SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                   FORM 10-Q/A
                                   (restated)

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

                  For the quarterly period ended June 28, 1998

                           Commission File No. 0-27742


                               CYLINK CORPORATION
             (Exact name of registrant as specified in its charter)


                California                                95-3891600
      (State or other jurisdiction of                  (I.R.S. Employer
       incorporation or organization)                 Identification No.)


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


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



Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
 Yes     X        No          
       ----           -----

As of August 10, 1998, there were 29,074,990  shares of the Registrant's  Common
Stock outstanding.


<PAGE>


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

CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data; unaudited)
<CAPTION>

                                                                     June 28,               December 31,
                                                                       1998                     1997
                                                                    ---------                ---------
                                   Assets                      (restated-see Note 2)     (restated-see Note 2)
<S>                                                                 <C>                      <C>       
Current assets:
   Cash and cash equivalents                                        $  46,052                $  22,977 
   Accounts receivable, net of allowances of $384 and $278             13,990                   13,914
   Note receivable                                                     12,424                     --
   Inventories                                                          8,419                    6,224
   Net assets of discontinued operations                                 --                     11,299
   Deferred income taxes                                                1,640                    1,533
   Other current assets                                                 2,464                    2,190
                                                                    ---------                ---------
            Total current assets                                       84,989                   58,137
                                                                                           
Property and equipment, net                                             6,105                    6,003
Acquired technology, goodwill and other intangibles, net                6,659                    8,017
Notes receivable from employees                                         5,703                    3,473
Other assets                                                            3,469                      925
                                                                    ---------                ---------
                                                                    $ 106,925                $  76,555
                                                                    =========                =========
                    Liabilities and Shareholders' Equity                                   
Current liabilities:                                                                       
   Current portion of lease obligations and long-term debt          $     194                $     210
   Accounts payable                                                     1,958                    2,238
   Accrued liabilities                                                  8,542                    6,194
   Accrued liabilities related to discontinued operations               3,850                     --
   Income taxes payable                                                 4,604                    1,304
   Deferred revenue                                                     1,581                      206
                                                                    ---------                ---------
            Total current liabilities                                  20,729                   10,152
                                                                    ---------                ---------
                                                                                           
Capital lease obligations and long-term debt                              178                      256
                                                                    ---------                ---------
                                                                                           
Deferred income taxes                                                      13                       13
                                                                    ---------                ---------
                                                                                           
Shareholders' equity:                                                                      
   Preferred stock, $0.01 par value; 5,000,000 shares authorized;                          
      none issued and outstanding                                        --                       --
   Common stock, $0.01 par value; 40,000,000 shares authorized;                            
      29,044,000 and 28,695,000 shares issued and outstanding             290                      287
   Additional paid-in capital                                         122,442                  120,092
   Deferred compensation related to stock options                        (208)                    (250)
   Cumulative translation adjustment                                      (62)                     (63)
   Accumulated deficit                                                (36,457)                 (53,932)
                                                                    ---------                ---------
            Total shareholders' equity                                 86,005                   66,134
                                                                    ---------                ---------
                                                                    $ 106,925                $  76,555
                                                                    =========                =========
                                                                                           
<FN>
                 See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                   1
<PAGE>

<TABLE>

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

                                                                 Three Months Ended                Six Months Ended
                                                                 ------------------                ----------------
                                                                June 28,        June 27,        June 28,       June 27,       
                                                                 1998            1997            1998            1997         
                                                               --------        --------        --------        --------   
                                                         (restated-see Note 2)          (restated-see Note 2)
<S>                                                            <C>             <C>             <C>             <C>        
Revenue                                                        $ 12,363        $ 11,584        $ 20,425        $ 20,936   
Cost of revenue                                                   3,990           3,385           6,621           6,195   
                                                               --------        --------        --------        --------   
Gross profit                                                      8,373           8,199          13,804          14,741   
                                                               --------        --------        --------        --------   
                                                                                                             
Operating expenses:                                                                                          
   Research and development, net                                  2,770           2,953           5,815           5,971   
   Selling and marketing                                          6,207           3,932          11,780           6,714   
   General and administrative                                     1,852           2,123           3,330           4,023   
   Amortization of purchased intangibles                            680            --             1,359            --     
                                                               --------        --------        --------        --------   
            Total operating expenses                             11,509           9,008          22,284          16,708   
                                                               --------        --------        --------        --------   
                                                                                                             
Loss from operations                                             (3,136)           (809)         (8,480)         (1,967)  
                                                                                                             
Other income:                                                                                                
   Interest income, net                                             687             874             839           1,816   
   Royalty and other income (expense), net                         (115)            195            (115)            326   
                                                               --------        --------        --------        --------   
                                                                                                             
Income (loss) from continuing operations before income taxes     (2,564)            260          (7,756)            175   
Provision (benefit) for income taxes                               (897)           --            (2,714)           --     
                                                               --------        --------        --------        --------   
Income (loss) from continuing operations                         (1,667)            260          (5,042)            175   
Income (loss) from discontinued operations, net of                                                           
   income tax expense (benefit) of $524, $(139) and $998           --               963            (259)          2,155   
Gain on disposal of discontinued operations,                                                                 
   net of income tax expense of $12,358                            --              --            22,776            --     
                                                               --------        --------        --------        --------   
Net income (loss)                                              $ (1,667)       $  1,223        $ 17,475        $  2,330   
                                                               ========        ========        ========        ========   
                                                                                                             
Earnings (loss) per share - basic:                                                                           
   Continuing operations                                       $  (0.06)       $   0.01        $  (0.17)       $   0.01   
   Discontinued operations                                         --              0.04            0.77            0.08   
                                                               --------        --------        --------        --------   
   Net income (loss)                                           $  (0.06)       $   0.05        $   0.60        $   0.09   
                                                               ========        ========        ========        ========   
                                                                                                             
Earnings (loss) per share - diluted:                                                                         
   Continuing operations                                       $  (0.06)       $   0.01        $  (0.17)       $   0.01   
   Discontinued operations                                         --              0.04            0.77            0.08   
                                                               --------        --------        --------        --------   
   Net income (loss)                                           $  (0.06)       $   0.05        $   0.60        $   0.09   
                                                               ========        ========        ========        ========   
                                                                                                             
Shares used in per share calculation - basic                     29,011          25,921          28,916          25,811   
                                                               ========        ========        ========        ========   
                                                                                                             
Shares used in per share calculation - diluted                   29,011          26,609          28,916          26,155   
                                                               ========        ========        ========        ========   
<FN>


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

CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<CAPTION>
                                                                                        Six Months Ended
                                                                                   -------------------------
                                                                                   June 28,         June 27,
                                                                                     1998             1997
                                                                                   --------         --------
Cash flows from operating activities:                                       (Restated-see Note 2)
<S>                                                                                <C>              <C>       
   Income (loss) from continuing operations                                        $ (5,042)        $    175  
   Adjustments  to  reconcile  income  (loss)  to net                                              
      cash  used in  continuing operations:                                                        
         Depreciation and amortization                                                2,215              878
         Deferred compensation related to stock options                                  42               42
         Deferred income taxes                                                         (107)            --
         Changes in assets and liabilities:                                                        
            Accounts receivable                                                         (76)          (3,147)
            Inventories                                                              (2,195)          (1,016)
            Other assets                                                                182           (1,158)
            Accounts payable                                                           (280)          (1,560)
            Accrued liabilities                                                      (2,588)             407
            Income Taxes Payable                                                     (4,271)            --
            Deferred revenue                                                          1,375             (109)
                                                                                   --------         --------
            Net cash used in continuing operations                                  (10,745)          (5,488)
            Net cash provided by (used in) discontinued operations                   (6,907)             417
                                                                                   --------         --------
               Net cash used in operating activities                                (17,652)          (5,071)
                                                                                   --------         --------
                                                                                                   
Cash flows from investing activities:                                                              
   Acquisition of property and equipment                                             (1,578)          (2,073)
   Loans to employees in exchange for notes receivable                               (2,230)          (3,473)
   Proceeds from sale of discontinued operations                                     46,000             --
   Acquisition of preferred stock of an unaffiliated company                         (3,000)            --
                                                                                   --------         --------
               Net cash provided by (used in) investing activities                   39,192           (5,546)
                                                                                   --------         --------
                                                                                                   
Cash flows from financing activities:                                                              
   Proceeds from issuance of common stock, net                                        1,628              555
   Payment of notes receivable from shareholders                                       --                301
   Repayment of capital lease obligations and long-term debt                            (94)             (76)
                                                                                   --------         --------
               Net cash provided by financing activities                              1,534              780
                                                                                   --------         --------
Effect of exchange rate changes on cash and cash equivalents                              1              (46)
                                                                                   --------         --------
Net increase (decrease) in cash and cash equivalents                                 23,075           (9,883)
Cash and cash equivalents at beginning of period                                     22,977           78,849
                                                                                   --------         --------
Cash and cash equivalents at end of period                                         $ 46,052         $ 68,966
                                                                                   ========         ========
                                                                                                   
Supplemental disclosures:                                                                          
   Cash paid for income taxes                                                      $  6,054         $     26
   Cash paid for interest                                                                30               44
                                                                                                   
<FN>
                                                                                              
                 See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                   3
<PAGE>

CYLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1.   Basis of Presentation

         The unaudited  condensed  consolidated  financial  statements  included
     herein  contain  all  adjustments,  consisting  only  of  normal  recurring
     adjustments  which,  in the opinion of management,  are necessary to fairly
     state the consolidated  financial position,  results of operations and cash
     flows of Cylink  Corporation  ("Cylink" or the  "Company")  for the periods
     presented.  These 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, 1997.  Interim  results
     of operations are not necessarily  indicative of the results to be expected
     for the full year.

         Beginning  in 1998,  the  Company's  interim  quarters  end on the last
     Sunday  preceding  the calendar  quarter  end.  Previously,  the  Company's
     interim  quarters ended on the last Friday  preceding the calendar  quarter
     end.

2.   Restatement of Financial Results

         On November 5, 1998,  the Company  publicly  announced  that it and its
     independent  accountants  had  initiated  a review of  revenue  recognition
     practices  which would result in a restatement  of previously  issued first
     and second  quarter 1998  results and that all three  quarters of 1998 were
     expected to show substantial operating losses.  During the review,  certain
     facts became known  indicating  errors had been made in the  application of
     revenue  recognition  policies  which also  impacted the fourth  quarter of
     1997, and as a result, 1997 full-year results have been restated along with
     first  and  second  quarter  1998  results.  These  restated  results  were
     announced in a press release dated December 16, 1998.

         This Quarterly  Report on Form 10-Q/A amends items 1 and 2 of Part I of
     the  Company's  Quarterly  Report  on Form  10-Q  previously  filed for the
     quarterly  period ended June 28, 1998. This Quarterly Report on Form 10-Q/A
     is filed in  connection  with the  Company's  restatement  of its financial
     statements  for  the  quarterly  period  ended  June  28,  1998.  Financial
     statement  information  and related  disclosures  included in this  amended
     filing reflect, where appropriate, changes as a result of the restatements.
     Except as otherwise noted,  information  contained in this Quarterly Report
     on form 10-Q/A is stated as of June 28, 1998.

     As a result of the restatement,  the statements of operations and financial
     position have been restated as follows:


                               Three Months Ended           Six Months Ended
                           -----------------------      ------------------------
                                 June 28, 1998               June 28, 1998
                                 -------------               -------------
                          As Originally               As Originally
                          -------------               -------------
                           Reported     As Restated     Reported     As Restated
                           --------     -----------     --------     -----------
                                              (in thousands)

Sales                      $ 18,035      $ 12,363       $ 33,864      $ 20,425 
                                                                     
Operating expenses           11,479        11,509         22,184        22,284
Income (loss) from                                                   
    continuing operations     1,732        (1,667)         2,814        (5,042)
                                                                     
Net income (loss)          $  1,732      $ (1,667)      $ 25,438      $ 17,475
                           ========      ========       ========      ========
                                                                     
                                        4
<PAGE>                                                               
<TABLE>
<CAPTION>
                                            Three Months Ended            Six Months Ended
                                        --------------------------     ------------------------
                                              June 28, 1998                June 28, 1998
                                              -------------                -------------
                                       As Originally                As Originally
                                       -------------                -------------
                                         Reported       As Restated    Reported      As Restated
                                         --------       -----------    --------      -----------
<S>                                      <C>             <C>            <C>            <C>    
Earnings (loss) per share - diluted
   Continuing operations                 $ 0.06          $ (0.06)       $ 0.09         $(0.17)
   Discontinued operations                    -               -           0.75           0.77
                                         =======         ========       =======        ======
   Net income (loss)                     $ 0.06          $ (0.06)       $ 0.84         $ 0.60
                                         =======         ========       =======        ======

                                                                         As of June 28, 1998
                                                                         -------------------

Accumulated deficit                                                   $ (25,526)     $ (36,457)
                                                                      =========      ========= 
</TABLE>
   
         The restatement of results for the fourth quarter of 1997 resulted in a
     reduction of previously  reported amounts at December 31, 1997 for accounts
     receivable of $1.6 million,  net asset of  discontinued  operations of $1.9
     million  and income  taxes  payable of $0.6  million,  and a  corresponding
     increase in the previously  reported  accumulated  deficit of $3.0 million,
     resulting in restated accumlated deficit of $53.9 million.

3.   Discontinued Operations

         On March 28, 1998, the Company sold its Wireless  Communications  Group
     ("Wireless")  to P-Com,  Inc. for $60.5 million  ($46.0 million in cash and
     unsecured promissory note in the amount of $14.5 million due 100 days after
     closing,  subject to closing  adjustments).  As a result, the operations of
     Wireless   have  been   classified  as   discontinued   operations  in  the
     accompanying Condensed Consolidated Financial Statements and related Notes.
     Accrued expenses in the amount of approximately $6.8 million, primarily for
     professional services,  anticipated excess facilities expenses, and certain
     other transaction related accruals were charged to discontinued  operations
     and  offset  against  the gain on  disposal.  Pursuant  to the  restatement
     referred to in Note 2, certain revenues of Wireless  previously  recognized
     in the fourth  quarter of 1997 and the first quarter of 1998 were adjusted.
     Based  on  the  net  assets  of  Wireless  as  of  March  28,  1998,  after
     restatement, the sales proceeds would have been approximately $58.4 million
     resulting in a note receivable of approximately  $12.4 million (a reduction
     of $2.1 million in the initial note  receivable).  Wireless  revenues  were
     $6.7  million  and $13.5  million in the second  quarter  and first half of
     1997,  respectively,  and were $4.5  million  in 1998  through  the date of
     disposal. On July 14, 1998, P-Com made a partial payment of $9.4 million on
     its promissory  note and is disputing the remaining  balance.  See Part II,
     Item 1 "Legal Proceedings."
    
4.   Notes Receivable From Employees

         Pursuant to their employment  agreements and related  promissory notes,
     the Company has loaned certain  employees $5.7 million towards the purchase
     of their principal  residences.  Of this amount, $5.1 million is receivable
     from  officers of the Company.  The notes are interest free and are secured
     by deeds of trust on the related  residences.  The loan agreements  provide
     for  accelerated  payment in the event of termination  of employment  under
     certain conditions and, in one instance,  under certain  circumstances will
     be  forgiven  to the  extent of any  decrease  in the value of the  related
     residence.  Maturity  dates are as  follows:  $1.6  million  in 2002,  $1.7
     million in 2003, and $2.4 million thereafter.
   
5.   Inventories

                                          June 28,             December 31,   
                                           1998                   1997     
                                          ------                 ------
                                     (restated-See Note 2)
                                                   (in thousands)           

Raw materials                             $2,965                 $2,191 
Work in process and subassemblies          2,256                  1,858
Finished goods                             3,198                  2,175
                                          ------                 ------
                                          $8,419                 $6,224
                                          ======                 ======
    

                                        5
                                                      
<PAGE>


<TABLE>
6.   Earnings (Loss) Per Share
<CAPTION>
                                                                     Three Months Ended                Six Months Ended
                                                                   -----------------------           -----------------------
                                                                  June 28,         June 27,         June 28,         June 27,      
                                                                    1998             1997             1998             1997        
                                                                   ------           ------           ------           ------
                                                           (restated-See Note 2)           (restated-See Note 2)
                                                                                        (in thousands)
<S>                                                                <C>              <C>              <C>              <C>     
Shares used to compute basic earnings (loss) per share
  (weighted  average number of common shares
  outstanding during the period)                                   29,011           25,921           28,916           25,811  
Incremental common shares attributable to assumed                                                                    
  exercise of dilutive stock options                                 --                688             --                344
                                                                   ------           ------           ------           ------
Shares used to compute diluted earnings (loss) per share           29,011           26,609           28,916           26,155
                                                                   ======           ======           ======           ======
                                                                                                                     
Antidilutive stock options                                          5,778            3,396            5,778            3,611
                                                                   ======           ======           ======           ======
</TABLE>
   
7.    Comprehensive Income
    
<TABLE>
                                                                            
         Effective  January 1, 1998, the Company adopted  Statement of Financial
     Accounting  Standards  No.  130,  "Reporting  Comprehensive  Income."  This
     Statement establishes standards for reporting  comprehensive income and its
     components in an annual financial statement that is displayed with the same
     prominence as other financial statements. Comprehensive income, as defined,
     includes all changes in equity (net assets)  during a period from  nonowner
     sources.  Examples of items to be included in comprehensive  income,  which
     are  excluded  from  net  income,   include  foreign  currency  translation
     adjustments  and  unrealized  gain/loss on  available-for-sale  securities.
     Annual  financial  statements  for prior periods will be  reclassified,  as
     required. The Company's total comprehensive income (loss) was as follows:
<CAPTION>

                                                    Three Months Ended                     Six Months Ended
                                              ----------------------------             ---------------------------
                                               June 28,            June 27,            June 28,           June 27,
                                                1998                 1997                1998               1997
                                              -------              -------             -------             -------
                                         (restated-See Note 2)                  (restated-See Note 2)
                                                                          (in thousands)
<S>                                           <C>                  <C>                 <C>                 <C>      
Net income (loss)                             $(1,667)             $ 1,223             $17,475             $ 2,330  
Other comprehensive income (loss)                 (15)                  37                   1                 (46)
                                              -------              -------             -------             -------
Total comprehensive income (loss)             $(1,682)             $ 1,260             $17,476             $ 2,284
                                              =======              =======             =======             =======
</TABLE>

   
8.   Recent Accounting Pronouncement
    
         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
     Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise
     and Related  Information." This statement establishes standards for the way
     companies report  information about operating  segments in annual financial
     statements.  It also establishes  standards for related  disclosures  about
     products and services,  geographic areas, and major customers.  The Company
     has not yet  determined  the  impact of  adopting  this new  standard.  The
     disclosures  prescribed  by FAS 131 are  effective  for  1998,  and are not
     required   for  interim   periods.   The  Company   does  not  expect  this
     pronouncement to have a material impact on its financial statements.

                                       6
<PAGE>


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


         The  statements  contained  in this  Report on Form 10-Q/A that are not
purely historical are  forward-looking  statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of  1934,   including  statements   regarding  Cylink's   expectations,   hopes,
intentions,   beliefs  or  strategies  regarding  the  future.   Forward-looking
statements  include:  the Company's  statements in Part I, Item 2  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
regarding  the  sufficiency  of the  Company's  existing  liquidity  and capital
resources,  management's belief that resolution of certain litigation  described
in Part II, Item 1 "Legal  Proceedings"  will not have a material adverse effect
on the Company's  financial  position and results of  operations,  the Company's
expectation that it will introduce a number of new products in 1998 and continue
to make a significant investment in engineering,  research and development,  its
intention  to  expand  its  foreign   sales   channels   and  enter   additional
international  markets,  and the  Company's  intention  to protect  itself  from
liability  arising out of "year 2000  errors."  All  forward-looking  statements
included in this document are based on  information  available to the Company as
of the date of the  original  Report on Form 10-Q  (August  12,  1998),  and the
Company 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.  It is  important  to note that the  Company's
actual  results  could  differ  materially  from  those in such  forward-looking
statements  for the reasons  detailed in "Risk  Factors  That May Affect  Future
Results"  and other  sections  of this  Report on Form  10-Q/A.  You should also
consult the risk factors  listed from time to time in the  Company's  Reports on
Form 10-Q, 10-Q/A, 8-K, 10-K and Annual Reports to the Shareholders.

DISCONTINUED OPERATIONS

         Pursuant  to an asset  purchase  agreement  dated March 27,  1998,  the
Company sold its Wireless business for approximately $46.0 million in cash and a
$14.5 million  unsecured note receivable due 100 days after closing,  subject to
closing  adjustments.  See Note 2 of Notes to Condensed  Consolidated  Financial
Statements.  The sale  resulted  in an after  tax  gain of  approximately  $22.8
million.  Except where noted,  the following  comments are  associated  with the
continuing network security business.

RESULTS OF OPERATIONS

         Revenue.  The Company's  revenue is derived primarily from sales of its
family of commercial network security products. Fees for maintenance and support
services are charged  separately.  Revenue from product sales is recognized upon
shipment to the customer.  Concurrently, a provision is made for estimated costs
to repair or replace products under warranty arrangements. Revenue from sales to
distributors is recognized upon shipment; no right of return or price protection
is given.  A provision is recorded for any  estimated  reduction in gross profit
due to limited  stock  rotation  privileges.  Revenue  from sales to value added
resellers is recognized upon shipment and concurrently a provision for estimated
returns is recorded.

         The Company's  revenue increased by 7% from $11.6 million for the three
months ended June 27, 1997 to $12.4  million for the three months ended June 28,
1998,  and  decreased by 2% from $20.9 million for the six months ended June 27,
1997 to $20.4  million  for the six months  ended  June 28,  1998.  The  revenue
increase  during the quarter ended June 28, 1998 over the  comparable  period in
the  previous  year  was  due  to  increased  shipments  of the  Company's  Link
Encryption and SecureFrame  products.  International  revenue was 29% and 37% of
total revenue for the second quarter of 1997 and 1998, respectively.

         Gross  Profit.  Gross profit  increased by 2% from $8.2 million for the
three months ended June 27, 1997 to $8.4 million for the three months ended June
28, 1998,  and  decreased by 6% from $14.7 million for the six months ended June
27,  1997 to  $13.8  million  for the six  months  ended  June  28,  1998.  As a
percentage of sales, gross profit was 71% and 68% for the second quarter of 1997
and 1998,  respectively,  and 70% and 68% for the  first  half of 1997 and 1998,
respectively.  The decrease in gross margin  percentage was due to lower average
unit costs for existing products.

         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  11% from $3.6  million for the three  months ended June 27,

                                       7
<PAGE>

1997 to $3.2 million for the three months ended June 28, 1998, and decreased 13%
from $7.1  million for the first half of 1997 to $6.2 million for the first half
of 1998. Gross research and development expenses as a percentage of revenue were
31% and 26% for the second quarter of 1997 and 1998,  respectively,  and 34% and
30% for the  first  half of 1997  and 1998  respectively.  The  dollar  decrease
resulted from reduced contract and other variable expenses related to externally
funded  development  and from cost  containment  efforts.  From time to time the
Company  receives  engineering  funding for  development of projects to apply or
enhance the Company's  technology to a particular  customer's  need. The amounts
recognized  under these  research and  development  contracts are offset against
research and development  expenses.  The amounts recognized under  non-recurring
engineering  contracts  totaled  $0.6  million  and $0.4  million for the second
quarter of 1997 and 1998,  respectively,  and $1.1  million and $0.4 million for
the first half of 1997 and 1998, respectively.

         Selling and Marketing. Selling and marketing expenses consist primarily
of  personnel   expenses,   including  sales   commissions,   and  expenses  for
advertising,  public relations,  seminars and trade shows. Selling and marketing
expenses  increased  58% from $3.9  million for the three  months ended June 27,
1997 to $6.2 million for the three months ended June 28, 1998, and increased 75%
from $6.7  million for the six months  ended June 27, 1997 to $11.8  million for
the six  months  ended  June 28,  1998.  Selling  and  marketing  expenses  as a
percentage of revenue were 34% and 50%, for the second quarter of 1997 and 1998,
respectively, and 32% and 58% for the first half of 1997 and 1998, respectively.
Sales and marketing expenses increased from the second quarter and first half of
1997 primarily to support the launch of new or enhanced products, as well as due
to continued  expansion of the Company's direct sales  operations,  product line
management,  marketing development and international  operations.  Additionally,
sales and marketing  expenses  increased due to integration  expenses  resulting
from the acquisition of Algorithmic Research ("ARL") in September 1997.

         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  13% from $2.1  million for the three months
ended June 27, 1997 to $1.9  million for the three  months  ended June 28, 1998,
and  decreased  17% from $4.0  million for the six months ended June 27, 1997 to
$3.3 million for the six months ended June 28, 1998.  General and administrative
expenses as a percentage  of revenue were 18% and 15% for the second  quarter of
1997 and  1998,  respectively,  and 19% and 16% for the  first  half of 1997 and
1998,  respectively.  The dollar decrease from the second quarter and first half
of 1997 was primarily due to decreases in consulting  expenses,  recruiting  and
relocation expenses related to senior management transition and legal fees.

         Other  Income.  Other income  consists  primarily  of interest  income.
Interest income, net, decreased from $0.9 million for the second quarter of 1997
to $0.7 million for the second  quarter of 1998, and decreased from $1.8 million
for the  first  half of 1997 to $0.8  million  for the first  half of 1998.  The
decrease is principally due to the decrease in average cash and cash equivalents
resulting from investing activities and working capital requirements.

LIQUIDITY AND CAPITAL RESOURCES

         At June 28, 1998,  the Company had cash and cash  equivalents  of $46.1
million, working capital of $64.3 million and minimal long-term obligations. For
the six months  ended June 28,  1998,  the Company  recorded net income of $17.5
million,  largely  due to the  gain  on  sale  of  Wireless.  Net  cash  used in
continuing  operating  activities  for the first  half of 1998 of $10.7  million
consisted  primarily of increases in  inventories in  anticipation  of increased
sales and payment of estimated income taxes.

         Cash provided by investing activities for the six months ended June 28,
1998 was $39.2  million,  of which $46.0  million was  attributed to the sale of
Wireless.  The funds  attributable to the Wireless sale were partially offset by
expenditures  for property and  equipment of $1.6  million,  long-term  loans to
employees of $2.2 million,  and a $3.0 million investment in the preferred stock
of an unaffiliated company.

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

         The Company  believes that  existing  cash balances and cash  generated
from  operations,  if any,  will be sufficient  to fund  necessary  purchases of
capital  equipment and to provide working capital through at least the remainder
of 1998.  However,  the  Company  may  require  additional  funds to support its
working  capital  requirements  or for other purposes and may seek to raise such
additional  funds  through  public or  private  equity  financing  or from

                                       8
<PAGE>

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.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

         The Company  incurred losses from continuing  operations in 1994, 1995,
1996 and 1997.  There can be no  assurances  that the Company  will  increase or
maintain its revenue or be  profitable  on a quarterly or an annual basis in the
future. The Company has historically experienced significant fluctuations in its
operating  results on an annual and a quarterly basis and could  experience such
fluctuations in the future.  The Company's  operating  results are affected by a
number  of  factors,  many  of  which  are  outside  of the  Company's  control,
including:  the timing of the  introduction  of new or enhanced  products by the
Company or its  competitors;  market  acceptance of new products of the Company,
its customers and its competitors; the timing, cancellation or delay of customer
orders,   including  cancellation  or  delay  in  anticipation  of  new  product
introduction   or  enhancement  or  resulting   from   uncertainty   related  to
intellectual property claims;  competitive factors, including pricing pressures;
changes  in  operating  expenses,  including  those  resulting  from  changes in
available  production capacity of independent  foundries and other suppliers and
the availability of raw materials; expenses associated with obtaining, enforcing
and defending claims with respect to intellectual  property  rights;  the mix of
products sold;  changes in the percentage of products sold through the Company's
direct  sales  force;  personnel  changes;  general  economic  conditions;   and
fluctuations  in  foreign  currency  exchange  rates.  The  Company  expects  to
introduce a number of new products in 1998.  The failure of such new products to
achieve market  acceptance at the time  anticipated  by the Company,  or at all,
would  materially  and adversely  affect the Company's  financial  condition and
results of operations.

Pending Litigation

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

Dependence on Key Personnel

         On November 13, 1996, the Company  announced the appointment of Fernand
B. Sarrat as President and Chief Executive Officer,  and during 1997 the Company
hired a number of executives to senior management  positions within the Company.
The Company's  future success will depend on the abilities of Mr. Sarrat and the
contributions by its executive officers, key management and technical personnel.
The loss of the services of one or more of the Company's  executive  officers or
key  personnel,  or the  inability  to continue to attract and retain  qualified
personnel,  could delay product  development cycles or otherwise have a material
adverse effect on the Company's business and operating results.

Lengthy Sales Cycle

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

                                       9
<PAGE>

Dependence on Recently Introduced and New Information Security Products

         The Company's  future results of operations will be highly dependent on
the successful completion of the design,  development,  introduction,  marketing
and manufacture of the PrivateWire  and PrivaCy  Manager  products,  portions of
which  are  under  development,   and  Link  Encryptors  NRZ,   SecureFrame  and
PrivateWire products,  which were recently introduced.  To date, the Company has
made only  limited  commercial  shipments  of  certain of such  products  and no
commercial  shipments of the  remainder of such  products.  No assurance  can be
given that any of such products will not require  additional  development  work,
enhancement,  testing or further  refinement  before they can be introduced  and
made  commercially  available  by the Company or that they will  achieve  market
acceptance.  If such new and  recently  introduced  products  have  performance,
reliability,  quality or other  shortcomings,  then such products  could fail to
achieve market acceptance and the Company may experience reduced orders,  higher
manufacturing  costs,  delays in collecting  accounts  receivable and additional
warranty and service expenses,  which in each case could have a material adverse
effect on the Company's financial condition and results of operations.

Competition

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

         The  Company's   competitors  in  the  information   security  markets,
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.,  SecureComputing  Corporation,
Security  Dynamics  Technologies,  Inc.,  Racal-Guardata,  Inc., and Information
Resource Engineering, Inc. In addition, Northern Telecom Limited, AT&T, Motorola
Corporation,  and Sun  Microsystems,  Inc.  offer certain  information  security
products as part of their overall networking solutions.  A number of significant
vendors,  including Microsoft Corporation,  Netscape Communications  Corporation
and Cisco Systems,  Inc., have embedded security solutions in their software. To
the extent that these embedded or optional security  capabilities provide all or
a portion of the functionality provided by the Company's products, the Company's
products may no longer be required by customers to attain network security.

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

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

Product Liability Risks

         Customers rely on the Company's  network  security  products to prevent
unauthorized access to their networks and data  transmissions.  A malfunction or
the inadequate design of the Company's products could result in tort or warranty
claims.  Although the Company attempts to reduce the risk of such losses through
warranty  disclaimers and liability  limitation clauses in its sales and license
agreements  and by  maintaining  product  liability  insurance,  there can be no
assurance  that such  measures  will be  effective  in  limiting  the  Company's
liability  for any such  damages.  Any  liability  for  damages  resulting  from
security  breaches could be substantial and could have a material adverse effect
on the Company's business and results of operations.

                                       10
<PAGE>

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

Year 2000

         Although the company believes that it has identified all risks of "year
2000  errors"  ("YK2  Errors") in its  products,  and is taking steps to repair,
replace or  end-of-life  all  products  which  contain  YK2  Errors,  there is a
continuing risk that some YK2 Errors will go undetected until after December 31,
1999.  The  Company  intends to attempt to protect  itself from  liability  with
appropriate  disclaimers  in its terms and  conditions of sale,  by  encouraging
customers  to  upgrade  their  products  to those  that  have  proven  to be YK2
compliant, and by discouraging continued use of those products known to have YK2
Errors.  However,  the Company may be met with  unanticipated  liability  for an
undiscovered  YK2  Error  which  cannot  be  limited  by any  of  the  foregoing
preventive actions, and conceivably could include an allegation of damages which
exceeds the terms or the amount of the  Company's  insurance  policies  covering
product liability.

         The Company is in the process of evaluating and  implementing  changes,
as necessary, to its information systems and accordingly does not anticipate any
material  YK2 Errors from its own  information  systems,  databases or programs.
However,  the Company's  financial  position and results of operations  could be
adversely  impacted by YK2 Errors faced by distributors,  suppliers,  customers,
vendors and financial service organizations with which the Company interacts.

Management of Growth And Reduction In Employees

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

         With the sale of its Wireless  business,  the Company has experienced a
significant  reduction  in  employees,  including  the  Company's  former  Chief
Technical  Officer,  Dr. Jim Omura. The sale of Wireless,  along with occasional
reductions in specific  engineering  programs in the network security  business,
may  create  a risk of  instability  within  the  existing  employee  population
resulting in departures of key  employees  critical to sustaining  growth in the
Company's  network  security  business.  Furthermore,  sudden  reductions in the
number of the  Company's  employees  places  greater  demands  on the  remaining
employees  which  may  distract  them  from  fulfilling  their  responsibilities
necessary to accomplishing the Company's financial goals.

         In September 1997, the Company acquired ARL and assumed  responsibility
for management of its worldwide operations of approximately sixty employees. The
Company  is  heavily  dependent  on  ARL's  success  in  continuing  to  develop
marketable  technology and products,  such as the PrivateWire family,  including
PrivateSafe and PrivateCard,  toolkits and other  components.  Key factors which
will determine  ARL's success  include  whether the Company can integrate  ARL's
management,  employee  culture and  organizational  practices  into the Company,
whether the Company can adequately fund ARL's  development  objectives,  whether
the Company can provide accurate  information for ARL to focus its technology on
significant market  opportunities,  and whether the Company can predict the most
attractive  features and functions for ARL's products.  The Company's success in
realizing  the  anticipated  return  from its  investment  in ARL  also  will be
determined by the Company's  ability to position and  introduce  ARL's  products
into the Company's  markets and channels,  and the Company's  ability to provide
adequate sales and customer  support for ARL's  products.  The Company and ARL's
successful  working  relationship  may be hindered  significantly by differences
between the two organizations  created by time, distance,  language and culture.

                                       11
<PAGE>

ARL operates from its principle offices in Israel, a country which is vulnerable
to disruption due to the sudden  outbreak of hostilities  with its neighbors and
various indigenous factors.  Many of ARL's employees have extensive  commitments
to the  country's  military  organizations  which  may  require  a loss of their
services on the Company's behalf in times of political instability.

Intellectual Property and Other Proprietary Rights

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

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

Evolving Network Security Market

         The  market  for  the  Company's  network  security  products  is  only
beginning  to  emerge.   This  market  is   characterized  by  rapidly  changing
technology,  emerging industry standards,  new product introductions and changes
in customer  requirements  and  preferences.  The Company's  future success will
depend in part upon end users' demand for network security  products in general,
and upon the Company's  ability to enhance its existing  products and to develop
and introduce new products and technologies that meet customer requirements. Any
significant  advance in technologies for attacking  cryptographic  systems could
render  some or all of the  Company's  existing  and new  products  obsolete  or
unmarketable.  To the extent that a specific  method other than the Company's is
adopted as the standard for implementing  network security in any segment of the
network security market, sales of the Company's existing and planned products in
that  market  segment  may be  adversely  impacted,  which could have a material
adverse effect on the Company's  financial  condition and results of operations.
There can be no assurance that network security-related products or technologies
developed by others will not adversely affect the Company's competitive position
or render its products or technologies noncompetitive or obsolete.

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

                                       12
<PAGE>

Rapid Technological Change

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

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

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

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

         Due  to  U.S.   government   regulations   restricting  the  export  of
cryptographic  devices and software,  including certain of the Company's network
security  products,  the  Company  may be at a  disadvantage  in  competing  for
international sales compared to companies located outside the United States that
are not subject to such restrictions.

Dependence  on  Component  Availability,   Subcontractor   Performance  and  Key
Suppliers

         The Company's  ability to timely deliver its products is dependent upon
the  availability  of quality  components and subsystems used in these products.
The Company depends in part upon  subcontractors  to  manufacture,  assemble and
deliver certain items in a timely and satisfactory  manner.  The Company obtains
certain  components and subsystems from single, or a limited number of, sources.
A significant  interruption  in the delivery of such items could have a material
adverse effect on the Company's financial condition and results of operations.

                                       13
<PAGE>


PART II.  OTHER INFORMATION


Item 1.   Legal Proceedings

         On March 7, 1997,  ten former  employees  of the Company  filed suit in
action No. CV764647 in the Superior Court of California,  County of Santa Clara,
against the Company,  each of its Directors and its General  Counsel,  asserting
claims for wrongful  termination,  fraud,  libel,  slander,  age discrimination,
invasion of privacy,  and  violation  of the federal RICO  statute.  On July 11,
1997,  an eleventh  employee  filed suit in action no.  CV767448 in the Superior
Court of California,  County of Santa Clara, alleging similar claims against the
Company and its Chief Executive  Officer.  The Company  removed  CV764647 to the
Federal  District Court for the Northern  District of California  and, after the
Company  obtained  an  order  dismissing  certain  of  the  plaintiff's  claims,
including the claims of libel and RICO violations, the Court remanded the action
back to the Santa Clara Superior Court.  Following the remand,  the Company then
obtained an order consolidating CV764647 with CV767448 for purposes of discovery
and trial.  Both  matters  are  currently  in the  discovery  phase,  with trial
currently  scheduled  for  December  1998.  Although  the Company has placed its
insurers on notice of these  claims,  all of its insurers  have  reserved  their
rights and  defenses  under  their  policies,  and the  extent of the  insurers'
liability under their respective policies is undetermined.  The Company believes
the terminations were lawful,  in the best interest of the Company,  and intends
to defend  the  matter  vigorously.  The  defense  of this  matter  may divert a
material  amount of  management's  attention  and  require  the  expenditure  of
significant  legal fees and costs.  An  unfavorable  outcome  which  exceeds the
Company's  insurance  coverage,  if any, could also result in a material adverse
effect on the Company's results.

         After  asserting  certain  deductions  arising under the contract dated
March 27, 1998,  for the sale of purchase of the  Company's  Wireless  division,
P-Com made a partial  payment on July 14, 1998, in the amount of $9.4 million on
its promissory note dated April 1, 1998. The Company is presently evaluating the
merits of P-Com's  deductions  and,  failing an amicable  resolution  of P-Com's
contentions, the matter will proceed to litigation.


Item 2.   Changes in Securities

(c)  The Company's Registration Statement Form S-1 was declared effective by the
     Securities  and  Exchange   Commission  on  February  15,  1996  (Reg.  No.
     33-80719).  In February and March 1996 the Company issued  5,750,000 shares
     of its common stock to the public at a price of $15 per share.  The Company
     received  approximately  $78.9  million net of  underwriting  discounts and
     commissions  of $6.0 million and other  offering  expenses of $1.4 million.
     Through the period ended June 28, 1998,  the net proceeds have been used as
     follows (in thousands):




Purchase and installation of equipment                               $  8,179
Acquisition of Algorithmic Research                                    45,913
Acquisition of preferrred stock of an unaffiliated company              3,000
Repayment of indebtedness                                               1,000
Working capital                                                        20,772
                                                                     --------
                                                                     $ 78,864
                                                                     ========



         None of the net  proceeds or expenses of issuance and  distribution  of
     the securities  were,  either  directly or indirectly,  paid to or invested
     with any related party or shareholder of the Company.


                                       14
<PAGE>

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

(a) The Registrant's Annual Meeting of Shareholders was held on May 22, 1998.

(b) The following directors were elected at the Meeting:

                                              For                 Withheld 
                                              ---                 -------- 
         Leo A. Guthart                    22,604,270             101,729
         William J. Perry                  22,603,970             102,029
         James H. Simmons                  22,605,770             100,229
         William W. Harris                 22,605,470             100,529
         Howard L. Morgan                  22,602,470             103,529
         Fernand B. Sarrat                 22,603,770             102,229
         Elwyn Berlekamp                   22,605,330             100,669
         King W.W. Harris                  22,602,370             103,629
         Yossi Tulpan                      22,607,030              98,969

(c) Other matters voted on at the meeting were the following:

(i)       Approval and  ratification  of the Cylink  Corporation  1994  Flexible
          Stock Incentive Plan, as amended, (the "Plan") which (i) increases the
          number of shares of Common Stock  reserved for issuance  thereunder to
          8,050,000,  and (ii)  provides  that as of  January 1 of each year the
          number of Common Shares  reserved for issuance  under the Plan will be
          increased, in the discretion of the Board of Directors, by up to 4% of
          the number of shares  outstanding as of December 31 of the immediately
          preceding year.

                              For                           14,038,141
                              Against                          949,686
                              Abstain                           60,652
                              Broker non-votes               7,657,520

(ii)      Ratification  of  the  appointment  of  Price  Waterhouse  LLP  as the
          Company's independent auditors for the fiscal year ending December 31,
          1998.

                              For                           22,656,025
                              Against                           17,335
                              Abstain                           32,639


Item 5.   Other Information

         Any shareholder  proposal  submitted with respect to the Company's 1999
Annual  Meeting  of  Shareholders,  which  proposal  is  submitted  outside  the
requirements  of Rule 14a-8 under the Securities  Exchange Act of 1934,  will be
considered  untimely for  purposes of Rule 14a-4 and 14a-5 if notice  thereof is
received by the Company after March 9, 1999.


Item 6.   Exhibits and Reports on Form 8-K

(a)   Exhibits Index:

      Exhibit
      Number      Description of Exhibit     
      ------      ----------------------     

       27.1      Financial Data Schedule

(b)  The Company  filed a report on Form 8-K on April 13, 1998  reporting  under
     Item 2 the  disposition  of the  Company's  Wireless  Communications  Group
     effective March 28, 1998.

                                       15
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

   
Date:  February 11, 1999                  CYLINK CORPORATION
    
                                         By:    /s/  ROGER A. BARNES        
                                                ----------------------------
                                                Roger A. Barnes
                                                Vice President of Finance
                                                and Administration and
                                                Chief Financial Officer
                                                (Duly Authorized Officer and
                                                Principal Financial Officer
                                                as of November 16, 1998)






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