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 September 30, 2001

                           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 November 12, 2001,  there were 32,864,900  shares of the Registrant's
common stock outstanding.


<PAGE>

<TABLE>
                                            CYLINK CORPORATION

                            FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001

                                                   INDEX
<CAPTION>


                                                                                                      Page
                                                                                                      ----



                                       PART I FINANCIAL INFORMATION
<S>      <C>                                                                                            <C>
Item 1   Financial Statements

         a)   Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000          2

         b)   Condensed Consolidated Statements of Operations for the three and nine months ended
              September 30, 2001 and October 1, 2000                                                     3

         c)   Condensed Consolidated Statement of Cashflows for the nine months ended
              September 30, 2001 and October 1, 2000                                                     4

         d)   Notes to Condensed Consolidated Financial Statements                                       5

Item 2   Management's Discussion and Analysis of Financial Condition and Results of Operations           8

                                         PART II OTHER INFORMATION                                      21

Item 1.  Legal Proceedings                                                                              21

Item 4.  Submission of Matters to a Vote of Security Holders                                            21

Item 5.  Other Information                                                                              21

Item 6.  Exhibits                                                                                       21

         Signature                                                                                      22
</TABLE>

                                                    1


<PAGE>


PART I.  FINANCIAL INFORMATION
Item 1.    Financial Statements

CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data; unaudited)

<TABLE>
<CAPTION>
                                                                                                   September 30,        December 31,
                                                                                                       2001                 2000
                                                                                                    ---------            ---------
<S>                                                                                                 <C>                  <C>
Assets
Current assets:
   Cash and cash equivalents                                                                        $  10,393            $  15,250
   Accounts receivable, net of allowances of $984 and $1,499                                            7,651               14,927
   Income tax  receivable                                                                                 109                 --
   Inventories                                                                                          5,620               10,741
   Deferred income taxes                                                                                 --                    800
   Other current assets                                                                                 1,036                1,697
                                                                                                    ---------            ---------
            Total current assets                                                                       24,809               43,415

Restricted cash                                                                                         1,400                1,400
Property and equipment, net                                                                             6,847               10,241
Acquired technology, goodwill and other intangibles                                                    17,418               20,707
Notes receivable from employees and former employees                                                    1,961                2,310
Other assets                                                                                            1,055                  811
                                                                                                    ---------            ---------
                                                                                                    $  53,490            $  78,884
                                                                                                    =========            =========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and equipment line of credit                                $     174            $     288
   Accounts payable                                                                                     2,354                5,137
   Accrued liabilities                                                                                  5,983                9,346
   Income taxes payable                                                                                   413                  359
   Deferred revenue                                                                                     2,944                3,147
                                                                                                    ---------            ---------
         Total current liabilities                                                                     11,868               18,277
                                                                                                    ---------            ---------

Capital lease obligations and equipment line of credit                                                   --                     86
Deferred revenue and other accruals, less current portion                                               1,160                1,368
                                                                                                    ---------            ---------
         Total long-term liabilities                                                                    1,160                1,454
                                                                                                    ---------            ---------

Commitments and contingencies (Notes 6, 10 & 12)

Shareholders' equity:
  Preferred Stock, $0.01 par value; 5,000,000 shares authorized;
    none issued and outstanding
   Common stock; $0.01 par value: 55,000,000 shares authorized;
    32,861,000 and 32,681,000 shares issued and outstanding                                               328                  327
   Additional paid-in capital                                                                         158,201              158,805
   Deferred compensation related to stock options                                                        --                 (1,231)
   Accumulated other comprehensive income (loss)                                                          (26)                 (16)
   Accumulated deficit                                                                               (118,041)             (98,732)
                                                                                                    ---------            ---------
            Total shareholders' equity                                                                 40,462               59,153
                                                                                                    ---------            ---------
                                                                                                    $  53,490            $  78,884
                                                                                                    =========            =========


<FN>
                               See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
                                                                  2

<PAGE>


CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
                                                                               Three months ended             Nine months ended
                                                                           ------------------------        ------------------------
                                                                         September 30,    October 1,     September 30,    October 1,
                                                                             2001            2000            2001            2000
                                                                           --------        --------        --------        --------
<S>                                                                        <C>             <C>             <C>             <C>
Revenue                                                                    $ 10,345        $ 17,192        $ 36,528        $ 52,575
Cost of revenue                                                               4,905           6,173          15,203          18,852
                                                                           --------        --------        --------        --------
Gross profit                                                                  5,440          11,019          21,325          33,723
                                                                           --------        --------        --------        --------

Operating expenses:
   Research and development, net                                              3,716           5,659          14,851          15,571
   Selling and marketing                                                      3,133           8,254          13,895          25,479
   General and administrative                                                 2,838           3,426           8,581          10,654
   Amortization of acquired intangibles                                         768             817           2,447           2,257
    Loss from divestiture of Algorithmic Research, Ltd.                         294            --             2,797            --
    Purchased in-process technology                                            --             3,681            --             3,681
                                                                           --------        --------        --------        --------
            Total operating expenses                                         10,749          21,837          42,571          57,642
                                                                           --------        --------        --------        --------

Loss from operations                                                         (5,309)        (10,818)        (21,246)        (23,919)

Other income (expense):
         Interest income, net                                                   223             281             596           1,108
         Write-down of investment in unaffiliated company                      (253)           --              (253)           --
         Royalty and other income (expense), net                                580            (171)            417            (237)
                                                                           --------        --------        --------        --------
                                                                                550             110             760             871
                                                                           --------        --------        --------        --------

Loss before income taxes                                                     (4,759)        (10,708)        (20,486)        (23,048)
Income tax benefit                                                             --              --            (1,177)              8
                                                                           --------        --------        --------        --------
Net loss                                                                   $ (4,759)       $(10,708)       $(19,309)       $(23,056)
                                                                           ========        ========        ========        ========

Loss per share - basic & diluted:                                          $  (0.15)       $  (0.35)       $  (0.60)       $  (0.76)
                                                                           ========        ========        ========        ========

Shares used in per share calculation - basic & diluted                       32,623          31,007          32,437          30,519
                                                                           ========        ========        ========        ========


<FN>
                               See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
                                                                  3

<PAGE>


CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
                                                                                                             Nine months ended
                                                                                                       ----------------------------
                                                                                                    September 30,         October 1,
                                                                                                         2001                2000
                                                                                                       --------            --------
<S>                                                                                                    <C>                 <C>
Cash flows from operating activities:
   Net loss                                                                                            $(19,309)           $(23,056)
   Adjustments to reconcile net loss to net
      cash used in operating activities:
         Write-down of investment in unaffiliated company                                                   253                --
         Loss on divestiture of ARL                                                                       2,797                --
         Loss on disposition of fixed assets                                                                 31                --
         Depreciation                                                                                     2,597               2,532
         Amortization                                                                                     2,447               2,258
         Write-off of acquired in-process research & development                                           --                 3,681
         Deferred income taxes                                                                              800                  (4)
         Amortization of imputed interest on note receivable                                               (211)               (182)
         Deferred compensation related to stock options                                                     528                 536
         Changes in operating assets and liabilities (net of effects of
          acquisition and divestitures):
            Accounts receivable                                                                           6,415                (995)
            Inventories                                                                                   4,722              (5,421)
            Income tax receivable                                                                          (109)               --
            Other assets                                                                                    309                 331
            Accounts payable                                                                             (2,427)             (1,060)
            Accrued liabilities                                                                          (2,192)               (404)
            Income taxes payable                                                                             (7)                 (6)
            Deferred revenue                                                                                509               1,322
                                                                                                       --------            --------
         Net cash used in operating activities                                                           (2,847)            (20,468)

Cash flows from investing activities:
   Acquisition of property and equipment                                                                   (605)             (2,622)
   Collections of employee notes receivable                                                                 560                --
   Cash transferred with divestiture of SDI                                                                 (28)               --
   Cash transferred with divestiture of ARL                                                              (1,900)               --
   Acquisition of Celotek Corporation                                                                      --                (1,061)
                                                                                                       --------            --------
               Net cash used in investing activities                                                     (1,973)             (3,683)
                                                                                                       --------            --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                                               82               6,209
   Other                                                                                                   (109)                (13)
                                                                                                       --------            --------
               Net cash provided by (used in) financing activities                                          (27)              6,196
                                                                                                       --------            --------
Effect of exchange rate changes on cash and cash equivalents                                                (10)                 72
                                                                                                       --------            --------
Net increase (decrease) in cash and cash equivalents                                                     (4,857)            (17,883)

Cash and cash equivalents at beginning of period                                                         15,250              33,170
                                                                                                       --------            --------
Cash and cash equivalents at end of period                                                             $ 10,393            $ 15,287
                                                                                                       ========            ========

Supplemental disclosures
   Acquisition of Celotek in exchange for Common Stock                                                 $   --              $ 25,759
   Cash refunds of income tax                                                                             3,342                --

<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, 2000.  Interim  results of  operations  are not  necessarily
indicative of the results to be expected for the full year.

     The statements  have been prepared in accordance  with  generally  accepted
accounting  principles in the United  States of America for interim  information
and the instructions to Form 10-Q and Article 10 of Regulation S-X.

     Certain 2000 financial  statement amounts were reclassified to conform with
2001  classifications.  These  reclassifications  had no  effect  on net loss or
shareholders' equity as previously reported.

2.       Accounting Changes

     Effective  January 1, 2001, the Company  adopted SFAS 133,  "Accounting for
Derivative  Instruments  and  Hedging  Activities,"  as amended.  The  statement
requires that all derivatives,  whether  designated in hedging  relationships or
not, are to be recorded on the balance sheet at fair value. If the derivative is
designated  as a fair value hedge,  changes in the fair value of the  derivative
and of the  hedged  item  attributable  to the  hedged  risk are  recognized  in
earnings.  If the  derivative is designated as a cash flow hedge,  the effective
portions  of the  changes in the fair value of the  derivative  are  recorded in
other comprehensive income (OCI) and are recognized in the income statement when
the hedged item affects  earnings.  Ineffective  portions of changes in the fair
value of cash flow hedges are  recognized in earnings.  The adoption of SFAS 133
did not result in a transition adjustment at January 1, 2001.

     The  Company  uses  derivative  instruments,   primarily  forward  exchange
contracts,  to manage the foreign  currency  exchange rate risk  associated with
certain assets and forecasted  transactions  which are denominated in currencies
other than the U.S. Dollar.  The Company monitors its foreign currency exposures
regularly to maximize the overall  effectiveness  of its foreign  currency hedge
positions,  with the  principal  currency  hedged being the British  Pound.  The
Company has not  designated  any of its forward  exchange  contracts  as hedging
instruments  under SFAS 133,  and  therefore  the changes in fair value of these
forward  contracts has been included in interest and other income in the quarter
ended  September 30, 2001.  The fair value of these  instruments as of September
30, 2001 was not significant.

3.       Inventories

                                             September 30,       December 31,
                                                 2001                2000
                                             --------------------------------
                                                       (in thousands)

   Raw materials                                $  2,677             $ 5,708
   Work in process and subassemblies               1,974               2,768
   Finished goods                                    969               2,265
                                                --------           ---------
                                                $  5,620           $  10,741
                                                ========           =========


4.       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.  As  of
September 30, 2001 and October 1, 2000,  the Company had 8,452,000 and 6,943,000
stock options  outstanding  with a weighted  average exercise price of $4.05 and
$4.95,  respectively.  These


                                       5

<PAGE>

options  expire  on  various  dates  through  2008.  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.

5.       Comprehensive Loss

     The components of comprehensive loss,  consisting of the Company's reported
net  loss  and  unrealized  gains  or  losses  in  the  translation  of  foreign
currencies, are as follows:

                                   Three Months Ended        Nine Months Ended
                                   --------------------    --------------------
                                  Sept. 30,     Oct. 1,   Sept. 30,     Oct. 1,
                                     2001        2000        2001        2000
                                   --------    --------    --------    --------
                                      (in thousands)         (in thousands)
Net loss                           $ (4,759)   $(10,708)   $(19,309)   $(23,056)
Other comprehensive
  income (loss)                         (67)         41         (10)         72
                                   --------    --------    --------    --------
Total comprehensive loss           $ (4,826)   $(10,667)   $(19,319)   $(22,984)
                                   ========    ========    ========    ========


6.       Contingencies

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

7.       Divestitures

     On April 9, 2001,  the Company sold its entire  interest in its  U.S.-based
professional services subsidiary, Security Design International, in exchange for
209,425 shares of Series C preferred stock in a private  company  representing a
minority  interest  in  that  company.  No  gain or  loss  was  recorded  on the
transaction.  The Company  evaluated the carrying value of its investment in the
preferred  shares of that Private  Company at September 30, 2001, and recorded a
third  quarter  charge for  impairment  of the value of that  investment  in the
amount of $0.3 million.

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

8.       Restructuring

     On July 20, 2001,  Cylink  announced  further  expense  reduction  actions,
including a further  reduction in its workforce by approximately  28% (excluding
the wind-up previously disclosed of ARL). The severance related costs associated
with the workforce reduction are approximately $0.5 million were recorded in the
third quarter of 2001.

9.       CFE Repair

     On August 2, 2001,  Cylink  determined that a hardware design could cause a
premature  failure of the backup  battery on its Cylink  Frame  Entcyptor  (CFE)
product.  Cylink has  announced  a program to give its  customers  the option of
updating  their CFE units by  returning  them to the  factory,  or  receiving an
extended  warranty covering the battery through the end of December 2002. Cylink
has  accrued  approximately  $1.0  million in warranty  costs  during the second
quarter associated with this program.


                                       6

<PAGE>

10.      Working Capital Loan

     On June 27, 2001,  the Company  entered into a loan and security  agreement
with a bank  under  which it can borrow up to $7.5  million by way of  revolving
advances. This loan is secured by all of Cylink's tangible assets. The revolving
loan  provides  for  loan  advances  up to 85%  of  Cylink's  eligible  accounts
receivable,  bears  interest at the bank's  prime rate of interest  (6.25% as of
September  30, 2001) plus 1.75% and is due April 30, 2002.  The loan  contains a
tangible net worth covenant. There have been no borrowings under the loan.

     In conjunction with the acquisition of Celotek  Corporation in August 2000,
Cylink assumed an equipment  loan with an  outstanding  balance of $0.3 million.
This loan matures December 1, 2002 and bears interest at the prime rate plus 1%.
As of September 30, 2001, the  outstanding  balance under the equipment line was
$0.2 million.

11.      NASDAQ Listing Notice.

     On July 25, 2001,  Cylink  received a notice from NASDAQ that the Company's
stock had failed to  satisfy  one of  NASDAQ's  listing  requirements,  that is,
maintaining a minimum bid price of $1.00 per share for more than 30  consecutive
trading days. The notice stated that the Company had 90 days to re-establish its
compliance by maintaining a minimum bid price of at least $1.00 per share for at
least 10  consecutive  trading  days.  If the Company  failed to do so, then the
NASDAQ  listing  staff  would  issue a notice of  delisting,  at which  time the
Company would have an opportunity  to appeal the staff's  decision to the NASDAQ
listing  qualifications  panel.  On September  27, 2001,  NASDAQ  suspended  its
minimum bid price requirements until January 2002.

12.      Subsequent Events

     Supplier  insolvency.  During  telephonic  discussions in October 2001, the
Company  received  reports  that  the sole OEM  supplier  of its ISDN  encryptor
product  was  experiencing  financial  difficulties,  and  may  face  insolvency
proceedings. The commencement of insolvency proceedings would have a significant
impact on the Company's ability to fulfill ISDN orders and a consequent negative
impact on revenues for the fourth quarter of 2001 and the first half of 2002.

13.      Recently issued accounting pronouncements.

     On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standard (SFAS) No. 141, "Business  Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business  combinations  initiated after June 30, 2001 be accounted for under
the purchase  method and addresses the initial  recognition  and  measurement of
goodwill and other intangible  assets acquired in a business  combination.  SFAS
No. 142 addresses the initial  recognition and measurement of intangible  assets
acquired  outside of a business  combination and the accounting for goodwill and
other intangible assets subsequent to their  acquisition.  SFAS No. 142 provides
that  intangible  assets with finite useful lives be amortized and that goodwill
and  intangible  assets with  indefinite  lives will not be amortized,  but will
rather be tested at least  annually for  impairment.  Cylink will adopt SFAS No.
142 for its fiscal year  beginning  January 1, 2002.  Upon adoption of SFAS 142,
Cylink will stop the  amortization  of goodwill  with an expected  net  carrying
value  of  $5,859,000  at the  date  of  adoption  and  annual  amortization  of
$1,034,000  that  resulted  from business  combinations  completed  prior to the
adoption of SFAS 141. Goodwill acquired  subsequent to June 30, 2001 will not be
amortized.

     The  Company  will  evaluate  goodwill  under  the  SFAS  142  transitional
impairment  test  and has not yet  determined  whether  or not  there  will be a
related impairment loss. Any transitional  impairment loss will be recognized as
a change in accounting principle under provisions of Accounting Principles Board
Opinion No. 20.

     In July 2001,  the Financial  Accounting  Standards  Board issued SFAS 143,
"Accounting for Asset  Retirement  Obligations"  ("FAS 143").  FAS 143 addresses
financial   accounting  and  reporting  for  obligations   associated  with  the
retirement of tangible  long-lived  assets and the associated  asset  retirement
costs.  It  applies  to legal  obligations  associated  with the  retirement  of
long-lived assets that result from the acquisition,  construction,  development,
and  (or) the  normal  operation  of a  long-lived  asset,  except  for  certain
obligations  of lessees.  The provisions of FAS 143 will be effective for fiscal
years beginning after June 15, 2002, however early application is permitted. The
Company is currently in the process of evaluating  the impact of this  Statement
on its financial condition and results of operations.

     In August 2001, the Financial  Accounting  Standards  Board issued SFAS 144
Accounting  for the  Impairment or Disposal of  Long-Lived  Assets" ("FAS 144").
This Statement addresses  financial  accounting and reporting for the impairment
or disposal of long-lived assets.  This Statement  supersedes FASB Statement No.
121,  Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed Of, and amends the accounting and reporting  provisions of
APB Opinion No. 30.  Reporting the Results of Operations -- Reporting the Effect
of  Disposal  of a  Segment  of  a  Business,  and  Extraordinary,  Unusual  and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a  business.  The  provisions  of FAS 144 will be  effective  for  fiscal  years
beginning  after  December 15, 2001.  The Company is  currently  evaluating  the
implications of adoption of FAS 144 and  anticipates  adopting its provisions in
fiscal year 2002.

                                       7

<PAGE>



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


     The following  Management's  Discussion and Analysis of Financial Condition
and  Results of  Operations  should be read in  conjunction  with the  unaudited
condensed  financial  statements and notes thereto  included in Part I Item 1 of
this Report on Form 10-Q and the audited financial  statements and notes thereto
and Management's  Discussion and Analysis of Financial  Condition and Results of
Operations  included in the Company's  2000 Report on Form 10-K.  This Report on
Form 10-Q includes  statements that reflect Cylink's beliefs  concerning  future
events and financial  performance.  Statements that 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  generally  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 (and  disclaims  any  obligation  to) update or
alter any such forward-looking  statements,  or to update the reasons why actual
results could differ from those projected in the  forward-looking  statements or
after the date hereof,  whether as a result of changes, new information,  future
events, or otherwise.

RESULTS OF OPERATIONS

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

                                                                    Three months ended             Nine months ended
                                                                ---------------------------    --------------------------
                                                                September 30,    October 1,    September 30,   October 1,
                                                                    2001            2000           2001           2000
                                                                -------------    ----------    -------------   ----------
<S>                                                                  <C>            <C>            <C>            <C>
Revenue                                                              100.0%         100.0%         100.0%         100.0%
Cost of revenue                                                       47.4           35.9           41.6           35.9
                                                                   -------        -------        -------        -------
Gross profit                                                          52.6           64.1           58.4           64.1
                                                                   -------        -------        -------        -------

Operating expenses:
  Research and development, net                                       35.9           32.9           40.7           29.6
  Selling and marketing                                               30.3           48.0           38.0           48.5
  General and administrative                                          27.4           19.9           23.5           20.3
  Amortization of acquired intangibles                                 7.4            4.8            6.7            4.3
  Loss from divestiture of Algorithmic Research, Ltd.                  2.8             --            7.7             --
  Purchased in-process technology                                       --           21.4             --            7.0
                                                                   -------        -------        -------        -------

     Total operating expenses                                        103.8          127.0          116.6          109.7
                                                                   -------        -------        -------        -------

Loss from operations                                                 (51.2)         (62.9)         (58.2)         (45.6)

Other income, net                                                      5.3            0.6            2.1            1.7
                                                                   -------        -------        -------        -------

Loss before income taxes                                             (45.9)         (62.3)         (56.1)         (43.9)
Income tax benefit                                                      --             --           (3.2)            --
                                                                   -------        -------        -------        -------

Net loss                                                             (45.9)%        (62.3)%        (52.9)%        (43.9)
                                                                   =======        =======        =======        =======
</TABLE>

                                                                8

<PAGE>

     Revenue.  Revenue  decreased  40% from $17.2  million for the three  months
ended October 1, 2000 to $10.3 million for the three months ended  September 30,
2001,  and decreased 31% from $52.6 million for the nine months ended October 1,
2000 to $36.5 million for the nine months ended September 30, 2001. The decrease
is primarily due to a market slowdown.  International revenue was 32% and 33% of
total revenue for the third quarter of 2001 and 2000, respectively.

     Gross  Profit.  Gross  profit  decreased  from $11.0  million for the three
months  ended  October  1,  2000 to $5.4  million  for the  three  months  ended
September  30, 2001 and  decreased  from $33.7 million for the nine months ended
October 1, 2000 to $21.3  million for the nine months ended  September 30, 2001.
The decrease in dollars was primarily a result of the decrease in revenue.  As a
percentage of sales, gross profit was approximately 64% and 53% for the quarters
ended  October 1, 2000 and  September  30, 2001,  respectively.  The decrease in
gross profit as a percentage  of revenue was a result of higher  provisions  for
inventory writedowns, manufacturing inefficiencies due to low production levels,
lower margins on non-core  revenue,  offset by margin  improvements from our ATM
encryptor  product  resulting from our  acquisition of Celotek  Corporation  and
margin improvements in customer support.

     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  decreased  35% from $5.7 million for the three months ended October 1,
2000 to $3.7 million for the three months ended September 30, 2001 and decreased
5% from $15.6 million for the nine months ended October 1, 2000 to $14.9 million
for the nine months ended  September 30, 2001.  Gross  research and  development
expenses as a percentage  of revenue were 33% for the third  quarter of 2000 and
36% for the third  quarter  2001.  The dollar  decrease  resulted  from  reduced
project  spending  and  headcount  as a  result  of  cost  savings  initiatives,
partially  offset by the  acquisition of the Celotek ATM  development  team. The
increase in expense as a percentage  of revenue for the third quarter of 2001 is
due to a greater  decline in revenues than the reduction in product  development
expenditures.

     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  decreased  63% from $8.3 million for the three months ended October 1,
2000 to $3.1  million  for the  three  months  ended  September  30,  2001,  and
decreased  45% from $25.5  million for the nine months ended  October 1, 2000 to
$13.9  million  for the nine  months  ended  September  30,  2001.  Selling  and
marketing  expenses as a  percentage  of revenue  were 48% and 30% for the third
quarter of 2000 and 2001,  respectively.  Sales expenses decreased for the third
quarter of 2001  compared to the third  quarter of 2000  primarily  due to lower
commission  spending  driven by decreased  revenues,  lower  headcount  spending
driven by the reduction in workforce  actions taken during the fourth quarter of
2000, and lower marketing and bonus spending due to the  implementation  of cost
savings initiatives.  Selling and marketing expenses,  expressed as a percentage
of revenue,  decreased as a result of the above spending  reductions  which were
greater than the percentage revenue declines for the same period.

     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  18% from $3.4  million for the three months
ended  October 1, 2000 to $2.8 million for the three months ended  September 30,
2001,  and decreased 20% from $10.7 million for the first nine months of 2000 to
$8.6  million  for the first nine  months of 2001.  General  and  administrative
expenses as a percentage  of revenue  were 20% and 27% for the third  quarter of
2000 and 2001,  respectively.  The dollar  decrease in the third quarter of 2001
versus the third quarter of 2000 was primarily due to lower  headcount  spending
driven by the reduction in workforce  actions taken during the fourth quarter of
2000 as well as the third quarter of 2001,  and lower bonus  spending due to the
implementation  of cost  savings  initiatives.  The  increase  in  expense  as a
percentage of revenue for the third quarter of 2001 is due to greater decline in
revenues than the reduction in general and administrative expenditures.

     Loss from  divestiture of Algorithmic  Research,  Ltd. In the quarter ended
September 30, 2001, the Company recorded an additional charge of $0.3 million to
cover additional losses associated with the divestiture of that subsidiary. (See
Note 7 to condensed  consolidated interim financial statements.) The Company had
previously  recorded a charge in the second  quarter of 2001 of $2.5  million to
cover the impairment in the value of assets  associated with the wind-up of that
subsidiary.


                                       9

<PAGE>

     Amortization of Acquired Intangibles. Amortization relating to goodwill and
other  intangibles  remained constant at $0.8 million for the first three months
ended  October  1,  2000  and  the  three  months  ended   September  30,  2001,
respectively,  and  increased  4% from $2.3  million for the nine  months  ended
October 1, 2000 to $2.4  million for the nine months ended  September  30, 2001.
The  dollar  increase  in the first  nine  months of 2001  versus the first nine
months of 2000 was primarily due to the  acquisition  of Celotek  Corporation in
the third quarter of 2000, offset in part by reduced amortization of intangibles
related to the  acquisition  of Algorithmic  Research,  Ltd ("ARL").

     Other Income (Expense), Net. Other income (expense), net consists primarily
of interest  income and  interest  expense,  foreign  exchange  gains or losses,
royalty  income,   and  impairment  losses  from  investments  in  non-operating
companies.  Other income,  net increased from $0.1 million for the quarter ended
October 1, 2000 to $0.6  million  for the  quarter  ended  September  30,  2001,
principally  due to interest  income on the  recognition of deferred income from
the payment of an employee note receivable,  and foreign currency gains,  offset
by the  recognition  of an  impairment  loss of $0.3  million  on the  Company's
investment in an unaffiliated company.

     Provision for Income Taxes.  No  significant  provision for or benefit from
income taxes was  recognized  in the either the quarter ended October 1, 2000 or
the quarter ended  September  30, 2001, 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.


LIQUIDITY AND CAPITAL RESOURCES

     At September  30, 2001,  the Company had working  capital of $12.9  million
(including  cash and cash  equivalents of $10.4  million) and minimal  long-term
obligations.  For the nine months ended September 30, 2001, the Company recorded
a net loss of $19.3 million. Net cash used in operating activities for the first
nine  months  of 2001 was $2.8  million  consisting  primarily  of the loss from
operations partially offset by a decrease in working capital requirements, which
included a decrease  in  accounts  receivable  of $6.4  million,  a decrease  in
inventories  of $4.7 million,  an increase in deferred  revenue of $0.5 million,
partially  offset by a decrease in accounts  payable and accrued  liabilities of
$4.6 million,  tax refunds of $3.3  million,  and an increase in other assets of
$0.3 million.  The decrease in accounts  receivable  was due to lower  shipments
during the quarter supported by improved collection activities.  The decrease in
inventories  and the  decrease in accounts  payable  were the result of stricter
purchasing controls.  The decrease in accrued liabilities was due principally to
decreased  commission,  bonus,  and  legal  liabilities,  along  with  decreased
employment  liabilities  resulting  from  reduced  headcount.  Net cash  used in
operating  activities  for the  first  nine  months  of 2000 was  $20.5  million
consisting  primarily  of the loss from  operations,  an  increase  in  accounts
receivable  of $1.0  million,  an increase in  inventories  of $5.4  million,  a
decrease in accounts payable and accrued liabilities of $1.5 million,  offset in
part by an increase in deferred revenue of $1.3 million.

     Cash used in investing  activities for the nine months ended  September 30,
2001 and October 1, 2000 was $2.0 million and $3.7 million,  respectively.  Cash
used in investing  activities for the first nine months of 2001 provided for the
acquisition  of $0.6  million of  property,  plant and  equipment,  $1.9 million
transferred in connection with the divestiture of our Algorithmic Research, Ltd.
subsidiary,  and was  offset by $0.6  million  collection  of an  employee  note
receivable.  Cash used in investing activities for the first nine months of 2000
provided for the  acquisition  of $2.6 million of property,  plant and equipment
and $1.1 million for the acquisition of Celotek Corporation.

     Cash used in financing  activities for the nine months ended  September 30,
2001 was not material. Cash provided by financing activities for the nine months
ended October 1, 2000 was $6.2 million, resulting from proceeds from the sale of
1,006,000 shares of stock, pursuant to the exercise of stock options.

     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.

     Assuming the Company's  financial  restructuring plan provides the intended
beneficial cost reduction,  the Company believes that existing cash balances and
prospective  borrowing  will be sufficient to fund  operations  through the next
twelve months.  Cylink has a $7.5 million revolving line of credit with its bank
that will assist the  Company,  if  necessary,  in meeting  its working  capital
requirements.  This line of credit is subject to the Company's satisfaction of a


                                       10

<PAGE>

tangible  net worth  covenant  during  the term of the loan.  There have been no
advances under the Company's  current or pre-existing  line since inception.  In
the event the  Company's  financial  plan is  unsuccessful,  or it is  otherwise
unable to satisfy the conditions  for use of this revolving line of credit,  the
Company may require additional funds in the near term to support working capital
requirements or for other purposes and may seek to raise such  additional  funds
through public or private  equity or debt  financing,  sales of assets,  or from
other  sources.  No assurance  can be given that  additional  financing  will be
available or that,  if available,  will be on terms  favorable to the Company or
its shareholders.


                                       11

<PAGE>

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     We have incurred significant net losses in the third quarter of 2001 and in
prior  years.  The  Company  had an  accumulated  deficit of $118  million as of
September  30, 2001.  We expect to continue to incur net losses at least through
2001.  We might not  increase or  maintain  our  revenue or be  profitable  on a
quarterly or an annual basis for the foreseeable  future.  Our continuing losses
may adversely impact our ability to raise additional capital when required.  Our
restructuring  plans may not succeed,  or may not be  sufficient  to allow us to
achieve break-even.

     The Company believes that its principal sources of liquidity, which include
cash  and cash  equivalents  of  $10.4  million  as of  September  30,  2001 and
prospective  borrowing via the Company's  working capital loan, will satisfy the
Company's   current   anticipated   working  capital  and  capital   expenditure
requirements  through at least the next twelve  months.  The  Company's  working
capital  loan  matures  in April  2002 and  provides  for up to $7.5  million of
borrowings, depending on the amount of eligible domestic accounts receivable, as
defined in the agreement.  The Company has  renegotiated  its credit facility in
order to obtain more favorable covenants.  There is no guarantee,  however, that
the Company can continue to meet those covenants, and there is no guarantee that
the loan will be renewed in April 2002. If the Company  fails to do either,  the
line of credit will not be available to fund our operations if it is needed.

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

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

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

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

     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 infringement claims;

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

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

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

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

     o    loss of an important customer;

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

     o    customer discounts and credits;


                                       12

<PAGE>

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

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

     o    disruption in the supply of OEM products caused by financial  hardship
          of suppliers;

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

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

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

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

     We introduced a number of new products during 2000, and plan to release new
versions of  existing  products  in 2001.  The  failure of any such  products to
achieve market  acceptance  when  anticipated,  or at all, would  materially and
adversely affect our financial condition and results of operations.

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  control.  We are often  required  to ship  products
shortly after we receive orders. Consequently, order backlog at the beginning of
any period has, at times in the past,  represented  only a small portion of that
period's  expected  revenue.  Furthermore,  increases in backlog from quarter to
quarter may be due to placement of orders  calling for delivery  dates  extended
over a much longer period of time into future periods.  Consequently,  our order
backlog becomes more vulnerable to customer cancellations.  As a result of these
fluctuations in our sales cycle and order backlog, product revenue in any period
has been and will  continue to be  substantially  dependent on orders booked and
shipped in that period.  We typically plan our  production and inventory  levels
based on internal forecasts of customer demand,  which are highly  unpredictable
and can  fluctuate  substantially.  In  particular,  market  forces  beyond  our
control,  including recession,  labor strikes among our customers, and limits or
changes in government spending may have a material affect on customer demand for
our products. If revenue falls significantly below anticipated levels, as it has
in the current  quarter and at times in the past,  our  financial  condition and
results of operations would be materially and adversely  affected.  In addition,
our  operating  expenses  are based on  anticipated  revenue  levels  and a high
percentage of our expenses are generally fixed in the short term. Based on these
factors,  a small fluctuation in the timing of sales can cause operating results
to vary  significantly  from period to period. It is possible that in the future
our  operating  results  will  again be below  the  expectations  of  securities
analysts  and  investors.  In  such  an  event,  or in the  event  that  adverse
conditions  prevail or are perceived to prevail generally or with respect to our
business,  or the  market  sector in which we  operate,  the price of our Common
Stock would likely be  adversely  affected.  These  factors make it difficult to
predict our financial performance.  As our quarterly results fluctuate, they may
fall below the  expectations  of public market  analysts or  investors.  If this
occurs, the price of our Common Stock may drop.

The overall economic climate continues to be weak.

     Our  products  typically  represent   substantial  capital  commitments  by
customers,  involving a  potentially  long sales  cycle.  As a result,  customer
purchase  decisions  may be  significantly  affected  by a  variety  of  factors
including  trends in  capital  spending  for  telecommunications  or  enterprise
software for contact center servers, market competition, and the availability or
announcement of alternative  technologies.  Continued recent weakness in general
economic  conditions  has  resulted  in many of our  customers  delaying  and/or
reducing their capital spending related to information  systems.  If the economy
continues to be weak, demand for the Company's products could decrease resulting
in lower  revenues  and a decline in the overall rate of the  Company's  revenue
growth.


                                       13

<PAGE>

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

     Our future results of operations will be highly dependent on the successful
marketing  and  manufacture  of the  NetHawk  product,  as  well  as  successful
marketing and manufacture of the Cylink Link Encryptors, PrivaCy Manager, Cylink
ATM, and Cylink Frame  Encryptor  products.  To date,  we have made only limited
commercial  shipments of our NetHawk  product,  which began shipping in mid-year
2000. This product may require  additional  development work,  enhancement,  and
testing or further refinement before it achieves widespread  commercial success.
If  this  or  other  new  or  recently  introduced  products  have  performance,
reliability,  quality or other shortcomings, such products could fail to achieve
adequate  market  acceptance.  The  failure of our new or  existing  products to
achieve or enjoy market  acceptance,  whether for these or other reasons,  could
cause us to experience reduced orders,  higher  manufacturing  costs,  delays in
collecting  accounts  receivable and additional  warranty and service  expenses,
which in each  case  could  have a  material  adverse  effect  on our  business,
financial condition and results of operations.  Furthermore, we have relied on a
third  party  original  equipment  manufacturer  to  supply  our ISDN  Encryptor
product,  and we have had limited  control over the supply of this product.  Our
former supplier of ISDN products declared  bankruptcy,  our current supplier has
also advised us of its probable insolvency,  and we may not be able to engage an
equivalent substitute.  Our NetAuthority product is presently installed with the
United  States  Postal  Service  under a license  agreement  signed  in 2000.  A
decision by the Postal Service to attempt to withdraw from or  renegotiate  this
license could have a material adverse impact on our business.

We face significant competition from other providers of network security systems

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

     o    the development of new products and features;

     o    product quality and performance;

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

     o    adoption of embedded security solutions in other vendor's hardware and
          software products;

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

     o    product price;

     o    name recognition; and

     o    perception of our stability and long-term viability.


Many of these competitive factors are beyond our control.

     Our competitors in the information  security markets,  including  companies
that offer products similar to, or as an alternative to, the Company's products,
include  Axent  Technologies,  Inc.,  Checkpoint  Software  Technologies,  Ltd.,
Network  Associates,  Inc.,  SafeNet,  Inc., Secure Computing  Corporation,  RSA
Security,  Inc., and Thales e-Security,  Inc. Our NetHawk VPN appliance competes
with numerous other products,  including  those offered or under  development by
Cisco Systems,  Inc., Newbridge Networks  Corporation,  Netscreen  Technologies,
Inc., Nokia Corp, and SonicWall, Inc. A number of significant vendors, including
Microsoft Corporation,  and Cisco Systems, Inc. have embedded security solutions
in their  software.  To the extent  that these  embedded  or  optional  security
capabilities  provide  all or a portion  of the  functionality  provided  by our
products,  our products may no longer be required by customers to attain network
security.

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


                                       14

<PAGE>

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

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

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

     On August 2, 2001,  Cylink  determined that a hardware design could cause a
premature  failure of its the backup battery on its Cylink Frame Encryptor (CFE)
product.  Cylink has  announced  a program to give its  customers  the option of
updating  their CFE units by  returning  them to the  factory,  or  receiving an
extended  warranty covering the battery through the end of December 2002. Cylink
accrued  approximately  $1.0 million in warranty costs during the second quarter
associated  with this  program.  While  this  reserve  was  based on  reasonable
estimates based on information  available to us at the time,  actual costs could
exceed these reserves.

     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.

     Our  future  success  will  depend in large  part on the  abilities  of our
executive  officers,  key management and technical  personnel and our ability to
retain qualified and competent  individuals  following our recent  reductions in
the  employee  workforce.  There  is no  guarantee  that our  present  executive
management and technical staff will remain with the Company, particularly if our
performance is not up to  expectations.  The loss of the services of one or more
of our  executive  officers or key  personnel,  or the  inability to attract and
retain additional executives and other qualified personnel,  could delay product
development  cycles or otherwise have a material  adverse effect on our business
and operating results


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

     We may not be able to hire and retain sufficient  technical,  marketing and
management personnel that we need to succeed because these people are limited in
number and are 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.  In
the recent past, competition has been intense for qualified technical, marketing
and management personnel.  In particular,  the current availability of qualified
engineers in our field is quite  limited,  and we compete with other  companies,
academic  institutions,  government entities and other organizations for skilled
and experienced engineers.  Furthermore, the recent reductions in our workforce,
and reduction in our stock price,  may create  greater  uncertainty  amongst our
existing employees,  who may decide not to continue employment with the Company.
There can be no assurance that we will be able  effectively to achieve or manage
any future


                                       15

<PAGE>

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, misappropriate our trade secrets, or design around the patents owned
by us.  Resorting  to the  courts to protect  our  intellectual  property  would
require significant financial and management resources. In addition, the laws of
certain countries in which our products are or may be developed, manufactured or
sold may not protect our products and  intellectual  property rights to the same
extent  as the  laws  of  the  United  States.  Our  inability  to  protect  our
intellectual  property  adequately  could have a material  adverse effect on our
financial condition and results of operations.

     The computer, communications,  software and network security industries are
characterized by substantial  litigation regarding patent and other intellectual
property rights. In the past, we have received communications from third parties
asserting  that our  patents,  features  or content  of certain of our  products
infringe upon the intellectual property rights held by third parties, and we may
receive such communications in the future.  There can be no assurance that third
parties will not assert claims against us that result in  litigation,  including
claims  that may arise out of the ATM  Encryptor  business we acquired in August
2000. 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 our network  security  products  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.  We believe that many  potential  customers do not appreciate the need
for our  security  products  unless and until  they have faced a major  security
breach.  Many potential  customers prefer not to disclose  significant  security
breaches of their  networks or are reluctant to invest in the  development  of a
professional  security  architecture  to protect  their  networks.  This  market
resistance  is  compounded  by our  limited  resources  to invest  in  marketing
campaigns for our products and services.

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


                                       16

<PAGE>

business,  financial condition and results of operations. The National Institute
of Standards  and  Technology  has recently  announced  that it will adopt a new
Advanced  Encryption  Standard,  or AES,  which we expect to integrate  into our
products.  Our  ability  to  timely  implement  the AES  into our  products  may
materially  affect  our  development  costs and  ability  to timely  market  our
solutions. Network security-related products or technologies developed by others
may  adversely  affect  our  competitive  position  or render  our  products  or
technologies noncompetitive or obsolete.

     In addition,  a portion of the sales of our network security  products will
depend upon a robust industry and  infrastructure for providing access to public
switched  networks,  such as the Internet.  The  infrastructure or complementary
products  necessary to 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 that
satisfy  customer  needs,  achieve  market  acceptance or address  technological
changes in our target markets. If we fail to develop products and introduce them
successfully and in a timely manner, this could adversely affect our competitive
position, financial condition and results of operations.

We face risks associated with our international operations.

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

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

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

We may incur additional claims arising from the ARL Divestiture.

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


                                       17

<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 a single,  or a limited number of, sources.  A significant delay
in obtaining a source of supply for components  selected by our design engineers
or  interruption  in the  delivery of such items  could have a material  adverse
effect on our financial condition and results of operations.

     During telephonic discussions in October 2001, the Company received reports
that the sole  OEM  supplier  of its ISDN  encryptor  product  was  experiencing
financial difficulties, and may face insolvency proceedings. The commencement of
insolvency  proceedings would have a significant impact on the Company's ability
to fulfill  ISDN orders and a  consequent  negative  impact on revenues  for the
fourth quarter of 2001 and the first half of 2002.


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

     On July 25,  2001,  the  Company  received  a notice  from the staff of the
Nasdaq  National Market that its Common Stock had failed to maintain the minimum
bid price of $1.00  over the prior 30 trading  days as  required  for  continued
listing on the Nasdaq National  Market.  The notice states that if during the 90
days  following the date of the notice the bid price of Cylink Common Stock does
not  close at or above  $1.00 for at least 10  consecutive  trading  days,  then
Cylink Common Stock could be delisted.

     Prior to any actual delisting, Cylink will have an opportunity to request a
hearing. At a hearing,  Cylink may present a plan demonstrating that the Company
can comply with the continued listing requirements.  At present, the Company has
made no  decision  with  respect  to a course of  action  but will  continue  to
evaluate alternatives, including accepting a delisting determination.

     On September 27, 2001, NASDAQ suspended its minimum bid price  requirements
until January 2002.

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

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


                                       18

<PAGE>

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

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

We face risks  associated  with our recently  completed  acquisition  of Celotek
Corporation.

     On August 30, 2000 we closed our  acquisition  of Celotek  Corporation,  or
Celotek, a privately held developer of  high-performance  Asynchronous  Transfer
Mode network security appliances, in exchange for 1,590,137 shares of our Common
Stock  with a fair  market  value  of  $22,386,000  and  cash  of  approximately
$515,000.  In addition,  we converted  outstanding  options to purchase  Celotek
Common Stock into options to purchase 307,500 shares of our Common Stock with an
aggregate  fair market value of  $2,329,000.  Celotek  employees  who became our
employees  were issued an additional  40,913  shares of our Common Stock,  as an
incentive  to  remain  in  Cylink's  employment.   The  shares  issued  in  this
acquisition have increased 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
organizations,  the potential  loss of key  employees of Celotek,  the potential
loss of key customers,  and potential  operational  challenges  that Celotek may
have and which are sometimes unforeseeable.  Any such circumstances could result
in the  acquisition of Celotek not rendering  sufficient  financial  benefits to
offset the cost of the acquisition.

Changes in accounting  practices could  adversely  affect the calculation of our
future operating results.

     In connection with the acquisition of Algorithmic Research Limited, or ARL,
in  September  1997,  we  allocated  $63.9  million  of the  purchase  price  to
in-process research and development, or IPR&D, and in accordance with accounting
principles  generally  accepted  in the  United  States of America  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,  or SEC,  stated the SEC Staff's  concerns  about  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 such IPR&D. To
the extent we are required by the SEC Staff to retroactively revise our estimate
of the value of IPR&D,  such  revision  could  result in the  capitalization  of
additional  goodwill,  the  amortization of which would reduce future  operating
results.

     In  November  1998,  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 first three quarters of that year.  During the ensuing review by the
Company and its independent  accountants,  certain facts became known indicating
that revenue  would have to be restated for the fourth  quarter of 1997 as well.
As a result,  Cylink filed amended Forms 10Q/A for the first and second quarters
of 1998,  and an amended  Form  10-K/A  for 1997.  Shortly  thereafter,  the SEC
instituted an investigation of Cylink's accounting  policies and practices,  and
the events leading to the restatements.

     On  September  27, 2000,  the SEC issued an order by consent,  finding that
former Cylink executives had engaged in fraudulent  accounting  practices in the
fourth  quarter  of 1997 and the first and  second  quarters  of 1998,  that the
Company had failed to maintain adequate accounting controls, and that Cylink had
promptly undertaken remedial measures.  Cylink consented to entry of a cease and
desist order ensuring  maintenance of strict accounting  controls in the future.
As a result, we must be diligent in our decisions regarding whether to recognize
revenue in connection with certain transactions.


                                       19

<PAGE>

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     As of September 30, 2001, we held a total of $10.4 million of cash and cash
equivalents.  These  securities  consist  primarily  of money  market  funds and
high-grade,  short-term corporate  obligations.  Certain of these securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10 % from  levels as of  September  30,  2001,  the decline in fair value of the
portfolio would not be material.

     We transact substantially all of our revenues and costs in U.S. dollars and
our results of operations  would not be materially  affected by  fluctuations in
foreign exchange rates. Accordingly,  to date, we have not used material amounts
of derivative financial  instruments.  As of September 30, 2001, we had no fixed
rate   obligations   except  for  capitalized   leases  and  long-term  debt  of
approximately $174,000. As such, the fair value of our fixed rate obligations is
not subject to a material adverse impact from changes in interest rates.


                                       20

<PAGE>

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

     In 1998,  Cylink filed amended Forms 10-Q for the first and second quarters
of 1998 and an amended Form 10K for 1997,  reflecting restated financial results
for those quarters, and for the fourth quarter of 1997. Between November 6, 1998
and December 14, 1998,  several  securities  class action  complaints were filed
against  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). The action is currently pending before the Court.

     Cylink believes it has meritorious  defenses and adequate insurance for the
damages  claimed  in 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  and exceed  Cylink's
applicable  insurance,  Cylink's business,  financial condition,  cash flows and
results of operations could be materially adversely affected.


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

         None

Item 5.   Other Information.

Notice was received  July 25, 2001 from the NASDAQ  National  Market  indicating
possible  delisting for failure to meet NASDAQ's  minimum bid  requirements.  On
September 27, 2001,  NASDAQ suspended its minimum bid price  requirements  until
January 2002.


Item 6.   Exhibits and Reports on Form 8-K

(a)   Exhibits Index:

         None

(b)  Reports on Form 8-K:

         The  registrant did not file any reports on Form 8-K during the quarter
ended September 30, 2001.


                                       21

<PAGE>

                                    SIGNATURE

     Pursuant to the  requirements  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: November 14, 2001                    CYLINK CORPORATION

                                           By:  /s/ R. Christopher Chillingworth
                                                --------------------------------
                                                R. Christopher Chillingworth
                                                Vice President of Finance
                                                and Chief Financial Officer
                                                (Duly Authorized Officer and
                                                Principal Financial Officer)


                                       22