SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-Q


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

                  For the quarterly period ended June 27, 1999

                           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
 incorporation or organization)                        Identification No.)



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


                                 (408) 735-5800
              (Registrant's telephone number, including area code)



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
                                       -----    -----

As of August 9, 1999, there were 29,460,000  shares of the  Registrant's  common
stock outstanding.

                                       1


<PAGE>

<TABLE>


                               CYLINK CORPORATION

                  FORM 10-Q FOR THE QUARTER ENDED JUNE 27, 1999

                                      INDEX


<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>
         Facing Sheet                                                                                    1

         Index                                                                                           2

Part I   Financial information

Item 1   Financial Statements and Supplementary Data

              a)  Condensed Consolidated Balance Sheets at June 27, 1999 and December 31, 1998           3

              b)  Condensed Consolidated  Statements of Operations for the three
                  and six months ended June 27, 1999 and June 28, 1998                                   4

              c)  Condensed  Consolidated  Statement  of  Cash Flows  for the six
                  months ended June 27, 1999 and June 28, 1998                                           5

              d)  Notes to Condensed Consolidated Financial Statements                                   6

Item 2   Management's discussion and analysis of financial condition and results of operations           9

Part II  Other Information                                                                              21

         Signature                                                                                      23

Exhibit  Exhibit 27.1, Financial data schedule                                                          24
</TABLE>

                                                            2

<PAGE>


     PART I.  FINANCIAL INFORMATION
     Item 1.    Financial Statements

<TABLE>
     CYLINK CORPORATION
     CONDENSED CONSOLIDATED BALANCE SHEETS
     (Dollars in thousands, except per share data; unaudited)
<CAPTION>
                                                                                           June 27,   December 31,
                                                                                             1999         1998
                                                                                          ---------    ---------
<S>                                                                                       <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                                                              $  41,797    $  46,575
   Accounts receivable, net of allowances of $1,495 and $1,251                               11,737        7,958
   Note receivable                                                                            3,545        3,545
   Inventories                                                                                5,864       10,289
   Deferred income taxes                                                                      4,469        4,495
   Other current assets                                                                       4,598        6,675
                                                                                          ---------    ---------
            Total current assets                                                             72,010       79,537

Property and equipment, net                                                                   5,860        5,731
Acquired technology, goodwill and other intangibles                                           3,947        5,341
Notes receivable from employees or former employees                                           2,665        2,558
Other assets                                                                                  1,814        1,151
                                                                                          ---------    ---------
                                                                                          $  86,296    $  94,318
                                                                                          =========    =========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and long-term debt                                $      76    $     120
   Accounts payable                                                                           4,072        3,656
   Accrued liabilities                                                                        7,453        8,230
   Accrued liabilities related to discontinued operations                                     3,351        3,878
   Income taxes payable                                                                       1,085        1,091
   Deferred revenue                                                                           1,973        1,975
                                                                                          ---------    ---------
         Total current liabilities                                                           18,010       18,950
                                                                                          ---------    ---------

Capital lease obligations and long-term debt                                                    128          147
                                                                                          ---------    ---------

Shareholders' equity:
   Preferred stock, $0.01 par value; 5,000,000 shares authorized;
       none issued and outstanding                                                             --           --
   Common stock, $0.01 par value; 40,000,000 shares authorized;
       29,138,000 and 29,115,000 shares issued and outstanding                                  291          291
   Additional paid-in capital                                                               123,991      123,929
   Deferred compensation related to stock options                                              (125)        (167)
   Accumulated other comprehensive loss                                                        (109)         (61)
   Accumulated deficit                                                                      (55,890)     (48,771)
                                                                                          ---------    ---------
            Total shareholders' equity                                                       68,158       75,221
                                                                                          ---------    ---------
                                                                                          $  86,296    $  94,318
                                                                                          =========    =========
<FN>
                        See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>

                                                           3
<PAGE>

<TABLE>

     CYLINK CORPORATION
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
     (Dollars in thousands, except per share data; unaudited)

<CAPTION>
                                                                          Three Months Ended              Six Months Ended
                                                                      -------------------------      -------------------------
                                                                       June 27,        June 28,      June 27,         June 28,
                                                                        1999             1998          1999             1998
                                                                      --------        --------        --------        --------
                                                                                     (restated)                      (restated)
<S>                                                                   <C>             <C>             <C>             <C>
Revenue                                                               $ 15,209        $ 12,363        $ 27,094        $ 20,425
Cost of revenue                                                          4,769           3,990           8,881           6,621
                                                                      --------        --------        --------        --------
Gross profit                                                            10,440           8,373          18,213          13,804
                                                                      --------        --------        --------        --------
Operating expenses:
   Research and development, net                                         3,940           2,770           7,493           5,815
   Selling and marketing                                                 6,218           6,207          11,637          11,780
   General and administrative                                            3,303           1,852           5,916           3,330
   Amortization of purchased intangibles                                   680             680           1,360           1,359
                                                                      --------        --------        --------        --------
            Total operating expenses                                    14,141          11,509          26,406          22,284
                                                                      --------        --------        --------        --------

Loss from operations                                                    (3,701)         (3,136)         (8,193)         (8,480)

Other income (expense):
         Interest income, net                                              628             687             936             839
         Royalty and other income (expense), net                            19            (115)            138            (115)
                                                                      --------        --------        --------        --------
                                                                           647             572           1,074             724
                                                                      --------        --------        --------        --------

Loss from continuing operations before income taxes                     (3,054)         (2,564)         (7,119)         (7,756)
Benefit for income taxes                                                  --              (897)           --            (2,714)
                                                                      --------        --------        --------        --------
Loss from continuing operations                                         (3,054)         (1,667)         (7,119)         (5,042)
Income (loss) from discontinued operations, net of
   income tax benefit of $139                                             --              --              --              (259)
Gain on disposal of discontinued operations
     net of income tax expense of $12,358                                 --              --              --            22,776
                                                                      --------        --------        --------        --------
Net income (loss)                                                     $ (3,054)       $ (1,667)       $ (7,119)       $ 17,475
                                                                      ========        ========        ========        ========
Earnings (loss) per share - basic:
   Continuing operations                                              $  (0.10)       $  (0.06)       $  (0.24)       $  (0.17)
   Discontinued operations                                                --              --              --              0.77
                                                                      --------        --------        --------        --------
   Net income (loss)                                                  $  (0.10)       $  (0.06)       $  (0.24)       $   0.60
                                                                      ========        ========        ========        ========

Earnings (loss) per share - diluted:
   Continuing operations                                              $  (0.10)       $  (0.06)       $  (0.24)       $  (0.17)
   Discontinued operations                                                --              --              --              0.77
                                                                      --------        --------        --------        --------
   Net income (loss)                                                  $  (0.10)       $  (0.06)       $  (0.24)       $   0.60
                                                                      ========        ========        ========        ========
Shares used in per share calculation - basic                            29,127          29,011          29,122          28,916
                                                                      ========        ========        ========        ========
Shares used in per share calculation - diluted                          29,127          29,011          29,122          28,916
                                                                      ========        ========        ========        ========
<FN>

                             See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>

                                                                4
<PAGE>

<TABLE>

     CYLINK CORPORATION
     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
     (Dollars in thousands; unaudited)
<CAPTION>
                                                                                       Six Months Ended
                                                                                  ---------------------------
                                                                                  June 27,           June 28,
                                                                                    1999               1998
                                                                                  --------           --------
                                                                                                    (restated)
<S>                                                                               <C>                <C>
Cash flows from operating activities:
   Net loss from continuing operations                                            $ (7,119)          $ (5,042)
   Adjustments to reconcile net loss to net
      cash used in operating activities:
         Depreciation                                                                1,238                856
         Amortization                                                                1,360              1,359
         Deferred Income Taxes                                                          26               (107)
         Amortization of imputed interest on Note Receivable                          (132)              --
         Deferred compensation related to stock options                                 42                 42
         Deferred compensation related to Notes Receivable                             251               --
         Changes in assets and liabilities
            Accounts receivable                                                     (3,650)               (76)
            Inventories                                                              4,425             (2,195)
            Other current assets                                                     1,059                182
            Accounts payable                                                           416               (280)
            Accrued liabilities                                                       (777)            (2,588)
            Income taxes payable                                                        (6)            (4,271)
            Deferred revenue                                                            (2)             1,375
                                                                                  --------           --------
         Net cash used in continuing operations                                     (2,869)           (10,745)
         Net cash provided by (used in) discontinued operations                       (527)            (6,907)
                                                                                  --------           --------
               Net cash used in operating activities                                (3,396)           (17,652)
                                                                                  --------           --------
Cash flows from investing activities:
   Acquisition of property and equipment                                            (1,333)            (1,578)
   Loans to employees in exchange for notes receivable                                --               (2,230)
   Proceeds from sale of discontinued operations                                      --               46,000
   Acquisition of preferred stock of unaffiliated company                             --               (3,000)
                                                                                  --------           --------
               Net cash provided by (used in)
                   investing activities                                             (1,333)            39,192
                                                                                  --------           --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                          62              1,628
   Other                                                                               (63)               (94)
                                                                                  --------           --------
               Net cash provided by (used in) financing activities                      (1)             1,534
                                                                                  --------           --------
Effect of exchange rate changes on
   cash and cash equivalents                                                           (48)                 1
                                                                                  --------           --------
Net increase (decrease) in cash and cash equivalents                              $ (4,778)          $ 23,075
Cash and cash equivalents at beginning of year                                      46,575             22,977
                                                                                  --------           --------
Cash and cash equivalents at end of year                                          $ 41,797           $ 46,052
                                                                                  ========           ========
Supplemental disclosures:
   Cash paid for income taxes                                                     $   --             $  6,054
   Income tax refund                                                                 2,500               --
   Cash paid for interest                                                                3                 30
<FN>
                          See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                              5

<PAGE>

     CYLINK CORPORATION
     NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     (unaudited)


     1.   Basis of Presentation

         The unaudited  condensed  consolidated  financial  statements  included
     herein  contain  all  adjustments,  consisting  only  of  normal  recurring
     adjustments  which,  in the opinion of management,  are necessary to fairly
     state the consolidated  financial position,  results of operations and cash
     flows of Cylink  Corporation  ("Cylink" or the  "Company")  for the periods
     presented.  These interim condensed  consolidated  financial statements and
     notes  thereto  should  be  read  in  conjunction   with  Cylink's  audited
     consolidated  financial  statements and notes thereto  included in Cylink's
     Annual  Report on Form 10-K for the year ended  December 31, 1998.  Interim
     results of operations are not  necessarily  indicative of the results to be
     expected for the fiscal year ending December 31, 1999.

     2.   Restatement of Financial Results

         On  November  5,  1998,  Cylink  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.

<TABLE>
         As a result  of the  restatement,  the  statements  of  operations  and
     financial  position  for the six  months  ended  June 28,  1998  have  been
     restated as follows:

<CAPTION>
                                                    Three Months Ended              Six Months Ended
                                                      June 28, 1998                  June 28, 1998
                                              ----------------------------     ----------------------------
                                              As Originally                    As Originally
                                                 Reported      As Restated        Reported      As Restated
                                                 --------        --------         --------        --------
                                                                     (in thousands)
<S>                                              <C>             <C>              <C>             <C>
Sales                                            $ 18,035        $ 12,363         $ 33,864        $ 20,425

Operating expenses                                 11,479          11,509           22,184          22,284

Income (loss) from
    continuing operations                           1,732          (1,667)           2,814          (5,042)

Net income (loss)                                $  1,732        $ (1,667)        $ 25,438        $ 17,475
                                                 ========        ========         ========        ========

Earnings (loss) per share - diluted
   Continuing operations                         $   0.06        $  (0.06)        $   0.09        $  (0.17)
   Discontinued operations                           --              --               0.75            0.77
                                                 ========        ========         ========        ========
   Net income (loss)                             $   0.06        $  (0.06)        $   0.84        $   0.60
                                                 ========        ========         ========        ========


                                                                                    As of June 28, 1998
                                                                                 -------------------------
Accumulated deficit                                                              $ (25,526)      $ (36,457)
                                                                                 =========       =========
</TABLE>
                                                               6

<PAGE>

     3.   Discontinued Operations

         On March  27,  1998,  Cylink  sold its  Wireless  Communications  Group
     ("Wireless") to P-Com, Inc. for $60.5 million ($46.0 million in cash and an
     unsecured promissory note in the amount of $14.5 million due 100 days after
     closing, subject to closing adjustments). The sale resulted in an after tax
     gain of  approximately  $22.8  million.  As a  result,  the  operations  of
     Wireless   have  been   classified  as   discontinued   operations  in  the
     accompanying Condensed Consolidated Financial Statements and related Notes.
     Accrued expenses in the amount of approximately $6.8 million, primarily for
     professional services,  anticipated excess facilities expenses, and certain
     other transaction-related  accruals were charged to discontinued operations
     and reduced the gain on disposal.  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.  On July 14,
     1998, P-Com made a partial payment on its promissory note, which along with
     other  credits,  totaled $8.9  million.  P-Com is disputing  the  remaining
     balance  of the  note  which  Cylink  presently  records  at $3.5  million.
     Wireless  revenues  were $4.4 million in the first  quarter of 1998 through
     the date of disposal.



     4.  Inventories

                                                     June 27,       December 31,
                                                       1999            1998
                                                     ---------------------------
                                                          (in thousands)

        Raw materials                                $ 1,935         $ 2,813
        Work in process and subassemblies              2,270           1,877
        Finished goods                                 1,659           5,599
                                                     -------         -------
                                                     $ 5,864         $10,289
                                                     =======         =======

     5.  Earnings (Loss) Per Share

         Basic earnings (loss) per share is based on the weighted-average number
     of common shares outstanding. Diluted earnings (loss) per share is based on
     the  weighted-average  number of shares  outstanding and dilutive potential
     common shares  outstanding.  Cylink's only potentially  dilutive securities
     are stock options.  All potentially  dilutive securities have been excluded
     from the  computation of diluted  earnings (loss) per share as their effect
     is  anti-dilutive  on the loss from  continuing  operations for the periods
     presented.

         As of June 27,  1999  and  June 28,  1998,  Cylink  had  6,422,000  and
     6,141,000 stock options  outstanding with a weighted average exercise price
     of $4.74 and $8.97, respectively.

     6. Comprehensive Loss

<TABLE>
         The components of comprehensive loss are as follows (in thousands):

<CAPTION>
                                                             Three Months Ended         Six Months Ended
                                                           June 27,      June 28,     June 27,     June 28,
                                                             1999          1998         1999         1998
                                                         -------------  ---------- -------------  --------
                                                                        (restated-                (restated-
                                                                        See Note 2)               See Note 2)
                                                         (in thousands)            (in thousands)
<S>                                                         <C>          <C>          <C>          <C>
         Net income (loss)                                  $ (3,054)    $ (1,667)    $ (7,119)   $ 17,475
         Other comprehensive income (loss)                       (36)         (15)         (48)          1
                                                            --------     --------     --------    --------
         Total comprehensive income (loss)                  $ (3,090)    $ (1,682)    $ (7,167)   $ 17,476
                                                            ========     ========     ========    ========
</TABLE>

                                       7

<PAGE>

     7.  New Lease

         On May 10, 1999, Cylink reached agreement to lease approximately 96,000
     square  feet of office and  manufacturing  space  located  in Santa  Clara,
     California for use as it principal office and manufacturing  facility.  The
     lease term is for 120 months  commencing  approximately  September 1, 1999,
     and  includes  an option to extend the lease for an  additional  5 years on
     commercially  reasonable  terms. The Landlord is obligated to contribute up
     to $2.4 million for the  construction  of tenant's  interior  improvements;
     however,  tenant's  interior  improvements  are  expected  to  exceed  this
     allowance by approximately $1.9 million which is expected to be expended by
     Cylink  during  the third  quarter  of  fiscal  1999.  The lease  agreement
     provides for the payment of rent on a net industrial lease basis commencing
     at $174,000  per month for the first year and  escalating  to $228,000  per
     month in the tenth year of the lease.  Cylink's lease on its present 86,000
     square foot headquarters facility has expired, and it is Cylink's intention
     to sublease its present manufacturing facility which occupies 34,500 square
     feet, which lease expires in June 2001.


     8.  Subsequent Events

         On July  21,  1999,  Cylink  acquired  Virginia-based  Security  Design
     International,  Inc.,  a  security  consulting  and  professional  services
     company which  provides  network  vulnerability  assessments.  Terms of the
     acquisition  include a $400,000  cash  payment,  issuance of  approximately
     306,000  shares of  Cylink's  common  stock to a three year  escrow,  and a
     deferred cash payout totaling $1.925 million based on revenue and operating
     income  performance  over a three year period.  Total potential cost of the
     acquisition is up to $3.5 million.

         On August 5, 1999, Cylink amended the above referenced lease, to add an
     additional  46,000  square feet  adjacent to its newly leased 96,000 square
     feet in Santa Clara,  CA, for use as expansion space. The lease term on the
     additional space is 119 months  commencing  approximately  October 1, 1999,
     and  includes  an option to extend the lease for an  additional  5 years on
     commercially   reasonable   terms.   The  Landlord  is  obligated  to  make
     substantially all of tenant's interior improvements, currently estimated to
     cost $450,000.  The lease  agreement  provides for the payment of rent on a
     net  industrial  lease basis  commencing at $47,880 per month for the first
     year and  escalating  to $64,025  per month in the tenth year of the lease.
     Currently,  the second floor of the facility is leased to an outside tenant
     for 5 years, at which point the leasehold interest will revert to Cylink on
     similar  terms and  conditions.  Cylink  intends  to seek a  subtenant  for
     approximately half the remaining space on the first floor until its planned
     use.

     9.  Contingencies

         Cylink is currently engaged in litigation.  See Part II, Item 1, "Legal
     Proceedings."

                                        8

<PAGE>


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

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

         You should not rely too  heavily on these  forward-looking  statements.
     They are subject to certain risks and  uncertainties  that may cause actual
     results to differ materially from past results or Cylink's predictions. For
     a  description  of these  risks see Item 2. "Risk  Factors  That May Affect
     Future Results," and other sections of this Report on Form 10-Q. You should
     also  consult the risk factors  listed from time to time in Cylink's  other
     Exchange Act Reports.

         All  forward-looking  statements included in this document are based on
     information available to Cylink as of the date of this Report on Form 10-Q,
     and  Cylink  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.

     RESTATEMENT OF FINANCIAL RESULTS

         On  November  5,  1998,  Cylink  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. Second quarter 1998 results
     reported in this Form 10-Q reflect the results of the restatement.

      DISCONTINUED OPERATIONS

         Pursuant to an asset purchase  agreement  dated March 27, 1998,  Cylink
     sold its Wireless  business to P-Com, Inc. See Note 3 of Notes to Condensed
     Consolidated  Financial Statements.  The sale resulted in an after tax gain
     of approximately $22.8 million.  Except where noted, the following comments
     are associated with the continuing network security business.

                                       9

<PAGE>

     RESULTS OF OPERATIONS

<TABLE>
         The  following  table  sets forth  certain  consolidated  statement  of
     operations data as a percentage of revenue for the periods indicated:

<CAPTION>
                                                Three Months Ended           Six Months Ended
                                               --------------------       ----------------------
                                               June 27,    June 28,       June 27,     June 28,
                                                 1999         1998           1999         1998
                                               --------   ----------      ---------  -----------
                                                          (restated)                  (restated)
<S>                                              <C>          <C>            <C>          <C>
 Revenue                                         100.0%       100.0%         100.0%       100.0%
 Cost of revenue                                  31.4%        32.3%          32.8%        32.4%
                                                 -----        -----          -----        -----
 Gross profit                                     68.6%        67.7%          67.2%        67.6%
                                                 -----        -----          -----        -----
 Operating expenses:
    Research and development, net                 25.9%        22.4%          27.7%        28.5%
    Selling and marketing                         40.9%        50.2%          43.0%        57.7%
    General and administrative                    21.7%        15.0%          21.8%        16.3%
    Amortization of purchased intangibles          4.5%         5.5%           5.0%         6.7%
                                                 -----        -----          -----        -----
             Total operating expenses             93.0%        93.1%          97.5%       109.1%
                                                 -----        -----          -----        -----
 Loss from operations                            -24.3%       -25.4%         -30.2%       -41.5%
 Other income                                      4.3%         4.6%           4.0%         3.5%
                                                 -----        -----          -----        -----
 Loss from continuing operations                 -20.1%       -20.7%         -26.3%       -38.0%
                                                 ====         =====          =====        =====
</TABLE>

         Revenue.  Revenue increased 23% from $12.4 million for the three months
     ended June 28, 1998 to $15.2  million for the three  months  ended June 27,
     1999,  and  increased  33% from $20.4 million for the six months ended June
     28,  1998 to $27.1  million  for the six months  ended June 27,  1999.  The
     increase  is  attributable  to  increases  in unit  shipments  of  existing
     products,  the introduction of products with higher average selling prices,
     and increased  revenues  associated  with software  maintenance and support
     services.  International  revenue was 37% and 48% of total  revenue for the
     first quarter of 1998 and 1999, respectively.

         Cylink's  revenue  is  derived  primarily  from  sales of its family of
     commercial  network  security  products,  and to a lesser extent,  from the
     license of software  products.  Fees for software  maintenance  and support
     services  are charged  separately.  Revenue  arising from sales of hardware
     products  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
     based on historical and anticipated experience.

         Cylink also derives  revenue from the license of its software  products
     as well as fees for  software  maintenance  and support.  Cylink's  revenue
     recognition policy is consistent with Statement of Position 97-2,  Software
     Revenue  Recognition,  and the related amendment SOP 98-4. Software license
     revenue is recognized when a written purchase order,  license  agreement or
     contract  has  been  executed;   delivery  of  software  has  occurred;  no
     significant  Company obligations remain; the fee is fixed and determinable;
     collectibility is probable and vendor-specific objective evidence exists to
     allocate  the total fee to  elements  of the  arrangement.  Vendor-specific
     objective  evidence is based on the price generally charged when an element
     is sold  separately,  or if not yet  sold  separately,  is  established  by
     authorized  management.  Allowances for estimated future returns,  which to
     date  have  been  immaterial,  are  provided  upon  shipment  and  adjusted
     periodically by management based on historical and anticipated  experience.
     Maintenance  and support  revenue  consists of ongoing  support and product
     updates  and is  deferred  and  recognized  ratably  over  the  term of the
     maintenance contract,  which is typically twelve months.  Software revenue,
     including  related  maintenance  and support fees,  was not material in any
     period presented.

                                       10
<PAGE>

         Gross  Profit.  Gross  profit  increased  25% from $8.4 million for the
     three  months  ended June 28, 1998 to $10.4  million  for the three  months
     ended June 27,  1999,  and  increased  32% from $13.8  million  for the six
     months  ended June 28, 1998 to $18.2  million for the six months ended June
     27, 1999. The increase in dollars was primarily a result of the increase in
     revenue.  As a  percentage  of sales,  gross profit was 68% and 69% for the
     first quarter of 1998 and 1999, respectively.  The increase in gross margin
     resulted  primarily from improved  manufacturing  utilization  and a higher
     profit margin product mix.

         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 41% from $3.2 million for the three months
     ended June 28,  1998 to $4.4  million for the three  months  ended June 27,
     1999, and increased 36% from $6.2 million for the six months ended June 28,
     1998 to $8.4 million for the six months ended June 27, 1999. Gross research
     and development expenses as a percentage of revenue were 26% for the second
     quarter of 1998 compared to 29% for the second quarter of 1999, and 30% for
     the first  half of 1998  compared  to 31% for the first  half of 1999.  The
     dollar  increase  resulted from  increased  spending on  externally  funded
     contracts,  increased  personnel,  and  development  costs of new products,
     particularly in Israel.  The increase in expense as a percentage of revenue
     is due to the  accelerated  spending  on new  products  at a rate of growth
     faster than the growth rate of the revenues.

         From time to time Cylink receives  engineering  funding for development
     of  projects  to apply  or  enhance  Cylink's  technology  to a  particular
     customer's   need.  The  amounts   recognized   under  these  research  and
     development contracts are offset against research and development expenses.
     Amounts recognized under non-recurring  engineering  contracts totaled $0.4
     million for the second  quarter of 1998 as compared to $0.5 million for the
     second  quarter of 1999, and $.4 million and $.9 million for the first half
     of 1998 and 1999, respectively.

         Selling and Marketing. Selling and marketing expenses consist primarily
     of  personnel  expenses,  including  sales  commissions,  and  expenses for
     advertising,  public  relations,  seminars  and trade  shows.  Selling  and
     marketing  expenses  remained  unchanged at $6.2 million for the both three
     months ended June 28, 1998 and June 27, 1999,  respectively,  and decreased
     1% from  $11.8  million  for the six months  ended  June 28,  1998 to $11.6
     million  for the six months  ended June 27,  1999.  Selling  and  marketing
     expenses as a percentage of revenue were 50% for the second quarter of 1998
     compared to 41% for the second  quarter of 1999, and 58% for the first half
     of 1998  compared  to 43% for the first half of 1999.  Sales and  marketing
     expenses  remained  unchanged  overall  for the  second  quarter  of  1999,
     although  reductions  in  travel,   headcount  and  payroll  related  costs
     undertaken as a streamlining measure were offset by increased  advertising,
     trade shows and other  marketing  costs.  Selling and  marketing  expenses,
     expressed  as a  percentage  of  revenue,  decreased  as a  result  of  the
     increased revenue base.

         General and Administrative. General and administrative expenses consist
     primarily of personnel and related costs, recruitment expenses, information
     systems  costs,  and  audit,  legal and other  professional  service  fees.
     General and administrative expenses increased 78% from $1.9 million for the
     three months ended June 28, 1998 to $3.3 million for the three months ended
     June 27,  1999.  General and  administrative  expenses as a  percentage  of
     revenue  were 15% for the second  quarter of 1998  compared  to 22% for the
     second  quarter of 1999, and 16% for the first half of 1998 compared to 22%
     for the first half of 1999. The dollar and percentage of revenue  increases
     in the second quarter of 1999 were primarily due to increases in legal fees
     for litigation  defense,  and accounting and consulting  expenses resulting
     from the restatement, as well as recruiting and relocation expenses related
     to senior management transition.

         Amortization  of  Purchased   Intangibles.   Amortization  relating  to
     goodwill and other  intangibles  was $0.7 million in each period  presented
     and relates to the  acquisition  of  Algorithmic  Research,  Ltd and Algart
     Holdings, Ltd. (collectively "ARL") in September 1997.

         Benefit from Income Taxes.  No provision  for, or benefit from,  income
     taxes was recognized in the quarter ended June 27, 1999 as Cylink  incurred
     a net  operating  loss  for  income  tax  purposes  and  had no  additional
     carryback potential.

         Other Income  (Expense),  Net. Other income  (expense),  net,  consists
     primarily of interest  income,  interest  expense and, to a lesser  extent,
     royalty income.  Interest income,  net, decreased from $0.7 million for the
     second  quarter of 1998 to $0.6  million  for the  second  quarter of 1999,
     principally due to lower cash and cash equivalent balances between periods.

                                       11
<PAGE>

     LIQUIDITY AND CAPITAL RESOURCES


         At June  27,  1999,  Cylink  had cash  and  cash  equivalents  of $41.8
     million,   working   capital  of  $54.0   million  and  minimal   long-term
     obligations.  For the six months ended June 27, 1999, Cylink recorded a net
     loss of $7.1  million.  Net cash used in operating  activities  for the six
     months ended June 27, 1999 of $3.4 million consisted  primarily of the loss
     from continuing  operations and an increase in accounts  receivable of $3.7
     million,  offset in part by a decrease in inventories of $4.4 million. Both
     the increase in accounts  receivable and the decrease in  inventories  were
     the result of  increased  sales.  For the six months  ended June 28,  1998,
     Cylink  recorded net income of $17.5 million,  principally due to the $22.8
     million  gain  on  sale  of  Wireless,  offset  by a loss  from  continuing
     operations of $5.0 million and a loss from  discontinued  operations of $.3
     million.  Net cash used in continuing  operating  activities  for the first
     half of  1998  of  $17.7  million  consisted  primarily  of the  loss  from
     continuing  operations  of $10.7 million and  increases in  inventories  in
     anticipation of increased sales and payment of estimated income taxes.

         Cash used in  investing  activities  for the six months  ended June 27,
     1999 was $1.3 million,  primarily to fund the license and implementation of
     an Oracle  Enterprise  Reporting and Planning System and the acquisition of
     related computer  hardware.  Cash provided by investing  activities for the
     six months ended June 28, 1998 was $39.2  million,  of which $46.0  million
     was  attributed  to the sale of  Wireless.  The funds  attributable  to the
     Wireless  sale were  partially  offset by  expenditures  for  property  and
     equipment of $1.6  million,  long-term  loans to employees of $2.2 million,
     and a $3.0 million  investment  in the preferred  stock of an  unaffiliated
     company.

         Cylink is currently engaged in litigation.  See Part II, Item 1. "Legal
     Proceedings."  Management  believes  that the ultimate  resolution of these
     matters  will not have a  material  adverse  effect on  Cylink's  financial
     position or results of operations.

         On  July  21,  1999,  Cylink  aquired  Virginia-based  Security  Design
     International,  Inc.  ("SDI"),  for a $400,000  cash  payment,  issuance of
     approximately  306,000 shares of Cylink's common stock, and a deferred cash
     payout  of up to $1.925  million.  See  further  description  under  Note 8
     "Subsequent  Events"  above.  In additon  to the  acquistion  cost,  SDI is
     expected to utilize  approximately  $0.5 million in capitial  equipment and
     operating loss requirements over the next 12 months.

         Cylink  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 at least the next
     twelve months.  However, Cylink 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.  This  additional  financing  may not be available on terms
     favorable to Cylink or its shareholders, if at all.

     Year 2000 Compliance

         "Year 2000  Compliance"  refers  generally  to the  problems  that some
     software,  including  firmware embedded in Cylink's  products,  may have in
     determining  the correct  century for the year. For example,  software with
     date-sensitive functions that is not Year 2000 compliant may not be able to
     distinguish  whether "00" means 1900 or 2000,  which may result in failures
     or the  creation  of  erroneous  results.  Cylink  has  defined  "Year 2000
     Compliant" as the ability to: (i) correctly handle date information  needed
     for the  December 31, 1999 to January 1, 2000 date  change;  (ii)  function
     according  to the  product  documentation  provided  for this date  change,
     without  changes in operation  resulting  from the advent of a new century,
     assuming  correct  configuration;   (iii)  where  appropriate,  respond  to
     two-digit  date input in a way that resolves the ambiguity as to century in
     a disclosed,  defined,  and  predetermined  manner,  such as in certificate
     based  products,  or in accordance  with Cylink's Year 2000  Compliant test
     plan; and (iv) recognize year 2000 as a leap year.

         Cylink  has  developed  a Year  2000  readiness  plan  for the  current
     versions of its  products.  Cylink has largely  completed all phases of its
     plan, except for contingency planning, with respect to the current versions
     of all of its products.  As a result,  the current  versions of each of its
     products  currently  offered  for  sale  are  believed  to  be  "Year  2000
     Compliant." In some cases, Cylink's products require an upgrade provided by
     Cylink which is either sold as a complete  substitute or as a kit sold with
     the product in order to be Year 2000 Compliant.

         Cylink  has  completed  a  review  of  its  mission  critical  internal
     information systems (including the third-party  software for its management
     information systems,  networks and desktop  applications,  and its hardware

                                       12
<PAGE>

     telecommunications  technology)  and believes it has addressed all critical
     concerns.  When deficiencies  have been identified in critical  components,
     Cylink is purchasing new or upgraded  versions which have been certified by
     their vendors as compliant.

         Cylink has funded its Year 2000 plan from operating cash.  While Cylink
     does not expect such costs to be  material,  Cylink  will incur  additional
     amounts  related  to the Year 2000  plan for  administrative  personnel  to
     manage  Cylink's  readiness  plans,   technical  support  for  its  product
     engineering and customer satisfaction.

         Cylink has  completed  its plans to address Year 2000  readiness of its
     critical operations based on its perception of the known risks involved.

         Despite testing by Cylink and current and potential customers,  and any
     assurances from developers of products  incorporated into Cylink's products
     or in use in Cylink's  business  operations,  Cylink's products may contain
     undetected  errors or  defects  associated  with Year 2000 date  functions.
     Further,  Cylink may be using products in its business operations which are
     not Year 2000 compliant. An unanticipated Year 2000 interruption could have
     material  adverse  financial  consequences  to Cylink or  seriously  impair
     business operations for an indefinite period of time.

         For a more  comprehensive  discussion  of Cylink's  Year 2000 plans and
     exposures,  see the "Year 2000"  topic under Part I, Item 2. "Risk  Factors
     That May Affect Future Results."


                                       13

<PAGE>

     RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

         Cylink incurred losses from continuing  operations in 1998 and for each
     of the prior four  years.  Cylink  expects  to incur net losses  through at
     least  1999.  Cylink  may  not  increase  or  maintain  its  revenue  or be
     profitable on a quarterly or an annual basis in the future.

         Cylink has  historically  experienced  significant  fluctuations in its
     operating   results  on  a  quarterly  basis  and  could   experience  such
     fluctuations in the future.  Cylink's  operating  results are affected by a
     number  of  factors,  many  of  which  are  outside  of  Cylink's  control,
     including:  the timing of the  introduction of new or enhanced  products by
     Cylink or its competitors; market acceptance of new products of Cylink, 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  Cylink's  direct sales  force;  personnel  changes;
     general economic conditions;  and fluctuations in foreign currency exchange
     rates.  Cylink  expects to  introduce a number of new  products  during the
     remainder  of 1999.  The  failure of such new  products  to achieve  market
     acceptance at the time  anticipated by Cylink,  or at all, would materially
     and  adversely   affect  Cylink's   financial   condition  and  results  of
     operations.

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

         In a letter  dated  September  15, 1998,  to the American  Institute of
     Certified  Public  Accountants,  the Chief Accountant of the Securities and
     Exchange  Commission  ("SEC") indicated the SEC Staff's concerns related to
     certain  appraisal  practices  generally  employed in determining  the fair
     value of IPR&D. As a result,  it is possible that the SEC staff may require
     that any  enterprise  that  recorded an IPR&D charge revise its estimate of
     the value of the IPR&D.  To the extent  Cylink 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.


     Pending Litigation

         See Part II, Item 1. "Legal Proceedings."

     Dependence on Key Personnel

         On November 4, 1998, Mr. William C. Crowell, formerly Vice President of
     Product  Strategy,  was promoted to President and Chief Executive  Officer,
     and on November  16,  1998,  Mr.  Roger A.  Barnes  became  Cylink's  Chief
     Financial Officer.  Cylink's future success will depend on the abilities of
     Mr. Crowell and the  contributions  by its other  executive  officers,  key
     management and technical personnel. The loss of the services of one or more
     of  Cylink's  executive  officers or key  personnel,  or the  inability  to
     continue to attract and retain  qualified  personnel,  could delay  product
     development  cycles or otherwise have a material adverse effect on Cylink's
     business and operating results.  Retention and attraction of such qualified
     personnel  may become even more  difficult  for Cylink  following  Cylink's
     recent  restatement  of its financial  statements  and recently  determined
     losses.

                                       14

<PAGE>

     Lengthy Sales Cycle

         Sales of Cylink'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 Cylink's products is typically lengthy and subject to
     a number of  significant  risks over which Cylink has little or no control.
     Cylink 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.  Cylink  typically  plans its
     production  and  inventory  levels based on internal  forecasts of customer
     demand, which are highly unpredictable and can fluctuate substantially.  In
     addition,  Cylink's  current  or future  customers  may  curtail or suspend
     investments  in  securing   their  existing   networks  as  the  Year  2000
     approaches,  or divert  technology  expenditures  reserved  for  enterprise
     security  products in order to address Year 2000  compliance  problems (see
     further  discussion under Year 2000 below). If revenue falls  significantly
     below  anticipated  levels,  as it  has at  times  in  the  past,  Cylink's
     financial  condition  and results of  operations  would be  materially  and
     adversely affected.  In addition,  Cylink's operating expenses are based on
     anticipated  revenue levels and a high percentage of Cylink'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.  For example,  on September 14, 1998,
     Cylink  announced  that its earnings for the third quarter of 1998 would be
     below  consensus  estimates.  It is  possible  that in the future  Cylink's
     operating  results  will  again be below  the  expectations  of  securities
     analysts  and  investors.  In such an event,  or in the event that  adverse
     conditions prevail or are perceived to prevail generally or with respect to
     Cylink's  business,  the price of Cylink's  Common  Stock  would  likely be
     materially adversely affected.

     Dependence on Recently Introduced and New Information Security Products

         Cylink's future results of operations  will be highly  dependent on the
     successful completion of the design, development,  introduction,  marketing
     and manufacture of Cylink's  virtual private  networking  ("VPN")  hardware
     product and commercial  versions of its public key  infrastructure  ("PKI")
     products,  as well as successful  marketing and  manufacture  of the Cylink
     Link Encryptors,  PrivaCy  Manager,  PrivateWire and Cylink Frame Encryptor
     products.  To date,  Cylink has made only limited,  and, in some cases,  no
     commercial  shipments of certain  versions of such  products.  Furthermore,
     Cylink relies on a third party original  equipment  manufacturer  to supply
     Cylink's ATM  Encryptor  product,  and Cylink is dependent on this supplier
     for continued  development,  manufacture  and support.  These  products may
     require  additional  development  work,  enhancement,  testing  or  further
     refinement  before  they  can  achieve  or  in  order  to  maintain  market
     acceptance.  If any of Cylink's  products  have  performance,  reliability,
     quality or other shortcomings,  then such products could fail to achieve or
     maintain  market  acceptance.  The  failure  by  Cylink's  new or  existing
     products to achieve or enjoy market acceptance,  whether for these or other
     reasons,   could  cause  Cylink  to  experience   reduced  orders,   higher
     manufacturing   costs,   delays  in  collecting   accounts  receivable  and
     additional  warranty and service expenses,  which in each case could have a
     material  adverse  effect on Cylink's  business,  financial  condition  and
     results of operations.

     Competition

         Competition is intense among providers of network security systems, and
     Cylink  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,
     name  recognition  and  perception  of  Company   stability  and  long-term
     viability.  Many of these factors are beyond Cylink's control. In addition,
     some factors,  such as the  perception of Cylink's  stability and viability
     over the long term may have been  adversely  affected by the December  1998
     restatement  of Cylink's 1997 and first and second  quarter 1998  financial
     statements,  which could  materially  adversely  impact Cylink's ability to
     compete.

         Cylink's  competitors in the information  security  markets,  including
     companies that offer  products  similar to or as an alternative to Cylink'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.  Cylink's  OEM  supplier of its ATM  Encryptor
     product also competes with Cylink, through distribution channels, for sales
     of this product.  In addition,  Northern  Telecom Limited,  AT&T,  Motorola
     Corporation, and Sun Microsystems,  Inc. offer certain information security
     products  as part of  their  overall  networking  solutions.  A  number  of
     significant   vendors,


                                       15
<PAGE>

     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  Cylink's  products,
     Cylink'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  from (and
     incompatible  with) the  method of  implementing  public  key  cryptography
     currently  used by Cylink in most of its  products.  Although  Cylink has a
     license 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 from those currently used by Cylink, to
     the exclusion of Cylink's  methods,  sales of Cylink's existing and planned
     products in that market segment may be adversely impacted, which could have
     a material  adverse effect on Cylink's  financial  condition and results of
     operations.

         Many of Cylink's  competitors  have  substantially  greater  financial,
     technical,  marketing,  distribution  and  other  resources,  greater  name
     recognition and longer standing  relationships  with customers than Cylink.
     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 Cylink's
     financial  condition and results of  operations.  Cylink may not be able to
     compete successfully in the future and competitive  pressures may result in
     price reductions, loss of market share or otherwise have a material adverse
     effect on Cylink's financial condition and results of operations.

     Product Liability Risks

         Customers  rely  on  Cylink's  network  security  products  to  prevent
     unauthorized access to their networks and data transmissions. A malfunction
     or the  inadequate  design of  Cylink's  products  could  result in tort or
     warranty claims. Although Cylink 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
     Cylink'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 Cylink's  business,  financial  condition  and
     results of operations.

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

     Year 2000

         The "Year  2000  Issue"  refers  generally  to the  problems  that some
     software,  including  firmware embedded in Cylink's  products,  may have in
     determining  the correct  century for the year. For example,  software with
     date-sensitive functions that is not Year 2000 compliant may not be able to
     distinguish  whether "00" means 1900 or 2000,  which may result in failures
     or the creation of erroneous results.

         Cylink  has  developed  a Year  2000  readiness  plan  for the  current
     versions  of its  products.  The plan  includes  development  of  corporate
     awareness, assessment, implementation (including remediation, upgrading and
     replacement  of  certain  product  versions),   validation   testing,   and
     contingency  planning.  Cylink  continues  to respond to customer  concerns
     about prior versions of its products on a case-by-case basis.

         Cylink  has  largely  completed  all  phases  of its plan,  except  for
     contingency  planning,  with respect to the current  versions of all of its
     products.  As a  result,  the  current  versions  of each  of its  products
     currently  offered  for sale are  believed to be "Year 2000  Compliant"  as
     defined  below when  configured  and used in  accordance  with the  related
     documentation,  and provided that the  underlying  operating  system of the
     host  machine and any other  software  used with or in the host  machine or
     Cylink's  products are also Year 2000  Compliant.  In some cases,  Cylink's
     products  require an upgrade  provided by Cylink  which is either sold as a
     complete  substitute  or as a kit sold with the product in order to be Year
     2000 Compliant.

                                       16

<PAGE>

         Cylink  has  defined  "Year  2000  Compliant"  as the  ability  to: (i)
     correctly  handle  date  information  needed for the  December  31, 1999 to
     January  1,  2000 date  change;  (ii)  function  according  to the  product
     documentation  provided for this date change,  without changes in operation
     resulting from the advent of a new century, assuming correct configuration;
     (iii)  where  appropriate,  respond to  two-digit  date input in a way that
     resolves  the  ambiguity  as  to  century  in  a  disclosed,  defined,  and
     predetermined  manner,  such  as  in  certificate  based  products,  or  in
     accordance  with Cylink's Year 2000 Compliant test plan; and (iv) recognize
     year  2000 as a leap  year.  Cylink  has not  tested  its  products  on all
     platforms or all versions of operating  systems that it currently  supports
     and has advised its customers to verify that their  platforms and operating
     systems support the transition to the year 2000.

         Cylink has not specifically tested software obtained from third parties
     (licensed software,  shareware, and freeware) that is incorporated into its
     products,  but  Cylink's  test  plan  was  designed  to  reveal  Year  2000
     deficiencies with third party software incorporated in Cylink's products.

         Despite testing by Cylink and current and potential customers,  and any
     assurances from developers of products incorporated into Cylink's products,
     Cylink's products may contain  undetected errors or defects associated with
     Year 2000 date functions. Also, certain prior versions of Cylink's products
     are not fully Year 2000  Compliant,  and Cylink is working to address these
     issues by  offering  for sale  upgrades  to  compliant  versions.  Known or
     unknown  errors or defects in Cylink's  products  could  result in delay or
     loss of revenue,  diversion of  development  resources,  damage to Cylink's
     reputation,  or increased  service and warranty  costs,  any of which could
     materially  adversely  affect  Cylink's  business,  operating  results,  or
     financial condition.

         Cylink does not currently have any information concerning the Year 2000
     compliance status of its customers. If Cylink's current or future customers
     suspend  investments in securing their existing networks while they achieve
     Year 2000 compliance, or if they divert technology expenditures (especially
     technology expenditures that are reserved for enterprise security products)
     to address Year 2000 compliance  problems,  Cylink's  business,  results of
     operations, or financial condition could be materially adversely affected.

         Some commentators have predicted significant  litigation regarding Year
     2000 compliance issues. Because this type of litigation lacks precedent, it
     is uncertain whether or to what extent Cylink may be affected by it.

         Cylink  has  completed  a  review  of  its  mission  critical  internal
     information systems (including the third-party  software for its management
     information systems,  networks and desktop  applications,  and its hardware
     telecommunications  technology)  and believes it has addressed all critical
     concerns. To the extent that Cylink is not been able to test the technology
     provided by third-party vendors, Cylink will purchase upgrades for versions
     which have been certified by their vendors as compliant. Although Cylink is
     not currently aware of any material  operational issues or costs associated
     with preparing its internal  information  systems for the Year 2000, Cylink
     may  experience  material   unanticipated  problems  and  costs  caused  by
     undetected  errors or defects  in the  technology  used in its  information
     systems.

         Cylink has funded its Year 2000 plan from operating cash.  While Cylink
     does not expect such costs to be  material,  Cylink  will incur  additional
     amounts  related  to the Year 2000  plan for  administrative  personnel  to
     manage  Cylink's  readiness  plans,   technical  support  for  its  product
     engineering  and  customer  satisfaction.  Cylink may  experience  material
     problems and costs with Year 2000 compliance  that could  adversely  affect
     Cylink's business, results of operations, and financial condition.

         Finally, Cylink is also subject to external forces that might generally
     affect  industry and commerce,  such as utility or  transportation  company
     Year 2000 compliance failures and related service interruptions.

         Cylink has  completed  its plans to address  Year 2000 readiness of its
     critical  operations  based on its perception of the known risks  involved.
     However, were Cylink to experience an unanticipated Year 2000 interruption,
     business operations could be seriously impaired for an indefinite period of
     time until remedial efforts could be achieved.

                                       17

<PAGE>

     Management of Growth And Reduction In Employees

         Cylink  has  recently  and  may  continue  to  experience   substantial
     fluctuations  in the number of employees and the scope of its operations in
     the network security business,  resulting in increased responsibilities for
     management.  To  manage  its  business  effectively,  Cylink  will  need to
     continue to improve its operational,  financial and management  information
     systems and to hire, train, motivate and manage its 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. Cylink has experienced delays in filling positions for engineering
     personnel and Cylink expects to experience  continued difficulty in filling
     its needs for qualified engineers and other personnel, especially given the
     recent announcement  regarding the restatement of its financial results and
     associated  issues.  There can be no assurance  that Cylink 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 Cylink's financial condition and results of operations.

         With the  sale of its  Wireless  Communications  Group  (the  "Wireless
     Group") in March,  1998, Cylink has experienced a significant  reduction in
     employees,  including  Cylink's  former Chief  Technical  Officer,  Dr. Jim
     Omura. The sale of its Wireless Group, the uncertainty  created by Cylink's
     recent  restatements  of its financial  results,  the  initiation of highly
     publicized  class actions  securities  litigation  against Cylink,  and the
     occasional  reductions  in  specific  engineering  programs  in the network
     security  business,  has  created  some  instability  within  the  existing
     employee  population  resulting  in  departures  of certain  key  employees
     critical  to  sustaining  growth in  Cylink's  network  security  business.
     Furthermore,  sudden reductions in the number of Cylink's  employees places
     greater  demands on the  remaining  employees  which may distract them from
     fulfilling  their  responsibilities  necessary  to  accomplishing  Cylink's
     financial goals.

         In September 1997, Cylink acquired Algorithmic  Research,  Ltd. ("ARL")
     and assumed responsibility for management of its worldwide operations which
     currently  consists  of  approximately  eighty-four  employees.  Cylink  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,  as well as
     Cylink's  next  generation  hardware  VPN product.  Key factors  which will
     determine   ARL's  success  include  whether  Cylink  can  integrate  ARL's
     management,  employee  culture and  organizational  practices  into Cylink,
     whether Cylink can adequately fund ARL's  development  objectives,  whether
     Cylink can provide accurate  information for ARL to focus its technology on
     significant market  opportunities,  and whether Cylink can predict the most
     attractive  features and functions for ARL's products.  Cylink's success in
     realizing the  anticipated  return from its  investment in ARL also will be
     determined  by Cylink's  ability to position and introduce  ARL's  products
     into  Cylink's  markets  and  channels,  and  Cylink's  ability  to provide
     adequate sales and customer support for ARL's products.  To date,  Cylink's
     efforts to market ARL's products through Cylink's direct sales channel have
     not  met  Cylink's  expectations  due  to  differences  between  the  sales
     expertise  required  for selling the ARL  products  and that  required  for
     Cylink's other products. Consequently,  Cylink has recently reorganized the
     management  of ARL to  strengthen  ARL's  responsibility  for marketing and
     sales of its products.  In addition,  ARL's improvements and development of
     new  products  have  been  delayed  by  inadequate   coordination   between
     engineering  departments located in Sunnyvale, CA and Petach Tikva, Israel.
     This  inadequate  coordination  to  date  is due to  differing  engineering
     practices concerning  development planning and restrictions imposed by U.S.
     export  control laws  governing  the transfer of  cryptographic  expertise.
     Cylink  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

         Cylink relies on patents,  trademarks,  copyrights,  licenses and trade
     secret law to  establish  and preserve its  intellectual  property  rights.
     Cylink  owns a number  of 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  Cylink  will not be  invalidated,
     circumvented or

                                       18
<PAGE>

     challenged,  that the rights granted  thereunder  will provide  competitive
     advantages  to  Cylink or that any of  Cylink's  pending  or future  patent
     applications  will be issued with the scope of the claims sought by Cylink,
     if at all. Further,  there can be no assurance that others will not develop
     technologies that are similar or superior to Cylink's technology, duplicate
     Cylink's  technology or design  around the patents owned by Cylink.  Cylink
     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  Cylink's
     products  are or may be  developed,  manufactured  or sold may not  protect
     Cylink's  products and  intellectual  property rights to the same extent as
     the laws of the United  States.  The  inability  of Cylink 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,  Cylink  has  received
     communications from third parties asserting that Cylink's patents, features
     or content of certain of Cylink's  products  infringe upon the intellectual
     property  rights  held by  third  parties,  and  Cylink  may  receive  such
     communications in the future.  There can be no assurance that third parties
     will not assert  claims  against  Cylink  that  result in  litigation.  Any
     litigation,  whether or not determined in favor of Cylink,  could result in
     significant  expense  to  Cylink  and  could  divert  management  and other
     resources.  In the event of an adverse ruling in any  litigation  involving
     intellectual  property,  Cylink 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
     Cylink on  reasonable  terms or at all. In the event of a successful  claim
     against  Cylink and  Cylink's  failure  to develop or license a  substitute
     technology on commercially  reasonable terms,  Cylink'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 Cylink's financial condition and results of
     operations.

     Evolving Network Security Market; Market Acceptance Risks

         The market for Cylink's network security  products is only beginning to
     emerge.  This  market is  characterized  by  rapidly  changing  technology,
     emerging  industry  standards,  new  product  introductions  and changes in
     customer requirements and preferences.  Cylink's future success will depend
     in part upon end users'  demand for network  security  products in general,
     and upon Cylink's  ability to enhance its existing  products and to develop
     and   introduce   new  products  and   technologies   that  meet   customer
     requirements. Cylink faces continuing challenges to educate customers as to
     the value of its security  products.  Cylink  believes that many  potential
     customers do not appreciate the need for high-end  security products unless
     and until they have faced a major security  breach.  If Cylink is unable to
     successfully  educate  potential  customers as to the value of, and thereby
     obtain broad market acceptance for, its products,  it will continue to rely
     primarily  on selling  new and  existing  products  to its base of existing
     customers,  which will  significantly  limit any opportunity for growth. In
     addition,   any   significant   advance  in   technologies   for  attacking
     cryptographic systems could render some or all of Cylink's existing and new
     products  obsolete or  unmarketable.  To the extent that a specific  method
     other than  Cylink's is adopted as the  standard for  implementing  network
     security in any segment of the network security  market,  sales of Cylink's
     existing  and  planned  products in that  market  segment may be  adversely
     impacted,  which could have a material adverse effect on Cylink's business,
     financial condition and results of operations.  See "Competition."  Network
     security-related products or technologies developed by others may adversely
     affect Cylink's competitive position or render its products or technologies
     noncompetitive or obsolete.

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

     Rapid Technological Change

         The markets for Cylink's products are characterized by rapidly changing
     technologies,  extensive  research  and new product  introductions.  Cylink
     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,  Cylink  expects to  continue to make a
     significant investment in engineering, research and development. Cylink


                                       19
<PAGE>

     may not 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 Cylink to develop  products  and  introduce  them
     successfully  and  in a  timely  manner  could  adversely  affect  Cylink's
     competitive position, financial condition and results of operations.

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

         Cylink  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,  export  control  laws,  tariffs  and other trade
     barriers,   political  and  economic   instability   in  foreign   markets,
     difficulties  in  the  staffing,  management  and  integration  of  foreign
     operations,   longer  payment  cycles,  greater  difficulty  in  collecting
     accounts  receivable,  currency  fluctuations  and potentially  adverse tax
     consequences.  Since most of Cylink's foreign sales are denominated in U.S.
     dollars,  Cylink'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.

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

         Due to U.S. and Israeli government  regulations  restricting the export
     of  cryptographic  devices  and  software,  including  certain of  Cylink's
     network security  products,  Cylink is often at a disadvantage in competing
     for  international  sales compared to companies  located outside the United
     States and Israel  that are not  subject  to such  restrictions.  Cylink is
     unable to offer its products to certain types of foreign  customers and, on
     occasion,  has lost sales due to  uncertainty  over whether  Cylink will be
     permitted to sell its products.  The  regulatory  environment in the United
     States for export of encryption  products is particularly  unsettled,  with
     various pending legislative initiatives and conflicting judicial decisions,
     all causing substantial  uncertainty in Cylink's international market. This
     confusion is often  exacerbated by U.S.  vendors'  incomplete or inaccurate
     press releases  concerning export licenses for their products,  and foreign
     competitors marketing campaigns which stress the restrictions on purchasing
     encryption  products  from U.S.  vendors.  There is no assurance  that this
     disruption will end anytime within the near future.

     Dependence on Component  Availability,  Subcontractor  Performance  and Key
     Suppliers

         Cylink's  ability  to  deliver  its  products  in a  timely  manner  is
     dependent upon the  availability of quality  components and subsystems used
     in  these  products.   Cylink  depends  in  part  upon   subcontractors  to
     manufacture,   assemble  and  deliver   certain   items  in  a  timely  and
     satisfactory manner.  Cylink 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 Cylink's
     financial condition and results of operations.


     Item 3.  Quantitative and Qualitative Disclosures about Market Risk

         Cylink's  market risk  exposures  are set forth in its Annual Report on
     Form  10-K for the  year  ended  December  31,  1998  and have not  changed
     significantly.

                                       20
<PAGE>

     PART II.  OTHER INFORMATION

     Item 1.   Legal Proceedings

         On March 7, 1997,  ten former  employees of Cylink filed suit in action
     No.  CV764647 in the Superior Court of  California,  County of Santa Clara,
     asserting  claims for wrongful  termination  and various  related causes of
     action.  Since the action was filed,  Cylink has  obtained  various  orders
     granting  summary  judgement  and  dismissal of the majority of the claims.
     Discovery with respect to the remaining  claims is  continuing,  with trial
     expected by late 1999. Although Cylink has placed its insurers on notice of
     these claims and has received  reimbursement from one insurer for a portion
     of its legal fees and costs,  all of the  remaining  insurers have reserved
     their  rights and  defenses  under  their  policies,  and the extent of the
     insurers'   collective   liability  under  their  respective   policies  is
     undetermined.  Cylink believes the  terminations  were lawful,  in the best
     interest  of Cylink,  and  intends to defend  the  matter  vigorously.  The
     continued   defense  of  this  matter  will  require  the   expenditure  of
     significant  legal fees and costs.  An  unfavorable  outcome  which exceeds
     Cylink's insurance coverage, could also result in a material adverse effect
     on Cylink's financial condition.

         After  asserting  certain  deductions  arising under the contract dated
     June 27, 1998, for the purchase of Cylink's  Wireless  Group,  P-Com made a
     partial  payment on July 14,  1998,  in the  amount of $8.9  million on its
     promissory note dated April 1, 1998 (the "Note").  On June 8, 1999,  Cylink
     initiated  arbitration  proceedings  with  P-com to obtain  payment  on the
     outstanding balance of the Note, including interest,  of approximately $6.6
     million. No hearings have yet been scheduled.

         On September 3, 1998, P-Com put Cylink on notice that certain shipments
     in the  fourth  quarter of 1997 and the first  quarter of 1998 by  Cylink's
     former  Wireless  Group and having an invoice value of  approximately  $3.5
     million had been seized by an agency of the United States Department of the
     Treasury  and  that  P-Com  intends  to  hold  Cylink  responsible  for the
     consequences of this event.  P-Com is currently  petitioning for release of
     the goods. Based on Cylink's  investigation to date, Cylink believes either
     that the grounds for the seizure are unfounded or that P-Com is responsible
     for this  action.  Cylink has no reason at this time to believe  that it is
     the subject of any official investigation and Cylink has been informed that
     P-Com is  presently  petitioning  for the  release of the seized  goods.  A
     failure by P-com to obtain  release of the  shipment  due to a violation of
     law by Cylink might adversely affect the amount collected from P-Com on its
     outstanding obligations under the promissory note, including payment of any
     relevant fines or penalties.

         On September 14, 1998, Cylink announced that its earnings for the third
     quarter of 1998 would be below  consensus  estimates.  On November 5, 1998,
     Cylink announced that, with the assistance of its independent  accountants,
     it was reviewing its revenue  recognition  practices,  and Cylink announced
     that its  first  and  second  quarter  earnings  of 1998  would  have to be
     restated  and that it would  have  operating  losses  for each of the three
     quarters  for the period  ended  September  27,  1998.  During the  review,
     certain  facts  became  known  indicating  errors  had  been  made  in  the
     application of revenue recognition  policies which also impacted the fourth
     quarter of 1997, and as a result, 1997 full-year results have been restated
     along with first and second quarter 1998 results.  Cylink has filed amended
     Forms 10-Q for the first and second  quarters  of 1998 and an amended  Form
     10-K for 1997. Between November 6 and November 25, 1998, several securities
     class  action  complaints  were filed  against  Cylink  and  certain of its
     current and former  directors and officers in federal courts in California.
     These  complaints  allege,  among other things,  that  Cylink's  previously
     issued  financial  statements were materially false and misleading and that
     the defendants  knew or should have known that these  financial  statements
     caused  Cylink's  common  stock  price to rise  artificially.  The  actions
     variously allege violations of Section 10(b) of the Securities Exchange Act
     of 1934 (the "Exchange  Act"), as amended,  and SEC Rule 10b-5  promulgated
     thereunder, and Section 20 of the Exchange Act.

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

                                       21
<PAGE>

     Item 4.   Submission of Matters to a Vote of Security Holders

(a)      The  Registrant's  Annual Meeting of  Shareholders  was held on May 14,
         1999.  The vote of holders of record of  29,118,467  shares of Cylink's
         common stock outstanding at the close of business on March 29, 1999 was
         solicited by proxy  pursuant to Regulation 14A under the Securities Act
         of 1934.

(b)      The  following  persons were elected  Directors of Cylink at the Annual
         Meeting:

                                    Votes For         Votes Withholding
         Elwyn Berlekamp            24,328,461              95,348
         Paul Gauvreau              24,309,505             114,304
         Regis McKenna              24,326,561              97,248

     (c) There were no other matters voted on at the meeting.

     Item 5.   Other Information

         Any shareholder proposal submitted with respect to Cylink's 2000 Annual
     Meeting  of   Shareholders,   which  proposal  is  submitted   outside  the
     requirements of Rule 14a-8 under the Securities  Exchange Act of 1934, will
     be  considered  untimely  for  purposes  of Rule  14a-4 and 14a-5 if notice
     thereof is received by Cylink after March 5, 2000.

     Item 6.   Exhibits and Reports on Form 8-K

         (a)   Exhibits.

                 Exhibit
                 Number                     Description of Exhibit
                 ------                     ----------------------
                 27.1   Financial Data Schedule for the fiscal quarter ended
                        June 27, 1999

(b)      Reports on Form 8-K.

         Cylink  filed a report on Form 8-K on July 19, 1999 as required by Item
     4 of Form 8-K with  respect to a change in  accountants.  On July 12, 1999,
     Cylink retained  Deloitte & Touche LLP as its  independent  accounting firm
     and  dismissed  PricewaterhouseCoopers  LLP. The change in the  independent
     accountants  was  approved  by the Audit  Committee  of  Cylink's  Board of
     Directors    and    does    not    reflect    any    disagreements     with
     PricewaterhouseCoopers   LLP  over  matters  of  accounting  principles  or
     practices, financial statement disclosure, or auditing scope or procedure.


         Items 2 and 3 are not applicable and have been omitted.

                                       22
<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.


         Date: August 10, 1999              CYLINK CORPORATION

                                            By: /s/  ROGER A. BARNES
                                                Roger A. Barnes
                                                Vice President of Finance
                                                and Administration and
                                                Chief Financial Officer
                                                (Duly Authorized Officer and
                                                Principal Financial Officer)


                                       23