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, 1999

                           Commission File No. 0-27742


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




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


                                 3131 Jay Street
                              Santa Clara, CA 95054
                    (Address of principal executive offices)


                                 (408) 855-6100
              (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 8, 1999, there were 29,730,000 shares of the Registrant's  common
stock outstanding.



                                       1
<PAGE>



                               CYLINK CORPORATION

               FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 26, 1999

                                      INDEX




                                                                            Page
                                                                            ----

         Facing Sheet                                                          1

         Index                                                                 2

Part I   Financial information

Item 1   Financial Statements and Supplementary Data

         a)   Condensed  Consolidated Balance Sheets at September
              26, 1999 and December 31, 1998                                   3

         b)   Condensed Consolidated Statements of Operations for
              the three and nine months ended  September 26, 1999
              and September 27, 1998                                           4

         c)   Condensed  Consolidated  Statement of Cashflows for
              the  nine  months  ended  September  26,  1999  and
              September 27, 1998                                               5

         d)   Notes   to   Condensed    Consolidated    Financial
              Statements                                                       6

Item 2    Management's   discussion  and  analysis  of  financial
          condition and results of operations                                  9

Part II   Other Information                                                   21

          Signature                                                           22

Exhibit   Exhibit 27.1, Financial data schedule                               23


                                2
<PAGE>


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
         --------------------

<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data; unaudited)
<CAPTION>
                                                                September 26,  December 31,
                                                                     1999        1998
                                                                  ---------    ---------
<S>                                                               <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                                      $  38,180    $  46,575
   Accounts receivable, net of allowances of $1,425 and $1,251       14,974        7,958
   Note receivable                                                     --          3,545
   Inventories                                                        5,102       10,289
   Deferred income taxes                                              4,504        4,495
   Other current assets                                               2,971        6,675
                                                                  ---------    ---------
            Total current assets                                     65,731       79,537

Restricted cash                                                       1,400         --
Property and equipment, net                                           8,336        5,731
Acquired technology, goodwill and other intangibles                   3,873        5,341
Notes receivable from employees or former employees                   3,282        2,558
Other assets                                                          1,203        1,151
                                                                  ---------    ---------
                                                                  $  83,825    $  94,318
                                                                  =========    =========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and long-term debt        $      29    $     120
   Accounts payable                                                   6,381        3,656
   Accrued liabilities                                                6,616        8,230
   Accrued liabilities related to discontinued operations              --          3,878
   Income taxes payable                                               1,045        1,091
   Deferred revenue                                                   2,175        1,975
                                                                  ---------    ---------
         Total current liabilities                                   16,246       18,950
                                                                  ---------    ---------

Capital lease obligations and long-term debt                            114          147
                                                                  ---------    ---------

Commitments and Contingencies (Note 9)

Shareholders' equity:
   Preferred stock, $.01 par value; 5,000,000 shares authorized
      none issued or outstanding                                       --           --
   Common stock, $.01 par value; 40,000,000 shares authorized
      29,573,000 and 29,115,000 shares issued and outstanding .         296          291
   Additional paid-in capital                                       126,237      123,929
   Deferred compensation                                             (1,989)        (167)
   Accumulated other comprehensive loss                                (197)         (61)
   Accumulated deficit                                              (56,882)     (48,771)
                                                                  ---------    ---------
            Total shareholders' equity                               67,465       75,221
                                                                  ---------    ---------
                                                                  $  83,825    $  94,318
                                                                  =========    =========
<FN>
          See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>

                                            3
<PAGE>

<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data; unaudited)
<CAPTION>
                                                                             Three Months Ended               Nine Months Ended
                                                                          ------------------------        ------------------------
                                                                        September 26,   September 27,   September 26,  September 27,
                                                                            1999            1998            1999           1998
                                                                          --------        --------        --------        --------
<S>                                                                       <C>             <C>             <C>             <C>
Revenue                                                                   $ 15,092        $ 12,130        $ 42,186        $ 32,555
Cost of revenue                                                              4,157           5,924          13,038          12,545
                                                                          --------        --------        --------        --------
Gross profit                                                                10,935           6,206          29,148          20,010
                                                                          --------        --------        --------        --------

Operating expenses:
   Research and development, net                                             3,783           6,222          11,276          12,037
   Selling and marketing                                                     6,424           6,170          18,061          17,950
   General and administrative                                                3,800           2,452           9,716           5,782
   Amortization of purchased intangibles                                       724             679           2,084           2,038
                                                                          --------        --------        --------        --------
            Total operating expenses                                        14,731          15,523          41,137          37,807
                                                                          --------        --------        --------        --------

Loss from operations                                                        (3,796)         (9,317)        (11,989)        (17,797)

Other income (expense):
         Interest income, net                                                  420             542           1,356           1,381
         Royalty and other income (expense), net                               138              32             276             (83)
                                                                          --------        --------        --------        --------
                                                                               558             574           1,632           1,298
                                                                          --------        --------        --------        --------

Loss from continuing operations before income taxes                         (3,238)         (8,743)        (10,357)        (16,499)
Benefit for income taxes                                                      --            (3,060)           --            (5,774)
                                                                          --------        --------        --------        --------
Loss from continuing operations                                             (3,238)         (5,683)        (10,357)        (10,725)
Loss from discontinued operations,
   net of tax (Note 2)                                                        --              --              --              (259)
Gain on disposal of discontinued operations,
   net of tax (Note 2)                                                       2,246            --             2,246          22,776
                                                                          --------        --------        --------        --------
Net income (loss)                                                         $   (992)       $ (5,683)       $ (8,111)       $ 11,792
                                                                          ========        ========        ========        ========

Earnings (loss) per share - basic:
   Continuing operations                                                  $  (0.11)       $  (0.20)       $  (0.36)       $  (0.37)
   Discontinued operations                                                    0.08            --              0.08            0.78
                                                                          --------        --------        --------        --------
   Net income (loss)                                                      $  (0.03)       $  (0.20)       $  (0.28)       $   0.41
                                                                          ========        ========        ========        ========

Earnings (loss) per share - diluted:
   Continuing operations                                                  $  (0.11)       $  (0.20)       $  (0.36)       $  (0.37)
   Discontinued operations                                                    0.08            --              0.08            0.78
                                                                          --------        --------        --------        --------
   Net income (loss)                                                      $  (0.03)       $  (0.20)       $  (0.28)       $   0.41
                                                                          ========        ========        ========        ========

Shares used in per share calculation - basic                                29,180          29,082          29,144          28,971
                                                                          ========        ========        ========        ========

Shares used in per share calculation - diluted                              29,180          29,082          29,144          28,971
                                                                          ========        ========        ========        ========

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

                                                                  4

<PAGE>

<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands; unaudited)
<CAPTION>
                                                                                                          Nine Months Ended
                                                                                                      --------------------------
                                                                                                   September 26,       September 27,
                                                                                                        1999              1998
                                                                                                      --------          --------
<S>                                                                                                   <C>               <C>
Cash flows from operating activities:
   Net income (loss)                                                                                  $ (8,111)         $ 11,792
   Adjustments to reconcile net income (loss) to net
      cash used in operating activities:
        Write-off of minority investment in unaffiliated company                                          --               3,000
         Gain on disposal of discontinued operations                                                    (2,246)          (22,776)
         Loss on disposition of property and equipment                                                     190              --
         Depreciation & amortization                                                                     4,169             3,695
         Deferred income taxes                                                                              (9)              (96)
         Amortization of imputed interest on Note receivable                                              (184)             --
         Amortization of deferred compensation related to stock options                                    212                62
         Changes in assets and liabilities (net of effects of acquisitions):
            Accounts receivable                                                                         (6,883)              431
            Inventories                                                                                  5,187            (3,602)
            Other assets                                                                                 2,650               472
            Accounts payable                                                                             2,717               925
            Accrued liabilities                                                                         (1,551)          (10,971)
            Income taxes payable                                                                           (46)             --
            Deferred revenue                                                                               200             1,172
                                                                                                      --------          --------
         Net cash used in continuing operations                                                         (3,705)          (15,896)
         Net cash used in discontinued operations                                                         (529)           (7,173)
                                                                                                      --------          --------
               Net cash used in operating activities                                                    (4,234)          (23,069)
                                                                                                      --------          --------

Cash flows from investing activities:
   Investment in restricted cash                                                                        (1,400)             --
   Acquisition of property and equipment                                                                (4,927)           (2,157)
   Loans to employees in exchange for notes receivable                                                    (565)           (2,289)
   Proceeds from sale of discontinued operations                                                          --              54,879
   Collection of Note Receivable (Note 2)                                                                3,250              --
   Acquisition of S.D.I. (Note 8)                                                                         (538)             --
   Acquisition of preferred stock of unaffiliated company                                                 --              (3,000)
                                                                                                      --------          --------
               Net cash provided by (used in)
                   investing activities                                                                 (4,180)           47,433
                                                                                                      --------          --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                                             279             1,751
   Other                                                                                                  (124)             (146)
                                                                                                      --------          --------
               Net cash provided by financing activities                                                   155             1,605
                                                                                                      --------          --------
Effect of exchange rate changes on
   cash and cash equivalents                                                                              (136)               36
                                                                                                      --------          --------
Net increase (decrease) in cash and cash equivalents                                                    (8,395)           26,005
Cash and cash equivalents at beginning of year                                                          46,575            22,977
                                                                                                      --------          --------
Cash and cash equivalents at end of year                                                              $ 38,180          $ 48,982
                                                                                                      ========          ========

Supplemental disclosures:
   Cash paid for income taxes                                                                         $   --            $  8,215
   Cash paid for interest                                                                                    3                55

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

                                                                  5
<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 interim condensed
consolidated   financial   statements  and  notes  thereto  should  be  read  in
conjunction with Cylink's audited  consolidated  financial  statements and notes
thereto  included  in  Cylink's  Annual  Report on Form 10-K for the year  ended
December 31, 1998. Interim results of operations are not necessarily  indicative
of the results to be expected for the fiscal year ending December 31, 1999.

2.   Discontinued Operations

    On  March  27,  1998,   Cylink  sold  its  Wireless   Communications   Group
("Wireless")  to P-Com,  Inc. for $60.5  million  ($46.0  million in cash and an
unsecured  promissory  note in the  amount of $14.5  million  due 100 days after
closing, subject to closing adjustments). The sale resulted in an after tax gain
of  approximately  $22.8 million.  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  reduced  the gain on
disposal. Pursuant to the restatement of revenues and operating results referred
to in Form 10-K for the year  ended  December  31,  1998,  certain  revenues  of
Wireless  previously  recognized  in the  fourth  quarter  of 1997 and the first
quarter of 1998 were adjusted.  Wireless revenues were $4.4 million in the first
quarter of 1998 through the date of disposal.

    On July 14, 1998, P-Com made a partial payment on its promissory note, which
along with other  credits,  totaled $8.9  million.  On August 23,  1999,  Cylink
accepted as a complete settlement of all outstanding claims and counter-claims a
total of $3.25 million of the  outstanding  balance.  After the  elimination  of
other claims by Cylink against P-Com and  offsetting  certain  reserves  against
those assets, Cylink recorded an additional net gain on disposal of discontinued
operations, net of tax, of $2.2 million.

3.  Inventories

                                           September 26,           December 31,
                                           -------------------------------------
                                                      (in thousands)
Raw materials                                 $ 2,003                $ 2,813
Work in process and subassemblies                 615                  1,877
Finished goods                                  2,484                  5,599
                                              -------                -------
                                              $ 5,102                $10,289
                                              =======                =======


4.  Earnings (Loss) Per Share

    Basic earnings (loss) per share is based on the  weighted-average  number of
common shares  outstanding  excluding  306,302 shares  escrowed  pursuant to the
acquisition of S.D.I.  disclosed in Note 8 below.  Diluted  earnings  (loss) per
share is based on the weighted-average number of shares outstanding and dilutive
potential  common  shares  outstanding.   Cylink's  only  potentially   dilutive
securities  are shares  exercisable  pursuant  to  currently  outstanding  stock
options and escrowed  shares.  All  potentially  dilutive  securities  have been
excluded  from the  computation  of

                                            6
<PAGE>

diluted  earnings (loss) per share as their effect is  anti-dilutive on the loss
from continuing operations for the periods presented.

    As of September 26, 1999 and  September  27, 1998,  Cylink had 6,699,000 and
6,081,000 stock options  outstanding  with a weighted  average exercise price of
$4.82 and $9.01, respectively.

5. Comprehensive Loss

<TABLE>
    The components of comprehensive loss are as follows (in thousands):

<CAPTION>
                                                      Three Months Ended                    Nine Months Ended
                                                 -------------------------------      -------------------------------
                                                 September 26,      September 27      September 26,      September 27
                                                      1999              1998               1999              1998
                                                    --------          --------           --------         --------
                                                          (in thousands)                       (in thousands)
<S>                                                 <C>               <C>                <C>              <C>
   Net income (loss)                                $   (992)         $ (5,683)          $ (8,111)        $ 11,792
   Other comprehensive income (loss)                     (88)               35               (136)             (27)
                                                    --------          --------           --------         --------
   Total comprehensive income (loss)                $ (1,080)         $ (5,648)          $ (8,247)        $ 11,765
                                                    ========          ========           ========         ========
</TABLE>


6.  New Lease

    On May 10, 1999, Cylink reached an agreement to lease  approximately  96,000
square feet of office and manufacturing space located in Santa Clara, California
for use as its principal office and  manufacturing  facility.  The lease term is
for 120 months and  commenced on  September  1, 1999,  and includes an option to
extend the lease for an additional 5 years on commercially reasonable terms. The
lease agreement provides for the payment of rent on a net industrial lease basis
commencing  at $174,000 per month for the first year and  escalating to $228,000
per month in the tenth year of the lease.  It is Cylink's  intention to sublease
its former manufacturing facility, occupying 34,500 square feet, under its lease
that expires in June 2001,  which carries a minimum monthly lease  obligation of
$32,775. Cylink's lease on its former headquarters facility expired on September
17, 1999.

    On August 5, 1999,  Cylink amended its lease for the Santa Clara premises to
add an additional  46,000 square feet directly adjacent to this facility for use
as  expansion  space.  The  lease  term on the  additional  space is 119  months
commencing  approximately  October 1, 1999, and includes an option to extend the
lease for an additional 5 years on commercially  reasonable  terms.  The amended
lease  provides for the payment of  additional  rent on a net  industrial  lease
basis  commencing  at  $47,513  per month for the first year and  escalating  to
$57,457 per month in the tenth year of the lease for approximately 22,000 square
feet of the newly added space.  The remaining 24,000 square feet of the facility
is currently leased to an outside tenant for a term not exceeding 5 years, after
which  the  leasehold  interest  will  revert to  Cylink  on  similar  terms and
conditions  to the initial  22,000  square feet,  with rent for this  additional
space  escalating  from  $59,100 in the sixth  year to $64,025  per month in the
tenth year of the lease.

7.       Restricted Cash

    As part of the lease  agreement  referenced in Note 6, the Company  posted a
cash  deposit  in the amount of $1.4  million  with its bank to secure a Standby
Letter of Credit in favor of the landlord which serves as an additional security
deposit.  The lease agreement provides for the release of all of this portion of
the security deposit after four years upon the achievement of certain  financial
profitability  goals.  Accordingly,  Cylink has  classified  this as a long-term
asset.

8.   Business Acquisition

    On  July  21,  1999,   Cylink   acquired   Virginia-based   Security  Design
International,  Inc. (S.D.I.),  a security consulting and professional  services
company which provides network  vulnerability  assessments.  Concurrent with the
acquisition,   Cylink  entered  into  employment   contracts  with  four  S.D.I.
shareholders.  In connection  with the  acquisition  and employment  agreements,
Cylink (1) paid $450,000 cash, (2) issued 306,302 shares of Cylink common shares
into  escrow,  to be released in annual  installments  as the shares vest over a
three-year  employment

                                       7
<PAGE>

period,  (3) issued options to purchase  150,000 Cylink common shares which vest
over  four  years,  and  (4)  agreed  to pay  bonuses  of up to  $1.925  million
contingent upon continued  employment and the  achievement of specified  revenue
and   profitability   goals  over  three  years.   Transaction   costs   totaled
approximately $132,000. Deferred compensation resulting from the issuance of the
escrowed  common shares and the stock options totaled  approximately  $2,034,000
and is reported as a reduction to shareholders  equity, to be amortized over the
applicable   vesting  period.   The  goodwill  resulting  from  the  acquisition
(approximately  $436,000) will be amortized over three years. The purchase price
allocation  is  preliminary  and  subject  to  adjustment  based  on  additional
information  concerning  the  fair  value of  assets  acquired  and  liabilities
assumed. The pro forma results of operations of S.D.I., assuming the acquisition
had  occurred  as of  January  1,  1999,  would  not  be  material  to  Cylink's
consolidated financial statements.

9.  Contingencies

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

                                       8
<PAGE>


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



    This Report on Form 10-Q includes  statements  that reflect  Cylink's belief
concerning  future events and financial  performance.  Statements  which are not
purely historical in nature are "forward-looking  statements" within the meaning
of Section 27A of the  Securities  Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We sometimes identify forward-looking statements with such
words as  "expects",  "anticipates",  "intends",  "believes"  or  similar  words
concerning future events.

    You should not rely too heavily on these  forward-looking  statements.  They
are subject to certain risks and uncertainties  that may cause actual results to
differ materially from past results or Cylink's  predictions.  For a description
of these risks see Item 2. "Risk  Factors That May Affect  Future  Results," and
other  sections  of this Report on Form 10-Q.  You should also  consult the risk
factors listed from time to time in Cylink's other Exchange Act Reports.

    All  forward-looking  statements  included  in this  document  are  based on
information  available to Cylink as of the date of this Report on Form 10-Q, and
Cylink assumes no obligation to update any such forward-looking  statements,  or
to update the reasons why actual  results  could differ from those  projected in
the forward-looking statements.

DISCONTINUED OPERATIONS

    Pursuant to an asset purchase  agreement  dated March 27, 1998,  Cylink sold
its  Wireless  business  to  P-Com,  Inc.  See  Note  2 of  Notes  to  Condensed
Consolidated  Financial  Statements.  The sale resulted in an overall  after-tax
gain of approximately $25.0 million.  Except where noted, the following comments
are associated with the continuing network security business.

RESULTS OF OPERATIONS

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

<CAPTION>
                                                               Three Months Ended   Nine Months Ended
                                                               ------------------   -----------------
                                                                Sep 26,   Sep 27,   Sep 26,   Sep 27,
                                                                 1999      1998      1999      1998
                                                                -----     -----     -----     -----
<S>                                                             <C>       <C>       <C>       <C>
Revenue                                                         100.0%    100.0%    100.0%    100.0%
Cost of revenue                                                  27.5%     48.8%     30.9%     38.5%
                                                                -----     -----     -----     -----
Gross profit                                                     72.5%     51.2%     69.1%     61.5%

Operating expenses:
   Research and development, net                                 25.1%     51.3%     26.7%     37.0%
   Selling and marketing                                         42.6%     50.9%     42.8%     55.1%
   General and administrative                                    25.2%     20.2%     23.0%     17.8%
   Amortization of purchased intangibles                          4.8%      5.6%      4.9%      6.3%
                                                                -----     -----     -----     -----
            Total operating expenses                             97.6%    128.0%     97.5%    116.1%
                                                                -----     -----     -----     -----

Loss from operations                                            -25.2%    -76.8%    -28.4%    -54.7%

Other income                                                      3.7%      4.7%      3.9%      4.0%
                                                                -----     -----     -----     -----

Loss from continuing operations before income taxes             -21.5%    -72.1%    -24.6%    -50.7%
                                                                =====     =====     =====     =====
</TABLE>

                                                 9
<PAGE>


    Revenue. Revenue increased 24% from $12.1 million for the three months ended
September  27, 1998 to $15.1  million for the three months ended  September  26,
1999,  and increased 30% from $32.6 million for the nine months ended  September
27, 1998 to $42.2 million for the nine months ended  September  26, 1999.  These
increases were attributable to increases in unit shipments of existing products,
shipments of products with higher average selling prices, and increased revenues
associated with software maintenance and support services. International revenue
was 38% and 52% of  total  revenue  for the  third  quarter  of 1998  and  1999,
respectively.

    Cylink's revenue is derived primarily from sales of its family of commercial
network security products,  and to a lesser extent, from the license of software
products.  Fees for  software  maintenance  and  support  services  are  charged
separately.  Revenue arising from sales of hardware  products is recognized upon
shipment to customers.  Concurrently,  a provision is made for estimated cost to
repair or replace  products under warranty  arrangements.  Revenue from sales to
distributors is recognized upon shipment;  no right of return, stock rotation or
price  protection  is given.  Revenue  from sales to value  added  resellers  is
recognized upon shipment and  concurrently a provision for estimated  returns is
recorded based on historical and anticipated experience.

    Cylink also derives  revenue  from the license of its  software  products as
well as fees for software maintenance and support.  Cylink's revenue recognition
policy  is  consistent  with  Statement  of  Position  97-2,   Software  Revenue
Recognition,  and the related  amendment SOP 98-4.  Software  license revenue is
recognized when a written purchase order, license agreement or contract has been
executed;  delivery of software has occurred; no significant Company obligations
remain;  the fee is fixed  and  determinable;  collectibility  is  probable  and
vendor-specific  objective evidence exists to allocate the total fee to elements
of the  arrangement.  Vendor-specific  objective  evidence is based on the price
generally  charged when an element is sold separately.  Allowances for estimated
future returns,  which to date have been immaterial,  are provided upon shipment
and adjusted  periodically  by management  based on historical  and  anticipated
experience.  Maintenance  and support  revenue  consists of ongoing  support and
product  updates and is deferred  and  recognized  ratably  over the term of the
maintenance  contract,  which is  typically  twelve  months.  Software  revenue,
including  related  maintenance and support fees, was not material in any period
presented.

    Since its acquisition of S.D.I. in July 1999,  Cylink also derives  revenues
from  network  security  consulting   services.   These  include   vulnerability
assessment, incident response assessment, design review and training, as well as
general consulting services. Services are delivered on either a firm fixed price
or time & materials basis,  depending upon customer  preference and availability
of  required  estimating  information.   Revenue  on  fixed  price  services  is
recognized on a percentage of completion  basis. Some services are rendered on a
time-and-materials  basis,  and revenue for those  services is recognized as the
services are performed.  For the quarter ended September 26, 1999,  revenue from
professional services was not material.

    Gross Profit.  Gross profit  increased 76.2% from $6.2 million for the three
months  ended  September  27, 1998 to $10.9  million for the three  months ended
September  26, 1999,  and  increased  46% from $20.0 million for the nine months
ended  September 27, 1998 to $29.1  million for the nine months ended  September
26,  1999.  The  increase in dollars was  primarily a result of the  increase in
revenue.  As a percentage of sales,  gross profit  increased to 72% in the third
quarter of 1999 from 51% for the third quarter of 1998.  This increase  resulted
primarily from improved manufacturing  utilization generating increased overhead
absorbtion and a product mix of higher profit margin products.

    Research  and  Development.   Research  and  development   expenses  consist
primarily  of salaries and other  personnel-related  expenses,  depreciation  of
development  equipment,   facilities  and  supplies.  Research  and  development
expenses  for the third  quarter  of 1998  included  a  one-time  charge of $3.0
million  related to the write off of a minority  investment  in an  unaffiliated
company.  Ignoring this one-time charge, gross research and development expenses
increased 7% from $3.9 million for the three months ended  September 27, 1998 to
$4.1 million for the three months ended  September  26, 1999,  and increased 25%
from $10.1 million for the nine months ended September 27, 1998 to $12.5 million
for the nine months ended  September 26, 1999.  Gross  research and  development
expenses as a percentage of revenue,  ignoring the one-time  write off, were 32%
for the third quarter of 1998 compared to 27% for the third quarter of 1999, and
31% for the first nine months of 1998  compared to 30% for the first nine months
of 1999.  The dollar  increase  resulted from  increased  spending on externally
funded contracts,  increased  personnel,  and development costs of new products,
particularly  in Israel.  The decrease in expense as a percentage of revenue was
due to an increase in revenue growth at a rate of faster than the growth rate of
spending on new products.

                                       10

<PAGE>

    From time to time Cylink  receives  engineering  funding for  development of
projects to apply or enhance  Cylink's  technology  to a  particular  customer's
need. The amounts recognized under these research and development  contracts are
offset against  research and  development  expenses.  Amounts  recognized  under
non-recurring  engineering  contracts totaled $0.6 million for the third quarter
of 1998 and $0.3  million for the third  quarter of 1999,  and $1.0  million and
$1.3 million for the first nine months of 1998 and 1999, 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 4% from $6.2 million for the three months ended  September 27, 1998 to
$6.4 million for the three months ended  September  26, 1999,  and  increased 1%
from $18.0 million for the nine months ended September 27, 1998 to $18.1 million
for the nine months ended September 26, 1999.  Selling and marketing expenses as
a percentage  of revenue were 51% for the third  quarter of 1998 compared to 43%
for the  third  quarter  of 1999,  and 55% for the  first  nine  months  of 1998
compared  to 43% for the  first  nine  months  of 1999.  These  modest  spending
increases were primarily due to increased  travel related costs  attributable to
further  development of Cylink's US channels  organization  and higher occupancy
costs.  Selling and  marketing  expenses,  expressed as a percentage of revenue,
decreased as a result of the increased revenue base.

    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  55% from $2.5  million for the three months
ended  September  27, 1998 to $3.8 million for the three months ended  September
26,  1999,  and  increased  68% from  $5.8  million  for the nine  months  ended
September 26, 1998 to $9.7 million for the nine months ended September 26, 1999.
General and administrative  expenses as a percentage of revenue were 20% for the
third quarter of 1998 compared to 25% for the third quarter of 1999, and 18% for
the first nine months of 1998 compared to 23% for the first nine months of 1999.
The dollar and percentage of revenue increases in the third quarter of 1999 were
primarily  due to  non-capitalized  training  and supply costs  associated  with
Cylink's  new  Enterprise  Resource  Planning  system,   relocation  and  excess
facilities  costs, an additional  provision for doubtful accounts of $.2 million
and additional professional services costs.

    Amortization of Purchased Intangibles. Amortization relating to goodwill and
other  intangibles was $0.7 million in each period  presented and relates to the
acquisition of Algorithmic Research, Ltd and Algart Holdings, Ltd. (collectively
"ARL") in September  1997, and the acquisition of S.D.I. in the third quarter of
1999.

    Benefit from Income Taxes.  No provision for, or benefit from,  income taxes
was recognized in the quarter ended  September 26, 1999 as Cylink incurred a net
operating  loss for income tax purposes  and had no  additional  loss  carryback
potential.

    Other Income (Expense), Net. Other income (expense), net, consists primarily
of interest income,  interest  expense and, to a lesser extent,  royalty income.
Interest income,  net, decreased from $0.5 million for the third quarter of 1998
to $0.4 million for the third quarter of 1999, principally due to lower cash and
cash equivalent balances between periods.


LIQUIDITY AND CAPITAL RESOURCES

    At  September  26,  1999,  Cylink  had cash and  cash  equivalents  of $38.2
million, working capital of $49.5 million and minimal long-term obligations. For
the nine months ended  September  26, 1999,  Cylink  recorded a net loss of $8.1
million.  Operating  activities  used  $4.2  million  in the nine  months  ended
September  26,  1999.  This  consisted  primarily  of the loss  from  continuing
operations  and an increase in accounts  receivable of $6.9  million,  offset in
part by a decrease in  inventories of $5.2 million Both the increase in accounts
receivable and the decrease in inventories  were the result of increased  sales.
For the nine months  ended  September  27, 1998,  Cylink  recorded net income of
$11.8  million,  principally  due to the $22.8 million gain on sale of Wireless,
offset by a loss from  continuing  operations  of $10.7  million and a loss from
discontinued  operations  of $.3  million.  For the  first  nine  months of 1998
continuing  operations used $15.9 million.  This consisted primarily of the loss
from  continuing  operations  of $10.7  million,  increases  in  inventories  in
anticipation of increased sales and payment of estimated income taxes related to
the gain on sale of Wireless.

    Investing  activities for the nine months ended September 26, 1999 used $4.2
million in cash. These expenditures  consisted primarily of investments in fixed
assets totaling $4.9 million,  the investment of $1.4 million in restricted

                                       11
<PAGE>

cash to secure a standby letter of credit,  long-term  loans to employees of $.6
million,  and a $.5 million  cash  investment  in S.D.I.,  offset in part by the
collection  of a note  receivable of $3.25  million.  The  investments  in fixed
assets consisted primarily of the license and implementation  costs of an Oracle
Enterprise  Resource  Planning  system,  the  acquisition  of  related  computer
hardware,  and tenant improvements and furniture in connection with Cylink's new
lease. Cash provided by investing activities for the nine months ended September
27, 1998 was $47.4 million, of which $54.9 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 $2.2  million,  long-term  loans to
employees  of  $2.2  million,  and a $3.0  million  minority  investment  in the
preferred stock of an unaffiliated company.

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

    On  July  21,  1999,   Cylink   acquired   Virginia-based   Security  Design
International,   Inc.("S.D.I."),  for  a  $450,000  cash  payment,  issuance  of
approximately 306,000 shares of Cylink's common stock, and a deferred cash bonus
of up to $1.925 million. In connection with the terms of the acquisition, Cylink
recorded a non-cash, deferred compensation charge of $1.8 million resulting from
the issuance of the 306,000 shares, which will be amortized over the life of the
underlying employment agreements,  and a non-cash,  deferred compensation charge
predicated on the difference  between market value of the underlying  shares and
the option  exercise  price on the date of the grant applied to 150,000  options
granted  in  connection  with  the  employment  by the  Company  of the  selling
shareholders  of  S.D.I.,  to be  amortized  over the  vesting  period  of those
options.  Cylink  recorded as goodwill  approximately  $.5 million excess of the
purchase  consideration  over the  identifiable  fair  value  of the net  assets
obtained, to be amortized over three years. In addition to the acquisition cost,
S.D.I. is expected to utilize  approximately  $0.5 million in capital  equipment
and operating loss requirements over the next 12 months.

    Cylink  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 next  twelve
months.  However,  Cylink may require additional funds to support its continuing
operating  losses,  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.  This additional  financing may not be available on terms
favorable to Cylink or its shareholders, if at all.

Year 2000 Compliance

    "Year 2000 Compliance"  refers generally to the problems that some software,
including  firmware embedded in Cylink's  products,  may have in determining the
correct  century  for  the  year.  For  example,  software  with  date-sensitive
functions that is not Year 2000 compliant may not be able to distinguish whether
"00"  means  1900 or 2000,  which may  result in  failures  or the  creation  of
erroneous  results.  Cylink has defined "Year 2000 Compliant" as the ability to:
(i)  correctly  handle  date  information  needed for the  December  31, 1999 to
January  1,  2000  date  change;   (ii)   function   according  to  the  product
documentation  provided  for this date  change,  without  changes  in  operation
resulting  from the advent of a new  century,  assuming  correct  configuration;
(iii) where appropriate,  respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed,  defined, and predetermined  manner,
such as in certificate based products,  or in accordance with Cylink's Year 2000
Compliant test plan; and (iv) recognize year 2000 as a leap year.

    Cylink has developed a Year 2000 readiness plan for the current  versions of
its products.  Cylink has largely  completed all phases of its plan,  except for
contingency  planning,  with  respect  to  the  current  versions  of all of its
products.  As a result,  the current versions of each of its products  currently
offered  for sale are  believed  to be "Year  2000  Compliant."  In some  cases,
Cylink's  products require an upgrade provided by Cylink which is either sold as
a complete substitute or as a kit sold with the product in order to be Year 2000
Compliant.

    Cylink has completed a review of its mission critical  internal  information
systems  (including  the  third-party  software for its  management  information
systems, networks and desktop applications,  and its hardware telecommunications
technology)  and  believes  it  has  addressed  all  critical   concerns.   When
deficiencies have been identified in critical  components,  Cylink is purchasing
new or  upgraded  versions  which  have  been  certified  by  their  vendors  as
compliant.

                                       12
<PAGE>

    Cylink has funded its Year 2000 plan from operating cash.  While Cylink does
not expect  such costs to be  material,  Cylink  will incur  additional  amounts
related to the Year 2000 plan for  administrative  personnel to manage  Cylink's
readiness  plans,  technical  support for its product  engineering  and customer
satisfaction.

     Cylink  has  completed  its plans to  address  Year 2000  readiness  of its
critical operations based on its perception of the known risks involved.

    Despite  testing by Cylink and  current  and  potential  customers,  and any
assurances from developers of products incorporated into Cylink's products or in
use in Cylink's business  operations,  Cylink's products may contain  undetected
errors or defects associated with Year 2000 date functions.  Further, Cylink may
be using products in its business  operations which are not Year 2000 compliant.
An unanticipated  Year 2000  interruption  could have material adverse financial
consequences to Cylink or seriously impair business operations for an indefinite
period of time.

    For a  more  comprehensive  discussion  of  Cylink's  Year  2000  plans  and
exposures,  see the "Year 2000" topic under Part I, Item 2. "Risk  Factors  That
May Affect Future Results."

                                       13
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

    Cylink incurred  losses from  continuing  operations in 1998 and for each of
the prior four years.  Cylink expects to continue to incur net losses through at
least the balance of 1999. Cylink may not increase or maintain its revenue or be
profitable on a quarterly or an annual basis in the future.

    Cylink  has  historically   experienced  significant   fluctuations  in  its
operating results on a quarterly basis and could experience such fluctuations in
the future. Cylink's operating results are affected by a number of factors, many
of which are outside of Cylink's control,  including the following:

o  the timing of the  introduction of new or enhanced  products by Cylink or its
   competitors

o  market  acceptance of new products of Cylink,  new products of its customers,
   and new product introductions by its competitors

o  the timing,  cancellation or delay of customer orders, including cancellation
   or delay in  anticipation  of new  product  introduction  or  enhancement  or
   resulting from uncertainty relating to intellectual property claims

o  competitive factors, including pricing pressures

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

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

o  expenses  incurred  in seeking  to obtain,  enforce  and defend  claims  with
   respect to intellectual property rights

o  the mix of products sold

o  changes in the  percentage  of products  sold through  Cylink's  direct sales
   force

o  personnel  changes

o  general economic conditions, and,

o  fluctuations in foreign currency exchange rates.

    Cylink expects to introduce a number of new products during the remainder of
1999 and 2000.  The failure of any such  products to achieve  market  acceptance
when  anticipated,  or at all, would  materially and adversely  affect  Cylink's
financial condition and results of operations.

    In  connection  with  the  acquisition  of ARL  in  September  1997,  Cylink
allocated  $63.9  million  of the  purchase  price to  in-process  research  and
development  ("IPR&D"),  and in accordance  with generally  accepted  accounting
principles  recorded  an  immediate  charge  off of that  amount  on the date of
acquisition. The amount allocated to IPR&D was determined in a manner consistent
with widely recognized appraisal practices.

    In a letter dated September 15, 1998, to the American Institute of Certified
Public  Accountants,  the  Chief  Accountant  of  the  Securities  and  Exchange
Commission  ("SEC")  indicated  the SEC  Staff's  concerns  related  to  certain
appraisal  practices  generally employed in determining the fair value of IPR&D.
As a result,  it is possible that the SEC staff may require that any  enterprise
that recorded an IPR&D charge revise its estimate of the value of the IPR&D.  To
the  extent  Cylink is  required  by the SEC Staff to  retroactively  revise its
estimate of the value of IPR&D, such revision could result in the capitalization
of additional goodwill,  the amortization of which would reduce future operating
results.

Lengthy Sales Cycle

    Sales of Cylink'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  Cylink's  products  is  typically  lengthy  and  subject  to a  number  of
significant  risks over which  Cylink has little or no control.  Cylink 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.  Cylink  typically  plans its production  and inventory  levels based on
internal  forecasts of customer demand,  which are highly  unpredictable and can
fluctuate substantially.  In addition,  Cylink's current or future customers may
curtail or suspend  investments in securing their existing  networks as the Year
2000  approaches,  or divert  technology  expenditures  reserved for  enterprise
security products in order to address Year 2000 compliance problems (see further
discussion

                                       14
<PAGE>

under Year 2000 below). If revenue falls significantly below anticipated levels,
as it has at times in the past,  Cylink's  financial  condition  and  results of
operations  would be materially and adversely  affected.  In addition,  Cylink's
operating expenses are based on anticipated revenue levels and a high percentage
of Cylink'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. For example, on September 14, 1998,
Cylink  announced that its earnings for the third quarter of 1998 would be below
consensus  estimates.  It is  possible  that in the  future  Cylink's  operating
results  will  again  be below  the  expectations  of  securities  analysts  and
investors.  In such an event, or in the event that adverse conditions prevail or
are  perceived to prevail  generally or with respect to Cylink's  business,  the
price of Cylink's Common Stock would likely be materially adversely affected.


Pending Litigation

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

Dependence on Key Personnel

    On November 4, 1998,  Mr.  William C. Crowell,  formerly  Vice  President of
Product Strategy,  was promoted to President and Chief Executive Officer, and on
November 16, 1998, Mr. Roger A. Barnes became Cylink's Chief Financial  Officer.
Cylink's  future  success will depend on the  abilities  of Mr.  Crowell and the
contributions  by its other  executive  officers,  key  management and technical
personnel.  The  loss  of the  services  of one or more  of  Cylink'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 Cylink's business and operating results.


Dependence on Recently Introduced and New Information Security Products

    Cylink's  future  results  of  operations  will be highly  dependent  on the
successful completion of the design,  development,  introduction,  marketing and
manufacture of Cylink's virtual private  networking ("VPN") hardware product and
commercial versions of its public key infrastructure  ("PKI") products,  as well
as successful  marketing and manufacture of the Cylink Link Encryptors,  PrivaCy
Manager,  PrivateWire and Cylink Frame Encryptor  products.  To date, Cylink has
made only  limited,  and,  in some cases,  no  commercial  shipments  of certain
versions of such  products.  These products may require  additional  development
work,  enhancement,  testing or further refinement before they can achieve or in
order to maintain market  acceptance.  In this regard,  Cylink relies on a third
party original equipment  manufacturer to supply Cylink's ATM Encryptor product,
and Cylink is dependent on this supplier for continued development,  manufacture
and support. If any of Cylink's products have performance,  reliability, quality
or other  shortcomings,  then such  products  could fail to achieve or  maintain
market  acceptance.  The failure by Cylink's new or existing products to achieve
or enjoy  market  acceptance,  whether for these or other  reasons,  could cause
Cylink to experience  reduced  orders,  higher  manufacturing  costs,  delays in
collecting  accounts  receivable and additional  warranty and service  expenses,
which in each case could have a material  adverse  effect on Cylink's  business,
financial condition and results of operations.

Competition

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

o  the development of new products and features

o  product quality and performance

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

o  product price

o  name recognition, and,

o  perception of Company stability and long-term viability.

    Many of these  factors  are  beyond  Cylink's  control.  In  addition,  some
factors,  such as the  perception of Cylink's  stability and viability  over the
long term may have been adversely  affected by the December 1998  restatement of
Cylink's  1997 and first and second  quarter 1998  financial  statements,  which
could materially adversely impact Cylink's ability to compete.

                                       15
<PAGE>

    Cylink's  competitors  in  the  information   security  markets,   including
companies  that offer  products  similar  to or as an  alternative  to  Cylink's
products,  include Axent Technologies,  Inc., Checkpoint Software  Technologies,
Ltd.,  Network  Associates,  Inc., Secure Computing  Corporation,  RSA Security,
Inc., Racal-Guardata,  Inc., and Information Resource Engineering, Inc. Cylink's
OEM supplier of its ATM Encryptor  product also  competes  with Cylink,  through
distribution channels, for sales of this product. 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
Cylink's  products,  Cylink's products may no longer be required by customers to
attain network security.

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

    Many  of  Cylink's   competitors  have   substantially   greater  financial,
technical, marketing, distribution and other resources, greater name recognition
and longer standing  relationships with customers than Cylink.  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 Cylink's financial  condition
and results of operations. Cylink may not be able to compete successfully in the
future and competitive pressures may result in price reductions,  loss of market
share  or  otherwise  have a  material  adverse  effect  on  Cylink's  financial
condition and results of operations.

Product Liability Risks

    Customers rely on Cylink's network security products to prevent unauthorized
access to their networks and data transmissions. A malfunction or the inadequate
design of Cylink's  products could result in tort or warranty  claims.  Although
Cylink 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 Cylink'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  Cylink's  business,  financial
condition 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
Cylink's   products  in  particular,   regardless  of  whether  such  breach  is
attributable to Cylink's products.  This could result in a decline in demand for
Cylink's  products,  which  would have a  material  adverse  effect on  Cylink's
business, financial condition and results of operations.

Year 2000

    The "Year 2000 Issue" refers  generally to the problems that some  software,
including  firmware embedded in Cylink's  products,  may have in determining the
correct  century  for  the  year.  For  example,  software  with  date-sensitive
functions that is not Year 2000 compliant may not be able to distinguish whether
"00"  means  1900 or 2000,  which may  result in  failures  or the  creation  of
erroneous results.

    Cylink has developed a Year 2000 readiness plan for the current  versions of
its products. The plan includes development of corporate awareness,  assessment,
implementation  (including  remediation,  upgrading and  replacement  of certain
product  versions),   validation  testing,  and  contingency  planning.   Cylink
continues to respond to customer  concerns  about prior versions of its products
on a case-by-case basis.

    Cylink has largely  completed all phases of its plan, except for contingency
planning,  with  respect to the current  versions of all of its  products.  As a
result,  the current versions of each of its products currently offered for sale
are believed to be "Year 2000  Compliant" as defined below when  configured  and
used in  accordance  with  the  related

                                       16
<PAGE>

documentation,  and provided that the  underlying  operating  system of the host
machine  and any other  software  used with or in the host  machine or  Cylink's
products are also Year 2000 Compliant.  In some cases, Cylink's products require
an upgrade  provided by Cylink which is either sold as a complete  substitute or
as a kit sold with the product in order to be Year 2000 Compliant.

    Cylink has defined  "Year 2000  Compliant"  as the ability to: (i) correctly
handle date information needed for the December 31, 1999 to January 1, 2000 date
change; (ii) function according to the product  documentation  provided for this
date change,  without  changes in operation  resulting  from the advent of a new
century,  assuming correct  configuration;  (iii) where appropriate,  respond to
two-digit  date input in a way that  resolves  the  ambiguity as to century in a
disclosed,  defined,  and  predetermined  manner,  such as in certificate  based
products, or in accordance with Cylink's Year 2000 Compliant test plan; and (iv)
recognize  year 2000 as a leap year.  Cylink has not tested its  products on all
platforms or all versions of  operating  systems that it currently  supports and
has advised its customers to verify that their  platforms and operating  systems
support the transition to the year 2000.

    Cylink has not  specifically  tested  software  obtained  from third parties
(licensed  software,  shareware,  and freeware)  that is  incorporated  into its
products,  but Cylink's test plan was designed to reveal Year 2000  deficiencies
with third party software incorporated in Cylink's products.

    Despite  testing by Cylink and  current  and  potential  customers,  and any
assurances  from  developers of products  incorporated  into Cylink's  products,
Cylink's products may contain  undetected errors or defects associated with Year
2000 date functions.  Also,  certain prior versions of Cylink's products are not
fully Year 2000  Compliant,  and Cylink is  working to address  these  issues by
offering for sale  upgrades to compliant  versions.  Known or unknown  errors or
defects in Cylink's products could result in delay or loss of revenue, diversion
of development  resources,  damage to Cylink's reputation,  or increased service
and warranty  costs,  any of which could  materially  adversely  affect Cylink's
business, operating results, or financial condition.

    Cylink does not  currently  have any  information  concerning  the Year 2000
compliance  status of its  customers.  If Cylink's  current or future  customers
suspend  investments in securing their existing networks while they achieve Year
2000  compliance,   or  if  they  divert  technology  expenditures   (especially
technology  expenditures that are reserved for enterprise  security products) to
address Year 2000 compliance problems, Cylink's business, results of operations,
or financial condition could be materially adversely affected.

    Some commentators have predicted significant  litigation regarding Year 2000
compliance  issues.  Because  this type of  litigation  lacks  precedent,  it is
uncertain whether or to what extent Cylink may be affected by it.

    Cylink has completed a review of its mission critical  internal  information
systems  (including  the  third-party  software for its  management  information
systems, networks and desktop applications,  and its hardware telecommunications
technology) and believes it has addressed all critical  concerns.  To the extent
that  Cylink is not been able to test the  technology  provided  by  third-party
vendors, Cylink will purchase upgrades for versions which have been certified by
their  vendors  as  compliant.  Although  Cylink is not  currently  aware of any
material  operational  issues or costs  associated  with  preparing its internal
information   systems  for  the  Year  2000,  Cylink  may  experience   material
unanticipated  problems and costs caused by undetected  errors or defects in the
technology used in its information systems.

    Cylink has funded its Year 2000 plan from operating cash.  While Cylink does
not expect  such costs to be  material,  Cylink  will incur  additional  amounts
related to the Year 2000 plan for  administrative  personnel to manage  Cylink's
readiness  plans,  technical  support for its product  engineering  and customer
satisfaction.  Cylink may experience  material problems and costs with Year 2000
compliance that could adversely affect Cylink's business, results of operations,
and financial condition.

    Finally,  Cylink is also  subject to external  forces  that might  generally
affect  industry and commerce,  such as utility or  transportation  company Year
2000 compliance failures and related service interruptions.

    Cylink  has  completed  its  plans to  address  Year 2000  readiness  of its
critical  operations  based  on its  perception  of the  known  risks  involved.
However,  were Cylink to experience  an  unanticipated  Year 2000  interruption,
business operations could be seriously impaired for an indefinite period of time
until remedial efforts could be achieved.

                                       17
<PAGE>

Management of Growth In Employees

    Cylink has recently and may continue to experience substantial  fluctuations
in the  number of  employees  and the  scope of its  operations  in the  network
security business,  resulting in increased  responsibilities for management.  To
manage its  business  effectively,  Cylink  will need to continue to improve its
operational,  financial and management  information  systems and to hire, train,
motivate  and  manage  its  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.  Cylink has experienced delays in filling
positions for engineering  personnel and Cylink expects to experience  continued
difficulty  in filling its needs for qualified  engineers  and other  personnel.
There can be no  assurance  that Cylink 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  Cylink's
financial condition and results of operations.

    In September 1997, Cylink acquired  Algorithmic  Research,  Ltd. ("ARL") and
assumed   responsibility  for  management  of  its  worldwide  operations  which
currently  consists of approximately  eighty-four  employees.  Cylink 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,  as well as Cylink's next generation hardware VPN
product.  Key factors which will determine  ARL's success include whether Cylink
can adequately  fund ARL's  development  objectives,  whether Cylink can provide
accurate  information  for ARL to focus its  technology  on  significant  market
opportunities,  and whether Cylink can predict the most attractive  features and
functions for ARL's  products.  Cylink's  success in realizing  the  anticipated
return from its investment in ARL also will be determined by Cylink's ability to
position and introduce  ARL's products into Cylink's  markets and channels,  and
Cylink's  ability to  provide  adequate  sales and  customer  support  for ARL's
products.  To date,  Cylink's  efforts to market ARL's products through Cylink's
direct  sales  channel  have not met Cylink's  expectations  due to  differences
between the sales  expertise  required  for selling  the ARL  products  and that
required  for  Cylink's  other  products.  Consequently,   Cylink  has  recently
reorganized  the  management  of  ARL to  strengthen  ARL's  responsibility  for
marketing  and  sales of its  products.  In  addition,  ARL's  improvements  and
development of new products have been delayed by inadequate coordination between
engineering  departments  located in Santa Clara,  CA and Petach Tikva,  Israel.
This inadequate  coordination to date is due to differing  engineering practices
concerning  development planning and restrictions imposed by U.S. export control
laws  governing  the  transfer  of  cryptographic  expertise.  Cylink  and ARL's
successful  working  relationship  may be hindered  significantly by differences
between the two organizations  created by time, distance,  language and culture.
ARL operates from its principal offices in Israel, a country which is vulnerable
to disruption due to the sudden  outbreak of hostilities  with its neighbors and
various indigenous factions.  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.

    Cylink's  recent  acquisition  of  S.D.I.   requires   management  of  their
professional services in a market where Cylink has limited experience.  S.D.I.'s
employee  morale and  reputation  for  providing  objective  assessments  on its
clients'  network  security  may be  adversely  affected  by  this  acquisition,
particularly if S.D.I.'s  prospective  clients believe S.D.I.'s  recommendations
are biased in favor of Cylink's  products and services.  The success of S.D.I.'s
business  is  critically  dependent  on  S.D.I.'s  ability to attract and retain
qualified employees, and S.D.I.'s present employees may not accept the influence
of Cylink's management and loss of autonomy they once enjoyed.


Intellectual Property and Other Proprietary Rights

    Cylink relies on patents, trademarks,  copyrights, licenses and trade secret
law to establish and preserve its intellectual  property  rights.  Cylink 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
Cylink will not be  invalidated,  circumvented  or  challenged,  that the rights
granted thereunder will provide competitive  advantages to Cylink or that any of
Cylink's pending or future patent  applications will be issued with the scope of
the claims sought by Cylink, if at all. Further,  there can be no assurance that
others  will not develop  technologies  that are similar or superior to Cylink's
technology,  duplicate Cylink's technology or design around the patents owned by
Cylink. Cylink may be subject to or may initiate interference proceedings in the
U.S.  Patent  Office,  which can require  significant  financial and  management

                                       18
<PAGE>

resources. In addition, the laws of certain countries in which Cylink's products
are or may be developed,  manufactured or sold may not protect Cylink's products
and  intellectual  property  rights to the same extent as the laws of the United
States. The inability of Cylink 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,  Cylink has received  communications  from
third parties asserting that Cylink's patents, features or content of certain of
Cylink's products  infringe upon the intellectual  property rights held by third
parties,  and Cylink may receive such communications in the future. There can be
no assurance  that third  parties  will not assert  claims  against  Cylink that
result in  litigation.  Any  litigation,  whether or not  determined in favor of
Cylink,  could  result  in  significant  expense  to  Cylink  and  could  divert
management  and  other  resources.  In the  event of an  adverse  ruling  in any
litigation  involving  intellectual  property,   Cylink  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
Cylink on reasonable terms or at all. In the event of a successful claim against
Cylink and  Cylink's  failure to develop or license a substitute  technology  on
commercially  reasonable  terms,  Cylink'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  Cylink's
financial condition and results of operations.

Evolving Network Security Market; Market Acceptance Risks

    The market for Cylink's network  security  products is relatively new and is
still evolving.  This market is characterized  by rapidly  changing  technology,
emerging industry standards,  new product  introductions and changes in customer
requirements and  preferences.  Cylink's future success will depend in part upon
end users' demand for network  security  products in general,  and upon Cylink's
ability to enhance  its  existing  products  and to develop  and  introduce  new
products  and  technologies  that  meet  customer  requirements.   Cylink  faces
continuing  challenges  to  educate  customers  as to the value of its  security
products.  Cylink  believes that many potential  customers do not appreciate the
need for  high-end  security  products  unless and until they have faced a major
security breach. If Cylink is unable to successfully educate potential customers
as to the  value of,  and  thereby  obtain  broad  market  acceptance  for,  its
products,  it will  continue  to rely  primarily  on  selling  new and  existing
products to its base of existing  customers,  which will significantly limit any
opportunity for growth. In addition, any significant advance in technologies for
attacking  cryptographic  systems could render some or all of Cylink's  existing
and new products obsolete or unmarketable.  To the extent that a specific method
other than Cylink's is adopted as the standard for implementing network security
in any segment of the network  security market,  sales of Cylink's  existing and
planned products in that market segment may be adversely  impacted,  which could
have a material  adverse effect on Cylink's  business,  financial  condition and
results of operations.  See "Competition." Network security-related  products or
technologies  developed  by others may  adversely  affect  Cylink's  competitive
position or render its products or technologies noncompetitive or obsolete.


Rapid Technological Change

    The markets for Cylink's  products  are  characterized  by rapidly  changing
technologies,  extensive research and new product introductions. Cylink 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,  Cylink  expects  to  continue  to  make a  significant
investment in engineering,  research and development.  Cylink may not 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 Cylink to develop
products and introduce them  successfully and in a timely manner could adversely
affect  Cylink's  competitive  position,  financial  condition  and  results  of
operations.

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

    Cylink 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

                                       19
<PAGE>

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 Cylink's foreign sales are denominated in U.S.
dollars,  Cylink'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.

    Cylink's ability to compete  successfully in foreign  countries is dependent
in part on  Cylink's  ability  to obtain  and retain  reliable  and  experienced
in-country  distributors  and other  strategic  partners.  Cylink  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. and Israeli  government  regulations  restricting  the export of
cryptographic  devices  and  software,  including  certain of  Cylink's  network
security  products,   Cylink  is  often  at  a  disadvantage  in  competing  for
international  sales compared to companies located outside the United States and
Israel that are not subject to such restrictions.  Cylink is unable to offer its
products to certain types of foreign customers and, on occasion,  has lost sales
due to  uncertainty  over whether Cylink will be permitted to sell its products.
The  regulatory  environment  in the  United  States  for  export of  encryption
products is particularly unsettled, with various pending legislative initiatives
and  conflicting  judicial  decisions,  all causing  substantial  uncertainty in
Cylink's  international  market.  This  confusion is often  exacerbated  by U.S.
vendors'  incomplete or inaccurate press releases concerning export licenses for
their products,  and foreign  competitors  marketing  campaigns which stress the
restrictions on purchasing  encryption  products from U.S. vendors.  There is no
assurance that this disruption will end anytime within the near future.

Dependence  on  Component  Availability,   Subcontractor   Performance  and  Key
Suppliers

    Cylink's  ability to deliver its  products in a timely  manner is  dependent
upon  the  availability  of  quality  components  and  subsystems  used in these
products.  Cylink depends in part upon  subcontractors to manufacture,  assemble
and deliver certain items in a timely and  satisfactory  manner.  Cylink obtains
certain  components and subsystems from single, or a limited number of, sources.
In particular,  Cylink relies on a single OEM supplier for Cylink's ATM product,
which  Cylink  offers  to its  customers  with its own  management  solution.  A
significant  interruption  in the  delivery  of such items could have a material
adverse effect on Cylink's financial condition and results of operations.


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

    Cylink's  market risk  exposures  are set forth in its Annual Report on Form
10-K for the year ended December 31, 1998 and have not changed significantly.

                                       20
<PAGE>


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

    On September  14,  1998,  Cylink  announced  that its earnings for the third
quarter of 1998 would be below consensus estimates.  On November 5, 1998, Cylink
announced  that,  with the  assistance of its  independent  accountants,  it was
reviewing its revenue recognition practices, and Cylink announced that its first
and second quarter  earnings of 1998 would have to be restated and that it would
have  operating  losses  for each of the three  quarters  for the  period  ended
September 27, 1998.  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.
Cylink has filed  amended  Forms 10-Q for the first and second  quarters of 1998
and an amended  Form 10-K for 1997.  Between  November 6 and  November 25, 1998,
several securities class action complaints were filed against Cylink and certain
of  its  current  and  former  directors  and  officers  in  federal  courts  in
California.   These  complaints  allege,   among  other  things,  that  Cylink's
previously issued financial  statements were materially false and misleading and
that the defendants  knew or should have known that these  financial  statements
caused Cylink's common stock price to rise  artificially.  The actions variously
allege  violations of Section 10(b) of the Securities  Exchange Act of 1934 (the
"Exchange  Act"), as amended,  and SEC Rule 10b-5  promulgated  thereunder,  and
Section 20 of the Exchange Act.

    Cylink believes it has meritorious  defenses to these actions and intends to
defend itself  vigorously.  However,  it is not feasible to predict or determine
the  final  outcome  of  these  proceedings,  and  if  the  outcome  were  to be
unfavorable,  Cylink's business,  financial condition, cash flows and results of
operations could be materially adversely affected.


Item 6.   Exhibits and Reports on Form 8-K

    (a)   Exhibits.

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

          27.1 Financial  Data Schedule for the fiscal  quarter ended  September
          26, 1999

          (b) Reports on Form 8-K.

             Cylink  filed a report on Form 8-K on July 19,  1999 as required by
         Item 4 of Form 8-K with respect to a change in accountants. On July 12,
         1999,  Cylink  retained  Deloitte  &  Touche  LLP  as  its  independent
         accounting firm and dismissed PricewaterhouseCoopers LLP. The change in
         the  independent  accountants  was  approved by the Audit  Committee of
         Cylink's Board of Directors and does not reflect any disagreements with
         PricewaterhouseCoopers  LLP over matters of  accounting  principles  or
         practices,   financial  statement  disclosure,  or  auditing  scope  or
         procedure.


    Items 2, 3, 4 and 5 are not applicable and have been omitted.


                                       21

<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 9, 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)