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, 1996

                         Commission File Number 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 Number)

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

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


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Sections 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.

                (1)     YES        X            NO
                                 -----                 -----
                (2)     YES        X            NO
                                 -----                 -----

     As of September 30, 1996, there were 25,448,132  shares of the Registrant's
common stock outstanding.

<PAGE>

                               CYLINK CORPORATION

                                    FORM 10-Q

                                      INDEX

PART I.  FINANCIAL INFORMATION                                              PAGE
                                                                            ----
Item 1.  Financial Statements
         
         Condensed Consolidated Balance Sheets
         at September 30, 1996 and December 31, 1995                        3
         
         Condensed Consolidated Statements of Operations
         for the three and nine months ended September 30                   4
         
         Condensed Consolidated Statements of Cash Flows 
         for the nine months ended September 30, 1996 and 1995              5
         
         Notes to Condensed Consolidated Financial Statement                6
         
Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                          7
         
PART II. OTHER INFORMATION
         
Item 1.  Legal Proceedings                                                  XX
         
Item 6.  Exhibits and reports on Form 8-K                                   XX
         
SIGNATURES                                                                  XX
        

<PAGE>

<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data; unaudited)

<CAPTION>
                                                                          September 30,   December 31,
                                                                              1996            1995
                                                                           ---------       ---------
<S>                                                                        <C>             <C>
ASSETS
Current assets:
        Cash and cash equivalents                                          $  79,412       $   3,240
        Marketable securities                                                   --             2,858
        Accounts receivable, net of allowances of $671 and $483               12,541           6,013
        Inventories                                                            8,354           6,096
        Deferred income taxes                                                  1,409           1,556
        Other current assets                                                     688             483
                                                                           ---------       ---------
                Total current assets                                         102,404          20,246
Property and equipment, net                                                    3,016           2,295
Other assets                                                                     192             184
                                                                           ---------       ---------
                                                                           $ 105,612       $  22,725
                                                                           =========       =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
        Bank borrowings under line of credit                               $      --       $   1,000
        Current portion of lease obligations                                     166             144
        Accounts payable                                                       3,632           1,378
        Accrued liabilities                                                    4,675           3,741
        Income taxes payable                                                     146              90
        Deferred revenue                                                       1,169           1,289
                                                                           ---------       ---------
                Total current liabilities                                      9,788           7,642
                                                                           ---------       ---------
Lease obligations, long-term                                                     278             291
                                                                           ---------       ---------
Deferred income taxes                                                            187             187
                                                                           ---------       ---------
Shareholders' equity:
        Preferred stock, $.01 par value; 5,000,000 shares authorized;
           none issued and outstanding                                          --              --
        Common stock, $.01 par value; 40,000,000 shares authorized;
           25,448,132 and 19,087,190 shares issued and outstanding               254             191
        Additional paid-in capital                                            89,004           8,864
        Notes receivable from shareholders                                      (415)           (515)
        Deferred compensation related to stock options                          (354)           --
        Cumulative marketable securities valuation adjustment                   --              (416)
        Cumulative translation adjustment                                       (113)           (135)
        Retained earnings                                                      6,983           6,616
                                                                           ---------       ---------
                Total shareholders' equity                                    95,359          14,605
                                                                           ---------       ---------
                                                                           $ 105,612       $  22,725
                                                                           =========       =========

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


<PAGE>

<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<CAPTION>
                                                       Three Months Ended      Nine Months Ended
                                                         September 30,           September 30,
                                                     ---------------------   --------------------
                                                       1996        1995        1996        1995
                                                     --------    --------    --------    --------

<S>                                                  <C>         <C>         <C>         <C>     
Revenue                                              $ 15,021    $  9,258    $ 35,790    $ 25,471
Cost of revenue                                         6,193       3,433      15,024       9,870
                                                     --------    --------    --------    --------
Gross profit                                            8,828       5,825      20,766      15,601
                                                     --------    --------    --------    --------

Operating expenses:
     Research and development, net                      2,774       2,546       8,413       8,084
     Selling and marketing                              3,415       2,373       9,531       6,835
     General and administrative                         1,671       2,180       4,332       4,043
                                                     --------    --------    --------    --------
             Total operating expenses                   7,860       7,099      22,276      18,962
                                                     --------    --------    --------    --------

Income (loss) from operations                             968      (1,274)     (1,510)     (3,361)

Other income (expense):
     Interest income, net                               1,003          22       2,302          85
     Licensing and other income (expense), net             67         415        (237)      1,317
                                                     --------    --------    --------    --------

Income (loss) before income taxes                       2,038        (837)        555      (1,959)

Provision (benefit) for income taxes                      693        (346)        189        (809)
                                                     --------    --------    --------    --------

Net income (loss)                                    $  1,345    $   (491)   $    366    $ (1,150)
                                                     ========    ========    ========    ========

Net income (loss) per share                          $   0.05    $  (0.03)   $   0.01    $  (0.06)
                                                     ========    ========    ========    ========

Shares used to compute net income (loss) per share     26,886      19,141      25,308      19,114
                                                     ========    ========    ========    ========



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

<PAGE>

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

<CAPTION>
                                                                        Nine Months Ended
                                                                          September 30,
                                                                      --------------------
                                                                         1996        1995
                                                                      --------    --------
<S>                                                                   <C>         <C>
Cash flows from operating activities:
     Net  income (loss)                                               $    366    $ (1,150)
     Adjustments to reconcile net income (loss) to net cash
        used in operating activities:
        Loss on sale of securities                                         432        --
        Depreciation and amortization                                      980         508
        Deferred compensation related to stock options                      63        --
        Deferred  income taxes                                             147        (701)
        Changes in assets and liabilities:
            Accounts receivable                                         (6,528)     (2,764)
            Inventories                                                 (2,258)     (1,311)
            Other assets                                                  (196)       (129)
            Accounts payable                                             2,254         522
            Accrued liabilities                                            934       1,071
            Income taxes payable                                            56          73
            Deferred revenue                                              (120)        458
                                                                      --------    --------
                Net cash used in operating activities                   (3,870)     (3,423)
                                                                      --------    --------
Cash flows from investing activities:
     Proceeds from sale of  short-term investments                       2,844        --
     Capital expenditures                                               (1,454)       (533)
                                                                      --------    --------
                Net cash provided by (used in) investing activities      1,390        (533)
                                                                      --------    --------
Cash flows from financing activities:
     (Repayment) borrowings under bank line of credit                   (1,000)      1,000
     Proceeds from issuance of common stock, net                        79,786          83
     Payment on notes receivable from shareholders                         100        --
     Repayment of capital lease obligations                               (238)       --
                                                                      --------    --------
                Net cash provided by  financing activities              78,648       1,083
                                                                      --------    --------
Effect of exchange rate changes on cash and cash equivalents                 4           2
                                                                      --------    --------
Net increase (decrease) in cash and cash equivalents                    76,172      (2,871)
Cash and cash equivalents at beginning of period                         3,240       4,031
                                                                      --------    --------
Cash and cash equivalents at end of period                            $ 79,412       1,160
                                                                      ========    ========

Supplemental disclosures:
     Cash paid for interest                                           $     95    $   --
Noncash investing and financing activities:
     Property and equipment acquired through capital leases           $    247    $   --




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


<PAGE>

                               CYLINK CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           (in thousands, except share and per share data; unaudited)

1.      Basis of Presentation

        The  unaudited  condensed  consolidated  financial  statements  included
herein contain all adjustments,  consisting only of normal recurring  adjusments
which, in the opinion of management, are necessary to fairly state the Company's
consolidated financial position,  results of operations,  and cash flows for the
periods presented. These financial statements should be read in conjunction with
the  Company's  audited  financial  statements  as  included  in  the  Company's
Registration  Statement on Form S-1 as declared  effective by the Securities and
Exchange  Commission on February 15, 1996 (Reg. No. 33-80719).  The consolidated
results of operations  for the three and nine month periods ended  September 30,
1996 are not  necessarily  indicative  of the  results  to be  expected  for any
subsequent quarter or for the entire calendar year ending December 31, 1996.

2.      Initial Public Offering

        In February and March 1996,  the Company  completed  its initial  public
offering (the "Offering") and issued 5,750,000 shares of its common stock to the
public at a price of $15.00 per share. The Company received  approximately $79.3
million of cash, net of  underwriting  discounts,  commissons and other offering
costs.

3.      Net Income (Loss) Per Share

        Net  income  (loss) per share is  computed  using the  weighted  average
number of  outstanding  shares of common  stock and  common  stock  equivalents.
Common stock  equivalents  consist of stock  options  (using the treasury  stock
method).  Common stock  equivalents  are excluded from the  computation if their
effect  is  antidilutive,  except  that,  pursuant  to the  requirements  of the
Securities and Exchange  Commission,  common stock equivalents issued subsequent
to November 30, 1994 through  February 15, 1996 (using the treasury stock method
and the initial public  offering price) have been included in the computation as
if they were  outstanding  for all  periods  presented  through  the date of the
offering.

4.      Balance Sheet Details
                                                     September 30,  December 31,
                                                         1996          1995
                                                         ----          ----
       Inventories:
           Raw materials                             $  4,158       $ 3,042
           Work in process and subassemblies            2,862         1,773
           Finished goods                               1,334         1,281
                                                     --------       -------
                                                     $  8,354       $ 6,096
                                                     ========       =======

        Property and equipment:
           Machinery and equipment                   $  6,399       $ 4,995
           Furniture and fixtures                         293           179
           Leasehold improvements                         450           267
                                                      -------       -------
                                                        7,142         5,441
           Less: accumulated depreciation 
              and amortization                         (4,126)       (3,146)
                                                     --------       -------
                                                     $  3,016       $ 2,295
                                                     ========       =======


<PAGE>

                               CYLINK CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           (in thousands, except share and per share data; unaudited)

4.      Balance Sheet Details (Continued)
                                                     September 30,  December 31,
                                                         1996          1995
                                                         ----          ----
        Accrued liabilities:
           Accrued compensation and benefits         $  1,924       $ 1,037
           Accrued professional fees                      200         1,365
           Other accrued liabilities                    2,551         1,339
                                                     --------       -------
                                                     $  4,675       $ 3,741
                                                     ========       =======


<PAGE>


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


         The  statements  contained  in this  Report  on Form  10-Q that are not
purely  historical are forward looking  statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934,  including  statements  regarding  the Company's  expectations,  hopes,
intentions,   beliefs  or  strategies  regarding  the  future.  Forward  looking
statements  include Cylink's  statement  regarding  liquidity,  anticipated cash
needs  and  availability,   and  anticipated  expense  levels  in  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations";
expected product introductions in "Risk Factors That May Affect Future Results -
Recent Losses;  Potential  Fluctuations in Operating  Results;  Future Operating
Results Uncertain";  and expected growth in "Risk Factors That May Affect Future
Results  -  Management  of  Growth";   and  expected  research  and  development
expenditures  and new product  introductions  in "Risk  Factors  That May Affect
Future Results - Rapid  Technological  Change." All forward  looking  statements
included in this document are based on  information  available to the Company on
the date  hereof,  and the  Company  assumes  no  obligation  to update any such
forward  looking  statement.  It is important to note that the Company's  actual
results could differ  materially from those in such forward looking  statements.
Among the factors that could cause actual  results to differ  materially are the
factors  detailed below and the risks  discussed in the "Risk  Factors"  section
included  in the  Company's  Registration  Statement  on Form S-1,  as  declared
effective by the Securities  and Exchange  Commission on February 15, 1996 (Reg.
No. 33-80719). You should also consult the risk factors listed from time to time
in the  Company's  Reports on Form  10-Q,  8-K,  10-K and Annual  Reports to the
Stockholders.


RESULTS OF OPERATIONS

         Revenue. The Company's total revenue is derived primarily from sales of
its family of  commercial  information  security  products  and its medium speed
spread  spectrum radio products.  Fees for maintenance and support  services are



<PAGE>

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

         The Company's  revenue increased by 62% from $9.3 million for the three
months  ended  September  30, 1995 to $15.0  million for the three  months ended
September 30, 1996,  and increased by 41% from $25.5 million for the nine months
ended  September 30, 1995 to $35.8  million for the nine months ended  September
30, 1996.  Sales of  information  security  products  increased by 32% from $5.4
million for the three  months ended  September  30, 1995 to $7.2 million for the
three months ended  September  30, 1996,  and increased 5% from $15.7 million in
the nine months  ended  September  30,  1995 to $16.4 for the nine months  ended
September 30, 1996.  The increase in revenue was primarily due to an increase in
demand for the  Company's  secure WAN, LAN and ACCESS  encryption  product line,
which is used in public and private linked networks. This increase was partially
offset  over the nine  month  period by a decrease  in demand for the  Company's
CIDEC  encryption  product  line.  Sales  of  wireless  communications  products
increased  104% from $3.7 million for the three months ended  September 30, 1995
to $7.5 million for the three months ended  September  30, 1996,  and  increased
102% from $9.1  million for the nine months  ended  September  30, 1995 to $18.3
million for the nine months ended  September  30, 1996  primarily as a result of
increased  demand  in  international  markets.  Maintenance,  support  and other
miscellaneous  revenue  increased  from  $180,000  for the  three  months  ended
September 30, 1995 to $374,000 for the three months ended September 30, 1996.

         International  product  revenue  was 51% of total  revenue in the three
months ended September 30, 1995 and was 58% of total revenue in the three months
ended September 30, 1996. International product revenue was 45% of total revenue
in the nine months ended  September 30, 1995 and was 56% of total revenue in the
nine months ended  September  30, 1996.  The increase in  international  product
revenue as a 

<PAGE>

percentage  of total  revenue was due  primarily to increased  unit sales of the
Company's wireless communications products.

         Gross Profit Gross profit increased 52% from $5.8 million for the three
months  ended  September  30, 1995 to $8.8  million for the three  months  ended
September  30, 1996,  and  increased  33% from $15.6 million for the nine months
ended  September 30, 1995 to $20.8  million for the nine months ended  September
30, 1996.  Gross margins were 63% for the three months ended  September 30, 1995
and 59% for the three months ended September 30, 1996. Gross margin in the third
quarter of 1996 was negatively  affected by increased  sales, as a percentage of
revenue, of wireless communications products, which generally have a lower gross
margin than information security products.  Further, gross margin on information
security  products declined as some of the new products have lower gross margins
than the CIDEC  encryption  products and represented an increased  percentage of
sales.  Gross margins were 61% for the nine months ended  September 30, 1995 and
58% for the nine months ended September 30, 1996. Gross margin in the first nine
months of 1996 was negatively affected by the aforementioned increased sales, as
a percentage of revenue, of wireless  communications products and by the decline
in gross margins on information security products. This decrease in gross margin
was partially offset by an overall increase in wireless  communications  product
gross margins compared to the first nine months of 1995.

         Research and  Development.  Research and development  expenses  consist
primarily  of salaries and other  personnel-related  expenses,  depreciation  of
development equipment,  facilities and supplies.  Gross research and development
expenses  increased  57% from $2.8 million for the three months ended  September
30, 1995 to $4.4  million for the three  months ended  September  30, 1996,  and
increased 47% from $8.4 million for the nine months ended  September 30, 1995 to
$12.3 million for the nine months ended  September 30, 1996.  Gross research and
development  expenses as a percentage  of revenue were 30% and 29% for the three
months ended  September  30, 1995 and 1996,  and 33% and 34% for the nine months
ended September 30, 1995 and 1996, respectively.  From time to time, the Company
receives  engineering  funding for development  projects to apply or 

<PAGE>

enhance the Company's  technology to a particular  customer's  need. The amounts
recognized  under these  research and  development  contracts are offset against
research  and  development  expenses.  Amounts  recognized  under  non-recurring
engineering  contracts totaled $242,000 for the three months ended September 30,
1995 and $1,593,000 for the three months ended  September 30, 1996, and $319,000
for the nine months ended  September 30, 1995 and $3,900,000 for the nine months
ended September 30, 1996.

         The Company believes that a significant  level of investment in product
research and development is required to remain competitive and, accordingly, the
Company  anticipates  that it will continue to devote  substantial  resources to
product  research and development for at least the remainder of fiscal 1996. The
Company  expects  research and  development  expenses  will increase in absolute
dollars for at least the remainder of fiscal 1996.

         Selling and Marketing. Selling and marketing expenses consist primarily
of personnel  costs,  including  sales  commissions,  and costs of  advertising,
public  relations,  seminars and trade  shows.  Selling and  marketing  expenses
increased 44% from $2.4 million for the three months ended September 30, 1995 to
$3.4 million for the three months ended  September  30, 1996,  and increased 39%
from $6.8 million for the nine months ended  September  30, 1995 to $9.5 million
for the nine months ended September 30, 1996.  Selling and marketing expenses as
a percentage  of revenue  were 26% and 23% for the three months ended  September
30,  1995  and  1996,  respectively,  and 27% for both  the  nine  months  ended
September 30, 1995 and 1996.  The increase in dollar amount was primarily due to
expenses  associated  with  expansion  of  the  Company's  direct  sales  force,
personnel  increases in the marketing group, and increased costs associated with
advertising,  public  relations and trade shows. The Company expects selling and
marketing  expenses will increase in absolute dollars for at least the remainder
of fiscal 1996.

         General and Administrative. General and administrative expenses consist
primarily of personnel  and related  costs,  recruitment  expenses,  information
system costs, and audit, legal and other professional  service fees. General and
administrative  expenses  decreased from $2.2 

<PAGE>

million for the three  months ended  September  30, 1995 to $1.7 million for the
three months ended  September 30, 1996,  and increased from $4.0 million for the
nine months ended  September  30, 1995 to $4.3 million for the nine months ended
September  30, 1996.  General and  administrative  expenses as a  percentage  of
revenue were 24% and 11% for the three months ended September 30, 1995 and 1996,
respectively,  and 16% and 12% for the nine months ended  September 30, 1995 and
1996, respectively.  The percentage and dollar decrease for the third quarter of
1996 as compared  to the  comparable  1995 period are  primarily a result of the
accrual of legal fees in the third quarter of 1995  associated  with  litigation
regarding intellectual property.  Excluding this accrual, the increase in dollar
amount  for the three  months  and nine  months  ended  September  30,  1996 was
primarily due to increased  staffing and  professional  fees necessary to manage
and support the Company's recent growth and provide infrastructure  required for
a public  company.  The Company  believes  that its  general and  administrative
expenses will increase in absolute  dollar amounts for at least the remainder of
fiscal  1996,  due  primarily  to  additional  personnel  costs  as the  Company
continues to expand its administrative  staff and due to increased  professional
fees related to reporting requirements as a public company.

         Other Income  (Expense),  Net. Other income (expense),  net,  primarily
consists of  royalties,  interest  income and  interest  expense.  Other  income
increased  from  $437,000  in the  three  months  ended  September  30,  1995 to
$1,070,000  in the three  months  ended  September  30,  1996.  The increase was
principally  due to an  increase in  interest  income from  $22,000 in the three
months  ended  September  30,  1995 to  $1,003,000  for the three  months  ended
September 30, 1996,  partially  offset primarily by a decrease in royalty income
from two licensees of the Company's  wireless  application  specific  integrated
circuit ("ASIC") products for cordless  telephones.  Other income increased from
$1,402,000 in the nine months ended  September  30, 1995 to  $2,065,000  for the
nine months ended  September 30, 1996.  The increase was  principally  due to an
increase in interest  income from $85,000 in the nine months ended September 30,
1995 to $2,302,000 in the nine months ended  September 30, 1996. The increase in
interest  income was due to the funds derived from the Company's  initial public
offering in February  1996.  The Company  sustained a decrease in royalty income
from  two  

<PAGE>

licensees of the Company's wireless ASIC products for cordless telephones during
the nine months  ended  September  30, 1996 as compared to the  comparable  1995
period.  Additionally,  the  Company  wrote down its  investment  in  marketable
securities in the first quarter of 1996 by $441,000 as management  concluded the
decline in value was permanent. These marketable securities were sold during the
third quarter of 1996 at an actual loss of $432,000.

         Provision  (Benefit) for Income Taxes.  The Company  recorded a benefit
for income taxes as a percentage  of income  before  income taxes of 41% for the
three months and nine months ended  September  30, 1995  compared to a provision
for income taxes as a percentage  of income  before  income taxes of 34% for the
three months and nine months ended September 30, 1996.


LIQUIDITY AND CAPITAL RESOURCES

         In February and March 1996,  the Company  completed its initial  public
offering  (the  "Offering")  and its common  stock  began  trading on the Nasdaq
National  Market under the symbol CYLK.  Through the Offering,  the Company sold
5,750,000  shares  of its  common  stock  which  generated  approximately  $79.3
million, net of underwriting discounts, commissions and other offering costs.

         As of  September  30, 1996,  the Company had $79.4  million in cash and
cash equivalents.  Net cash used by operating  activities was $3,870,000 for the
nine  months  ended  September  30,  1996.  Cash  used by  operating  activities
consisted  primarily of increases in accounts  receivable and inventories  which
were partially offset by increases in accounts payable and accrued liabilities.

         The Company has a credit agreement with a bank which provides a line of
credit  for  working  capital  advances  of up to $5.0  million  or a  specified
percentage of eligible  accounts  receivable.  Interest on borrowings  under the
line of credit is set at the 30-day LIBOR plus 2.0%.  At September  30, 1996, no
borrowings were outstanding under the line of credit.


<PAGE>

         The Company  believes  that its current cash and cash  equivalents  and
line of  credit  will be  sufficient  to fund  necessary  purchases  of  capital
equipment and to provide working capital through at least the remainder of 1996.


RISK FACTORS THAT MAY AFFECT FUTURE RESULTS


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

          Due  primarily  to  increased  research  and  development,  sales  and
marketing, and litigation expenses, the Company incurred losses in 1994 and 1995
and the first six months of 1996.  There can be no  assurances  that the Company
will  increase or maintain  its revenue or be  profitable  on a quarterly  or an
annual basis in the future.

         The Company has historically  experienced  significant  fluctuations in
its operating  results on an annual and a quarterly  basis and could  experience
such fluctuations in the future. The Company's operating results are affected by
a number  of  factors,  many of which  are  outside  of the  Company's  control,
including:  the timing of the  introduction  of new or enhanced  products by the
Company or its  competitors;  market  acceptance of new products of the Company,
its customers and its competitors; the timing, cancellation or delay of customer
orders,   including  cancellation  or  delay  in  anticipation  of  new  product
introduction   or  enhancement  or  resulting  from   uncertainty   relating  to
intellectual property claims;  competitive factors, including pricing pressures;
changes  in  operating  expenses,  including  those  resulting  from  changes in
available  production capacity of independent  foundries and other suppliers and
the availability of raw materials; expenses associated with obtaining, enforcing
and defending claims with respect to intellectual  property  rights;  the mix of
products sold;  changes in the percentage of products sold through the Company's
direct  sales  force;  personnel  changes;  general  economic  conditions;   and
fluctuations  in  foreign  currency  exchange  rates.  The  Company  expects  to
introduce a number of new products in 1996.  The failure of such new products to
achieve market  acceptance at the time  anticipated  by the Company,  or at all,
would  materially  and 

<PAGE>

adversely affect the Company's financial condition and results of operations.

Pending Litigation

         The Company is currently engaged in several litigation matters relating
to the patents that cover Public Key cryptography.  Certain of the pending cases
pertain  to the  Company's  sublicensing  rights to certain  patents  originally
developed  at  Stanford  University  that  claim the  invention  of  Public  Key
cryptography.  The  Public  Key Cases  also  pertain  to the  rights of RSA Data
Security,  Inc.("RSA DSI"), which holds a right to license a patent developed at
the   Massachusetts   Institute   of   Technology   that  claims  a   particular
implementation  of Public Key  cryptography  using the algorithm known as "RSA".
Certain of these cases seek to invalidate  the Stanford  Patents.  An additional
litigation matter relates to Cylink's use of a federal  government  standard for
sending digital signatures.  An unfavorable outcome in certain of the litigation
matters in which the Company is involved could have a material adverse effect on
the Company's  financial condition and results of operations.  In addition,  the
Company  may incur  significant  additional  legal  expenses  in the future with
respect to litigation.

Dependence on Key Personnel

         On  November  13,  1996,  the  Company  announced  Fernand B. Sarrat as
President and Chief Executive Officer. Sarrat, 45, succeeds Lewis C. Morris, 64,
who suffered a stroke in May, 1996. Dr. Jim Omura, Chief Technology Officer, had
been serving as acting Chief  Executive  officer.  At this time,  the Company is
unable to assess the  potential  impact  resulting  from the  retirement  of Mr.
Morris, a co-founder of the Company, and the transition to a new CEO.

         The  Company's  future  success  will  depend to a large  extent on the
abilities  of and  successful  transition  to the new CEO, as well as  continued
contributions  of its  executive  officers  and  key  management  and  technical
personnel.  The failure to successfully  integrate the new CEO into the Company,
loss of the services of one or more of the Company's  executive  officers or key
personnel or the  inability  to continue to attract  qualified  personnel  could

<PAGE>

delay product  development cycles or otherwise have a material adverse effect on
the Company's business and operating results.

Lengthy Sales Cycle

         Sales  of  the  Company's  products  generally  involve  a  significant
commitment  of  capital  by  customers,  with the  attendant  delays  frequently
associated  with large capital  expenditures.  For these and other reasons,  the
sales cycle  associated  with the  Company's  products is typically  lengthy and
subject to a number of significant risks over which the Company has little or no
control.  The  Company  is often  required  to ship  products  shortly  after it
receives orders and, consequently,  order backlog at the beginning of any period
has in the past  represented  only a small  portion  of that  period's  expected
revenue. As a result,  product revenue in any period is substantially  dependent
on orders  booked and shipped in that period.  The Company  typically  plans its
production and inventory levels based on internal  forecasts of customer demand,
which is highly unpredictable and can fluctuate substantially.  If revenue falls
significantly  below anticipated  levels, the Company's  financial condition and
results of operations would be materially and adversely  affected.  In addition,
the Company's  operating expenses are based on anticipated  revenue levels and a
high percentage of the Company's expenses are generally fixed in the short term.
Based on these  factors  a small  fluctuation  in the  timing of sales can cause
operating results to vary significantly  from period to period. In addition,  it
is possible that in the future the Company's operating results will be below the
expectations of securities  analysts and investors.  In such an event, or in the
event that adverse  conditions  prevail or are perceived to prevail generally or
with respect to the Company's business,  the price of the Company's Common Stock
would likely be materially adversely affected.

Dependence on Recently Introduced and New Information Security Products

         The Company's  future results of operations will be highly dependent on
the successful completion of the design,  development,  introduction,  marketing
and manufacture of the SecureManager  and Secure Node products,  which are under

<PAGE>

development,   and  the  SecureGate,   SecureTraveler,   SecurePocket  Traveler,
SecureFrame and SecureDomain products, which were recently introduced.  To date,
the  Company  has made only  limited  commercial  shipments  of  certain of such
products and no  commercial  shipments of the  remainder  of such  products.  No
assurance  can be given that any of such  products  will not require  additional
development work, enhancement,  testing or further refinement before they can be
introduced  and made  commercially  available  by the  Company or that they will
achieve market  acceptance.  If such new and recently  introduced  products have
performance,  reliability,  quality or other  shortcomings,  then such  products
could fail to achieve market  acceptance and the Company may experience  reduced
orders, higher manufacturing costs, delays in collecting accounts receivable and
additional  warranty  and  service  expenses,  which in each case  could  have a
material adverse effect on the Company's results of operations.  Failure of such
products to achieve market  acceptance  would have a material  adverse effect on
the Company's financial condition and results of operations.

Competition

         Competition is intense among providers of information  security systems
and wireless communications  equipment and systems, and the Company expects such
competition to increase in the future.  Significant competitive factors in these
markets  include the  development of new products and features,  product quality
and  performance,  the quality and  experience  of sales,  marketing and service
organizations,  product  price and name  recognition.  Many of these factors are
beyond the Company's control.

         The Company's  competitors in the information  security markets include
Security  Dynamics,  Inc.,   Racal-Guardata,   Inc.  and  Information  Resources
Engineering,  Inc.  Recently,  AT&T Corp.  ("AT&T"),  Northern  Telecom Limited,
Motorola,  Inc., Digital Equipment  Corporation and Sun Microsystems,  Inc. have
begun to offer certain  information  security  products as part of their overall
networking  solutions.  In addition,  a number of significant  software vendors,
including  Lotus  Development  Corporation,   Microsoft  Corporation,   Computer
Associates, Netscape Communications Corporation and Spyglass Inc., have embedded
security  solutions in their software or announced  their intention to 

<PAGE>

do so. To the extent these embedded or optional  security  capabilities  provide
all or a portion of the functionality  provided by the Company's  products,  the
Company's  products may no longer be required by customers to attain information
security.

         RSA DSI licenses a method of implementing  Public Key cryptography that
is different than (and incompatible with) the method of implementing  Public Key
cryptography used by the Company. The Company and RSA DSI are each attempting to
establish their respective methods as industry standards. To the extent that RSA
DSI's method is adopted as a standard for  implementing  Public Key cryptography
in any  segment  of the  information  security  market,  sales of the  Company's
existing and planned products in that segment may be adversely  impacted,  which
could have a material  adverse effect on the Company's  financial  condition and
results of operations.

         The Company  competes  with a large number of companies in the wireless
communications  markets,  including  U.S.  local  exchange  carriers and foreign
telephone  companies.  The most significant  competition for sub-T1 rate AirLink
products in the wireless  market is from  telephone  companies that offer leased
line data services.  The Company also competes with other  suppliers of wireless
products  such as Digital  Wireless  Inc.,  Western  Multiplex  Corporation  and
California Microwave Inc.

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


<PAGE>

Product Liability Risks

                  Customers rely on the Company's  information security products
to prevent  unauthorized  access to their  networks  and data  transmissions.  A
malfunction or the inadequate  design of the Company's  products could result in
tort or warranty  claims.  Although  the Company  attempts to reduce the risk of
such losses through warranty disclaimers and liability limitation clauses in its
sales agreements and by maintaining product liability insurance, there can be no
assurance  that such  measures  will be  effective  in  limiting  the  Company's
liability  for any such  damages.  Any  liability  for  damages  resulting  from
security  breaches could be substantial and could have a material adverse effect
on  the  Company's   business  and  results  of  operations.   In  addition,   a
well-publicized  actual or perceived  security breach could adversely affect the
market's  perception of security products in general,  or the Company's products
in  particular,  regardless  of  whether  such  breach  is  attributable  to the
Company's  products.  This could result in a decline in demand for the Company's
products,  which would have a material adverse effect on the Company's financial
condition and results of operations.

Management of Growth

         The Company has recently  experienced  and may  continue to  experience
substantial  growth  in the  number  of  its  employees  and  the  scope  of its
operations,  resulting in increased  responsibilities for management.  To manage
growth   effectively,   the  Company  will  need  to  continue  to  improve  its
operational,  financial and management  information  systems and to hire, train,
motivate and manage a growing  number of employees.  Competition  is intense for
qualified  technical,  marketing and management  personnel,  particularly highly
skilled  engineers.  In  particular,   the  current  availability  of  qualified
engineers  is  quite  limited,   and  competition   among  companies,   academic
institutions,  government  entities  and other  organizations  for  skilled  and
experienced  engineering  personnel  is very  intense.  The Company is currently
attempting to hire a number of engineering  personnel and has experienced delays
in  filling  such  positions.   The  Company  expects  to  experience  continued
difficulty  in filling its needs for qualified  engineers  and other  personnel.
There can be no assurance that the Company will be able to  effectively  achieve
or manage any  future  growth,  and its  failure  to do so could  delay  product

<PAGE>

development  cycles or otherwise have a material adverse effect on the Company's
financial condition and results of operations.

Patents and Proprietary Rights

         The Company  relies on patents,  trademarks,  copyrights,  licenses and
trade secret law to establish and preserve its intellectual property rights. The
Company owns twelve U.S. patents covering certain aspects of its product design.
The Company also has the  exclusive  right to sublicense  the Stanford  Patents,
which  expire in 1997.  There can be no  assurance  that any patent,  trademark,
copyright  or  license  owned or held by the  Company  will not be  invalidated,
circumvented  or  challenged,  that the rights granted  thereunder  will provide
competitive  advantages to the Company or that any of the  Company's  pending or
future patent  applications will be issued within the scope of the claims sought
by the Company,  if at all. Further,  there can be no assurance that others will
not  develop  technologies  that  are  similar  or  superior  to  the  Company's
technology,  duplicate  the  Company's  technology  or design around the patents
owned by the Company. The Company may be subject to or may initiate interference
proceedings in the U.S. Patent Office,  which can require significant  financial
and management  resources.  In addition,  the laws of certain countries in which
the  Company's  products are or may be developed,  manufactured  or sold may not
protect the  Company's  products and  intellectual  property  rights to the same
extent as the laws of the United States. The inability of the Company to protect
its intellectual property adequately could have a material adverse effect on its
financial condition and results of operations.

         The  network  information  security  and  the  wireless  communications
industries  in which  the  Company  sells  its  products  are  characterized  by
substantial  litigation regarding patent and other intellectual property rights.
From time to time,  the Company has received  communications  from third parties
asserting  that the Company's  patents or that features or content of certain of
the Company's  products  infringe upon the intellectual  property rights held by
third parties,  and the Company may receive such  communications  in the future.
For example, the Company has recently been notified of certain patents held by a
leading  

<PAGE>

telecommunications  company that apply to certain  general  techniques  for data
scrambling  and an error  correction  method for certain T1  transmissions.  The
Company is not aware that its patents or the features or content of its products
wrongfully  infringe  on any  valid  intellectual  property  rights  of  others.
However, there can be no assurance that this telecommunications company or other
third  parties  will not  assert  claims  against  the  Company  that  result in
litigation.  The  Company is  currently  engaged in several  litigation  matters
related to the patents that cover the practice of Public Key  cryptography.  Any
litigation,  whether or not determined in favor of the Company,  could result in
significant  expense  to the  Company  and  could  divert  management  and other
resources.  In the  event  of an  adverse  ruling  in any  litigation  involving
intellectual  property,  the Company might be required to discontinue the use of
certain processes,  cease the manufacture,  use and sale of infringing products,
expend  significant  resources to develop  non-infringing  technology  or obtain
licenses  to the  infringing  technology  and may  suffer  significant  monetary
damages,  which could include  treble  damages.  There can be no assurance  that
under  such  circumstances  a  license  would be  available  to the  Company  on
reasonable  terms or at all.  In the event of a  successful  claim  against  the
Company and the Company's failure to develop or license a substitute  technology
on commercially  reasonable terms, the Company's financial condition and results
of  operations  would be  adversely  affected.  There can be no  assurance  that
existing claims or any other assertions will not materially and adversely affect
the Company's financial condition and results of operations.

Evolving Information Security Market

         The market for the  Company's  information  security  products  is only
beginning  to  emerge.   This  market  is   characterized  by  rapidly  changing
technology,  emerging industry standards,  new product introductions and changes
in customer  requirements  and  preferences.  The Company's  future success will
depend in part upon end  users'  demand for  information  security  products  in
general,  and upon the Company's ability to enhance its existing products and to
develop  and  introduce  new  products  and  technologies   that  meet  customer
requirements.   Any   significant   advance  in   technologies   for   attacking
cryptographic systems could 

<PAGE>

render  some or all of the  Company's  existing  and new  products  obsolete  or
unmarketable.  To the extent that a specific  method other than the Company's is
adopted as the standard for implementing  information security in any segment of
the information  security  market,  sales of the Company's  existing and planned
products in that market  segment may be adversely  impacted,  which could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations. There can be no assurance that information security-related products
or  technologies  developed by others will not  adversely  affect the  Company's
competitive  position or render its products or technologies  noncompetitive  or
obsolete.

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

Rapid Technological Change

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


<PAGE>

Wireless Communications Industry Regulatory Environment

         Wireless communications are subject to regulations by United States and
foreign laws and  international  treaties.  In the United States,  the Company's
wireless  communications  products  are  subject to various  regulations  of the
Federal  Communications  Commission (the "FCC").  Current FCC regulations permit
license-free operation of certain FCC certified wireless products. The future of
remote  wireless  communications  is  highly  volatile,  due in part to  ongoing
uncertainty regarding  telecommunications  deregulation and the status of recent
initiatives  relating  to the auction of licenses  for  personal  communications
service  ("PCS")  frequencies.  Regulatory  changes,  including  changes  in the
allocation of available  frequencies,  could significantly  affect the Company's
operations  by diverting  the  Company's  development  efforts,  making  current
products  obsolete or increasing the  opportunity  for  additional  competition.
There can be no assurance that new  regulations  will not be  promulgated  which
could have a material  adverse effect on the Company's  financial  condition and
results of operations.

         The  Company  also is subject  to  regulatory  requirements  in foreign
markets.  Equipment  can be marketed in a country  only if permitted by suitable
frequency  allocations and regulations,  and only if such equipment has received
type  approval by the country in  question.  The process of  complying  with new
regulations  and of obtaining type approval is often complex and lengthy and can
result in significant  expense and delays in the introduction of products in new
countries.

         Changes in, or the failure by the  Company to comply  with,  applicable
domestic and  international  regulations could have a material adverse effect on
the Company's business and operating results. There can be no assurance that the
Company will be able to comply with regulations in any particular country.

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

         International product sales represented approximately 33%, 35%, 47% and
56% of revenue in 1993, 1994, 1995 and the nine months ended September 30, 1996,
respectively.  In  particular,  sales of the Company's  wireless  communications
products are currently  concentrated in developing countries.  

<PAGE>

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

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

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

Dependence On Component Availability, Subcontractor 
Performance And Key Suppliers

         The Company's  ability to timely deliver its products is dependent upon
the  availability  of quality  components and subsystems used in these products.
The Company depends in part upon  subcontractors  to  manufacture,  assemble and

<PAGE>

deliver certain items in a timely and satisfactory  manner.  The Company obtains
certain  components and subsystems from single, or a limited number of, sources.
A significant  interruption  in the delivery of such items could have a material
adverse effect on the Company's financial condition and results of operations.


Part II. OTHER INFORMATION


Item 1.  Legal Proceedings.

         The Company is currently engaged in several litigation matters relating
to the patents that cover Public Key cryptography.  Certain of the pending cases
(N.D.  Cal Nos.  C-94-02322  (the "MIT Patent  Case"),  MMC;  C-94-20512 SW (the
"Third  Party  Case");   and  C-95-03256  WHO  (the  "Stanford   Patents  Case")
(collectively "the Public Key Cases")) pertain to the patents issued to Stanford
University (U.S. Patents Nos.  4,200,770,  4,218,582,  and 4,424,414) that claim
the  invention  of Public Key  cryptography  (the  "Stanford  Patents")  and the
Company's  sublicensing  rights with  respect to those  patents.  The Public Key
Cases also  pertain to a patent  developed  at the  Massachusetts  Institute  of
Technology that claims a particular  implementation  of Public Key  cryptography
(U.S.  Patent No. 4,405,892) using the algorithm known as RSA (the "MIT Patent")
and the rights of RSA DSI with respect to the Stanford  Patents.  An  additional
litigation  matter (D.D.C.  No. CV02121) (the "DSS Case") relates to the digital
signature  standard  ("DSS") adopted by the National  Institute of Standards and
Technology ("NIST").  The Third Party Case was brought by an individual seeking,
among other things, to invalidate the Stanford Patents and the MIT Patent.

         The Public Key Cases. The Company's  wholly-owned  subsidiary Caro-Kann
Corporation  ("Caro-Kann")  holds exclusive  sublicensing rights to the Stanford
Patents,  and RSA DSI currently holds the exclusive  sublicensing  rights to the
MIT  Patent.  In 1990,  the Company and RSA DSI formed  Public Key  Partners,  a
California general partnership  ("PKP").  The partners assigned to PKP exclusive
sublicensing  rights with respect to all of their Public Key patents,  including
the  Stanford  and the MIT  Patents.  

<PAGE>

Certain  disputes  arose  between  Cylink,  Caro-Kann  and RSA DSI in the  years
following  the formation of PKP. In April 1994,  Cylink and Caro-Kann  initiated
private  arbitration  proceedings  against RSA DSI (the  "Arbitration").  In the
Arbitration,  Cylink  sought relief with respect to its  contractual  claim to a
license  for the MIT  Patent  and to damages  resulting  from RSA DSI's  alleged
diversion of PKP  business  opportunities.  RSA DSI made  certain  counterclaims
against Cylink for breach of fiduciary duty. The arbitrators  issued a ruling in
September 1995, which determined that: (i) PKP was to be dissolved, effective as
of September 6, 1995;  (ii) Cylink has an option to a patent  license to the MIT
Patent,  subject to certain then unspecified  conditions  requiring inclusion of
RSA DSI software in Cylink products covered by the MIT Patent; and (iii) RSA DSI
did not have, and never had during PKP's existence,  sufficient  rights to grant
to its customers the right to make copies of software incorporating the Stanford
Patents without a license under the Stanford  Patents.  With PKP's  dissolution,
the exclusive right to sublicense the Stanford Patent was returned to Caro-Kann,
and the exclusive  right to  sublicense  the MIT Patent was returned to RSA DSI.
The  arbitrators  further  ruled that  neither  party  prevailed on the material
breach issues.

         Both parties submitted further with respect to their claims for damages
based on other alleged breaches of the partnership agreement and their fiduciary
duties and requested  clarification  to Cylink's  license to the MIT Patent.  On
February 1, 1996,  the  arbitrators  issued an additional  ruling,  in which the
arbitrators (i) clarified that Cylink could include all or any part of RSA DSI's
software code in its products, rather than merely selected software specified by
RSA DSI, (ii) ordered RSA DSI to use its best efforts to provide Cylink with the
requirements  for  licensing  the software and (iii) stated the royalty terms on
which such software was to be licensed to Cylink for use in stand-alone software
products as well as hardware products.  In that ruling, the arbitrators  further
denied the  parties'  claim for damages  against each other and stated that each
party had the right to be  indemnified  by PKP for legal  expenses  incurred  in
connection with related actions.

         On May 9,  1996,  the  arbitrators  further  ruled  that  RSA  DSI  was
obligated  to provide its  software to the Company  

<PAGE>

according to license terms  commensurate  with the form of license  agreement it
offered to other  licensees on  September 6, 1995.  The effect of this ruling at
this  time is that the  Company  will be able to make,  use,  and sell  products
incorporating  RSA DSI software by modifying such software to create  interfaces
and other software necessary to enable such products to operate.  In return, the
Company will pay a source code fee of $50,000,  and a $5.00 per copy minimum for
software  products.  The  Company  has  received  RSA DSI's  source  code and is
entitled to practice the MIT Patent if it so chooses.

         In June  1994,  after  RSA DSI  threatened  to sue  Cylink  for  patent
infringement, Cylink initiated the MIT Patent Case (N.D. Cal. No. 94-02332 MMC),
seeking a declaratory  judgment that the MIT Patent is invalid or  unenforceable
against Cylink.  RSA DSI has  counterclaimed in this action seeking  unspecified
damages from Cylink for  infringement of the MIT Patent with respect to products
that  practice  the MIT Patent  technology.  The Company has obtained an opinion
from its patent counsel that the MIT Patent is  unenforceable.  However,  if the
MIT Patent is not adjudicated to be unenforceable, Cylink believes that its only
products  that may rely on the MIT Patent prior to obtaining  one RSA DSI source
code are the Secure X.25L and the Secure X.25H encryptor products.  As a result,
the Company  does not believe  that an adverse  determination  in the MIT Patent
Case with respect to  infringement  will have a material  adverse  effect on the
Company's financial condition,  liquidity or results of operations.  In addition
to its claims of  infringement,  RSA DSI has also  asserted  certain  claims for
breach  of  fiduciary  duty  relating  to PKP and for  other  matters  that were
addressed in the Arbitration.

         In September  1995, RSA filed the Stanford  Patents Case (N.D. Cal. No.
C95-03256  WHO) against  Cylink  seeking  declaratory  relief to invalidate  the
Stanford  Patents.  The Stanford  Patents Case is in the  discovery  phase.  The
Company has obtained an opinion from its patent  counsel that the two  principal
Stanford  Patents are valid.  On April 8, 1996,  the Court denied the  Company's
motion  for  summary  judgment  on the res  judicata  effect of the  Arbitration
decision dated  September 6, 1995. The effect of the Court's ruling at this time
is that the Company's  claims for relief 

<PAGE>

may be deferred  until  trial.  On May 16, the Court denied RSA DSI's motion for
summary  judgment on the issues of patent  exhaustion and implied  license,  and
denied  the  Company's  motion for  summary  judgment  on the issue of  licensor
estoppel.  The effect of the Court's  rulings at this time is that these  claims
for relief may be deferred  until trial.  On May 16, 1996 the Court also granted
the Company's motion for leave to supplement its  counterclaims  against RSA DSI
to  allege  direct,  as well  as  indirect,  infringement.  Finally,  the  Court
concluded a Markman type hearing to resolve  issues related to  construction  of
the patent claims on October 1-2, 1996 and set a trial date of February 3, 1997.
Even if the Stanford  Patents  were  adjudicated  to be invalid,  Cylink has not
historically  received  significant  royalty or license fees with respect to the
Stanford  Patents,  and the Stanford  Patents  expire in 1997. As a result,  the
Company believes that the RSA DSI claims against the Stanford  Patents,  even if
successful,  would not have a material adverse effect on the Company's financial
condition,  liquidity or results of operations.  Caro-Kann has  cross-complained
against RSA DSI in the Stanford Patent Case for  contributory  infringement  and
inducement of infringement of the Stanford Patents.

         In July 1994, an individual  filed the Third Party Case (N.D.  Cal. No.
C94-20512 SW) against PKP and RSA DSI seeking, among other things, to invalidate
the Stanford Patents and the MIT Patent. Caro-Kann has been allowed to intervene
in light of the  dissolution  of PKP for the limited  purpose of  defending  the
validity of the Stanford Patents. At present, there are summary judgment motions
pending in the Third Party Case as to the  Stanford  Patents and the MIT Patent,
and as to various  business  torts alleged  against RSA DSI and PKP by the third
party plaintiff. In February 1996, the Stanford Patents Case and the Third Party
Case were consolidated into a single action.

         The DSS Case The Company filed the DSS Case (D.D.C.  No. 95-CV02121) on
November  15,  1995  to  seek a  declaratory  judgment  consistent  with  NIST's
previously  stated  position that the practice of the digital  signal  algorithm
("DSA") in complying with the DSS, a Federal  Information  Processing  Standard,
does not  infringe  a patent  owned by Dr.  Claus P.  Schnorr  (U.S.  Patent No.
4,995,082) (the "Schnorr Patent").  The Company has obtained an opinion from its
counsel that 

<PAGE>

DSS is not  covered  by the  Schnorr  Patent.  Based on  representations  by Dr.
Schnorr and his  representatives,  RSA DSI, that they were not threatening  suit
for  infringement  of the Schnorr Patent by practicing  DSS, the court dismissed
the DSS case on September  26, 1996.  However,  should it be  determined  in the
future  that  the  Company's  products  infringe  the  Schnorr  Patent,  such  a
determination  could create confusion in the marketplace of DSS-based  products,
require that the Company pay damages and obtain a license to the Schnorr  Patent
to the extent such  license is  available or require the Company to redesign its
products to eliminate DSS methods.  If any of such events occurs,  the Company's
financial  condition and results of operations could be materially and adversely
affected.

         These cases involve a number of complex issues, and no assurance can be
given as to the likely outcome of the Stanford  Patents Case, the RSA DSI Patent
Case,  the DSS  Case or the  Third  Party  Case.  The  Arbitration  resulted  in
substantial  costs and  diversion of effort by the Company,  and the Company may
continue to incur significant legal expenses with respect to litigation.

Item 6.  Exhibits and Reports on Form 8-K

         (b) No  reports  on Form  8-K  were  filed  during  the  quarter  ended
September 30, 1996.







<PAGE>

                                   SIGNATURES

         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, 1996                        CYLINK CORPORATION
                                               (Registrant)


                                               By: /s/ John H. Daws
                                                  ------------------------------
                                                   John H. Daws
                                                   Vice President of Finance
                                                   and Administration and
                                                   Chief Financial Officer
                                                   (Duly Authorized Officer
                                                   and Principal Financial
                                                   Officer)