SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-Q


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

                For the quarterly period ended September 26, 1997

                           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 November 6, 1997, there were 28,681,544 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>
                                                                                                        September 26,   December 31,
                                                                                                            1997            1996
                                                                                                        ---------         ---------
                                  Assets
<S>                                                                                                     <C>               <C>      
Current assets:
   Cash and cash equivalents                                                                            $  25,089         $  78,849
   Accounts receivable, net of allowance
      for doubtful accounts of $413 and $644                                                               20,951            12,682
   Inventories                                                                                             10,241             8,828
   Deferred income taxes                                                                                    1,432             1,432
   Other current assets                                                                                     2,596             1,351
                                                                                                        ---------         ---------
            Total current assets                                                                           60,309           103,142

Property and equipment, net                                                                                 6,342             3,760
Acquired technology, goodwill and other intangibles, net                                                    8,682              --
Notes receivable from employees                                                                             3,473              --
Other assets                                                                                                1,076               186
                                                                                                        ---------         ---------
                                                                                                        $  79,882         $ 107,088
                                                                                                        =========         =========
                   Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of capital lease obligations and long-term debt                                      $     207         $     167
   Accounts payable                                                                                         2,737             3,954
   Accrued liabilities                                                                                      8,903             5,150
   Deferred revenue                                                                                           530               353
                                                                                                        ---------         ---------
         Total current liabilities                                                                         12,377             9,624
                                                                                                        ---------         ---------
Capital lease obligations and long-term debt                                                                  320               241
                                                                                                        ---------         ---------
Deferred income taxes                                                                                          12                12
                                                                                                        ---------         ---------

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;  28,629,000 and
      25,597,000 shares issued and outstanding                                                                286               257
   Additional paid-in capital                                                                             119,999            89,772
   Notes receivable from shareholders                                                                        --                (301)
   Deferred compensation related to stock options                                                            (272)             (334)
   Cumulative translation adjustment                                                                         (100)                4
   Retained earnings (accumulated deficit)                                                                (52,740)            7,813
                                                                                                        ---------         ---------
            Total shareholders' equity                                                                     67,173            97,211
                                                                                                        ---------         ---------
                                                                                                        $  79,882         $ 107,088
                                                                                                        =========         =========

<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                 Nine Months Ended
                                                                    -----------------------------      -----------------------------
                                                                    September 26,   September 27,      September 26,   September 27,
                                                                       1997               1996             1997              1996
                                                                     --------          --------          --------          --------
<S>                                                                  <C>               <C>               <C>               <C>     
Revenue                                                              $ 20,560          $ 15,021          $ 55,011          $ 35,790
Cost of revenue                                                         7,251             6,193            18,973            15,024
                                                                     --------          --------          --------          --------
Gross profit                                                           13,309             8,828            36,038            20,766
                                                                     --------          --------          --------          --------

Operating expenses:
   Research and development, net                                        4,326             2,774            12,113             8,413
   Selling and marketing                                                5,851             3,415            15,514             9,531
   General and administrative                                           2,499             1,671             6,708             4,332
   Purchased in-process technology                                     63,920              --              63,920              --
                                                                     --------          --------          --------          --------
            Total operating expenses                                   76,596             7,860            98,255            22,276
                                                                     --------          --------          --------          --------

Income (loss) from operations                                         (63,287)              968           (62,217)           (1,510)

Other income (expense):
   Interest income, net                                                   663             1,003             2,479             2,302
   Royalty and other income (expense), net                                 76                67               518              (237)
                                                                     --------          --------          --------          --------

Income (loss) before income taxes                                     (62,548)            2,038           (59,220)              555
Provision for income taxes                                                335               693             1,333               189
                                                                     --------          --------          --------          --------
Net income (loss)
                                                                     $(62,883)         $  1,345          $(60,553)         $    366
                                                                     ========          ========          ========          ========

Net income (loss) per share                                          $  (2.37)         $   0.05          $  (2.32)         $   0.01
                                                                     ========          ========          ========          ========

Shares used to compute net income (loss)
   per share                                                           26,514            26,886            26,046            25,308
                                                                     ========          ========          ========          ========

<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>

                                                                                                              Nine Months Ended
                                                                                                         ---------------------------
                                                                                                         September 26, September 27,
                                                                                                              1997            1996
                                                                                                            --------       --------
<S>                                                                                                         <C>            <C>     
Cash flows from operating activities:
   Net income (loss)                                                                                        $(60,553)      $    366
   Adjustments  to  reconcile  net income  (loss) to net cash used in  operating
      activities:
         Purchased in-process technology                                                                      63,920           --
         Depreciation and amortization                                                                         1,614            980
         Realized loss on sale of securities                                                                    --              432
         Deferred compensation related to stock options                                                           62             63
         Deferred income taxes                                                                                  --              147
         Changes in assets and  liabilities (net of effects of
          Algorithmic Research purchase):
            Accounts receivable                                                                               (7,286)        (6,528)
            Inventories                                                                                         (990)        (2,258)
            Other assets                                                                                        (921)          (196)
            Accounts payable                                                                                  (1,397)         2,254
            Accrued liabilities                                                                                1,606            990
            Deferred revenue                                                                                      (8)          (120)
                                                                                                            --------       --------
               Net cash used in operating activities                                                          (3,953)        (3,870)

Cash flows from investing activities:
   Proceeds from sale of short-term investments                                                                 --            2,844
   Acquisition of property and equipment                                                                      (2,803)        (1,454)
   Purchase of Algorithmic Research, net of cash acquired                                                    (44,350)          --
   Loans to employees in exchange for notes receivable                                                        (3,473)          --
                                                                                                            --------       --------
               Net cash provided buy (used in) investing activities                                          (50,626)         1,390
                                                                                                            --------       --------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                                                   731         79,786
   Payment of notes receivable from shareholders                                                                 301            100
   Repayment of capital lease obligations and long-term debt                                                    (109)          (238)
   Repayment of borrowings under bank line of credit                                                            --           (1,000)
                                                                                                            --------       --------
               Net cash provided by financing activities                                                         923         78,648
                                                                                                            --------       --------
Effect of exchange rate changes on cash and cash equivalents                                                    (104)             4
                                                                                                            --------       --------
Net increase (decrease) in cash and cash equivalents                                                         (53,760)        76,172
Cash and cash equivalents at beginning of period                                                              78,849          3,240
                                                                                                            --------       --------
Cash and cash equivalents at end of period                                                                  $ 25,089       $ 79,412
                                                                                                            ========       ========

Supplemental disclosures:
   Cash paid for income taxes                                                                               $     31       $   --
   Cash paid for interest                                                                                         78             95
   Equipment acquired under capital lease obligations                                                           --              247
   Equity issued and liabilities incurred for
      purchase of Algorithmic Research                                                                        30,056           --


<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, 1996.  Interim  results
     of operations are not necessarily  indicative of the results to be expected
     for the full year.

2.   Acquisition of Algorithmic Research

         On  September  8, 1997,  the Company  acquired  all of the  outstanding
     shares of Algorithmic Research,  Ltd. and Algart Holdings,  Ltd. (hereafter
     referred to on a combined basis as  "Algorithmic  Research"),  both limited
     liability  companies  organized  under  the laws of the  State  of  Israel.
     Algorithmic  Research is an information  security company  providing remote
     access software products and smart-card  technology  focusing on the market
     for  Internet-based  (TCP/IP)  communications.  Algorithmic  Research  also
     provides  security products to broadcast  networks.  Consideration for this
     purchase  was  $44,881,000  in  cash,  net  of  cash  acquired,   including
     transaction   expenses  paid  and  accrued  of  $2,996,000   and  $531,000,
     respectively;  and  2,593,169  shares  of the  Company's  common  stock and
     409,641  fully vested  options to purchase  common stock of the Company for
     $0.01 per share.  The total  value  placed on the common  stock and options
     issued by the Company was $29,525,000.  The common stock and options issued
     are  subject  to   decreasing   restrictions   on  trading  and   exercise,
     respectively, for three years from the transaction date.

          The  acquisition was recorded under the purchase method of accounting;
     and  accordingly,  the results of  operations of  Algorithmic  Research are
     included  in  the  consolidated  financial  statements  from  the  date  of
     acquisition.  The purchase price has been allocated to the assets  acquired
     and  liabilities  assumed  based upon the fair market values at the date of
     acquisition, as summarized below (in thousands):

   Current assets (including cash and cash equivalents of $1,857)   $ 4,380
   Property and equipment                                             1,261
   In-process technology                                             63,920
   Developed technology and other intangibles                         7,498
   Goodwill                                                           1,317
   Other non-current assets                                              96
   Current liabilities assumed                                       (2,021)
   Long-term debt assumed                                              (188)
                                                                    -------
                                                                    $76,263
                                                                    =======


         The  amounts  allocated  to  technology  were  estimated  using  a risk
     adjusted income approach applied to specifically  identified  technologies.
     In-process  technology was expensed upon acquisition because  technological
     feasibility  had  not  been  established  and no  alternative  future  uses
     existed.  Amounts allocated to capitalized  intangibles other than goodwill
     are being amortized on a straight-line basis over three years.
     Goodwill is being amortized on a straight-line basis over seven years.

         The following unaudited pro forma financial information gives effect to
     the  acquisition  as if it had occurred on January 1, 1996,  excluding  the
     charge related to purchased in-process technology.  These pro forma results
     have been prepared for  comparative  purposes only and do not purport to be
     indicative of the  operations  which  actually  would have resulted had the
     acquisition  occurred  on the date  indicated,  or which may  result in the
     future.

                                       4
<PAGE>
<TABLE>
<CAPTION>

                                                                        Nine Months
                                                          Year Ended       Ended
                                                         December 31,  September 26,
                                                            1996           1997
                                                           --------     --------
                                                    (in thousands, except per share data)
<S>                                                        <C>          <C>     
Revenue                                                    $ 59,164     $ 59,222
Net income (loss)                                            (1,943)         869
Net income (loss) per share                                   (0.07)        0.03
Shares used to compute net income (loss) per share           27,187       29,621
</TABLE>


3.   Notes Receivable From Employees

         Pursuant to their employment  agreements and related  promissory notes,
     during  the first  quarter of 1997 the  Company  loaned  certain  employees
     $3,473,000  towards the  purchase of their  principal  residences.  Of this
     amount,  $2,843,000 is receivable  from officers of the Company.  The notes
     are  interest  free and are due five  years  from the dates of the  related
     notes,  at which time the notes must be repaid or convert into,  and become
     subject to, the terms of a standard,  interest-bearing commercial loan. The
     notes are secured by deeds of trust on the 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.

4.   Inventory

                                                    September 26,  December 31,
                                                        1997         1996
                                                       -------      -------
                                                           (in thousands)
     Raw materials                                     $ 4,552      $ 4,126
     Work in process and subassemblies                   2,494        3,196
     Finished goods                                      3,195        1,506
                                                       $10,241      $ 8,828
                                                       =======      =======


<TABLE>
5.   Recent Accounting Pronouncement

         In February 1997,  the Financial  Accounting  Standards  Board ("FASB")
     issued  Statement of Financial  Accounting  Standards  No. 128 ("FAS 128"),
     "Earnings  Per Share." This  statement  redefines  earnings per share under
     generally accepted accounting principles.  Under the new standard,  primary
     earnings  per  share is  replaced  by basic  earnings  per  share and fully
     diluted  earnings per share is replaced by diluted  earnings per share. The
     Company is  required  to adopt the new  standard  in the fourth  quarter of
     1997.  The  following  table  sets  forth net  income  (loss)  per share as
     reported and  unaudited  pro forma basic and diluted net income  (loss) per
     share assuming FAS 128 had been applied during the periods presented:

<CAPTION>

                                                           Three Months Ended             Nine Months Ended
                                                    ------------------------------  ------------------------------ 
                                                    September 26,     September 27, September 26,    September 27,
                                                        1997             1996          1997             1996
                                                      --------         --------     ---------            ----
<S>                                                   <C>              <C>          <C>                  <C> 
Net income (loss) per share as reported               $  (2.37)        $   0.05     $   (2.32)           0.01
Pro forma basic net income (loss) per share              (2.37)            0.05         (2.32)           0.02
Pro forma diluted net income (loss) per share            (2.37)            0.05         (2.32)           0.01
</TABLE>


         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
     Standards No. 130 ("FAS 130"),  "Reporting  Comprehensive  Income." FAS 130
     establishes standards for reporting comprehensive income and its components
     in a 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

                                       5
<PAGE>

     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.  The
     disclosure  prescribed  by FAS 130 must be made  beginning  with the  first
     quarter of 1998.

         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.

                                       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 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 1997 and continue
to make a significant investment in engineering,  research and development,  and
its  intention  to expand  its  foreign  sales  channels  and  enter  additional
international markets. All forward-looking  statements included in this document
are based on information  available to the Company as of the date of this Report
on Form  10-Q,  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. You
should also consult the risk factors  listed from time to time in the  Company's
Reports on Form 10-Q, 8-K, 10-K and Annual Reports to the Shareholders.

BUSINESS ACQUISITION

         On September 8, 1997, the Company  acquired  Algorithmic  Research,  an
Israeli  company.  Algorithmic  Research  is  an  information  security  company
providing  remote access network  security  products and  smart-card  technology
focusing on the market for Internet-based (TCP/IP)  communications.  Algorithmic
Research also provides  security products to broadcast  networks.  See Note 2 of
Notes to Condensed  Consolidated  Financial  Statements.  The total  acquisition
price of  approximately  $76.3  million  was funded  from a  combination  of the
Company's  existing  working  capital,  newly issued common stock and options to
purchase common stock.  Approximately  $63.9 million of the total purchase price
represented  the  value  of  in-process  technology  that  had not  yet  reached
technological feasibility, had no alternative future uses and was charged to the
Company's  operations  in the  third  quarter  ended  September  26,  1997.  The
amortization of capitalized intangibles and the charge resulting from in-process
technology  are not  deductible  for income tax purposes.  The  acquisition  was
accounted for under the purchase  method of  accounting;  and  accordingly,  the
results of operations of Algorithmic  Research are included in the  consolidated
financial statements from the date of acquisition.

RESULTS OF OPERATIONS

         Revenue.  The Company's  revenue is derived primarily from sales of its
family of commercial  information  security products and its medium speed spread
spectrum radio products.  Fees for maintenance and support  services are 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,  stock  rotation  or price
protection is given.  Revenue from sales to value added  resellers is recognized
upon shipment and concurrently a provision for estimated returns is recorded.

         The Company's revenue increased by 37% from $15.0 million for the three
months  ended  September  27, 1996 to $20.6  million for the three  months ended
September 26, 1997,  and increased by 54% from $35.8 million for the nine months
ended  September 27, 1996 to $55.0  million for the nine months ended  September
26, 1997.  Sales of  information  security  products  increased by 75% from $7.5
million for the third  quarter of 1996 to $13.1 million for the third quarter of
1997,  and increased by 96% from $17.3 million for the first nine months of 1996
to $34.1 million for the first nine months of 1997.  The increase in information
security product revenue resulted primarily from significantly increased product
shipments in the SecureWan and SecureLan  encryption  product  lines,  which are
used in public and private linked  networks.  Overall average selling prices for
information security products decreased marginally. Information security product
revenue for the third  quarter of 1997  includes  $1.1 million  attributable  to
Algorithmic  Research.  Sales of  wireless  communications  products  were  $7.5
million  for both the third  quarter of 1996 and 1997.  Increased  shipments  of
wireless  communications  products  were offset by decreases in overall  average
selling prices. Wireless communications revenue increased 14% from $18.4 million
for the first nine

                                       7
<PAGE>

months of 1996 to $20.9 million for the first nine months of 1997. This increase
was primarily due to higher unit sales,  particularly for the Company's  AirLink
S-Band  radios and AirLink  T1/E1  products,  partially  offset by a decrease in
average selling prices.

         International  revenue  was 58% and 54% of total  revenue for the third
quarter of 1996 and 1997, respectively, and was 56% and 52% of total revenue for
the  first  nine  months  of  1996  and  1997,  respectively.  The  decrease  in
international product revenue as a percentage of total revenue from 1996 to 1997
was due primarily to the increased  percentage of total revenue  represented  by
information security products, which are sold mostly in the United States.

         Gross Profit.  Gross profit  increased by 51% from $8.8 million for the
three  months  ended  September  27, 1996 to $13.3  million for the three months
ended  September 26, 1997,  and increased by 74% from $20.8 million for the nine
months  ended  September  27, 1996 to $36.0  million  for the nine months  ended
September  26,  1997.  The  increase  in dollars  was  primarily a result of the
significant  increase in revenue. As a percentage of sales, gross profit was 59%
and 65% for the third  quarter of 1996 and 1997,  respectively,  and 58% and 66%
for the first nine months of 1996 and 1997, respectively.  The increase in gross
margin  resulted from the increased  percentage of total revenue  represented by
information  security  products,  which generally have higher gross margins than
wireless communications  products. In addition, the increase in gross margin was
due to lower average unit costs for both wireless communications and information
security  products,  and a decrease  in  expenses  for  maintenance  and support
services related to the Company's information security 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 2% from $4.4 million for the three months ended September 27,
1996 to $4.3  million  for the  three  months  ended  September  26,  1997,  and
increased 7% from $12.3 million for the nine months ended  September 27, 1996 to
$13.2 million for the nine months ended  September 26, 1997.  Gross research and
development  expenses as a percentage  of revenue were 29% and 21% for the third
quarter  of 1996 and  1997,  respectively,  and 34% and 24% for the  first  nine
months of 1996 and 1997,  respectively.  The dollar increase for the nine months
ended September 26, 1997 compared to the same period last year resulted from the
Company's  expanded  product  development  efforts,  partially offset by reduced
contract and other variable  expenses related to externally  funded research and
development.  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. No
engineering  funding was  recognized  during the third quarter of 1997.  Amounts
recognized under  non-recurring  engineering  contracts totaled $1.6 million for
the third quarter of 1996,  and $3.9 million and $1.1 million for the first nine
months of 1996 and 1997, 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  71% from $3.4 million for the three months ended  September
27, 1996 to $5.8  million for the three  months ended  September  26, 1997,  and
increased 63% from $9.5 million for the nine months ended  September 27, 1996 to
$15.5  million  for the nine  months  ended  September  26,  1997.  Selling  and
marketing  expenses as a  percentage  of revenue  were 23% and 28% for the third
quarter  of 1996 and  1997,  respectively,  and 27% and 28% for the  first  nine
months of 1996 and 1997, respectively. The dollar increases were due to expenses
associated  with  expansion  of the  Company's  direct  sales  force,  personnel
increases  in the  marketing  group,  and  increased  expenses  associated  with
advertising, public relations and trade shows.

         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  increased  50% from $1.7  million for the three months
ended  September  27, 1996 to $2.5 million for the three months ended  September
26, 1997, and 55% from $4.3 million for the nine months ended September 27, 1996
to $6.7  million for the nine  months  ended  September  26,  1997.  General and
administrative  expenses  as a  percentage  of revenue  were 11% and 12% for the
third  quarter  of 1996 and 1997,  respectively,  and were 12% for both the nine
months ended 1996 and 1997. The dollar increases were primarily due to increased
staffing and  professional  fees  necessary to manage and support the  Company's
recent growth. General and administrative expenses for the third quarter of 1997
include  approximately  $132,000 of  amortization  expense related to intangible
assets  resulting from the  acquisition of Algorithmic  Research.  In subsequent
quarters, this amortization will be approximately $675,000.

                                       8
<PAGE>

         Other Income  (Expense),  Net. Other income (expense),  net,  primarily
consists of royalties,  interest  income,  interest expense and investment gains
and losses. Interest income, net, increased from $2.3 million for the first nine
months of 1996 to $2.5  million for the first nine  months of 1997,  principally
due to interest income  resulting from funds derived from the Company's  initial
public offering in February and March of 1996.  Interest income,  net, decreased
from  $1.0  million  for the third  quarter  of 1996 to  $663,000  for the third
quarter of 1997 due to cash used for the acquisition of Algorithmic Research. In
the first quarter of 1997, the Company recorded a benefit of $632,000  primarily
related to the reversal of an allowance  provided on the  receivable  related to
the Company's  interest in the residual value of a former  partnership  known as
Public Key Partners  ("PKP").  Management  considers the  uncertainty  regarding
ultimate  collection  to  have  been  resolved  as a  result  of the  settlement
agreement  between the Company and RSA Data  Security,  Inc.,  a  subsidiary  of
Security Dynamics ("RSA DSI"). The assets of the former partnership,  consisting
primarily of cash,  are being held in trust  pending the  resolution  of certain
litigation described in Part II, Item 1 "Legal Proceedings." Management does not
believe that the ultimate resolution of this matter will have a material adverse
effect on the Company's  financial position or results of operations.  The first
quarter  of 1996  includes a $441,000  write  down of the  Company's  short-term
investments as management  concluded the decline in value was  permanent.  These
investments  were sold at an actual  loss of  $432,000  in the third  quarter of
1996.  The Company also  experienced a decline in royalty income during the nine
months ended September 27, 1997 as compared to the same period in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         At September  26, 1997,  the Company had cash and cash  equivalents  of
$25.1  million,   working  capital  of  $47.9  million  and  minimal   long-term
obligations.  For the nine months ended September 26, 1997, the Company recorded
a net  loss  of  $60.6  million  due to a  nonrecurring  charge  for  in-process
technology related to the acquisition of Algorithmic Research.  Net cash used in
operating  activities for the nine month period ended September 26, 1997 of $4.0
million consisted primarily of increases in current assets other than cash and a
decrease  in  accounts  payable,  partially  offset by an  increase  in  accrued
liabilities.

         Cash used in investing  activities for the nine months ended  September
26,  1997 was $50.6  million,  of which  $44.4  million  was  attributed  to the
acquisition  of Algorithmic  Research.  The Company also made  expenditures  for
property and equipment of $2.8 million and provided long-term loans to employees
of $3.5 million.

         The Company is currently  engaged in litigation  and has certain assets
subject  to  litigation.  See Part II,  Item 1 "Legal  Proceedings."  Management
believes that the ultimate  resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.

         The Company  believes that  existing  cash balances and cash  generated
from  operations,  if any,  will be sufficient  to fund  necessary  purchases of
capital  equipment and to provide working capital through at least the remainder
of 1997.  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 other
sources.  No assurance can be given that additional  financing will be available
or that,  if available,  will be available 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.

          Due  primarily  to  increased  research  and  development,  sales  and
marketing, and litigation expenses, the Company incurred losses in 1994 and 1995
and the first six months of 1996.  The Company also incurred a loss in the third
quarter of 1997 due to expenses  resulting  from the  acquisition of Algorithmic
Research.  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

                                       9
<PAGE>

delay in  anticipation of new product  introduction or enhancement;  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,  and the effect of any such  claims on  customer
acceptance  of  Company  products;  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
1997. 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.

Potential Volatility of Stock Price

         The trading of the Company's  Common Stock has been and may continue to
be subject to wide fluctuations in response to quarter to quarter  variations in
operating results, announcements of technological innovations or new products by
the  Company  or its  competitors,  developments  with  respect  to  patents  or
proprietary rights,  general conditions in the information  security systems and
wireless communications  industries,  changes in earnings estimates by analysts,
or other  events or  factors.  In  addition,  the stock  market has  experienced
extreme  price and volume  fluctuations,  which have  particularly  affected the
market prices of many  technology  companies and which have often been unrelated
to the operating performance of such companies. The Company's sales or operating
results  in future  quarters  may be below  the  expectations  of public  market
securities  analysts and  investors.  In such event,  the price of the Company's
Common Stock would likely decline, perhaps substantially. These Company-specific
factors or broad market  fluctuations  may have a material adverse effect on the
market price of the Company's Common Stock.

Pending Litigation

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

Dependence on Key Personnel

         The  Company's  future  success  will  depend to a large  extent on the
abilities and successful contributions of its executive officers, key management
and technical  personnel.  The Company has been able to recruit  several  senior
managers  in the last year and its  future is closely  linked to the  ability to
successfully integrate these key employees into the Company, and to maintain and
extend  its  base  of  talented  management,   technical  and  other  personnel.
Competition for  highly-skilled  business,  product  development,  technical and
other  personnel is intense,  and 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 qualified personnel, could delay product development cycles or otherwise
have a material adverse effect on the Company's  financial  position and results
of operations.

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.

                                       10

<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 SecureManager and PrivateSafe products, some of which are
under development, and the SecureGate, SecureFrame, SecureDomain and PrivateWire
products,  which were recently  introduced.  To date,  the Company has made only
limited  commercial  shipments of certain 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 information  security systems
and wireless communications  equipment and systems, and the Company expects such
competition to increase in the future.  Significant competitive factors in these
markets  include the  development of new products and features,  product quality
and  performance,  the quality and  experience  of sales,  marketing and service
organizations,  product  price and name  recognition.  Many of these factors are
beyond the Company's control.

         The Company's  competitors in the information  security markets include
Security  Dynamics,   Semaphore,   Cray  Research,   Racal-Guardata,   Inc.  and
Information Resource Engineering,  Inc. Northern Telecom Limited, AT&T, Motorola
Corporation,  Digital  Equipment  Corporation and Sun  Microsystems,  Inc. offer
certain  information  security  products  as part of  their  overall  networking
solutions.  In addition,  a number of significant  vendors,  including Microsoft
Corporation, Netscape Communications Corporation and Cisco Systems have embedded
security solutions in their software. Other vendors, notably Checkpoint, Raptor,
Trusted Information  Systems, and others, offer a technology known as firewalls,
which is often perceived by customers as an adequate security solution obviating
a need for the Company's products. 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 information security.

         Several vendors including  Certicom and RSA DSI license various methods
of implementing cryptographic technology, including some that are different than
(and incompatible with) the method of implementing  cryptography  currently used
by the Company in most of its products. Although Cylink has a license to use all
of the leading  methods  promoted by the  Company,  Certicom and RSA DSI, to the
extent  relevant  industries  impose  technical  standards  different than those
currently used by the Company in any segment of the information security market,
sales of the Company's  existing and planned products in that market segment may
be  adversely  impacted,  which  could  have a  material  adverse  effect on the
Company's financial condition and results of operations.

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

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

Product Liability Risks

         Customers  rely  on the  Company's  information  security  products  to
prevent  unauthorized  access  to  their  networks  and  data  transmissions.  A
malfunction or the inadequate design of the Company's products could result in

                                       11
<PAGE>



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

Management of Growth

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

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 twelve U.S. patents covering certain aspects of its product designs
and  has  one  additional  U.S.  patent  application  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  Company  incorporates  in its  products  cryptographic  technology
described  in certain  fundamental  patents to public key  crytography  owned by
Stanford  University (the "Stanford Patents") which expired in the United States
in September  and October,  1997.  Consequently,  this basic  technology  is now
freely  available for use by the Company's  competitors  and  customers.  To the
extent the  Company's  competitors  are  successful  in  duplicating  or reverse
engineering  the Company's  know how in  commercializing  this  technology,  the
customer's demand for the Company's products may be adversely affected.

         The network information security and wireless communications industries
in which the  Company  sells  its  products  are  characterized  by  substantial
litigation regarding patent and other intellectual property rights. From time to
time, the Company has received  communications from third parties asserting that
the Company's patents,  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. The Company is not aware
that any of the features or content of its products  wrongfully  infringe on any
valid  intellectual  property  rights of others.  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

                                       12
<PAGE>

indemnity from customers resulting from infringement claims) will not materially
and  adversely  affect  the  Company's   financial   condition  and  results  of
operations.

Evolving Information Security Market

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

         In  addition,  a  portion  of the  sales of the  Company's  information
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.

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.

Wireless Communications Industry Regulatory Environment

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

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

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

                                       13
<PAGE>
Risks  Associated  with  International  Sales;  Reliance  Upon  Local  Partners.

         International product sales represented approximately 35%, 47%, 59% and
52% of revenue in 1994,  1995,  1996 and for the nine months ended September 26,
1997,   respectively.   In   particular,   sales  of  the   Company's   wireless
communications products are currently concentrated in developing countries.  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,
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.

Risks Associated with Regulation Over Information Security Products

         United  States  government  regulations  restrict the export of certain
cryptographic  devices,  including certain of the Company's information security
products.  As a result,  the Company may be at a  disadvantage  in competing for
international sales compared to companies located outside the United States that
are not subject to such restrictions.  In addition,  international customers may
be unwilling to purchase the  Company's  products  which are eligible for export
due to perceptions  that such products are inferior to those marketed within the
United States, may contain  undocumented  features which undermine the products'
security  architecture,  or are required to incorporate  security features which
are   unacceptable   to  the  customer.   Furthermore,   the  regime  of  export
administration, and resulting regulations in the United States are in a stage of
transition due to political controversy  concerning their purposes and legality.
Consequently,  the uncertainty  concerning the interpretation and application of
such  regulations  may unduly  delay or prevent the export of Company  products,
leading to a commensurate loss of revenue and market position.

         Recent  legislative  proposals  have  indicated  the  possibility  that
Company  products  sold for use  within the United  States  may be  required  to
incorporate  certain  features to assist law enforcement  agencies in recovering
suspect  communications.  In the event such  proposals are enacted into law, the
Company may be obligated  to expend  considerable  sums in  complying  with such
regulations.  In addition,  the market  opportunities and customer acceptance of
the Company's  products may be adversely  affected by the  Company's  compliance
with such laws, leading to a commensurate loss of revenue and market share.

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.


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.  After removing
the action to the United States District Court, Northern District of California,
the court dismissed the libel and RICO claims against all defendants,  the fraud
claims against all outside directors,  and remanded the action back to the state
Superior  Court.  On July 23, 1997,  one  additional  former  employee  served a
summons  and  complaint  in  action  No.  CV767448  in  the  Superior  Court  of
California,  County of Santa  Clara,  against  the  Company  and one  additional
defendant  alleging  grounds  similar  to  those  asserted  by the  ten  pending
plaintiffs.  Discovery in both actions has been initiated and trial of either or
both  actions is not  expected  before  late 1998 or early  1999.  Although  the
Company  has placed its  insurers on notice of these  claims,  only some of them
have admitted  coverage with  reservation  of certain  rights and defenses.  The
Company believes the  terminations  were lawful 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  financial
condition.


                                       14
<PAGE>

         On  September  6, 1995,  the  Company  obtained  an  arbitration  award
dissolving  a  former   partnership,   known  as  PKP,   between  the  Company's
wholly-owned subsidiary,  Caro-Kann Corporation, and RSA DSI. The only remaining
claim against PKP, which was dismissed in September 1997 in action C-94-20512 SW
before the United States District Court for the Northern  District of California
is presently an appeal by a third party plaintiff. An unfavorable outcome on the
appeal,  and a  subsequent  verdict in favor of the  plaintiff  of trial,  might
affect the residual value the Company may receive from the former partnership.


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  September  26, 1997,  the net proceeds  have been
     used as follows (in thousands):


     Purchase and installation of equipment                         $ 5,618
     Acquisition of Algorithmic Research                             45,913
     Repayment of indebtedness                                        1,000
     Working capital                                                  5,854
     Temporary investment in money market accounts                   20,479
                                                                    -------
                                                                    $78,864
                                                                    =======


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

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  September  23,  1997  reporting
     under Item 2 the acquisition of Algorithmic Research effective September 8,
     1997.


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<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:  November 10, 1997                 CYLINK CORPORATION

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






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