UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-Q

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

                   For the quarterly period ended July 1, 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 August 13, 2001,  there were  32,752,889  shares of the  Registrant's
common stock outstanding.
<PAGE>

                               CYLINK CORPORATION

                  FORM 10-Q FOR THE QUARTER ENDED JULY 1, 2001

                                      INDEX
<TABLE>
<CAPTION>
                                                                                    Page
                                                                                    ----

                          Part I Financial information

<S>      <C>                                                                         <C>
Item 1   Financial Statements

         a)  Condensed  Consolidated Balance Sheets at July 1, 2001 and December
             31, 2000                                                                 2

         b)  Condensed  Consolidated  Statements of Operations for the three and
             six months ended July 1, 2001 and July 2, 2000                           3

         c)  Condensed  Consolidated  Statement of Cashflows  for the six months
             ended July 1, 2001 and July 2, 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                                  20

Item 1.  Legal Proceedings                                                           20

Item 4.  Submission of Matters to a Vote of Security Holders                         20

Item 5.  Other Information                                                           20

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 par value data; unaudited)

<TABLE>
<CAPTION>
                                                                                 July 1,            December 31,
                                                                                  2001                  2000
                                                                                ---------            ---------
<S>                                                                             <C>                  <C>
Assets
Current assets:
   Cash and cash equivalents                                                    $  11,758            $  15,250
   Accounts receivable, net of allowances of $1,614 and $1,499                     10,711               14,927
   Income tax receivable                                                              900                 --
   Inventories                                                                      7,146               10,741
   Deferred income taxes                                                             --                    800
   Other current assets                                                             1,733                1,697
                                                                                ---------            ---------
            Total current assets                                                   32,248               43,415

Restricted cash                                                                     1,400                1,400
Property and equipment, net                                                         7,728               10,241
Acquired technology, goodwill and other intangibles                                18,187               20,707
Notes receivable from employees and former employees                                2,335                2,310
Other assets                                                                        1,372                  811
                                                                                ---------            ---------
                                                                                $  63,270            $  78,884
                                                                                =========            =========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and equipment line of credit            $     208            $     288
   Accounts payable                                                                 3,212                5,137
   Accrued liabilities                                                              8,089                9,346
   Income taxes payable                                                               359                  359
   Deferred revenue                                                                 4,938                3,147
                                                                                ---------            ---------
         Total current liabilities                                                 16,806               18,277
                                                                                ---------            ---------

Capital lease obligations and equipment line of credit                                 73                   86
Deferred revenue and other accruals, less current portion                           1,219                1,368
                                                                                ---------            ---------
         Total long-term liabilities                                                1,292                1,454
                                                                                ---------            ---------

Commitments and contingencies (Note 6)

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;                       328                  327
    32,708,000 and 32,681,000 shares issued and outstanding
   Additional paid-in capital                                                     158,729              158,805
   Deferred compensation related to stock options                                    (116)              (1,231)
   Treasury stock                                                                    (528)                --
   Accumulated other comprehensive income (loss)                                       41                  (16)
   Accumulated deficit                                                           (113,282)             (98,732)
                                                                                ---------            ---------
            Total shareholders' equity                                             45,172               59,153
                                                                                ---------            ---------
                                                                                $  63,270            $  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                Six months ended
                                                               ------------------------        ------------------------
                                                                July 1,         July 2,         July 1,         July 2,
                                                                 2001            2000            2001            2000
                                                               --------        --------        --------        --------

<S>                                                            <C>             <C>             <C>             <C>
Revenue                                                        $ 13,571        $ 18,005        $ 26,183        $ 35,383
Cost of revenue                                                   5,953           6,433          10,298          12,679
                                                               --------        --------        --------        --------
Gross profit                                                      7,618          11,572          15,885          22,704
                                                               --------        --------        --------        --------

Operating expenses:
   Research and development, net                                  5,190           5,269          11,135           9,912
   Selling and marketing                                          5,013           9,114          10,762          17,225
   General and administrative                                     2,729           3,009           5,743           7,228
   Amortization of acquired intangibles                             817             720           1,679           1,440
   Impairment loss on Algorithmic Research, Ltd.                  2,503            --             2,503            --
                                                               --------        --------        --------        --------
            Total operating expenses                             16,252          18,112          31,822          35,805
                                                               --------        --------        --------        --------

Loss from operations                                             (8,634)         (6,540)        (15,937)        (13,101)

Other income (expense):
         Interest income, net                                       183             540             373             827
         Royalty and other income (expense), net                   (144)            (93)           (163)            (66)
                                                               --------        --------        --------        --------
                                                                     39             447             210             761
                                                               --------        --------        --------        --------

Loss before income taxes                                         (8,595)         (6,093)        (15,727)        (12,340)
Income tax expense (benefit)                                     (1,177)           --            (1,177)              8
                                                               --------        --------        --------        --------
Net loss                                                       $ (7,418)       $ (6,093)       $(14,550)       $(12,348)
                                                               ========        ========        ========        ========

Loss per share - basic & diluted:                              $  (0.23)       $  (0.20)       $  (0.45)       $  (0.41)
                                                               ========        ========        ========        ========

Shares used in per share calculation - basic & diluted           32,384          30,511          32,331          30,258
                                                               ========        ========        ========        ========

<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>
                                                                                     Six months ended
                                                                                ----------------------------
                                                                                 July 1,             July 2,
                                                                                  2001                2000
                                                                                --------            --------
<S>                                                                             <C>                 <C>
Cash flows from operating activities:
   Net loss                                                                     $(14,550)           $(12,348)
   Adjustments to reconcile net loss to net
      cash used in operating activities:
         Impairment loss on Algorithmic Research, Ltd.                             2,503                --
         Loss on disposal of fixed assets                                             29                --
         Depreciation                                                              1,849               1,636
         Amortization                                                              1,784               1,440
         Deferred income taxes                                                       800                  (4)
         Amortization of imputed interest on note receivable                         (25)               (119)
         Deferred compensation related to stock options                              412                 369
         Changes in assets and liabilities (net of effects of
          acquisition):
            Accounts receivable                                                    4,022              (3,380)
            Inventories                                                            3,070              (6,253)
            Income taxes receivable                                                 (900)               --
            Other assets                                                            (556)               (132)
            Accounts payable                                                      (1,905)               (585)
            Accrued liabilities                                                   (1,183)                776
            Income taxes payable                                                    --                    (3)
            Deferred revenue                                                       1,666               1,258
                                                                                --------            --------
         Net cash used in operating activities                                    (2,984)            (17,345)

Cash flows from investing activities:
   Acquisition of property and equipment                                            (526)             (2,159)
   Cash transferred with divestiture of Security Design International                (28)               --
                                                                                --------            --------

         Net cash used in investing activities                                      (554)             (2,159)
                                                                                --------            --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                        82               5,230
   Other                                                                             (93)                (20)
                                                                                --------            --------
          Net cash provided by (used in) financing activities                        (11)              5,210
                                                                                --------            --------
Effect of exchange rate changes on
   cash and cash equivalents                                                          57                  31
                                                                                --------            --------
Net decrease in cash and cash equivalents                                         (3,492)            (14,263)
Cash and cash equivalents at beginning of period                                  15,250              33,170
                                                                                --------            --------
Cash and cash equivalents at end of period                                      $ 11,758            $ 18,907
                                                                                ========            ========

Supplemental disclosures
   Cash refunds of income tax                                                   $  2,541                --

<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.

     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 July 1, 2001.  The fair value of these  instruments as of July 1, 2001 was
not significant.

3. Inventories

                                                  July 1,          December 31,
                                                   2001                2000
                                                 ---------------------------
                                                        (in thousands)

Raw materials                                    $ 3,827             $ 5,708
Work in process and subassemblies                  2,005               2,768
Finished goods                                     1,314               2,265
                                                 -------             -------
                                                 $ 7,146             $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 July 1,
2001 and July 2, 2000,  the Company had 7,135,000  and  6,717,000  stock options
outstanding  with  a  weighted  average  exercise  price  of  $5.59  and  $6.61,
respectively.   These  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
<PAGE>

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:

<TABLE>
<CAPTION>
                                           Three Months Ended                         Six Months Ended
                                       ----------------------------            ----------------------------
                                        July 1,             July 2,             July 1,             July 2,
                                         2001                2000                2001                2000
                                       --------            --------            --------            --------
                                              (in thousands)                          (in thousands)
<S>                                    <C>                 <C>                 <C>                 <C>
Net loss                               $ (7,418)           $ (6,093)           $(14,550)           $(12,348)
Other comprehensive income                  (28)                 11                  57                  31
                                       --------            --------            --------            --------
Total comprehensive loss               $ (7,446)           $ (6,082)           $(14,493)           $(12,317)
                                       ========            ========            ========            ========
</TABLE>

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.

     On June 22,  2001,  the Company  announced  that it would close or sell its
Israeli subsidiary,  Algorithmic Research, Ltd. ("ARL") within the next 30 to 60
days.  The Company  has taken an  approximate  $2.5  million  charge  during the
quarter,  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 will transfer an 81% ownership in ARL to a trustee  acting on
behalf  of ARL's  existing  employees,  and  converted  its  remaining  minority
interest to preferred stock having certain rights and privileges in the event of
ARL's sale or  liquidation.  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  intellectual  property,  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.

8. 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.

9. 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 will be 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 (6.75%
as of July 1, 2001) plus 1.75% and will be due April 30, 2002. The loan contains
a tangible net worth covenant.  This loan replaces a pre-existing  $10.0 million
revolving loan with the same bank containing more restrictive  covenants.  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 $324,253.  This
loan matures  December 1, 2002 and bears  interest at the prime rate plus 1%. As
of July 1, 2001, the outstanding balance under the equipment line was $208,371.

                                       6
<PAGE>

10. Subsequent Events

     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 $513,000 which will be
recorded in the third quarter of 2001.

     NASDAQ Listing Notice. Late on July 25, 2001, Cylink received a notice from
NASDAQ that the  Company's  stock has 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 states that the Company has 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
fails to do so, then the NASDAQ  listing staff will issue a notice of delisting,
at which  time the  Company  will  have an  opportunity  to appeal  the  staff's
decision to the NASDAQ listing qualifications panel.

11. 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
Statement of Financial  Accounting  Standard (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 is an impairment
loss.  Any  transitional  impairment  loss  will be  recognized  as a change  in
accounting principle.

                                       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 belief  concerning  future
events and financial performance.  Statements which are not purely historical in
nature are called "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities  Exchange Act of
1934.  We  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 update any such forward-looking  statements,  or
to update the reasons why actual  results  could differ from those  projected in
the forward-looking statements.

RESULTS OF OPERATIONS

     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             Six months ended
                                                                    ------------------             ----------------
                                                                  July 1,        July 2,        July 1,        July 2,
                                                                    2001           2000           2001           2000
                                                                   -----          -----          -----          -----

<S>                                                                <C>            <C>            <C>            <C>
Revenue                                                            100.0%         100.0%         100.0%         100.0
                                                                   -----          -----          -----          -----
Cost of revenue                                                     43.9           35.7           39.3           35.8
                                                                   -----          -----          -----          -----

Gross profit                                                        56.1           64.3           60.7           64.2
                                                                   -----          -----          -----          -----

Operating expenses:
  Research and development, net                                     38.2           29.3           42.5           28.0
  Selling and marketing                                             37.0           50.6           41.1           48.7
  General and administrative                                        20.1           16.7           21.9           20.4
   Loss from divestiture of Algorithmic Research, Ltd.              18.4            --             9.6            --
  Amortization of purchased intangibles                              6.0            4.0            6.4            4.1
                                                                   -----          -----          -----          -----

     Total operating expenses                                      119.7          100.6          121.5          101.2
                                                                   -----          -----          -----          -----

Loss from operations                                               (63.6)         (36.3)         (60.8)         (37.0)

Other income, net                                                    0.3            2.5            0.8            2.1
                                                                   -----          -----          -----          -----

Loss before income taxes                                           (63.3)         (33.8)         (60.0)         (34.9)
Provision for income taxes                                          (8.7)           --            (4.5)           --
                                                                   -----          -----          -----          -----

Net loss                                                           (54.6)%        (33.8)%        (55.5)%        (34.9)
                                                                   =====          =====          =====          =====
</TABLE>
                                        8
<PAGE>

     Revenue.  Revenue  decreased  25% from $18.0  million for the three  months
ended July 2, 2000 to $13.6 million for the three months ended July 1, 2001, and
decreased  26% from $35.4 million for the six months ended July 2, 2000 to $26.2
million for the six months ended July 1, 2001.  The decrease is primarily due to
a market  slowdown.  International  revenue was 32% and 34% of total revenue for
the second quarter of 2001 and 2000, respectively.

     Gross  Profit.  Gross  profit  decreased  from $11.6  million for the three
months  ended July 2, 2000 to $7.6  million for the three  months  ended July 1,
2001 and  decreased  from $22.7 million for the six months ended July 2, 2000 to
$15.9 million for the six months ended July 1, 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 56% for the  quarters  ended July 2, 2000 and
July 1, 2001,  respectively.  The decrease in gross  profit as a  percentage  of
revenue was a result of higher provisions for inventory  writedowns,  additional
warranty  reserves for Cylink's CFE product (see footnote 8 to interim financial
statements)  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 7% from $5.6 million for the three months ended July 2, 2000
to $5.2 million for the three  months  ended July 1, 2001 and  decreased 2% from
$10.1  million for the six months ended July 2, 2000 to $9.9 million for the six
months  ended  July 1,  2001.  Gross  research  and  development  expenses  as a
percentage  of revenue  were 31% for the second  quarter of 2000 and 38% for the
second  quarter  2001.  The dollar  increase  resulted from the  acquisition  of
Celotek ATM development team,  partially offset by reduced project and headcount
related  spending  as a result of cost  savings  initiatives.  The  increase  in
expense as a  percentage  of revenue for the second  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 45% from $9.1 million for the three months ended July 2, 2000
to $5.0 million for the three months ended July 1, 2001,  and decreased 38% from
$17.2 million for the six months ended July 2, 2000 to $10.8 million for the six
months ended July 1, 2001.  Selling and  marketing  expenses as a percentage  of
revenue were 51% and 37% for the second quarter of 2000 and 2001,  respectively.
Sales  expenses  decreased for the second quarter of 2001 compared to the second
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  9% from $3.0  million for the three  months
ended July 2, 2000 to $2.7 million for the three months ended July 1, 2001,  and
decreased  21% from $7.2  million for the first half of 2000 to $5.7 million for
the first half of 2001. General and  administrative  expenses as a percentage of
revenue were 17% and 20% for the second quarter of 2000 and 2001,  respectively.
The dollar  decrease in the second  quarter of 2001 versus the second 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 second
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
second quarter of 2001 is due to greater  decline in revenues than the reduction
in general and administrative expenditures.

     Impairment loss on Algorithmic Research,  Ltd. In the quarter ended July 1,
2001,  the  Company  recorded  a  non-cash  charge of $2.5  million to cover the
write-down of assets associated with the wind-up of that subsidiary. (See Note 7
to interim financial statements.)

     Amortization of Goodwill and Other  Intangibles.  Amortization  relating to
goodwill  and other  intangibles  increased  13% from $0.7 million for the first
three  months ended July 2, 2000 to $0.8 million for the three months ended July
1, 2001,  and  increased  17% from $1.4 million for the six months ended July 2,
2000 to $1.7 million for the six months ended July 1, 2001. The dollar  increase
in the first half of 2001 versus the first half 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") in September 1997.

                                       9
<PAGE>

     Provision for Income Taxes. Cylink recognized a tax benefit of $1.2 million
for the three months ended July 1, 2001 representing the partial  recognition of
the  Company's  net  operating  loss for income  tax  purposes.  No  significant
provision  for or benefit from income taxes was  recognized in the quarter ended
July 2,  2000 as the  Company  incurred  a net  operating  loss for  income  tax
purposes  and the  tax  benefit  therefrom  was  offset  by an  increase  in the
valuation allowance on the deferred tax asset.

     Other Income (Expense), Net. Other income (expense), net consists primarily
of interest income and interest expense,  foreign exchange gains or losses,  and
royalty income.  Other income, net decreased from $0.4 million for quarter ended
July 2, 2000 to $0.0 million for the quarter ended July 1, 2001, principally due
to interest  income on decreased cash and cash  equivalents  and reduced royalty
and other income.

LIQUIDITY AND CAPITAL RESOURCES

     At July 1,  2001,  the  Company  had  cash and  cash  equivalents  of $11.8
million, working capital of $15.4 million and minimal long-term obligations. For
the six  months  ended July 1, 2001,  the  Company  recorded a net loss of $14.6
million.  Net cash used in operating  activities  for the first half of 2001 was
$3.0 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 $4.0 million, a decrease in inventories of $3.1 million,
an increase in deferred revenue of $1.7 million,  partially offset by a decrease
in accounts  payable and accrued  liabilities of $3.1 million and an increase in
other assets of $0.6  million.  The decrease in accounts  receivable  was due to
lower than average 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.  Net cash used in operating  activities  for the first half of 2000
was $17.3  million  consisting  primarily of the loss from  operations  of $12.3
million,  an increase in accounts  receivable  of $3.4  million,  an increase in
inventories of $6.3 million,  offset in part by an increase in accounts  payable
and accrued liabilities of $0.2 million,  and an increase in deferred revenue of
$1.3 million.

     Cash used in investing activities for the six months ended July 1, 2001 and
July 2, 2000 was $0.5 million and $2.2 million, respectively,  primarily to fund
the acquisition of property, plant and equipment.

     Cash used in financing activities for the six months ended July 1, 2001 was
not  material.  Cash provided by financing  activities  for the six months ended
July 2, 2000 was $5.2 million,  resulting from proceeds from the sale of 875,000
shares of stock, pursuant to the exercise of stock options.

     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  negotiated a $7.5 million  revolving line of credit
with its bank to replace a $10.0 million  revolving line of credit,  in order to
obtain more favorable covenants. The renegotiated line of credit will assist the
Company, if necessary, in meeting its working capital requirements. The new line
of credit will be subject to the Company's  satisfaction of a 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.

                                       10
<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 second quarter of 2001 and
in prior  years.  The Company had an  accumulated  deficit of $113 million as of
July 1, 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 $11.8 million as of July 1, 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 on
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 and  second  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 and
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 claims;

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

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

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

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

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

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

         o   loss of an important customer;

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

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

                                       11
<PAGE>

         o   disruption in our operations  caused by reductions in our workforce
             and recent departures of a number of senior executives;

         o   customer discounts and credits; and

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

     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  and,  consequently,  order  backlog  at the
beginning  of any period  has,  at times in the past,  represented  only a small
portion of that period's  expected  revenue.  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 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.

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,

                                       12
<PAGE>

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 has declared  bankruptcy,  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  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 (formerly Zaxus, 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. Our professional
services  business  competes with very large  consulting  organizations  such as
Accenture,  PricewaterhouseCoopers  and other  entities  which  have  formidable
resources to market and support their security consulting  businesses.  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 most 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.

     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

                                       13
<PAGE>

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
has  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.

     In late 1998,  Mr.  William C. Crowell,  formerly Vice President of Product
Strategy was promoted to President and Chief Executive  Officer.  On November 3,
2000,  Mr. Roger A. Barnes,  our Vice  President of Finance and Chief  Financial
Officer,  notified  us of his  decision  to resign  from  Cylink  to accept  the
position  of Chief  Executive  Officer  and  President  of another  company.  On
November 5, we appointed Mr. Christopher  Chillingworth,  formerly our Corporate
Controller, to the position of Acting Chief Financial Officer. Mr. Chillingworth
was appointed  Vice  President of Finance and Chief  Financial  Officer in early
2001.

     In addition to Mr.  Barnes,  our Vice  Presidents  of  Engineering,  Sales,
Professional  Services and  Marketing,  and our Chief  Scientist  recently ended
their employment relationships with us. Although we filled the positions of Vice
President of Engineering  and Vice President of Sales,  it is uncertain  whether
and how quickly we will fill the remaining executive positions.

     Our  future  success  will  depend in large  part on the  abilities  of Mr.
Crowell,  the contributions by our other 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 remaining 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.

                                       14
<PAGE>

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.
Competition  is  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  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. Resort 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 and security consulting

                                       15
<PAGE>

services.  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  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 sales to foreign  governments of certain of our
network  security  products,  we are often at a  disadvantage  in competing  for
international sales compared to companies located outside the United States 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

                                       16
<PAGE>

to our commercial  customers,  we still face export controls on sales to certain
foreign governments and transfers of our technology to foreign partners.

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.

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. Since the date of the original notice and
August 15, 2001, the bid price of our common stock has not closed above $1.00.

     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.

     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  remains 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.

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

                                       17
<PAGE>

were issued 40,913  shares of our Common  Stock, which will be released from our
right to repurchase such shares if such employees  continue to be employed by us
for a period of 12 months.  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 companies,
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 the 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.

                                       18
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     As of July 1,  2001,  we held a total  of  $11.8  million  of cash and cash
equivalents.  These  securities  consist  primarily  of money  market  funds and
high-grade,  short-term corporate  obligations.  Certain of these securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10  percent  from  levels as of July 1, 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 July 1, 2001, we had no fixed rate
obligations  except for capitalized  leases and long-term debt of  approximately
$281,000.  As such, the fair value of our fixed rate  obligations is not subject
to a material adverse impact from changes in interest rates.

                                       19
<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).  Plaintiffs recently filed an amended consolidated complaint and
our motion to dismiss the complaint is pending before the Court.

     Cylink believes it has meritorious defenses to 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,  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

(a)  The Registrant's  Annual Meeting of Shareholders was held May 16, 2001. The
     vote of the holders of record of 32,706,298 shares of Cylink's common stock
     outstanding  at the close of business on March 30,  2001 was  solicited  by
     proxy pursuant to Regulation 14A under the Securities Act of 1934.

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

                                            Votes                Votes
               Name of Director              For                Against
               ----------------          ----------             -------

               Dr. Leo Guthart           19,961,469             161,069
               Dr. James Simons          19,956,501             166,037

(c)  The  shareholders  ratified  the  appointment  of  Deloitte & Touche LLP as
     Cylink's independent auditor for the fiscal year ending December 31, 2001.

                   Votes                     Votes                 Votes
                    For                     Against               Withheld
                 ----------                 -------               --------

                 26,642,048                  28,235                6,792

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

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.

                                       20
<PAGE>

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 July 1, 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: August 15, 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