one-time charge related to the  reorganization  and
replacement of several senior management positions.

         Other Income  (Expense),  Net. Other income (expense),  net,  primarily
consists of royalties,  interest  income,  interest expense and investment gains
and  losses.  The  increase  in other  income to $2.7  million  in 1996 from net
expense of $0.1 million in 1995 was  principally  due to an increase in interest
income  resulting from funds derived from the Company's  initial public offering
in February  and March  1996.  Other  expenses  increased  as the  Company  sold
marketable  securities  at a loss of $432,000  in 1996.  Interest  income,  net,
decreased  from $3.3  million in 1996 to $2.7  million in 1997 due  primarily to
cash used for the acquisition of ARL. Additionally, in 1997 the Company recorded
a benefit of $632,000 

                                       23
<PAGE>


primarily  related to the  reversal of an allowance  provided on the  receivable
related to the Company's  interest in a former partnership with RSA DSI known as
PKP. Management  considers the uncertainty  regarding ultimate collection of the
receivable to have been resolved as a result of the settlement agreement between
the  Company  and RSA DSI.  The  assets of the  former  partnership,  consisting
primarily of cash,  are being held in trust  pending the  resolution  of certain
litigation described in Part I, Item 3 "Legal Proceedings."  Management does not
believe the  ultimate  resolution  of this  matter will have a material  adverse
impact on the Company's financial position or results of operations.

         Provision  (Benefit)  for  Income  Taxes.  Excluding  the  charges  for
purchased in-process technology and amortization of capitalized intangibles, the
Company's  effective tax rate for 1997 was  approximately  27%. Net deferred tax
assets  of $1.5  million  at  December  31,  1997,  were  based on  management's
determination  that the Company  will more  likely than not realize  such assets
based on expected future income in the next twelve months. However, there can be
no assurance that the Company will be profitable in future  periods.  See Item I
"Business  - Risk  Factors  That May Affect  Future  Results  -- Recent  Losses;
Potential   Fluctuations  in  Operating   Results,   Future  Operating   Results
Uncertain."

         Net income (loss). The Company had losses from continuing operations of
$4.3 million in 1995,  $5.5 million in 1996 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.  While revenue  increased in
1995,  the Company  incurred a net loss due to continued high levels of research
and  development  expenses  related  to the  Company's  strategic  research  and
development  projects.  In 1996,  increased  gross profit  resulting  from newer
information  security  products  was more than  offset by  higher  spending  for
selling and marketing, resulting in a loss from operations. In 1997, the Company
incurred a loss from  continuing  operations  due primarily to the  nonrecurring
charge related to purchased in-process technology of $63.9 million.

LIQUIDITY AND CAPITAL RESOURCES

         At December  31,  1997,  the Company had cash and cash  equivalents  of
$23.0  million,  working  capital  of  $  47.3  million  and  minimal  long-term
obligations. For 1997 the Company reported a net loss from continuing operations
of $ 65.0  million  due to  the  aforementioned  nonrecurring  charge  from  the
acquisition of in-process technology.  Net cash used by operating activities for
the  years  ended  December  31,  1995,  1996 and 1997  consisted  primarily  of
significant  increases in accounts  receivable and inventory in order to support
increased revenue.

         Cash used in investing  activities in 1997 was $52.1 million,  of which
$44.9  million  was used for the  acquisition  of ARL.  The  Company  also  made
expenditures  for property and equipment of $3.8 million and provided  long-term
loans to employees of $3.5  million.  The Company made capital  expenditures  of
$614,000 and $2.8 million in 1995 and 1996, respectively.  Additionally, in 1995
and 1996 the Company  acquired  $493,000 and  $256,000 of equipment  financed by
capital leases. Expenditures for property and equipment have generally consisted
of computer workstations,  networking equipment, office furniture and equipment,
and leasehold  additions and  improvements.  In 1996, the Company  received $2.8
million from the sale of marketable securities acquired in 1994.

         Cash provided by financing  activities was $2.2 million,  $79.7 million
and $1.0  million for the years  ended  December  31,  1995,  1996 and 1997.  In
February and March 1996, the Company  completed its initial public  offering and
its Common Stock began  trading on the Nasdaq  National  Market under the symbol
CYLK. Through the offering the Company sold 5,750,000 shares of its Common Stock
which  generated  approximately  $79.3  million  in  cash,  net of  underwriting
discounts, commissions and other offering costs.

         The Company  believes 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 1998.  However,  the
Company may require additional funds to support its 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 the Company or its  shareholders.  See Item 3
"Legal  Proceedings"  and Item 1 "Business - Risk Factors That May Affect Future
Results."

         The company is in the process of evaluating and  implementing  changes,
as necessary, to its information systems and accordingly does not anticipate any
material  "year 2000  issues"  from its own  information  systems,  databases or
programs.  Management  also  believes  that it has  identified  all risks of Y2K
errors in the Company's  products.  See Item 1  "Business-Year  2000" and " Risk
Factors  that may affect  Future  Results."  However,  the  Company's  financial
position and

                                       24

<PAGE>

results of operations  could be adversely  impacted by year 2000 issues faced by
distributors, suppliers, customers, vendors, and financial service organizations
with which the company interacts.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable.


                                       25

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedules


                                                                            Page
                                                                            ----
Financial Statements:

   Report of PricewaterhouseCoopers, LLP, Independent Accountants            26
   Consolidated Balance Sheets at December 31, 1997 and 1996                 27
   Consolidated Statements of Operations for the years ended
      December 31, 1997, 1996 and 1995                                       28
   Consolidated Statements of Shareholders' Equity for the years ended
      December 31, 1997, 1996 and 1995                                       29
   Consolidated Statements of Cash Flows for the years ended
      December 31, 1997, 1996 and 1995                                       30
   Notes to Consolidated Financial Statements                                31

Financial Statement Schedule:

   Schedule II - Valuation and Qualifying Accounts                           48

   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.


                        Report of Independent Accountants

        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, 1997
        and 1996,  and the results of their  operations and their cash flows for
        each of the three  years in the  period  ended  December  31,  1997,  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.

        As  indicated  in  Note 2,  the  Company  restated  its  1997  financial
        statements with respect to revenue recognition.

        PricewaterhouseCoopers LLP
        San Jose, California
        
        February  12,  1998,  except  as  to  the  effect  of  the  discontinued
        operations  described in Note 13, which is as of March 28, 1998, and the
        effect of the  restatement  described in Note 2, which is as of December
        16, 1998

                                       26
<PAGE>

<TABLE>
                               Cylink Corporation
                           Consolidated Balance Sheets
             (dollars in thousands, except share and per share data)
<CAPTION>
                                                                                December 31,
                                                                 ----------------------------------------
                                                                          1997                    1996
                                                                 ---------------------          ---------
                           Assets                                (restated-See Note 2)
<S>                                                                    <C>                      <C>      
Current assets:
   Cash and cash equivalents                                           $  22,977                $  78,849
   Accounts receivable, net of allowances of $433 and $644                21,292                   12,682
   Inventories                                                            11,913                    8,828
   Deferred income taxes                                                   1,533                    1,432
   Other current assets                                                    2,195                    1,351
                                                                       ---------                ---------
            Total current assets                                          59,910                  103,142

Property and equipment, net                                                6,699                    3,760
Acquired technology, goodwill and other intangibles                        8,017                     --
Notes receivable from employees                                            3,473                     --
Other assets                                                                 932                      186
                                                                       ---------                ---------
                                                                       $  79,031                $ 107,088
                                                                       =========                =========
               Liabilities and Shareholders' Equity                                    
Current liabilities:                                                                        
   Current portion of lease obligations and long-term debt             $     210                $     167
   Accounts payable                                                        4,112                    3,954
   Accrued liabilities                                                     6,796                    5,090
   Income taxes payable                                                    1,304                       60
   Deferred revenue                                                          206                      353
                                                                       ---------                ---------
         Total current liabilities                                        12,628                    9,624
                                                                       ---------                ---------
Capital lease obligations and long-term debt                                 256                      241
                                                                       ---------                ---------
Deferred income taxes                                                         13                       12
                                                                       ---------                ---------
Commitments and contingencies (Notes 10, 12 and 13)                                         
                                                                                            
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;                             
      28,695,000 and 25,597,000 shares issued and outstanding                287                      257
   Additional paid-in capital                                            120,092                   89,772
   Notes receivable from shareholders                                       --                       (301)
   Deferred compensation related to stock options                           (250)                    (334)
   Cumulative translation adjustment                                         (63)                       4
   Retained earnings (accumulated deficit)                               (53,932)                   7,813
                                                                       ---------                ---------
            Total shareholders' equity                                    66,134                   97,211
                                                                       ---------                ---------
                                                                       $  79,031                $ 107,088
                                                                       =========                =========
<FN>
                The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       27

<PAGE>

<TABLE>
                               Cylink Corporation
                      Consolidated Statements of Operations
                  (dollars in thousands, except per share data)
<CAPTION>
                                                                  Year ended December 31,
                                                            -----------------------------------
                                                               1997         1996        1995
                                                            ---------    ---------    ---------
                                                            (restated-
                                                           See Note 2)
<S>                                                         <C>          <C>          <C>      
Revenue                                                     $  47,690    $  25,793    $  21,534
Cost of revenue                                                13,986        9,731        6,890
                                                            ---------    ---------    ---------
Gross profit                                                   33,704       16,062       14,644
                                                            ---------    ---------    ---------
Operating expenses:
   Research and development, net                               12,488        8,198        8,142
   Selling and marketing                                       16,036        9,475        5,698
   General and administrative                                   8,422        5,963        4,937
   Amortization of purchased intangibles                          807         --           --
   Purchased in-process technology                             63,920         --           --
   Employee severance costs                                      --            634         --
                                                            ---------    ---------    ---------
            Total operating expenses                          101,673       24,270       18,777
                                                            ---------    ---------    ---------
Loss from operations                                          (67,969)      (8,208)      (4,133)

Other income (expense):
   Interest income, net                                         2,697        3,303           50
   Royalty and other income (expense), net                        317         (617)        (177)
                                                            ---------    ---------    ---------
Loss from continuing operations before income taxes           (64,955)      (5,522)      (4,260)
Provision for income taxes                                       --           --           --
                                                            ---------    ---------    ---------
Loss from continuing operations                               (64,955)      (5,522)      (4,260)
Income from discontinued operations, net of income tax
   expense (benefit) of $1,439, $251 and $(755) (Note 13)       3,210        6,719        3,181
                                                            ---------    ---------    ---------
Net income (loss)                                           $ (61,745)   $   1,197    $  (1,079)
                                                            =========    =========    ========= 
Earnings (loss) per share - basic:
   Continuing operations                                    $   (2.43)   $   (0.23)   $   (0.24)
   Discontinued operations                                       0.12         0.28         0.18
                                                            ---------    ---------    ---------
   Net income (loss)                                        $   (2.31)   $    0.05    $   (0.06)
                                                            =========    =========    ========= 
Earnings (loss) per share - diluted:
   Continuing operations                                    $   (2.43)   $   (0.23)   $   (0.24)
   Discontinued operations                                       0.12         0.28         0.18
                                                            ---------    ---------    ---------
   Net income (loss)                                        $   (2.31)   $    0.05    $   (0.06)
                                                            =========    =========    ========= 
Shares used in per share calculation - basic                   26,703       24,412       17,862
                                                            =========    =========    ========= 
Shares used in per share calculation - diluted                 26,703       24,412       17,862
                                                            =========    =========    ========= 
<FN>

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

                                       28

<PAGE>

Cylink Corporation
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                                       Deferred                                 
                                                                            Notes     Compensation    Unrealized                
                                                             Additional   Receivable   Related to        Gain       Cumulative  
                                        Common Stock          Paid-in       from         Stock        (Loss) on    Translation  
                                    Shares       Amount       Capital   Shareholders    Options      Investments    Adjustment  
                                  ----------   ----------   ----------   ----------    ----------    ----------    ----------   
                                                                                                                                
                                                                                                                                
<S>                               <C>          <C>          <C>          <C>           <C>           <C>           <C>          
Balance at December 31, 1994      17,624,000   $      176   $    7,063   $     --      $     --      $     (679)   $     (106)  
Issuance of common stock
   under stock option plans        1,463,000           15        1,801         (515)         --            --            --     
Deferred compensation related
   to stock options                     --           --            417         --            (417)         --            --     
Unrealized gain on investments          --           --           --           --            --             263          --     
Translation adjustment                  --           --           --           --            --            --             (29)  
Net loss                                --           --           --           --            --            --            --     
                                  ----------   ----------   ----------   ----------    ----------    ----------    ----------   
Balance at December 31, 1995      19,087,000          191        9,281         (515)         (417)         (416)         (135)  
Issuance of common stock
   under stock option plans          760,000            8        1,088         --            --            --            --     
Issuance of common stock in
   initial public offering, net    5,750,000           58       78,806         --            --            --            --     
Tax benefit from exercise of
   nonqualified stock options           --           --            597         --            --            --            --     
Payment on notes receivable
   from shareholders                    --           --           --            214          --            --            --     
Amortization of deferred
   compensation                         --           --           --           --              83          --            --     
Reversal of unrealized loss on
   investments upon disposition         --           --           --           --            --             416          --     
Translation adjustment                  --           --           --           --            --            --             139   
Net income                              --           --           --           --            --            --            --     
                                  ----------   ----------   ----------   ----------    ----------    ----------    ----------   
Balance at December 31, 1996      25,597,000          257       89,772         (301)         (334)         --               4   
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 exercise of
   nonqualified stock options           --           --            296         --            --            --            --     
Payment on notes receivable
   from shareholders                    --           --           --            301          --            --            --     
Amortization of deferred
   compensation                         --           --           --           --              84          --            --     
Translation adjustment                  --           --           --           --            --            --             (67)  
Net loss                                --           --           --           --            --            --            --     
                                  ----------   ----------   ----------   ----------    ----------    ----------    ----------   
Balance at December 31, 1997      28,695,000   $      287   $  120,092   $     --      $     (250)   $     --      $      (63)  
                                  ==========   ==========   ==========   ==========    ==========    ==========    ==========   



                                  Retained                     
                                  Earnings                     
                               (Accumulated                   
                                  Deficit)       Total        
                                 ----------    ----------     
                                 (restated-                   
                                 See Note 2)                  
                                 <C>           <C>
Balance at December 31, 1994     $    7,695    $   14,149     
Issuance of common stock                                      
   under stock option plans            --           1,301     
Deferred compensation related                                 
   to stock options                    --            --       
Unrealized gain on investments         --             263     
Translation adjustment                 --             (29)    
Net loss                             (1,079)       (1,079)    
                                 ----------    ----------     
Balance at December 31, 1995          6,616        14,605     
Issuance of common stock                                      
   under stock option plans            --           1,096     
Issuance of common stock in                                   
   initial public offering, net        --          78,864     
Tax benefit from exercise of                                  
   nonqualified stock options          --             597     
Payment on notes receivable                                   
   from shareholders                   --             214     
Amortization of deferred                                      
   compensation                        --              83     
Reversal of unrealized loss on                                
   investments upon disposition        --             416     
Translation adjustment                 --             139     
Net income                            1,197         1,197     
                                 ----------    ----------     
Balance at December 31, 1996          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 exercise of                                  
   nonqualified stock options          --             296     
Payment on notes receivable                                   
   from shareholders                   --             301     
Amortization of deferred                                      
   compensation                        --              84     
Translation adjustment                 --             (67)    
Net loss                            (61,745)      (61,745)    
                                 ----------    ----------     
Balance at December 31, 1997     $  (53,932)   $   66,134     
                                 ==========    ==========     
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                       29
<PAGE>

<TABLE>
                                                  Cylink Corporation
                                        Consolidated Statements of Cash Flows
                                                (dollars in thousands)
<CAPTION>
                                                                                       Year ended December 31,
                                                                              --------------------------------------
                                                                                1997           1996           1995
                                                                              --------       --------       --------
                                                                            (restated-
                                                                            See Note 2)
<S>                                                                           <C>            <C>             <C>      
Cash flows from operating activities:
   Net income (loss)                                                          $(61,745)      $  1,197       $ (1,079)
   Adjustments to reconcile net income (loss) to net
      cash used in operating activities:
         Purchased in-process technology                                        63,920           --             --
         Depreciation and amortization                                           2,914          1,350            919
         Deferred compensation related to stock options                             84             83           --
         Deferred income taxes                                                    (100)          (516)          (383)
         Realized loss on sale of investments                                     --              432           --
         Changes in assets and liabilities (net of effects of
          ARL acquisition):
            Accounts receivable                                                 (7,627)        (6,669)        (1,269)
            Inventories                                                         (2,662)        (2,732)        (1,451)
            Other assets                                                          (376)          (405)           573
            Accounts payable                                                       (22)         2,576            252
            Accrued liabilities                                                     90          1,349            414
            Income taxes payable                                                 1,244            (30)          (314)
            Deferred revenue                                                      (332)          (936)           (77)
                                                                              --------       --------       --------
               Net cash used in operating activities                            (4,612)        (4,301)        (2,415)
                                                                              --------       --------       --------
Cash flows from investing activities:
   Acquisition of property and equipment                                        (3,786)        (2,815)          (614)
   Purchase of Algorithmic Research, net of cash acquired                      (44,890)          --              --
   Loans to employees in exchange for notes receivable                          (3,473)          --              --
   Proceeds from sale of short-term investments                                   --            2,842            --
                                                                              --------       --------       --------
               Net cash provided by (used in)
                   investing activities                                        (52,149)            27           (614)
                                                                              --------       --------       --------
Cash flows from financing activities:
   (Repayment) borrowings under bank line of credit                               --           (1,000)         1,000
   Proceeds from issuance of common stock, net                                     529         79,960          1,301
   Payment on notes receivable from shareholders                                   301            214            --
   Repayment of capital lease obligations and long-term debt                      (170)           (27)           (58)
   Tax benefit from exercise of stock options                                      296            597            --
                                                                              --------       --------       --------
               Net cash provided by financing activities                           956         79,744          2,243
                                                                              --------       --------       --------
Effect of exchange rate changes on
   cash and cash equivalents                                                       (67)           139             (5)
                                                                              --------       --------       --------
Net increase (decrease) in cash and cash equivalents                           (55,872)        75,609           (791)
Cash and cash equivalents at beginning of year                                  78,849          3,240          4,031
                                                                              --------       --------       --------
Cash and cash equivalents at end of year                                      $ 22,977       $ 78,849       $  3,240
                                                                              ========       ========       ========
Supplemental disclosures:
   Cash paid for income taxes                                                 $     31       $    184       $     58
   Cash paid for interest                                                          159            110             32
   Equipment acquired under capital lease obligations                             --              256            493
   Common stock issued for notes receivable                                       --             --              515
   Equity issued for purchase of ARL                                            29,525           --             --
<FN>
                      The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                          30
<PAGE>

                               Cylink Corporation
                   Notes to Consolidated Financial Statements


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

The Company

     Cylink  Corporation  (the  "Company")  was  incorporated  in  California in
October 1989 to engage in the development, manufacture, license and marketing of
electronic   encryption   devices   and  in  1990  began   developing   wireless
communication  products (see Note 13 for discontinued  operations  subsequent to
year end).

Basis of presentation

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

     Through  1997 the  Company's  interim  quarters  ended  on the last  Friday
preceding the calendar quarter end. The Company's year end is December 31.

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 shareholders'  equity. 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 statement of operations.  Net gains
and losses from foreign currency transactions were not significant during any of
the periods presented.

Cash equivalents and short-term investments

     Cash equivalents  consist of highly liquid  investment  instruments with an
original maturity at the time of purchase of three months or less.

     The Company's short-term  investments are classified as  available-for-sale
and therefore are reported at fair value with  unrealized  gains and losses as a
separate component of shareholders' equity.

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 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.

Amortization of Goodwill and other Intangibles

     Goodwill  related  to  the  acquisition  of  ARL is  being  amortized  on a
straight-line   basis  over  seven  years.   Amounts  allocated  to  capitalized
intangibles other than goodwill are being amortized over three years.

Revenue recognition

     Revenue is recognized upon shipment to customers. Concurrently, a provision
is made  for  estimated  cost to  repair  or  replace  products  under  warranty
arrangements. Revenue from sales to distributors is recognized upon shipment; no
right of return, stock rotation or price protection is given. Revenue from sales
to value  added  resellers  is  recognized  upon  shipment  and  concurrently  a
provision for estimated returns is recorded.

                                       31
<PAGE>

Research and development

     Research and development  costs are charged to operations as incurred.  The
Company on occasion receives  nonrecurring  engineering  funding for development
projects to apply or enhance the Company's technology to a particular customer's
needs.  Non-refundable  receipts are recognized  over the term of the respective
contract  using  the  percentage  of  completion  method.  Receipts,  which  are
refundable  pending  the  achievement  of  certain  results,  are  deferred  and
recognized  upon  acceptance  by the customer.  Amounts  billed on contracts and
collected prior to being earned are recorded as deferred revenue. At the time of
recognition,  amounts  received  under  research and  development  contracts are
offset against research and development expenses.

     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  software  development  costs once
technological   feasibility  is  established,   which  the  Company  defines  as
completion  of a working  model.  The  capitalized  cost is then  amortized on a
straight-line  basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To date, the
period between achieving technological  feasibility and the general availability
of such software has been short and software  development  costs  qualifying for
capitalization  have  been  insignificant.  Accordingly,  the  Company  has  not
capitalized any software development costs.

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   Standard   No.  123  (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.

Net income (loss) per share

     Effective  December  31,  1997,  the  Company  adopted  the  provisions  of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128").  SFAS 128 requires  the Company to report both basic  earnings per share,
which is based on the weighted-average number of common shares outstanding,  and
diluted  earnings per share,  which is based on the  weighted-average  number of
common shares outstanding and dilutive potential common shares outstanding.  All
prior  years'  earnings  per share  data  have  been  restated  to  reflect  the
provisions of SFAS 128. The Company's only potentially  dilutive  securities are
stock options (See Note 7). All common stock equivalents have been excluded from
the computation of diluted  earnings per share as their effect is  anti-dilutive
on the loss from continuing operations.

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 potential credit losses;  historically  such losses have
been immaterial.  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, 1997 and  December 31, 1996 and no customer  accounted  for more than 10% of
revenue for any of the periods presented.

                                       32

<PAGE>


Use of estimates

     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.

Dependence on suppliers

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

Recent accounting pronouncements

     In June 1997, the FASB issued Statement of Financial  Accounting  Standards
No.130,  "Reporting  Comprehensive  Income"("SFAS  130").  SFAS 130  establishes
standards for reporting  comprehensive  income and its components in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  Comprehensive income as defined 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,  include foreign
currency translation  adjustments and unrealized gain/loss on available for sale
securities.  The  disclosure  prescribes by SFAS 130 must be made beginning with
the first quarter of 1998.

     In June 1997, the FASB issued Statement of Financial  Accounting  Standards
No. 131,  "Disclosures about Segments of an Enterprise and Related  Information"
(SFAS 131"). This statement  establishes  standards for the way companies report
information  about operating  segments in annual financial  statements.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas, and major  customers.  The Company has not yet determined the
impact of adopting this new standard. The disclosures prescribes by SFAS 131 are
effective for 1998.

2.       Restatement of Financial Results

     On  November  5,  1998,  the  Company  publicly  announced  that it and its
independent  accountants had initiated a review of revenue recognition practices
which  would  result in a  restatement  of  previously  issued  first and second
quarter 1998 results and that the first three quarters of 1998 were all expected
to show substantial  operating losses.  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. These restated results were announced in a press release dated December
16, 1998.

     This Annual  Report on Form 10-K/A  amends the  Company's  Annual Report on
Form 10-K  previously  filed for the year ended  December 31, 1997.  This Annual
Report on Form 10-K/A is filed in connection  with the Company's  restatement of
its  financial  statements  for the year  ended  December  31,  1997.  Financial
statement  information and related  disclosures  included in this amended filing
reflect,  where appropriate,  changes as a result of the restatement.  Except as
otherwise noted,  information  contained in this Annual Report on Form 10-K/A is
stated as of December 31, 1997.

     As a result, the statement of operations has been restated as follows:

                                       33
<PAGE>

                                               For the year ended
                                                December 31, 1997
                                         ------------------------------
                                         As Originally
                                            Reported        As Restated
                                         -------------      -----------
                                                 (in thousands)
Sales                                      $  49,333          $  47,690
                                                           
Operating expenses                           101,673            101,673
                                                           
Income (loss) from                                         
    continuing operations                    (63,312)           (64,955)
                                                           
Net income (loss)                          $ (58,777)         $ (61,745)
                                           =========          ========= 
Earnings (loss) per share-diluted                          
   Continuing Operations                   $   (2.37)         $   (2.43)
   Discontinued Operations                      0.17               0.12
                                           ---------          --------- 
   Net income (loss)                       $   (2.20)         $   (2.31)
                                           =========          ========= 

         The  restatement  of  results  for  1997  resulted  in a  reduction  of
previously reported amounts at December 31, 1997 for accounts receivable of $5.0
million, and income taxes payable of $0.6 million, and a corresponding  increase
in the previously reported amounts for inventory of $1.4 million and accumulated
deficit of $3.0 million,  resulting in a restated  accumulated  deficit of $53.9
million.

3. Acquisition of 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 $44,890,000 in cash,
net  of  cash  acquired,  including  transaction  expenses  of  $3,536,000;  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 the common  stock and options  issued by the Company was  $29,525,000.
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 has been
allocated to the assets  acquired and  liabilities  assumed  based upon the 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
                                                                      ========

                                       34
<PAGE>

     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.

     In connection  with the  acquisition of ARL in September  1997, the Company
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  and  reviewed by our  independent
accountants  in the context of their  examination  of the  financial  statements
taken as a whole.

     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 the Company is required by the SEC Staff to  retroactively
revise its  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.


         The following unaudited pro forma financial information relating to the
Company's  continuing  operations  gives effect to the  acquisition as if it had
occurred  on  January  1,  1996,  excluding  the  charge  related  to  purchased
in-process   technology.   These  pro  forma  results  have  been  prepared  for
comparative  purposes only and do not purport to be indicative of the results of
continuing  operations  which actually  would have resulted had the  acquisition
occurred on the date indicated, or which may result in the future.

                                                       Year ended December 31,
                                                   ---------------------------
                                                       1997             1996
                                                   ----------        ---------
                                                   (restated-
                                                   See Note 2)
                                                       (in thousands, except
                                                     per share data, unaudited)
Revenue                                             $ 51,900           $ 32,999
Net loss on continuing operations                     (4,010)            (9,552)
Net loss per share                                     (0.14)             (0.35)
Shares used to compute net loss per share
   (basic and diluted)                                28,522             27,005

                                       35

<PAGE>

4. Initial Public Offering

     In February  1996, the Company  completed its initial  public  offering and
issued  5,000,000  shares of its common stock to the public at a price of $15.00
per share.  In March 1996,  the  underwriters  exercised  their  option to cover
over-allotments  and an additional 750,000 shares of common stock were issued at
$15.00 per share. The Company received approximately $79 million of cash, net of
underwriting discounts, commissions and other offering costs.

     In connection  with the Company's  initial  public  offering,  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, 1997.

5.   Details of Balance Sheet Components

                                                          December 31,
                                            -----------------------------------
                                                    1997               1996
                                                 --------            ----------
                                          (restated-See Note 2)
                                                         (in thousands)
Inventories:
   Raw materials                                 $  4,781             $  4,126
   Work in process and subassemblies                3,332                3,196
   Finished goods                                   3,800                1,506
                                                 --------             --------
                                                 $ 11,913             $  8,828
                                                 ========             ========
Property and equipment:                                        
   Machinery and equipment                       $ 11,151             $  7,068
   Furniture and fixtures                           1,246                  624
   Land and building                                  814                  --
   Leasehold improvements                             680                  564
                                                 --------             --------
                                                   13,891                8,256
   Less:  accumulated depreciation and                         
          amortization                             (7,192)              (4,496)
                                                 --------             --------
                                                 $  6,699             $  3,760
                                                 ========             ========
Accrued liabilities:                                           
   Compensation and benefits                     $  3,035             $  2,116
   Royalties                                          982                  665
   Employee severance costs                         1,313                  634
   Distributor commissions                            380                  543
   Other                                            1,086                1,132
                                                 --------             --------
                                                 $  6,796             $  5,090
                                                 ========             ========

                                       36
<PAGE>

6.   Income Taxes

     In computing  the  separate  provision  for (benefit  from) income taxes on
continuing and discontinued  operations,  no benefit was allocated to the losses
from the  continuing  operations  since on a stand alone basis the Company would
not have  recognized  the tax  benefit  of such  losses  due to  uncertainty  of
realization.  Any  benefits  realized  from these  losses as a result of taxable
income  generated by the  discontinued  operations  have been netted against the
provisions  associated with discontinued  operations.  There is no obligation on
the part of the discontinued operations to refund such benefits to the continued
operations.  The provision (benefit) for income taxes on discontinued operations
consists of the following:

                                               Year ended December 31,
                                         --------------------------------
                                             1997       1996       1995
                                          -------    -------    ------- 
                                         (restated-
                                         See Note 2)
                                                  (in thousands)
Current:                                                                
   Federal                                $ 1,457    $   709    $  (403)
   State                                        6         58        (92)
   Foreign                                     76       --          123
                                          -------    -------    ------- 
                                            1,539        767       (372)
                                          -------    -------    ------- 
Deferred:                 
   Federal                                    (24)      (478)      (348)
   State                                      (76)       (38)       (35)
                                          -------    -------    ------- 
                                             (100)      (516)      (383)
                                          -------    -------    ------- 
                                          $ 1,439    $   251    $  (755)
                                          =======    =======    ======= 
                  



     Deferred tax assets (liabilities) comprise the following:


                                                                 December 31,
                                                          ---------------------
                                                            1997           1996
                                                          -------       -------
                                                              (in thousands)
Assets:
Net operating loss and credit carryforwards               $ 1,109       $   984
Unrealized capital loss                                       270           166
Bad debt reserve                                              151           230
Inventory reserves and basis differences                    1,492         1,382
Accrued expenses                                              368           448
Deferred rent                                                --              30
Warranty reserve                                               71            60
Other                                                          41           102
                                                          -------       -------
         Total deferred tax assets                          3,502         3,402
                                                          -------       -------
Liabilities:
Depreciation                                                  (13)           (5)
Other liabilities                                            --              (7)
                                                          -------       -------
         Total deferred tax liabilities                       (13)          (12)
                                                          -------       -------
Valuation allowance                                        (1,969)       (1,970)
                                                          -------       -------
Net deferred tax assets                                   $ 1,520       $ 1,420
                                                          =======       =======

                                       37


<PAGE>

    Net  deferred tax assets of  $1,520,000  at December 31, 1997 were based on
the  Company's  expected  future income in the next twelve  months.  The Company
recorded a partial valuation allowance against the remainder of its deferred tax
assets.

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


                                                    Year ended December 31,
                                             ----------------------------------
                                                 1997         1996        1995
                                                 ----         ----        ----
                                              (restated-
                                             See Note 2)
U.S. federal statutory income tax rate          (34.0)%       34.0%      (34.0)%
State taxes, net of federal tax benefit           --           0.9        (4.6)
Research and development tax credits             (0.2)       (24.2)        --
Change in valuation allowance                     --           7.4         --
Purchased in-process technology                  36.0           --         --
Foreign losses not benefitted                    (0.1)         5.2         --
Other                                             0.6         (6.0)       (2.6)
                                                 ----         ----        ---- 
Effective Tax Rate                                2.3%        17.3%      (41.2)%
                                                 ====         ====        ==== 

     The Company has not  provided  United  States  federal  income taxes on the
undistributed  earnings  of foreign  subsidiaries  because  it is the  Company's
intention to permanently reinvest such earnings.  At December 31, 1997, 1996 and
1995, total  undistributed  earnings of these  subsidiaries  were  approximately
$1,916,000, $1,846,000 and $1,579,000, respectively.

     The  Company  had  research  and  development   credit  carry  forwards  of
approximately $938,000 and $980,000 at December 31, 1997 and 1996, respectively,
which expire from 2009 to 2012.


7.   Stock Option Plans

     The Company has two stock option plans:  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 5,950,000 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, 1997, 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 five
years.  Options  expire ten years  from the date of grant.  Shares  issued  upon
exercise   of   options   are   subject  to   certain   restrictions   on  their
transferability. The Company has the right to repurchase such shares, at a price
equal to the fair market value, when the option is no longer associated with the
Company.  As of  December  31,  1997 there were no shares  subject to  purchase.
Shares  repurchased  increase the number of shares available for grant under the
Plans.

     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  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.

                                       38
<PAGE>


     The following  table  summarizes  the Company's  stock option  activity and
related  weighted  average  exercise  price within each category for each of the
three years in the period ended December 31, 1997:

                                                             Weighted
                                    Shares                    Average
                                  Available     Options      Exercise
                                  for grant   Outstanding     Price
                                ----------     ---------    ---------
Balance at December 31, 1994       983,055     3,399,945    $    1.44
   Approved                      1,200,000          --
   Granted at market price        (779,450)      779,450         2.60
   Granted below market price     (436,000)      436,000         2.02
   Exercised                          --      (1,462,785)        1.25
   Canceled                        315,452      (315,452)        1.91
                                ----------     ---------
Balance at December 31, 1995     1,283,057     2,837,158         1.89
   Approved                      2,000,000          --
   Granted at market price      (2,042,810)    2,042,810        12.53
   Exercised                          --        (760,492)        1.44
   Canceled                        741,723      (741,723)        4.89
                                ----------     ---------
Balance at December 31, 1996     1,981,970     3,377,753         7.72
   Approved                        410,000          --   
   Granted at market price      (2,519,157)    2,519,157        10.38
   Granted below market price     (409,641)      409,641          .01
   Exercised                          --        (504,144)        1.64
   Canceled                        537,187      (537,187)       12.17
                                ----------     ---------
Balance at December 31, 1997           359     5,265,220    $    8.52
                                ==========     =========

     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  previously
granted to  employees,  and reissued  all such options at $11.00 to $11.63,  the
fair market value of the stock on the date of cancellation. The reissued options
have a ten-year term and vest over five years from the date of reissuance.

<TABLE>
     Significant  option groups  outstanding  at December 31, 1997,  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>                <C>   
  $ 0.01 to $ 2.00      1,206,408             7.5             $ 1.27              933,085            $ 1.07
  $ 4.80 to $8.88       1,060,983             9.5               8.30               90,009              7.05
  $9.00 to $11.00       1,450,834             9.0              10.75              259,827             10.71
 $ 11.06 to $23.50      1,546,995             8.9              12.23              159,647             12.98
                        ---------                                               ---------                      
                        5,265,220             8.7             $ 8.52            1,442,568            $ 4.50
                        =========                                               =========
</TABLE>

                                       39
<PAGE>

     The weighted  average  estimated  grant date fair value, as defined by SFAS
123, for options  granted  during 1995 at market price and below market price on
the dates of grant were  $1.04 and $1.47,  respectively.  The  weighted  average
estimated  grant date fair value for options granted at market price during 1997
and 1996 was $4.70 and $6.03, 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  tradeable,  fully
transferable  options without vesting  restrictions,  which significantly differ
from the  Company's  stock  option  awards.  These  models also  require  highly
subjective  assumptions,  including  future stock price  volatility and expected
time until exercise, which greatly affect the calculated grant date fair value.

     The estimated grant date fair value for options granted 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.

     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:


                                              1997         1996         1995
                                              ----         ----         ----
Expected life (years)                         3.10         3.04         3.04
Risk-free interest rate                       5.98%        5.93%        6.22%
Volatility                                   64.16%       69.46%       54.89%
Dividend yield                                0.00%        0.00%        0.00%


<TABLE>
     Had the Company  recorded  compensation  costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its 1994 Plan,
the  Company's net income (loss) and net income (loss) per share would have been
reduced to the pro forma  amounts  below for the years ended  December 31, 1997,
1996 and 1995 (in thousands, except for per share amounts):

<CAPTION>
                                                                   1997          1996            1995
                                                                   ----          ----            ----
                                                               (restated-
                                                              See Note 2)
<S>                                       <C>                   <C>              <C>           <C>     
Net income (loss)                         As reported           $(61,745)        $1,197        $(1,079)
                                          Pro forma              (65,243)          (325)        (1,354)

Net income (loss) per share               As reported           $  (2.31)        $ 0.05        $ (0.06)
                                          Pro forma                (2.44)         (0.01)         (0.08)
</TABLE>

     The pro forma effect on net income  (loss) and net income  (loss) per share
for 1997,  1996 and 1995 is not  representative  of the pro forma  effect on net
income in future  years  because it does not take into  consideration  pro forma
compensation expense related to grants made prior to 1995.

     As of December 31, 1995,  the Company had granted  certain  options for the
purchase  of  common  stock at less  than  the  deemed  fair  market  value  and
approximately  $417,000  of  compensation  expense is being  amortized  over the
five-year vesting period of the options.

8.   Notes Receivable From Employees

     Pursuant  to their  employment  agreements  and related  promissory  notes,
during the first quarter of 1997 the Company loaned certain employees $3,473,000
towards the purchase of their principal residences.  Of this amount,  $2,843,000
is receivable from officers of the Company.  The notes are interest free and are
due five years from the dates of the related notes, at which time the notes must
be repaid or convert  into,  and  become  subject  to, the terms of a  standard,
interest-bearing commercial loan. The notes are secured by deeds of trust on the
residences.  The loan agreements provide for 

                                       40
<PAGE>

accelerated  payment in the event of  termination  of  employment  under certain
conditions and, in one instance, under certain circumstances will be forgiven to
the extent of any decrease in the value of the related residence.

9.   Research and Development Contracts

     During the years  ended  December  31,  1997,  1996 and 1995,  the  Company
performed research and development under several government funded  arrangements
aggregating $1,201,000,  $3,777,000, and $526,000, respectively. These contracts
provide  funding  (irrespective  of the results) for research and development of
certain  cryptographic  technologies  which will be jointly owned by the Company
and these government agencies. 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  which provide for the  development  and transfer of
technology  in exchange  for  development  funding.  The  Company  recorded as a
reduction of research and development expenses $225,000, $2,363,000 and $604,000
under such  arrangements  in the years ended  December 31, 1997,  1996 and 1995,
respectively.

10.  Joint Venture and Contingencies

     On September 6, 1995, the Company obtained an arbitration  award dissolving
a  former  partnership,   known  as  PKP,  between  the  Company's  wholly-owned
subsidiary,  Caro-Kann Corporation, and RSA DSI. Although various claims between
the  Company  and RSA DSI were  settled on  December  31,  1996,  a third  party
continues to pursue various claims against PKP and RSA DSI for wrongful business
practices in action  C-94-20512 SW before the United States  District  Court for
the Northern District of California.  A summary  judgement  favorable to PKP was
entered on August 29, 1997, and the matter has been appealed by the plaintiff to
the United  States  Court of Appeals for the Federal  Circuit.  In the event the
judgement of the district  court is reversed,  an  unfavorable  outcome at trial
might affect the residual  value of the  Company's  interest in PKP.  Management
believes  that the ultimate  resolution  of this matter will not have a material
adverse effect on the Company's  financial position,  results of operations,  or
cash flows.

     On March 7, 1997, ten former  employees of the Company filed suit in action
No. CV764647 in the Superior Court of California, County of Santa Clara, against
the Company, each of its Directors and its General Counsel, asserting claims for
wrongful  termination,  fraud, libel,  slander, age discrimination,  invasion of
privacy,  and  violation  of the federal  RICO  statute.  On July 11,  1997,  an
eleventh  employee  filed suit in action No.  CV767448 in the Superior  Court of
California,  County of Santa Clara,  alleging similar claims against the Company
and its Chief Executive  Officer.  The Company  removed  CV764647 to the Federal
District  Court for the Northern  District of California  and, after the Company
obtained an order dismissing  certain of the plaintiffs'  claims,  including the
claims of libel and RICO violations, the Court remanded the action back to Santa
Clara Superior Court.  Following the remand,  the Company then obtained an order
consolidating  CV764647 with CV767448 for purposes of discovery and trial.  Both
matters are currently in the discovery phase,  with trial scheduled for December
1998.  Although the Company has placed its  insurers on notice of these  claims,
all of its  insurers  have  reserved  their  rights  and  defenses  under  their
policies,  and the extent of the  insurers'  liability  under  their  respective
policies is undetermined.  The Company believes the terminations were lawful, in
the best  interests of the Company and intends to defend the matter  vigorously.
The  defense  of this  matter  may  divert a  material  amount  of  management's
attention and require the  expenditure of significant  legal fees and costs.  An
unfavorable outcome, which exceeds the Company's insurance coverage, if any, may
also result in a material adverse effect on the Company's  financial  condition.
However,  management  believes that the ultimate  resolution of this matter will
not have a material adverse effect on the Company's financial position,  results
of operations or cash flows.

                                       41
<PAGE>

11.  Geographic Information

<TABLE>
     The  Company  operates  in one  industry  segment.  Revenue  and loss  from
operations and identifiable assets,  classified by the major geographic areas in
which the Company operates, were as follows:

<CAPTION>
                                                                       Year ended December 31,
                                                                    -----------------------------
                                                                    1997        1996         1995
                                                                    ----        ----         ----
                                                                 (restated-
                                                                See Note 2)
                                                                           (in thousands)
<S>                                                              <C>          <C>          <C>      
Revenue:
   Sales to unaffiliated customers:
      United States:
         Customers in United States and Canada                   $  26,970    $  13,744    $  13,096
         Customers in Central and
            South America                                            2,340          911        1,044
         Customers in Europe                                         7,996        5,694        2,072
         Customers in Asia                                           2,326        1,592        1,852
      Europe                                                         5,113        3,852        3,470
      Israel:
         Customers in Europe                                           530         --           --
         Customers in Asia                                           2,332         --           --
         Other                                                          83         --           --
                                                                 ---------    ---------    --------- 
                                                                 $  47,690    $  25,793    $  21,534
                                                                 ---------    ---------    --------- 
Intercompany sales among geographic
   entities eliminated in consolidation                          $   2,266    $   2,223    $   1,782
                                                                 ---------    ---------    --------- 
Income (loss) from operations:
   United States                                                 $  (3,723)   $  (8,127)   $  (4,490)
   Europe                                                               76          (81)         357
   Israel                                                          (64,322)        --           --
                                                                 ---------    ---------    --------- 
                                                                 $ (67,969)   $  (8,208)   $  (4,133)
                                                                 =========    =========    ========= 
</TABLE>


<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                              ----------------------
                                                                                  1997        1996
                                                                              -----------   --------
                                                                              (restated-
                                                                              See Note 2)
                                                                                   (in thousands)
<S>                                                                            <C>          <C>      
Identifiable assets:
   United States                                                               $  40,959    $  26,026
   Europe                                                                          2,124        2,213
   Israel                                                                         12,971          --
                                                                                 -------     --------
                                                                                  56,054       28,239
General corporate assets consisting of cash,
   cash equivalents and short-term investments                                    22,977       78,849
                                                                                 -------     --------
                                                                                 $79,031     $107,088
                                                                                 =======     ========
</TABLE>

     Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.

     At  December  31,  1997 and  1996,  total  foreign  liabilities  (excluding
intercompany balances) were $2,747,000 and $660,000, respectively.

                                       42

<PAGE>

12.  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 June 2001 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.  The Company also leases certain  equipment under long-term
lease  agreements that are classified as capital  leases.  These capital leases,
which  consist  primarily  of computer  equipment,  terminate  at various  dates
through 2000. Total equipment  acquired under these  capitalized  leases,  which
secure such  borrowings,  was $621,000 at cost and $294,000 at net book value as
of December 31, 1997.

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

                                            Operating              Capital
Year ending December 31,                     Leases                Leases
                                            -------                -------
1998                                        $ 1,175                $   191
1999                                            721                     86
2000                                            393                      8
2001                                            197                    --
                                            -------                -------
Total minimum payments                      $ 2,486                    285
                                            =======
Less:  amount representing interest                                    (40)
                                                                   -------
Present value of capital lease obligations                             245
Less:  current portion                                                (165)
                                                                   -------
Lease obligations, long-term                                       $    80
                                                                   =======


     Rent expense under  operating  leases  totaled  $1,720,000,  $1,207,000 and
$909,000 during the years ended December 31, 1997, 1996 and 1995, respectively.

13.  Subsequent Event

     On March 28,  1998,  the Company  sold its  Wireless  Communications  Group
("Wireless") to P-Com, Inc. for approximately  $46.0 million in cash and a $14.5
million  unsecured note receivable due 100 days after closing,  subject to final
closing adjustments.  Pursuant to the restatement referred to in Note 2, certain
revenues of Wireless previously recognized in the fourth quarter of 1997 and the
first quarter of 1998 were  adjusted.  Based on the net assets of Wireless as of
March  28,  1998,  after  restatement,   the  sales  proceeds  would  have  been
approximately  $58.4 million  resulting in a note  receivable  of  approximately
$12.4  million.  The results of operations  of Wireless have been  classified as
discontinued   operations  in  the  accompanying   consolidated   statements  of
operations.  Wireless revenues were $28.0 million (restated),  $26.2 million and
$13.4  million  for  the  years  ended   December  31,  1997,   1996  and  1995,
respectively. The components of Wireless assets at December 31, 1997 (restated),
are as follows:

     Accounts receivable, net                  $ 7,378
     Inventories                                 5,689
     Property and equipment                        696
     Other assets                                   12
     Accounts payable                           (1,874)
     Accrued liabilites                           (602)
                                              --------
                                              $ 11,299
                                              ========

                                       43
<PAGE>



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

       Not applicable



                                       44

<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 the  Company's  Proxy  Statement  for the 1998  annual  meeting  of
shareholders  to be held on or about May 22,  1998 (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  1997,  is
incorporated  herein  by  reference.  The  information  required  by  this  Item
concerning the Company'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 the Company'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  the
Company'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 the Company'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 25 of this Form 10-K/A.

      2. Financial  Statement  Schedule -- See Index to  Consolidated  Financial
         Statements  and  Financial  Statement  Schedule at page 25 of this Form
         10-K/A.

      3. Exhibits Index:

         Exhibit
         Number     Description of Exhibit
         -------    ----------------------
            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)

            2.3     Parent  shareholders   Indemnity  Agreement,   dated  as  of
                    September 8, 1997 among registrant, A.R. Data Security Ltd.,
                    Amos Fiat, Yossi Cohen, Yossi Tulpan,  Koor Capital Markets,
                    and Telrad Holdings Ltd. (4)

                                       45


<PAGE>

            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.

            4.2     Specimen certificate for Common Stock. (1)

            10.1    Stockholder  Agreement,  dated  as of  September  29,  1989,
                    between the Company and the  shareholders set forth therein,
                    and amendments thereto. (1)

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

            10.3    Employment  Agreement  between  the  Company  and  Lewis  C.
                    Morris, dated April 1, 1989, and amendments thereto. (1) (2)

            10.4    Employment Agreement between the Company and Jimmy K. Omura,
                    dated as of April 1, 1989, and amendments thereto. (1) (2)

            10.5    Employment  Agreement  between  the  Company  and Fernand B.
                    Sarrat, dated as of November 6, 1996. (2) (3)

            10.6    Lease Agreement between the Company and ARGOSystems, Inc., a
                    wholly-owned  subsidiary of The Boeing Company, dated May 1,
                    1994. (1)

            10.7    License  Agreement  between  the  Company  and The  Board of
                    Trustees of the Leland Stanford Junior University,  dated as
                    of  August  25,  1989,   the  First   Amendment  to  License
                    Agreement,  dated  as of  April  6,  1990,  and  the  Second
                    Amendment  to License  Agreement,  dated as of July 7, 1995.
                    (1)

            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)

            10.10   Loan and Security  Agreement between the Company and Silicon
                    Valley Bank dated as of July 20, 1995. (1)

            21.1    Subsidiaries of the Company.

            23.1    Consent of PricewaterhouseCoopers LLP.

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

            27.1    Financial Data Schedule. (5)

-------------------------------------------
            (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/A 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/A.

(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.

                                       46

<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:  April 21, 1999                          By:  /s/ William P. Crowell 
                                                    -----------------------
                                                    William P. Crowell
                                                    President and Chief
                                                    Executive Officer
                                                    (as of November 4, 1998)

         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/A,  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 and Chief Executive Officer               April 21, 1999
    -----------------------        (Principal Executive Officer) 
    William P. Crowell             (as of November 4, 1998)


/s/ ROGER A. BARNES                Vice President of Finance and Administration        April 21, 1999
    -----------------------        and Chief Financial Officer (Principal Financial  
    Roger A. Barnes                and Accounting Officer) (as of November 16, 1998) 
                                   


/s/ LEO A. GUTHART                 Chairman of the Board                               April 21, 1999
    -----------------------        
    Leo A. Guthart


/s/ ELWYN BERLEKAMP                Director                                            April 21, 1999
    -----------------------        
    Elwyn Berlekamp

 
/s/ WILLIAM W. HARRIS              Director                                            April 21, 1999
    -----------------------        
    William W. Harris


/s/ HOWARD L. MORGAN               Director                                            April 21, 1999
    -----------------------        
    Howard L. Morgan

</TABLE>

                                                   47


<PAGE>


<TABLE>

                                  SCHEDULE II

                               CYLINK CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS
                  Years ended December 31, 1995, 1996 and 1997
                                 (in thousands)
<CAPTION>
                                                         Additions
                                       Balance at       Charged to     Deductions          Balance
                                       Beginning       Statement of       from             at end
                                       of Period        Operations      Reserves         of  Period
<S>                                      <C>              <C>            <C>                <C> 
Allowance for doubtful accounts
Year ended December 31, 1995             $279             $ 210          $   (6)            $483
Year ended December 31, 1996             $483             $ 269            $108             $644
Year ended December 31, 1997             $644             $(211)         $    -             $433
</TABLE>

                                                   48