UNITED STATES
                       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 July 2, 2000

                           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.)

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

                                 (408) 855-6000
              (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 14, 2000, there were 30,837,000 shares of the Registrant's
common stock outstanding.


<PAGE>


                               CYLINK CORPORATION

                  FORM 10-Q FOR THE QUARTER ENDED JULY 2, 2000


                                      INDEX

                                                                            Page
                                                                            ----

         Index                                                                1

Part I   Financial information

Item 1   Financial Statements and Supplementary Data

         a)   Condensed Consolidated Balance Sheets at July 2, 2000
              and December 31, 1999                                           2

         b)   Condensed Consolidated  Statements of Operations for
              the three and six months ended July 2, 2000 and June 27, 1999   3

         c)   Condensed  Consolidated  Statements of Cashflows for the
              six months ended July 2, 2000 and June 27, 1999                 4

         d)   Notes to Condensed Consolidated Financial Statements            5

Item 2   Management's discussion and analysis of financial condition
         and results of operations                                            7

Part II  Other Information                                                   16

         Signature                                                           19

Exhibit  Exhibit 27.1, Financial Data Schedule                               20

                                       1

<PAGE>


<TABLE>
PART I.  FINANCIAL INFORMATION
Item 1.    Financial Statements

CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data; unaudited)


<CAPTION>
                                                                       July 2,              Dec 31,
                                                                        2000                 1999
                                                                      ---------            ---------
<S>                                                                   <C>                  <C>
Assets
Current assets:
   Cash and cash equivalents                                          $  18,907            $  33,170
   Accounts receivable, net of allowances of  $1,012 and $941            19,510               16,130
   Inventories                                                           12,998                6,745
   Deferred income taxes                                                  4,371                4,367
   Other current assets                                                   1,911                1,648
                                                                      ---------            ---------
            Total current assets                                         57,697               62,060

Restricted cash                                                           1,400                1,400
Property and equipment, net                                              10,558               10,038
Acquired technology, goodwill and other intangibles                       1,746                3,188
Notes receivable from employees or former employees                       3,284                3,165
Other assets                                                              1,312                1,438
                                                                      ---------            ---------
                                                                      $  75,997            $  81,289
                                                                      =========            =========

Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and long-term debt            $      39            $      24
   Accounts payable                                                       6,050                6,635
   Accrued liabilities                                                    9,858                9,082
   Income taxes payable                                                   1,030                1,062
   Deferred revenue                                                       3,653                2,395
                                                                      ---------            ---------
         Total current liabilities                                       20,630               19,198
                                                                      ---------            ---------

Capital lease obligations and long-term debt, less current portion          106                  112
                                                                      ---------            ---------

Commitments and contingencies (Note 5)

Shareholders' equity:
   Preferred stock, $0.01 par value; 5,000,000 shares authorized;          --                   --
      none issued and outstanding
   Common stock, $0.01 par value; 55,000,000 shares authorized;             308                  299
      30,751,000 and 29,877,000 shares issued and outstanding
   Additional paid-in capital                                           132,117              126,896
   Deferred compensation related to stock options                        (1,421)              (1,790)
   Accumulated other comprehensive loss                                     (51)                 (82)
   Accumulated deficit                                                  (75,692)             (63,344)
                                                                      ---------            ---------
            Total shareholders' equity                                   55,261               61,979
                                                                      ---------            ---------
                                                                      $  75,997            $  81,289
                                                                      =========            =========

<FN>
                See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                  2

<PAGE>


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


<CAPTION>
                                                        Three Months Ended              Six Months Ended
                                                     ------------------------        ------------------------
                                                      July 2,        June 27,         July 2,        June 27,
                                                       2000            1999            2000            1999
                                                     --------        --------        --------        --------
<S>                                                  <C>             <C>             <C>             <C>
Revenue                                              $ 18,005        $ 15,209        $ 35,383        $ 27,094
Cost of revenue                                         6,433           4,769          12,679           8,881
                                                     --------        --------        --------        --------
Gross profit                                           11,572          10,440          22,704          18,213
                                                     --------        --------        --------        --------

Operating expenses:
   Research and development, net                        5,269           3,940           9,912           7,493
   Selling and marketing                                9,114           6,218          17,225          11,637
   General and administrative                           3,009           3,303           7,228           5,916
   Amortization of purchased intangibles                  720             680           1,440           1,360
                                                     --------        --------        --------        --------
            Total operating expenses                   18,112          14,141          35,805          26,406
                                                     --------        --------        --------        --------

Loss from operations                                   (6,540)         (3,701)        (13,101)         (8,193)

Other income (expense):
         Interest income, net                             540             628             827             936
         Royalty and other income (expense), net          (93)             19             (66)            138
                                                     --------        --------        --------        --------
                                                          447             647             761           1,074
                                                     --------        --------        --------        --------

Loss before income taxes                               (6,093)         (3,054)        (12,340)         (7,119)
Provision for income taxes                               --              --                 8            --
                                                     --------        --------        --------        --------
Net loss                                             $ (6,093)       $ (3,054)       $(12,348)       $ (7,119)
                                                     ========        ========        ========        ========

   Net loss per share - basic:                       $  (0.20)       $  (0.10)       $  (0.41)       $  (0.24)
                                                     ========        ========        ========        ========

   Net loss per share - diluted:                     $  (0.20)       $  (0.10)       $  (0.41)       $  (0.24)
                                                     ========        ========        ========        ========

Shares used in per share calculation - basic           30,511          29,127          30,258          29,122
                                                     ========        ========        ========        ========

Shares used in per share calculation - diluted         30,511          29,127          30,258          29,122
                                                     ========        ========        ========        ========

<FN>
                    See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                       3

<PAGE>


<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands; unaudited)


<CAPTION>
                                                                                Six Months Ended
                                                                           -----------------------------
                                                                            July 2,             June 27,
                                                                             2000                  1999
                                                                           --------             --------
<S>                                                                        <C>                  <C>
Cash flows from operating activities:
   Net income (loss)                                                       $(12,348)            $ (7,119)
   Adjustments to reconcile net income (loss) to net
      cash used in operating activities:
         Depreciation                                                         1,636                1,238
         Amortization of purchased intangibles                                1,440                1,360
         Deferred income taxes                                                   (4)                  26
         Amortization of imputed interest on note receivable                   (119)                (132)
         Deferred compensation related to stock options                         369                   42
         Deferred compensation related to employee notes receivable            --                    251
         Changes in assets and liabilities:
            Accounts receivable                                              (3,380)              (3,650)
            Inventories                                                      (6,253)               4,425
            Other assets                                                       (132)               1,059
            Accounts payable                                                   (585)                 416
            Accrued liabilities                                                 776                 (777)
            Income taxes payable                                                 (3)                  (6)
            Deferred revenue                                                  1,258                   (2)
                                                                           --------             --------
         Net cash used in operating activities                              (17,345)              (2,869)
         Net cash used in discontinued operations                              --                   (527)
                                                                           --------             --------
              Net cash used in operating activities                         (17,345)              (3,396)
                                                                           --------             --------

Cash flows from investing activities:
   Acquisition of property and equipment                                     (2,159)              (1,333)
                                                                           --------             --------
               Net cash used in investing activities                         (2,159)              (1,333)
                                                                           --------             --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                5,230                   62
   Other                                                                        (20)                 (63)
                                                                           --------             --------
               Net cash provided by (used in) financing activities            5,210                   (1)
                                                                           --------             --------
Effect of exchange rate changes on
   cash and cash equivalents                                                     31                  (48)
                                                                           --------             --------
Net decrease in cash and cash equivalents                                   (14,263)              (4,778)
Cash and cash equivalents at beginning of year                               33,170               46,575
                                                                           --------             --------
Cash and cash equivalents at end of year                                   $ 18,907             $ 41,797
                                                                           ========             ========
Supplemental disclosures
   Income tax refund                                                           --               $  2,500

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

                                                    4

<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  state  fairly  the
consolidated financial position,  results of operations and cash flows of Cylink
Corporation  ("Cylink"  or the  "Company")  for  the  periods  presented.  These
financial  statements  should be read in conjunction with the Company's  audited
financial  statements  included in the Company's  Annual Report on Form 10-K for
the year  ended  December  31,  1999.  Interim  results  of  operations  are not
necessarily indicative of the results to be expected for the full year.

2.       Inventories

                                                        July 2,         Dec. 31,
                                                         2000             1999
                                                        -------         -------
                                                              (in thousands)

Raw materials                                           $ 6,505         $ 2,412
Work in process and subassemblies                         3,239           1,610
Finished goods                                            3,254           2,723
                                                        -------         -------
                                                        $12,998         $ 6,745
                                                        =======         =======

3.       Loss Per Share

         Basic loss per share is based on the weighted-average  number of common
shares outstanding,  excluding shares in escrow. Diluted loss per share is based
on the  weighted-average  number of shares  outstanding  and dilutive  potential
common  shares  outstanding,  excluding  contingent  shares held in escrow.  The
Company's  only  potentially   dilutive   securities  are  stock  options.   All
potentially  dilutive  securities  have been  excluded from the  computation  of
diluted loss per share as their effect is  anti-dilutive on the net loss for the
periods presented.

         As of July 2, 2000 and June 27,  1999,  the Company had  6,717,000  and
6,422,000 stock options  outstanding  with a weighted  average exercise price of
$6.61 and $4.74,  respectively.  These options expire on various dates beginning
in 2000 through 2008.

4.       Comprehensive Loss

<TABLE>
         The components of comprehensive loss are as follows:

<CAPTION>
                                            Three Months Ended                      Six Months Ended
                                       ----------------------------            ----------------------------
                                        July 2,            June 27,             July 2,            June 27,
                                         2000                1999                2000                1999
                                       --------            --------            --------            --------
<S>                                    <C>                 <C>                 <C>                 <C>
Net loss                               $ (6,093)           $ (3,054)           $(12,348)           $ (7,119)
Other comprehensive income (loss)            11                 (36)                 31                 (48)
                                       --------            --------            --------            --------
Total comprehensive loss               $ (6,082)           $ (3,090)           $(12,317)           $ (7,167)
                                       ========            ========            ========            ========
</TABLE>


5.       Recently issued accounting pronouncements

         In December 1999, the Securities and Exchange  Commission  issued Staff
Accounting   Bulletin   (SAB)  No.  101,   "Revenue   Recognition  in  Financial
Statements,"   which  provides  the  SEC  staff's  views  on  selected   revenue
recognition  issues.  The guidance in SAB 101 must be adopted  during the fourth
quarter of 2000, and the effects,  if any, are required to be recorded through a
retroactive,  cumulative-effect adjustment as of the beginning of the year, with
a

                                       5

<PAGE>


restatement of all prior interim quarters in the year.  Management is evaluating
the effects,  if any,  that SAB 101 may have on the Company's  income  statement
presentation, operating results or financial position.

         In June 1998, the Financial  Accounting Standards Board issued SFAS No.
133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities."  This
statement,   which  is  effective  for  the  year  beginning  January  1,  2001,
establishes  accounting and reporting  standards for derivative  instruments and
for hedging  activities.  SFAS No. 133 was amended by SFAS No. 138 in June 2000.
SFAS No. 133 requires a company to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  Management is evaluating  the impact this  statement may have on
the company's financial statements.

6.       Contingencies

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

7.       Subsequent Events

         Working  capital loan. On July 27, 2000,  Cylink  received a commitment
for a $10.0  million  working  capital loan secured by all of Cylink's  tangible
assets from a bank.  The revolving  loan provides for loan advances up to 80% of
Cylink's  eligible accounts  receivable,  bears interest at a rate not exceeding
the Bank's prime rate of interest, and is due July 31, 2001.

         Acquisitions.  On July 27,  2000,  Cylink  entered into an agreement to
acquire  all the  outstanding  shares of Celotek  Corporation,  a  developer  of
high-performance  Asynchronous  Transfer Mode network  security  appliances  for
approximately  $21,500,000 less certain expenses. The consideration will be paid
by the  issuance  of that  number of  shares of common  stock to be based on the
average price twenty days preceding the closing, but in any event not to be less
than $11.50 nor greater than $15.00 per share.  The  acquisition  is expected to
close no later than August 31, 2000, is subject to customary closing  conditions
and will be treated for accounting purposes as a purchase.

                                       6

<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 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 the reasons described in 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  Reports on Form
10-K, 10-Q, and 8-K.

         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.

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
                                                       ------------------            -------------------
                                                      July 2,      June 27,         July 2,       June 27,
                                                       2000         1999             2000          1999
                                                       -----        -----            -----         -----
<S>                                                    <C>          <C>              <C>           <C>
 Revenue                                               100.0%       100.0%           100.0%        100.0%
 Cost of revenue                                        35.7         31.4             35.8          32.8
                                                       -----        -----            -----         -----
 Gross profit                                           64.3         68.6             64.2          67.2
                                                       -----        -----            -----         -----
 Operating expenses:
   Research and development, net                        29.3         25.9             28.0          27.7
   Selling and marketing                                50.6         40.9             48.7          43.0
   General and administrative                           16.7         21.7             20.4          21.8
   Amortization of purchased intangibles                 4.0          4.5              4.1           5.0
                                                       -----        -----            -----         -----
      Total operating expenses                         100.6         93.0            101.2          97.5
                                                       -----        -----            -----         -----
 Loss from operations                                  (36.3)       (24.4)           (37.0)        (30.3)

 Other income, net                                       2.5          4.3              2.1           4.0
                                                       -----        -----            -----         -----
 Loss before income taxes                              (33.8)       (20.1)           (34.9)        (26.3)
 Provision for income taxes                               --           --               --            --
                                                       -----        -----            -----         -----
 Net loss                                              (33.8)%      (20.1)%          (34.9)%       (26.3)%
                                                       =====        =====            =====         =====
</TABLE>


         Revenue.  Revenue increased 18% from $15.2 million for the three months
ended June 27, 1999 to $18.0  million for the three  months  ended July 2, 2000,
and  increased  31% from $27.1 million for the six months ended June 27, 1999 to
$35.4  million  for  the  six  months  ended  July  2,  2000.  The  increase  is
attributable  to  increases  in  unit  shipments  of  existing   products,   the
introduction  of new  products  late in the 2nd  quarter  of 2000,  shipment  of
products  with  higher  average  selling  prices,  increased  revenues  from our
Algorithmic Research, Ltd. subsidiary, increased

                                       7

<PAGE>


revenues associated with maintenance and support services,  and the introduction
of revenues  from  professional  service  consulting in the latter half of 1999.
International revenue was 34% and 47% of total revenue for the second quarter of
2000 and 1999, respectively.

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

         Gross Profit.  Gross profit  increased from $10.4 million for the three
months  ended June 27, 1999 to $11.6  million for the three months ended July 2,
2000, and increased from $18.2 million for the six months ended June 27, 1999 to
$22.7 million for the six months ended July 2, 2000. The increase in dollars was
primarily a result of the increase in revenue.  As a percentage of sales,  gross
profit was  approximately  69% and 64% for the quarters  ended June 27, 1999 and
July 2, 2000,  respectively.  The decrease in gross  profit as a  percentage  of
revenue was due to a higher  percentage  of revenues  derived from our OEM-based
ATM encryptor  business which  historically  has lower gross margins and greater
revenue contribution from lower margin customer service business.

         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  26% from $4.4  million for the three  months ended June 27,
1999 to $5.6 million for the three months ended July 2, 2000,  and increased 20%
from $8.4  million for the six months  ended June 27, 1999 to $10.1  million for
the six months ended July 2, 2000. Gross research and development  expenses as a
percentage  of revenue  were 29% for the second  quarter of 1999 and 31% for the
second  quarter  2000,  and 31% for the first half of 1999 and 29% for the first
half  of  2000.  The  dollar  increase  resulted  from  increased  spending  for
development  costs of new  products,  offset by  reduced  spending  and  related
reimbursements  for externally  funded  contracts.  The increase in expense as a
percentage  of revenue for the second  quarters is due to the greater  growth in
spending  due  to  new  product  introductions  and  lower  development  project
reimbursements than the rate of revenue growth.

         From  time  to  time  the  Company  receives  engineering  funding  for
development  of  projects  to apply or enhance  the  Company's  technology  to a
particular  customer's  need.  The amounts  recognized  under these research and
development  contracts are offset  against  research and  development  expenses.
Amounts  recognized  under  non-recurring  engineering  contracts  totaled  $0.5
million for the second  quarter of 1999 and $0.1  million for second  quarter of
2000.

         Selling and Marketing. Selling and marketing expenses consist primarily
of personnel expenses, including sales commissions and bonuses, and expenses for
advertising,  public relations,  seminars and trade shows. Selling and marketing
expenses  increased  47% from $6.2  million for the three  months ended June 27,
1999 to $9.1 million for the three months ended July 2, 2000,  and increased 48%
from $11.6m for the six months ended June 27, 1999 to $17.2  million for the six
months ended July 2, 2000.  Selling and  marketing  expenses as a percentage  of
revenue were 41% and 51% for the second quarter of 1999 and 2000,  respectively,
and 43%  and 49% for the  first  half  of 1999  and  2000,  respectively.  Sales
expenses  increased for the second quarter of 2000 primarily due to the addition
of 12 employees,  commissions  and  payroll-related  costs  associated  with the
increased  revenue and the management of indirect sales channels through the use
of value-added resellers. Marketing expenses increased due to the addition of 11
employees,  consulting,  advertising,  trade  shows  and other  marketing  costs
associated  with new marketing  initiatives and a Cylink  awareness  promotional
campaign. Selling and marketing expenses,  expressed as a percentage of revenue,
increased as a result of the above  factors in advance of  incremental  revenues
generated by new product introductions.

         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  decreased  9% from $3.3  million for the three  months
ended June 27, 1999 to $3.0 million for the three months ended July 2, 2000, and
increased  22% from $5.9  million for the first half of 1999 to $7.2 million

                                       8

<PAGE>


for the first half of 2000. General and administrative  expenses as a percentage
of  revenue  were  22% and  17%  for  the  second  quarter  of  1999  and  2000,
respectively, and 22% and 20% for the first half of 1999 and 2000, respectively.
The dollar  decrease in the second  quarter of 2000 versus the second quarter of
1999 was primarily due to the recovery of legal costs under our insurance policy
with  respect  to the class  action  litigation,  a  one-time  telecommunication
billing error recovery , the elimination of executive bonuses, offset in part by
increased spending in the information  technology area to support the Oracle ERP
system. The decrease as a percentage of revenue is due primarily to the decrease
in overall costs measured against an increasing revenue base.

         Amortization of Goodwill and Other 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 ("ARL") in September
1997, and the acquisition of S.D.I. in the third quarter of 1999.

         Provision for Income  Taxes.  No  significant  provision for or benefit
from  income  taxes was  recognized  in the  quarter  ended  July 2, 2000 as the
Company  incurred  a net  operating  loss for income  tax  purposes  and the tax
benefit  therefrom was offset by an increase in the  valuation  allowance on the
deferred tax asset.

         Other  Income  (Expense),  Net.  Other income  (expense),  net consists
primarily of interest  income and interest  expense,  foreign  exchange gains or
losses,  and royalty income.  Other income,  net decreased from $0.6 million for
the second  three  months of 1999 to $0.4 million for the second three months of
2000, principally due to decreased cash and cash equivalents and reduced royalty
and other income.

LIQUIDITY AND CAPITAL RESOURCES

         At July 2, 2000,  the  Company had cash and cash  equivalents  of $18.9
million, working capital of $37.1 million and minimal long-term obligations. For
the three  months  ended July 2, 2000,  the Company  recorded a net loss of $6.1
million.  Net cash used in operating  activities  for the first half of 2000 was
$17.3 million consisting  primarily of the loss from operations,  an increase in
accounts receivable of $3.4 million, an increase in inventories of $6.3 million,
an increase in accounts payable and accrued  liabilities of $.1m, offset in part
by an  increase  deferred  revenue of $1.3  million.  The  increase  in accounts
receivable was due to higher than average shipments during the last month of the
quarter.  The increase in  inventories  was the result of advanced  purchases of
critical  components  to avoid stock  shortages,  and  pre-production  component
purchases  for a  soon-to-be-released  new  product.  The  decrease  in accounts
payable  resulted  from payment  cycles which are shorter  than  inventory  turn
cycles.  The  increase  in  accrued  liabilities  was due  principally  to sales
commission  accruals and amounts due under Cylink's Employee Stock Purchase Plan
that was  introduced in the first  quarter of 2000.  Net cash used in continuing
operating  activities  for the first  half of 1999 was $2.9  million  consisting
primarily of the loss from continuing operations of $7.1 million 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 over the previous
quarter.

         Cash used in investing activities for the six months ended July 2, 2000
and June 27, 1999 was $2.2 million and $1.3 million, respectively,  primarily to
fund the acquisition of property, plant and equipment.

         Cash provided by financing  activities for the six months ended July 2,
2000 was $5.2 million,  resulting  from proceeds from the sale of 875,000 shares
of stock pursuant to the exercise of stock  options.  Cash provided by financing
activities for the six months ended June 27, 1999 was not material.

         The Company 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 the  Company's  financial
position or results of operations.

         The Company  believes that  existing  cash balances and cash  generated
from  operations,  if any,  will be sufficient  to fund  necessary  purchases of
capital  equipment  and to  provide  working  capital  through at least the next
twelve  months.  Cylink has  secured a $10 million  revolving  line of credit at
favorable  terms with a leading  Silicon  Valley bank to assure that we can meet
any working capital  requirements.  The Company may require  additional funds to
support its working  capital  requirements or for other purposes and may seek to
raise such  additional  funds through public or private equity or debt financing
or from other sources in the future.  No assurance can be given that  additional
financing will be available or that, if available, will be on terms favorable to
the Company or its shareholders.

                                       9

<PAGE>


RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

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

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

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

         o     the timing,  cancellation or delay of customer orders,  including
               cancellation   or   delay   in   anticipation   of  new   product
               introductions  or  enhancements  or  resulting  from  uncertainty
               relating to intellectual property claims;

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

         o     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;

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

         o     delays in software development;

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

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

         o     changes in the  percentage  of products  sold  through our direct
               sales force versus indirect channels;

         o     changes in the  percentage  of products  sold in the U.S.  versus
               international markets;

         o     loss of an important customer;

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

         o     customer discounts and credits; and

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


         We  introduced a number of new products  during the first half of 2000,
and we expect to introduce  other new products during the remainder of 2000. The
delay in product  availability  and/or  failure of any such  products to achieve
market  acceptance when  anticipated,  or at all, would materially and adversely
affect our financial condition and results of operations.

Pending Litigation

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

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

         Sales of our products  generally  involve a  significant  commitment of
capital by customers, with the attendant delays frequently associated with large
capital  expenditures.  For these and other reasons,  the sales cycle associated
with our  products is typically  lengthy and subject to a number of  significant
risks over which we have  little or no

                                       10

<PAGE>


control.  We are often required to ship products shortly after we receive orders
and, consequently, order backlog at the beginning of any period has, at times in
the past, represented only a small portion of that period's expected revenue. As
a  result,  product  revenue  in any  period  has been and will  continue  to be
substantially  dependent  on  orders  booked  and  shipped  in that  period.  We
typically plan our production and inventory  levels based on internal  forecasts
of  customer  demand,   which  are  highly   unpredictable   and  can  fluctuate
substantially.  If revenue falls  significantly  below anticipated levels, as it
has at times in the past,  our  financial  condition  and results of  operations
would be materially and adversely affected. In addition,  our operating expenses
are based on anticipated  revenue  levels and a high  percentage of our expenses
are  generally  fixed  in the  short  term.  Based  on  these  factors,  a small
fluctuation  in the  timing  of  sales  can  cause  operating  results  to  vary
significantly  from  period to  period.  It is  possible  that in the future our
operating  results will again be below the  expectations of securities  analysts
and investors. In such an event, or in the event that adverse conditions prevail
or are  perceived  to prevail  generally  or with respect to our business or the
market sector in which we operate, the price of our Common Stock would likely be
adversely affected.

         These factors make it difficult to predict our  financial  performance.
As our quarterly  results  fluctuate,  they may fall below the  expectations  of
public  market  analysts or investors.  If this occurs,  the price of our common
stock may drop.

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

         Our  future  results  of  operations  will be highly  dependent  on the
successful completion of the design,  development,  introduction,  marketing and
manufacture  of the  NetAuthority  and NetHawk  products,  as well as successful
marketing  and  manufacture  of the Cylink  Link  Encryptors,  PrivaCy  Manager,
PrivateWire, Cylink ATM Encryptors and Cylink Frame Encryptor products. To date,
we have made only limited commercial shipments of certain of these products. Our
development  engineers  employed by ARL in Israel  delivered  NetHawk in January
2000 for beta testing with customers in the United States, and our production at
our Santa Clara  facilities  depends on the continued  availability and delivery
schedules  for  components,  or  suitable  alternatives,  selected by our design
engineers. NetAuthority is based on a pilot system delivered in mid-1999 under a
development  contract with the United States Postal  Service,  which we upgraded
with our first  commercial  release during July 2000. These products may require
additional  development  work,  enhancement,  and testing or further  refinement
before they can be introduced and made  commercially  available by us or achieve
market acceptance.  If such new and/or other recently  introduced  products have
performance,  reliability,  quality or other  shortcomings,  such products could
fail to achieve market  acceptance.  The failure by our new or existing products
to achieve or enjoy market acceptance, whether for these or other reasons, could
cause us to experience reduced orders,  higher  manufacturing  costs,  delays in
collecting  accounts  receivable and additional  warranty and service  expenses,
which in each  case  could  have a  material  adverse  effect  on our  business,
financial condition and results of operations. On July 27, 2000, we entered into
a contract to acquire the third party original equipment manufacturer of our ATM
Encryptor product. Should this contract fail to close, we have no assurance that
our supply  contract  will be renewed and in the event of a change of control or
termination  of operations,  we may experience a temporary  reduction in product
availability  and related ATM revenues  pending  successful  renegotiation of an
alternate supply contract or re-engineering of the product to be manufactured by
Cylink.

Competition

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

         o     the development of new products and features;

         o     product quality and performance;

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

         o     product price;

         o     name recognition;

         o     perception of our stability and long-term viability; and

         o     Adoption  of  embedded  security   solutions  in  other  vendors'
               hardware and software products.

         Many of these factors are beyond our control.

                                       11

<PAGE>


         Our  competitors  in  the  information   security  markets,   including
companies that offer  products  similar to or as an alternative to the Company's
products,  include Axent Technologies,  Inc., Checkpoint Software  Technologies,
Ltd., Information Resource Engineering,  Inc., Network Associates,  Inc., Secure
Computing Corporation,  Zaxus Limited (formerly  Racal-Guardata,  Inc.), and RSA
Data Security,  Inc. Our PKI product,  NetAuthority,  competes with numerous PKI
products offered by other vendors,  including  Baltimore  Technologies,  Entrust
Technologies,  Inc., and VeriSign Inc., that already have numerous customers and
significantly  greater  market  recognition  than the  Company.  Our NetHawk VPN
appliance  competes with numerous  other  products,  including  those offered or
under  development  by Cisco  Systems,  Inc.,  Newbridge  Networks  Corporation,
Netscreen Technologies,  Inc. and Nokia Corp. Our professional services business
competes with very large consulting  organizations such as Andersen  Consulting,
PricewaterhouseCoopers  and other  entities which have  formidable  resources to
market and support their security consulting businesses.  Our original equipment
manufacturer ("OEM") supplier of its ATM Encryptor product also competes with us
through other  channels,  for sales of this product and, in the event we fail to
close our  agreement to acquire our OEM, this  competition  will  continue.  Our
smart  cards  compete  with  numerous  vendors,   including  Gemplus,   S.A  and
Schlumberger  Ltd.  A  number  of  significant   vendors,   including  Microsoft
Corporation,  America On Line,  Inc.  and Cisco  Systems,  Inc.,  have  embedded
security  solutions  in their  software.  To the extent  that these  embedded or
optional  security  capabilities  provide all or a portion of the  functionality
provided by our products, our products may no longer be required by customers to
attain network security.

         Certicom  Corporation  and RSA Data  Security,  Inc.,  license  various
methods  of  implementing  public  key  cryptography,  including  some  that are
different from (and  incompatible  with) the method of  implementing  public key
cryptography currently used in most of the Company's products.  Although we have
a license to use all of the  principal  public key methods  promoted by Certicom
and RSA DSI, to the extent  significant  segments of the network security market
adopt  technical  standards  different  from those  currently used by us, to the
exclusion  of our methods,  sales of our  existing and planned  products in that
market segment may be adversely  impacted,  which could have a material  adverse
effect on our financial condition and results of operations.

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

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

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

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

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

         In late 1998 Mr. William C. Crowell, formerly Vice President of Product
Strategy,  was promoted to President and Chief Executive Officer,  and Mr. Roger
A. Barnes became our Chief Financial Officer.  Our future success will depend in
large part on the abilities of Mr.  Crowell and the  contributions  by our other
executive  officers,  key  management and technical  personnel.  The loss of the
services  of one or more of our  executive  officers  or key  personnel,  or the
inability

                                       12

<PAGE>


to continue  to attract  and retain  qualified  personnel,  could delay  product
development  cycles or otherwise have a material  adverse effect on our business
and operating results.

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

         We recently  experienced,  and may continue to experience,  substantial
fluctuations  in the number of employees and the scope of our  operations in the
network  security  business,   resulting  in  increased   responsibilities   for
management.  To manage our  business  effectively,  we will need to  continue to
improve our  operational,  financial and management  information  systems and to
hire,  train,  motivate  and manage our  employees.  Competition  is intense for
qualified  technical,  marketing and management  personnel.  In particular,  the
current  availability of qualified  engineers is quite limited,  and competition
among  companies,   academic   institutions,   government   entities  and  other
organizations for skilled and experienced engineering personnel is very intense.
We have  experienced  delays in filling  positions for engineering and marketing
personnel and expect to experience  continued difficulty in filling our need for
qualified engineers and other personnel.  There can be no assurance that we will
be able  effectively to achieve or manage any future growth,  and our failure to
do so could  delay  product  development  cycles or  otherwise  have a  material
adverse effect on our financial condition and results of operations.

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

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

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

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

         The  market for our  network  security  products  is  characterized  by
rapidly  changing   technology,   emerging  industry   standards,   new  product
introductions and changes in customer  requirements and preferences.  Our future
success will depend in part upon end-users' demand for network security products
in general, and upon our ability to enhance our existing products and to develop
and introduce new products and technologies that meet customer requirements.  We
face continuing  challenges to educate customers as to the value of our security
products  and  security  consulting

                                       13

<PAGE>


services.  We believe that many  potential  customers do not appreciate the need
for security  products unless and until they have faced a major security breach.
Many potential customers prefer not to disclose significant security breaches of
their  networks or are reluctant to invest in the  development of a professional
security  architecture  to protect  their  networks.  This market  resistance is
compounded  by our limited  resources to invest in marketing  campaigns  for our
products and services.

         If we are unable  successfully to educate potential customers as to the
value of, and thereby  obtain  broad  market  acceptance  for,  our products and
services,  we will  continue  to rely  primarily  on  selling  new and  existing
products to our base of existing  customers,  which will significantly limit any
opportunity for growth. In addition, any significant advance in technologies for
attacking cryptographic systems could render some or all of our existing and new
products  obsolete or  unmarketable.  To the extent that a specific method other
than ours is adopted as the standard for  implementing  network  security in any
segment of the  network  security  market,  sales of our  existing  and  planned
products in that market  segment may be adversely  impacted,  which could have a
material  adverse  effect on our  business,  financial  condition and results of
operations. Also, network security-related products or technologies developed by
others may adversely  affect our competitive  position or render our products or
technologies noncompetitive or obsolete.

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

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

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

We face risks associated with international operations.

         We plan to continue to expand our foreign  sales  channels and to enter
additional  international  markets,  both  of  which  will  require  significant
management attention and financial resources. International sales are subject to
a number of risks,  including  unexpected  changes in  regulatory  requirements,
export control laws,  tariffs and other trade  barriers,  political and economic
instability in foreign  markets,  difficulties  in the staffing,  management and
integration of foreign operations,  longer payment cycles, greater difficulty in
collecting accounts  receivable,  currency  fluctuations and potentially adverse
tax  consequences.  Since  most of our  foreign  sales are  denominated  in U.S.
dollars,  our products become less price competitive in countries in which local
currencies  decline in value  relative to the U.S.  dollar.  The  uncertainty of
monetary  exchange values has caused,  and may in the future cause, some foreign
customers  to delay  new  orders  or delay  payment  for  existing  orders.  The
long-term  impact of such  devaluation,  including  any  possible  effect on the
business outlook in other developing countries, cannot be predicted.

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

         Due to U.S. and Israeli government  regulations  restricting the export
of cryptographic devices and software, including sales to foreign governments of
certain of our network  security  products,  we are often at a  disadvantage  in
competing for  international  sales  compared to companies  located  outside the
United States and Israel that are not subject to such restrictions. Although the
Department of Commerce recently relaxed the export control laws as they apply to
sales of our products to our commercial  customers,  we still face  considerable
export controls on sales to foreign  governments and transfers of our technology
to foreign partners.

                                       14

<PAGE>


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

         Our ability to deliver our  products  in a timely  manner is  dependent
upon  the  availability  of  quality  components  and  subsystems  used in these
products.  We depend in part upon  subcontractors  to manufacture,  assemble and
deliver  certain items in a timely and  satisfactory  manner.  We obtain certain
components and subsystems from single, or a limited number of, sources.  We rely
on a single OEM supplier for our ATM Encryptor,  which we offer to our customers
with our own  management  solution.  In the event we fail to close  our  pending
contract to acquire this OEM  supplier,  our  dependence  on this sole source of
production  will continue for the  foreseeable  future.  A significant  delay in
obtaining a source of supply for components  selected by our design engineers or
interruption in the delivery of such items could have a material  adverse effect
on our financial condition and results of operations.

We face risks associated with our pending acquisition.

         On July 27, 2000 we agreed to acquire Celotek Corporation,  a privately
held company in the ATM encryption business,  in exchange for $21,500,000 of our
Common Stock minus certain expenses. The shares to be issued in this acquisition
will  increase  the  number of  shares  of our  common  stock  outstanding,  and
therefore  will  result in  earnings  per share  dilution  unless we are able to
realize sufficient financial benefits from the transaction.  While we believe we
will achieve  financial  benefits  that will offset the  dilution,  acquisitions
inherently  involve risks and  uncertainties.  These include potential costs and
management  distractions  associated with  integrating the operations of the two
companies,  the  potential  loss of key employees of the acquired  company,  the
potential loss of key customers,  and potential operational  challenges that the
acquired  company  may have and  which  are  sometimes  unforeseeable.  Any such
circumstances  could result in the acquisition not rendering  financial benefits
to offset the cost of the acquisition.

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

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

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

                                       15

<PAGE>


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

         As of July 2, 2000,  we held a total of $18.9  million of cash and cash
equivalents.  These  securities  consist  primarily  of money  market  funds and
high-grade,  short-term corporate  obligations.  Certain of these securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10  percent  from  levels as of July 2, 2000,  the  decline in fair value of the
portfolio would not be material.

         We transact substantially all of our revenues and costs in U.S. dollars
and our results of operations  would not be materially  affected by fluctuations
in foreign  exchange  rates.  Accordingly,  to date,  we have not used  material
amounts of derivative financial instruments. As of July 2, 2000, we had no fixed
rate   obligations   except  for  capitalized   leases  and  long-term  debt  of
approximately $145,000. As such, the fair value of our fixed rate obligations is
not subject to a material adverse impact from changes in interest rates.


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

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

         The  securities  class action  lawsuits have been ordered  consolidated
into a single  action  pending  in the  United  States  District  Court  for the
Northern District of California,  captioned In Re Cylink Securities  Litigation,
No. C98-4292 (VRW).  Plaintiffs recently filed an amended consolidated complaint
and our motion to dismiss the complaint is pending before the Court.

         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.

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<PAGE>


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

(a)      The Registrant's  Annual Meeting of Shareholders was held May 17, 2000.
         The vote of holders of record of 30,440,642  shares of Cylink's  common
         stock  outstanding  at the  close of  business  on March  31,  2000 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                   Votes
        Name of Director                     For                   Withheld
        ----------------                     ---                   --------
        Howard L. Morgan                  26,607,890                69,185
        William W. Harris                 26,601,590                75,485
        William P. Crowell                26,606,061                71,014


(c)      The shareholders approved Cylink's 2000 Employee Stock Purchase Plan

                            Votes            Votes           Votes
                             For            Against        Withheld
                             ---            -------        --------
                          25,757,999        880,539         38,537


(d)      The shareholders  amended the Articles of Incorporation to increase the
         authorized  number of Common Stock the Company may issue by  15,000,000
         shares to a total of 55,000,000 shares.

                            Votes            Votes           Votes
                             For            Against        Withheld
                             ---            -------        --------
                          26,496,032        153,209         27,834


(e)      The  shareholders  ratified the appointment of Deloitte & Touche LLP as
         Cylink's  independent  auditor for the fiscal year ending  December 31,
         2000.

                            Votes            Votes           Votes
                             For            Against        Withheld
                             ---            -------        --------
                          26,642,048         28,235          6,792


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


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<PAGE>


Item 6.   Exhibits and Reports on Form 8-K

(a)   Exhibits Index:

         Exhibit
         Number            Description of Exhibit
         ------            ----------------------
          27.1             Financial Data Schedule


(b)      Reports on Form 8-K:

         On August 4,  2000,  Cylink  filed a report on Form 8-K dated  July 31,
         2000 as required by Item 2 of Form 8-K with respect to an Agreement and
         Plan of  Reorganization  to acquire Celotek  Corporation for a value of
         $21,5000,000 in Cylink Common Stock minus certain expenses.

Items 2, 3 and 5 are not applicable and have been omitted.


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<PAGE>


                                    SIGNATURE

         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 15, 2000                          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)

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