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


                                    FORM 10-Q

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

                 For the quarterly period ended October 1, 2000

                           Commission File No. 0-27742

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




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


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


                                 (408) 855-6000
              (Registrant's telephone number, including area code)



         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

          Yes     X        No
               -------         --------


         As  of  November  10,  2000,  there  were  32,585,490   shares  of  the
Registrant's common stock outstanding.


<PAGE>

<TABLE>
                                            CYLINK CORPORATION
                              FORM 10-Q FOR THE QUARTER ENDED OCTOBER 1, 2000
                                                   INDEX
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                     <C>
         Index                                                                                           1

Part I   Financial information

Item 1   Financial Statements and Supplementary Data

         a)   Condensed Consolidated Balance Sheets at October 1, 2000 and December 31, 1999             2

         b)   Condensed Consolidated  Statements of Operations for the three and
              nine months ended October 1, 2000 and September 26, 1999                                   3

         c)   Condensed  Consolidated Statement of Cashflows for the nine months
              ended October 1, 2000 and September 26, 1999                                               4

         d)   Notes to Condensed Consolidated Financial Statements                                       5

Item 2   Management's discussion and analysis of financial condition and results of operations           8

Item 3   Quantitative and Qualitative Disclosures about Market Risk                                     18

Part II  Other Information                                                                              18

         Signature                                                                                      20

Exhibit  Exhibit 27.1, Financial Data Schedule                                                          21
</TABLE>


                                                     1

<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>
                                                                                    Oct 1,          Dec 31,
                                                                                     2000             1999
                                                                                   --------         --------
<S>                                                                                <C>              <C>
Assets
Current assets:
   Cash and cash equivalents                                                       $ 15,287         $ 33,170
   Accounts receivable, net of allowances of  $996 and $941                          17,676           16,130
   Inventories                                                                       13,796            6,745
   Deferred income taxes                                                              4,371            4,367
   Other current assets                                                               1,735            1,648
                                                                                   --------         --------
            Total current assets                                                     52,865           62,060

Restricted cash                                                                       1,400            1,400
Property and equipment, net                                                          11,270           10,038
Acquired technology, goodwill and other intangibles                                  21,968            3,188
Notes receivable from employees or former employees                                   3,347            3,165
Other assets                                                                          1,243            1,438
                                                                                   --------         --------
                                                                                   $ 92,093         $ 81,289
                                                                                   ========         ========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and long-term debt                            $ 207         $     24
   Accounts payable                                                                   6,549            6,635
   Accrued liabilities                                                                8,325            8,709
   Income taxes payable                                                               1,048            1,062
   Current portion of deferred revenue                                                3,003            2,380
                                                                                   --------         --------
         Total current liabilities                                                   19,132           18,810

Long-term liabilities:
   Capital lease obligations and long-term debt, less current portion                   269              112
   Deferred revenue and other accruals, less current portion                          1,462              388
                                                                                   --------         --------
                                                                                      1,731              500
Commitments and contingencies

Shareholders' equity:
   Preferred stock, $0.01 par value; 5,000,000 shares authorized;                         -                -
      none issued and outstanding
   Common stock, $0.01 par value; 55,000,000 shares authorized;                         325              299
      32,547,000 and 29,877,000 shares issued and outstanding
   Additional paid-in capital                                                       158,577          126,896
   Deferred compensation related to stock options                                    (1,262)          (1,790)
   Accumulated other comprehensive loss                                                 (10)             (82)
   Accumulated deficit                                                              (86,400)         (63,344)
                                                                                   --------         --------
            Total shareholders' equity                                               71,230           61,979
                                                                                   --------         --------
                                                                                   $ 92,093         $ 81,289
                                                                                   ========         ========
<FN>
                      See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                          2

<PAGE>

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


                                                              Three Months Ended       Nine Months Ended
                                                             --------------------    --------------------
                                                                Oct 1,     Sep 26,     Oct 1,     Sep 26,
                                                                2000        1999        2000        1999
                                                             --------    --------    --------    --------
<S>                                                          <C>         <C>         <C>         <C>
Revenue                                                      $ 17,192    $ 15,092    $ 52,575    $ 42,186
Cost of revenue                                                 6,173       4,157      18,852      13,038
                                                             --------    --------    --------    --------
Gross profit                                                   11,019      10,935      33,723      29,148
                                                             --------    --------    --------    --------
Operating expenses:
   Research and development, net                                5,659       3,783      15,571      11,276
   Selling and marketing                                        8,254       6,424      25,479      18,061
   General and administrative                                   3,426       3,800      10,654       9,716
   Amortization of purchased intangibles                          817         724       2,257       2,084
   Purchased in-process technology                              3,681        --         3,681        --
                                                             --------    --------    --------    --------
            Total operating expenses                           21,837      14,731      57,642      41,137
                                                             --------    --------    --------    --------
Loss from operations                                          (10,818)     (3,796)    (23,919)    (11,989)

Other income (expense):
         Interest income, net                                     281         420       1,108       1,356
         Royalty and other income (expense), net                 (171)        138        (237)        276
                                                             --------    --------    --------    --------
                                                                  110         558         871       1,632
                                                             --------    --------    --------    --------

Loss before income taxes                                      (10,708)     (3,238)    (23,048)    (10,357)
Provision for income taxes                                       --          --             8        --
                                                             --------    --------    --------    --------
Loss from continuing operations                               (10,708)     (3,238)    (23,056)    (10,357)
Gain on disposal of discontinued operations, net of tax          --         2,246        --         2,246
                                                             --------    --------    --------    --------
Net loss                                                     $(10,708)   $   (992)   $(23,056)   $ (8,111)
                                                             ========    ========    ========    ========
Earnings (loss) per share - basic:
     Continuing Operations                                   $  (0.35)   $  (0.11)   $  (0.76)   $  (0.36)
     Discontinued Operations                                     --          0.08        --          0.08
                                                             --------    --------    --------    --------
     Net income (loss)                                       $  (0.35)   $  (0.03)   $  (0.76)   $  (0.28)
                                                             ========    ========    ========    ========
Earnings (loss) per share - diluted:
     Continuing Operations                                   $  (0.35)   $  (0.11)   $  (0.76)   $  (0.36)
     Discontinued Operations                                     --          0.08        --          0.08
                                                             --------    --------    --------    --------
     Net income (loss)                                       $  (0.35)   $  (0.03)   $  (0.76)   $  (0.28)
                                                             ========    ========    ========    ========

Shares used in per share calculation - basic                   31,007      29,180      30,519      29,144
                                                             ========    ========    ========    ========
Shares used in per share calculation - diluted                 31,007      29,180      30,519      29,144
                                                             ========    ========    ========    ========

<FN>
                  See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                    3

<PAGE>

<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands; unaudited)
<CAPTION>
                                                                                      Nine Months Ended
                                                                                    ----------------------
                                                                                     Oct 1,        Sep 26,
                                                                                      2000          1999
                                                                                    --------     ---------
<S>                                                                                 <C>          <C>
Cash flows from operating activities:
   Net income (loss)                                                                $(23,056)    $ (8,111)
   Adjustments to reconcile net income (loss) to net
      cash used in operating activities:
         Gain on disposal of discontinued operations                                    --         (2,246)
         Loss on disposal of fixed assets                                               --            190
         Depreciation                                                                  2,532        2,130
         Amortization of purchased intangibles                                         2,258        2,039
         Write-off of purchased in-process technology                                  3,681         --
         Deferred income taxes                                                            (4)          (9)
         Amortization of imputed interest on note receivable                            (182)        (184)
         Deferred compensation related to stock options                                  536          212
         Changes in assets and liabilities (net of effects of acquisitions):
            Accounts receivable                                                         (995)      (6,883)
            Inventories                                                               (5,421)       5,187
            Other assets                                                                 331        2,650
            Accounts payable                                                          (1,060)       2,717
            Accrued liabilities                                                         (404)      (1,551)
            Income taxes payable                                                          (6)         (46)
            Deferred revenue                                                           1,322          200
                                                                                    --------     --------
         Net cash used in operating activities                                       (20,468)      (3,705)
         Net cash used in discontinued operations                                       --           (529)
                                                                                    --------     --------
              Net cash used in operating activities                                  (20,468)      (4,234)
                                                                                    --------     --------

Cash flows from investing activities:
   Investment of Restricted Cash                                                        --         (1,400)
   Acquisition of property and equipment                                              (2,622)      (4,927)
   Loans to employees in exchange for notes receivable                                  --           (565)
   Collection of note receivable                                                        --          3,250
   Acquisition of S.D.I                                                                 --           (538)
   Acquisition of Celotek Corporation                                                 (1,061)        --
                                                                                    --------     --------
               Net cash used in investing activities                                  (3,683)      (4,180)
                                                                                    --------     --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                         6,209          279
   Other                                                                                 (13)        (124)
                                                                                    --------     --------
               Net cash provided by financing activities                               6,196          155
                                                                                    --------     --------
Effect of exchange rate changes on
   cash and cash equivalents                                                              72         (136)
                                                                                    --------     --------
Net decrease in cash and cash equivalents                                            (17,883)      (8,395)
Cash and cash equivalents at beginning of year                                        33,170       46,575
                                                                                    --------     --------
Cash and cash equivalents at end of year                                            $ 15,287     $ 38,180
                                                                                    ========     ========



Supplemental disclosures
   Cash paid for interest                                                           $   --       $      3
   Acquisition of corporation in exchange for Common Stock                          $ 25,759     $   --

<FN>

                  See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                     4

<PAGE>


CYLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.       Basis of Presentation

     The unaudited condensed  consolidated  financial statements included herein
contain all adjustments,  consisting only of normal recurring adjustments which,
in the opinion of  management,  are  necessary to state fairly the  consolidated
financial  position,  results of operations and cash flows of Cylink Corporation
("Cylink"  or  the  "Company")  for  the  periods  presented.   These  financial
statements  should be read in conjunction with the Company's  audited  financial
statements  included in the  Company's  Annual  Report on Form 10-K for the year
ended  December 31, 1999.  Interim  results of  operations  are not  necessarily
indicative of the results to be expected for the full year.

     Certain 1999 financial  statement amounts were reclassified to conform with
2000  classifications.  These  reclassifications  had no  effect  on net loss or
shareholders' equity as previously reported.

2.       Inventories

                                                  October 1,       December 31,
                                                     2000               1999
                                                  -----------------------------
                                                            (in thousands)

   Raw materials                                  $    8,894         $    2,412
   Work in process and subassemblies                   1,378              1,610
   Finished goods                                      3,524              2,723
                                                  ----------         ----------
                                                  $   13,796         $    6,745
                                                  ==========         ==========

3.       Loss Per Share

     Basic  loss per  share is based on the  weighted-average  number  of common
shares outstanding,  excluding shares in escrow. Diluted loss per share is based
on the  weighted-average  number of shares  outstanding  and dilutive  potential
common  shares  outstanding,  excluding  contingent  shares held in escrow.  The
Company's  only  potentially   dilutive   securities  are  stock  options.   All
potentially  dilutive  securities  have been  excluded from the  computation  of
diluted loss per share as their effect is  anti-dilutive on the net loss for the
periods presented.

     As of October 1, 2000 and September 26, 1999, the Company had 6,943,000 and
6,699,000 stock options  outstanding  with a weighted  average exercise price of
$4.95 and $4.82,  respectively.  These options expire on various dates beginning
in 2000 through 2008.

4.       Comprehensive Loss
<TABLE>
     The components of comprehensive loss,  consisting of the Company's reported
net  loss  and  unrealized  gains  or  losses  in  the  translation  of  foreign
currencies, are as follows:
<CAPTION>
                                                        Three Months Ended           Nine Months Ended
                                                      ----------------------       ---------------------
                                                       Oct 1,       Sept 26,         Oct 1,     Sept 26,
                                                        2000          1999            2000        1999
                                                      ---------     --------       ---------    --------
<S>                                                   <C>             <C>          <C>          <C>
 Net loss                                             $ (10,708)      $ (992)      $ (23,056)   $ (8,111)
 Other comprehensive income (loss)                           41          (88)             72        (136)
                                                      ---------     --------       ---------    --------
 Total comprehensive loss                             $ (10,667)    $ (1,080)      $ (22,984)   $ (8,247)
                                                      =========     ========       =========    ========
</TABLE>


                                       5

<PAGE>

5.       Business Acquisition

     On August 30, 2000,  Cylink acquired all the outstanding  shares of Celotek
Corporation, a developer of high-performance  Asynchronous Transfer Mode network
security  appliances  in exchange for the issuance of  1,664,000  Cylink  shares
valued at  $23,431,000,  the issuance of options to purchase  307,500  shares of
Cylink common shares which vest over 4 years valued at $2,329,000,  and net cash
of  approximately  $1,316,000.  The aggregate  purchase  price of  approximately
$27,076,000  includes  transaction  costs of approximately  $1,558,000,  some of
which were satisfied through the issuance of Cylink shares.  The acquisition was
treated for accounting purposes as a purchase. The results of Celotek operations
have been included in the Company's  consolidated  statement of operations after
the  acquisition  date.  The  purchase  price has been  allocated  to the assets
acquired and  liabilities  assumed based upon the fair market values at the date
of acquisition, as summarized below (in thousands):

Current assets (including cash and cash equivalents of $253)           $  2,657
Property and equipment                                                    1,142
Current technology                                                       12,077
In-process technology                                                     3,681
Goodwill                                                                  7,521
Other intangibles                                                         1,403
Current liabilities                                                      (1,220)
Long-term debt assumed                                                     (185)
                                                                       ---------
                                                                       $ 27,076
                                                                       =========

     The  amount of the  purchase  price  allocated  to  intangible  assets  was
determined  by  independent   appraisal  in  a  manner  consistent  with  widely
recognized  appraisal  practices.  The  amounts  allocated  to  technology  were
estimated  using  a  risk  adjusted  income  approach  applied  to  specifically
identified  technologies.  In-process  technology was expensed upon  acquisition
because  technological  feasibility had not been  established and no alternative
future  uses  existed  at the  time of the  transaction.  Amounts  allocated  to
capitalized   current   technology  and  goodwill  are  being   amortized  on  a
straight-line basis over seven years. Amounts allocated to other intangibles are
amortized on a straight-line basis over four to five years.

     The  following  unaudited  pro  forma  information  shows  the  results  of
operations  for the nine months ended October 1, 2000 and September 26, 1999, as
if the Celotek  acquisition had occurred at the beginning of the earliest period
presented and at the purchase  price  established in October 2000 (in thousands,
except per share amounts):

                                                        Nine months ended
                                                   October 1,      September 26,
                                                      2000             1999
                                                   ----------      -------------

 Total Revenue                                     $   54,035      $     42,759

 Net loss                                          $  (27,451)     $    (17,405)

 Loss per share - basic & diluted:                 $     (.87)     $       (.57)


     The pro forma results for the nine months ended October 1, 2000 exclude the
$3,681,000 charge for purchased in-process technology,  as it is a non-recurring
charge and includes amortization of intangible assets. The pro forma results for
the nine months ended  September  26, 1999 includes  amortization  of intangible
assets.

     The pro forma  information is presented for illustrative  purposes only and
is not necessarily  indicative of the operating results that would have occurred
if the acquisition had been  consummated at the beginning of the earliest period
presented, nor is it necessarily indicative of future operating results.

6.       Working Capital Loan.

     On September 29, 2000,  Cylink  entered into an agreement with a bank for a
$10.0 million working capital loan secured by all of Cylink's  tangible  assets.
The revolving  loan  provides for loan  advances up to 80% of Cylink's  eligible


                                       6

<PAGE>

accounts  receivable,  bears  interest at a rate not  exceeding the Bank's prime
rate of interest,  and is due  September  29, 2001.  There have been no advances
made under the loan since its inception.

7.       Recently issued accounting pronouncements

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting   Bulletin   (SAB)  No.  101,   "Revenue   Recognition  in  Financial
Statements,"   which  provides  the  SEC  staff's  views  on  selected   revenue
recognition  issues.  The guidance in SAB 101 must be adopted  during the fourth
quarter of 2000, and the effects,  if any, are required to be recorded through a
retroactive,  cumulative-effect adjustment as of the beginning of the year, with
a  restatement  of all  prior  interim  quarters  in  the  year.  Management  is
evaluating  the effects,  if any, that SAB 101 may have on the Company's  income
statement presentation, operating results or financial position.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging Activities." This statement,
which  is  effective  for  the  year  beginning  January  1,  2001,  establishes
accounting and reporting  standards for derivative  instruments  and for hedging
activities.  SFAS No. 133 was amended by SFAS No. 138 in June 2000. SFAS No. 133
requires a company to recognize all  derivatives as either assets or liabilities
in the  statement of financial  position and measure those  instruments  at fair
value.  Management  is  evaluating  the impact  this  statement  may have on the
company's financial statements.

8.       Contingencies

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

9.       Subsequent Events

          Financial Restructuring. On October 31, 2000, Cylink announced that it
was reducing its workforce by approximately  12% as a part of a program to bring
costs into line with near-term  revenue  expectations.  Certain costs associated
with the  restructuring  will be  reflected  in a one-time  charge in the fourth
quarter of 2000.


                                       7

<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 called  "forward-looking  statements" within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities   Exchange  Act  of  1934.  We  sometimes  identify   forward-looking
statements with such words as "expects", "anticipates", "intends", "believes" or
similar words concerning future events. The  forward-looking  statements in this
document  include,  without  limitation,  the  projected  impact  of our  recent
financial restructuring on our operating results and cash needs.

     You should not rely on these forward-looking  statements.  They are subject
to  certain  risks and  uncertainties  that may cause  actual  results to differ
materially from past results or Cylink's predictions. For a description of these
risks see the reasons  described in Item 2 "Risk  Factors That May Affect Future
Results,"  and other  sections  of this  Report on Form 10-Q.  You  should  also
consult the risk  factors  listed from time to time in Cylink's  Reports on Form
10-K, 10-Q, and 8-K.

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

RESULTS OF OPERATIONS
<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
                                                    --------------------          ---------------------
                                                    Oct 1,      Sept 26,          Oct 1,       Sept 26,
                                                     2000         1999             2000          1999
                                                    ------      --------          ------       --------
<S>                                                  <C>          <C>              <C>           <C>
 Revenue                                             100.0 %      100.0 %          100.0 %       100.0 %
 Cost of revenue                                      35.9         27.5             35.9          30.9
                                                     -----       -----            -----          -----
 Gross profit                                         64.1         72.5             64.1          69.1
                                                     -----       -----            -----          -----
 Operating expenses:
   Research and development, net                      32.9         25.0             29.6          26.7
   Selling and marketing                              48.0         42.6             48.4          42.8
   General and administrative                         19.9         25.2             20.3          23.0
   Amortization of purchased intangibles               4.8          4.8              4.3           5.0
    Purchased in-process technology                   21.4            -              7.0             -
                                                     -----       -----            -----          -----
      Total operating expenses                       127.0         97.6            109.6          97.5
                                                     -----       -----            -----          -----

 Loss from operations                                (62.9)       (25.1)           (45.5)        (28.4)

 Other income, net                                     0.6          3.7              1.7           3.9
                                                     -----       -----            -----          -----

 Loss before income taxes                            (62.3)       (21.4)           (43.8)        (24.5)
 Provision for income taxes                             -            -                -             -
                                                     -----       -----            -----          -----

 Net loss                                            (62.3)%     (21.4) %         (43.8) %       (24.5)%
                                                     =====       =====            =====          =====
</TABLE>
     Revenue.  Revenue  increased  14% from $15.1  million for the three  months
ended  September 26, 1999 to $17.2 million for the three months ended October 1,
2000,  and increased 25% from $42.2 million for the nine months ended  September
26,  1999 to $52.6  million  for the nine  months  ended  October 1,  2000.  The
increase is  attributable  to increases in unit shipments of existing  products,
the  introduction  of new  products,  shipment of products  with higher


                                       8

<PAGE>

average selling prices,  increased revenues from our Algorithmic Research,  Ltd.
subsidiary, increased revenues associated with maintenance and support services,
and  increased   revenues  from  professional   service   consulting   business.
International  revenue was 33% and 52% of total revenue for the third quarter of
2000 and 1999, respectively.

     The  Company'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 and from professional services,  including customer support
and consulting.  Fees for maintenance and support services of hardware  products
are charged  separately from product revenue.  Revenues derived from the sale or
license  of the  Company's  products  are  recognized  in  accordance  with  the
applicable  accounting  standards,  including  Statement  of Position  No. 97-2,
"Software Revenue  Recognition."  Revenue is recognized when persuasive evidence
of a sale arrangement  exists,  such as receipt of a contract or purchase order,
the  product  has been  shipped,  the  sales  price is fixed  and  determinable,
collection  is  probable,  and  vendor-specific  objective  evidence  exists  to
allocate  a  portion  of  the  total  fee  to any  undelivered  elements  of the
arrangement.  Such  undelivered  elements  typically  consist of maintenance and
support,  which are deferred and amortized over the applicable  period,  usually
twelve months.  Vendor specific  objective  evidence of the value of maintenance
and support is  generally  based on the annual  renewal  rate.  Concurrent  with
sales,  a provision is made for  estimated  costs to repair or replace  products
under  warranty  arrangements.  Consulting  revenues,  which to date  have  been
immaterial,  are recognized on a time-and-materials  or percentage of completion
basis in accordance  with the  provisions of  Accounting  Research  Bulletin-45,
"Long-Term  Construction-Type   Contracts,"  and  Statement  of  Position  81-1:
"Accounting for  Performance of  Construction-type  and Certain  Production-type
Contracts" depending on the contract.

     Gross  Profit.  Gross  profit  increased  from $10.9  million for the three
months  ended  September  26,  1999 to $11 million  for the three  months  ended
October 1, 2000,  and  increased  from $29.1  million for the nine months  ended
September  26, 1999 to $33.7  million for the nine months ended October 1, 2000.
The increase in dollars was primarily a result of the increase in revenue.  As a
percentage of sales, gross profit was approximately 72% and 64% for the quarters
ended  September  26, 1999 and October 1, 2000,  respectively.  The  decrease in
gross  profit as a  percentage  of  revenue  was due to a higher  percentage  of
revenues derived from our OEM-based ATM and ISDN encryptor business,  which have
lower gross margins, and greater revenue contribution from lower margin customer
service business.

     Research  and  Development.   Research  and  development  expenses  consist
primarily of salaries and other  personnel  related  expenses,  depreciation  of
development equipment,  facilities and supplies.  Gross research and development
expenses  increased  37% from $4.1 million for the three months ended  September
26,  1999 to $5.7  million  for the three  months  ended  October 1,  2000,  and
increased 25% from $12.5 million for the nine months ended September 26, 1999 to
$15.7  million for the nine months  ended  October 1, 2000.  Gross  research and
development  expenses as a percentage  of revenue were 27% for the third quarter
of 1999 and 33% for the third quarter 2000, and 30% for the first nine months of
1999 and 30% for the first nine  months of 2000.  The dollar  increase  resulted
from  increased  spending  for  development  costs  of  new  products,  and  the
acquisition of the Celotek ATM development  team, offset by reduced spending and
related reimbursements for externally funded contracts.  The increase in expense
as a percentage of revenue for the third quarter is due to increased investments
in new product development.

     From time to time the Company receives  engineering funding for development
of  projects  to apply or  enhance  the  Company's  technology  to a  particular
customer's  need. The amounts  recognized  under these research and  development
contracts  are  offset  against  research  and  development  expenses.   Amounts
recognized under  non-recurring  engineering  contracts totaled $0.3 million for
the third quarter of 1999. No amounts were recognized for third quarter of 2000.

     Selling and Marketing.  Selling and marketing expenses consist primarily of
personnel  expenses,  including sales commissions and bonuses,  and expenses for
advertising,  public relations,  seminars and trade shows. Selling and marketing
expenses  increased  30% from $6.4 million for the three months ended  September
26,  1999 to $8.3  million  for the three  months  ended  October 1,  2000,  and
increased 41% from $18.1 million for the nine months ended September 26, 1999 to
$25.5 million for the nine months ended  October 1, 2000.  Selling and marketing
expenses as a percentage  of revenue  were 43% and 48% for the third  quarter of
1999 and 2000,  respectively,  and 43% and 48% for the first nine months of 1999
and 2000,  respectively.  Sales expenses increased for the third quarter of 2000
primarily due to increased  commission  spending  driven by increased  revenues,
headcount additions,  and increased  advertising and trade show costs associated
with the  "Securing  e-business"  promotional  campaign.  Selling and  marketing
expenses,  expressed  as a percentage  of revenue,  increased as a result of the
above  factors in advance  of  incremental  revenues  generated  by new  product
introductions.

     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


                                       9

<PAGE>

and administrative expenses decreased 10% from $3.8 million for the three months
ended  September  26, 1999 to $3.4 million for the three months ended October 1,
2000,  and  increased 10% from $9.7 million for the first nine months of 1999 to
$10.7  million  for the first nine months of 2000.  General  and  administrative
expenses as a percentage  of revenue  were 25% and 20% for the third  quarter of
1999 and 2000,  respectively,  and 23% and 20% for the first nine months of 1999
and 2000, respectively.  The dollar decrease in the third quarter of 2000 versus
the  third  quarter  of 1999 was  primarily  due to lower  legal  spending,  and
one-time charges in the third quarter of 1999 related to the ERP  implementation
and move  related  expenses.  The  decrease  as a  percentage  of revenue is due
primarily  to the  decrease  in overall  costs  measured  against an  increasing
revenue base.

     Amortization of Goodwill and Other  Intangibles.  Amortization  relating to
goodwill and other  intangibles  was $0.8 million in each period  presented  and
relates to the  acquisition  of Algorithmic  Research,  Ltd ("ARL") in September
1997,  the  acquisition  of  S.D.I.  in the  third  quarter  of  1999,  and  the
acquisition of Celotek in the third quarter of 2000.

     Purchased in-process technology. In-process technology acquired as a result
of the Celotek acquisition was expensed upon acquisition as a one-time charge in
accordance with generally accepted accounting principles.

     Provision for Income Taxes.  No  significant  provision for or benefit from
income taxes was  recognized in the quarter ended October 1, 2000 as the Company
incurred  a net  operating  loss for  income tax  purposes  and the tax  benefit
therefrom was offset by an increase in the  valuation  allowance on the deferred
tax asset.

     Other Income (Expense), Net. Other income (expense), net consists primarily
of interest income and interest expense,  foreign exchange gains or losses,  and
royalty  income.  Other income,  net  decreased  from $0.6 million for the third
three  months  of 1999 to $0.1  million  for the  third  three  months  of 2000,
principally  due to decreased cash and cash  equivalents and reduced royalty and
other income.

LIQUIDITY AND CAPITAL RESOURCES

     At October 1, 2000,  the  Company  had cash and cash  equivalents  of $15.3
million, working capital of $32.3 million and minimal long-term obligations. For
the three months ended October 1, 2000, the Company recorded a net loss of $10.7
million. Net cash used in operating activities for the first nine months of 2000
was $20.5 million consisting primarily of the loss from operations,  an increase
in accounts  receivable  of $1.0  million,  an increase in  inventories  of $5.4
million,  an  decrease in accounts  payable  and accrued  liabilities  of $1.1m,
offset in part by an increase deferred revenue of $1.3 million.  The increase in
accounts  receivable  was due to higher than average  shipments  during the last
month of the  quarter.  The increase in  inventories  was the result of advanced
purchases  of critical  components  to avoid stock  shortages.  The  decrease in
accounts  payable  resulted from payment cycles which are shorter than inventory
turn cycles. The decrease in accrued  liabilities was due principally to payroll
timing.  Net cash used in  continuing  operating  activities  for the first nine
months of 1999 was $3.7 million consisting primarily of the loss from continuing
operations  of $8.1  million  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 over the previous quarter.

     Cash used in investing activities for the nine months ended October 1, 2000
and  September 26, 1999 was $3.7 million and $4.2  million,  respectively.  Cash
used in investing  activities for the nine months ended October 1, 2000 included
$2.6 million used to acquire  property,  plant, and equipment,  and $1.1 million
used in the acquisition of Celotek. Cash used in the nine months ended September
26, 1999 was used  primarily  to fund the  acquisition  of  property,  plant and
equipment.

     Cash provided by financing  activities for the nine months ended October 1,
2000 was $6.2 million, resulting from proceeds from the sale of 1,006,000 shares
of stock pursuant to the exercise of stock  options.  Cash provided by financing
activities for the nine months ended September 26, 1999 was not material.

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

     Assuming the Company's  financial  restructuring plan provides the intended
beneficial cost reduction,  the Company believes that existing cash balances and
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.


                                       10

<PAGE>

Cylink has secured a $10 million revolving line of credit with a leading Silicon
Valley bank to assist the Company, if necessary,  in meeting its working capital
requirements,  subject  to  the  Company's  satisfaction  of  certain  operating
covenants at the time of drawing  against  this  revolving  line of credit.  The
Company  is  targeting  its  financial   restructuring  plan  to  satisfy  these
covenants. In the event the Company's financial restructuring plan is delayed or
unsuccessful,  or it is otherwise  unable to satisfy the  conditions  for use of
this revolving line of credit,  the Company may require  additional funds in the
near term to support working capital  requirements or for other purposes and may
seek to raise such  additional  funds through  public or private  equity or debt
financing or from other  sources in the future.  No assurance  can be given that
additional  financing will be available or that, if available,  will be on terms
favorable to the Company or its shareholders.


                                       11

<PAGE>



RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

We have a history of losses  and expect  this to  continue  for the  foreseeable
future.

     We incurred losses from  continuing  operations in 1999 and for each of the
prior four years.  We expect to continue to incur net losses  through  2000.  We
might not increase or maintain our revenue or be profitable on a quarterly or an
annual basis in the future.

Our quarterly  operating  results may vary in the future,  which could cause our
stock price to drop.

     We have historically  experienced significant fluctuations in our operating
results on a  quarterly  basis and could  experience  such  fluctuations  in the
future. Our operating results are affected by a number of factors, many of which
are outside of our control, including the following:

         o     the timing of the introduction by us or by our competitors of new
               or enhanced products;

         o     market   acceptance   of  our  new  products  and  those  of  our
               competitors,  in  particular,  our recently  introduced  products
               which have received limited market acceptance to date;

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

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

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

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

         o     delays in software development;

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

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

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

         o     changes in the  percentage  of products  sold in the U.S.  versus
               international markets;

         o     loss of an important customer;

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

         o     customer discounts and credits; and

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

         o     any disruption in our operations  caused by our recent  reduction
               in  work  force  or  recent  departures  of a  number  of  senior
               executives.

     We  introduced  a number of new  products  during the first nine  months of
2000,  and we expect to  introduce  other new products  during the  remainder of
2000. The delay in product  availability  and/or failure of any such products to
achieve market  acceptance  when  anticipated,  or at all, would  materially and
adversely affect our financial condition and results of operations.

Pending Litigation

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

Our  sales  cycles  are long and  unpredictable,  which  makes  period-to-period
revenues difficult to predict.


                                       12

<PAGE>

     Sales of our products generally involve a significant commitment of capital
by customers, with the attendant delays frequently associated with large capital
expenditures.  For these and other reasons,  the sales cycle associated with our
products is typically  lengthy and subject to a number of significant risks over
which we have  little or no  control.  We are often  required  to ship  products
shortly  after  we  receive  orders  and,  consequently,  order  backlog  at the
beginning  of any period  has,  at times in the past,  represented  only a small
portion of that period's  expected  revenue.  Furthermore,  increases in backlog
from  quarter to quarter may be due, as in the third  quarter,  to  placement of
orders  calling for delivery  dates  extended  over a much longer period of time
into future periods.  Consequently, our order backlog becomes more vulnerable to
customer cancellations. As a result of these fluctuations in our sales cycle and
order  backlog,  product  revenue in any period has been and will continue to be
substantially  dependent  on  orders  booked  and  shipped  in that  period.  We
typically plan our production and inventory  levels based on internal  forecasts
of  customer  demand,   which  are  highly   unpredictable   and  can  fluctuate
substantially.  If revenue falls  significantly  below anticipated levels, as it
has at times in the past,  our  financial  condition  and results of  operations
would be materially and adversely affected. In addition,  our operating expenses
are based on anticipated  revenue  levels and a high  percentage of our expenses
are  generally  fixed  in the  short  term.  Based  on  these  factors,  a small
fluctuation  in the  timing  of  sales  can  cause  operating  results  to  vary
significantly  from  period to  period.  It is  possible  that in the future our
operating  results will again be below the  expectations of securities  analysts
and investors. In such an event, or in the event that adverse conditions prevail
or are  perceived  to prevail  generally  or with respect to our business or the
market sector in which we operate, the price of our Common Stock would likely be
adversely affected.

     These  factors make it difficult to predict our financial  performance.  As
our quarterly results fluctuate,  they may fall below the expectations of public
market analysts or investors.  If this occurs, the price of our common stock may
drop.

We are dependent on recently introduced and new network security products.

     Our future results of operations will be highly dependent on the successful
completion of the design, development,  introduction,  marketing and manufacture
of the NetAuthority and NetHawk  products,  as well as successful  marketing and
manufacture of the Cylink Link Encryptors, PrivaCy Manager, PrivateWire,  Cylink
ATM Encryptors and Cylink Frame Encryptor  products.  To date, we have made only
limited  commercial  shipments of certain of these  products.  A number of these
products  require  additional  development  work,  enhancement,  and  testing or
further refinement before they can achieve adequate market  acceptance.  If such
new and/or other recently  introduced  products have  performance,  reliability,
quality or other  shortcomings,  such  products  could  fail to  achieve  market
acceptance.  The  failure by our new or  existing  products  to achieve or enjoy
market  acceptance,  whether  for  these or  other  reasons,  could  cause us to
experience  reduced orders,  higher  manufacturing  costs,  delays in collecting
accounts receivable and additional warranty and service expenses,  which in each
case could have a material adverse effect on our business,  financial  condition
and results of operations.

Competition

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

         o     the development of new products and features;

         o     product quality and performance;

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

         o     product price;

         o     name recognition;

         o     perception of our stability and long-term viability; and

         o     Adoption  of  embedded  security   solutions  in  other  vendors'
               hardware and software products.

     Many of these factors are beyond our control.

     Our competitors in the information  security markets,  including  companies
that offer products  similar to or as an alternative to the Company's  products,
include  Axent  Technologies,  Inc.,  Checkpoint  Software  Technologies,  Ltd.,
Information  Resource  Engineering,   Inc.,  Network  Associates,  Inc.,  Secure
Computing Corporation,  Zaxus Limited


                                       13

<PAGE>

(formerly  Racal-Guardata,  Inc.), and RSA Data Security,  Inc. Our PKI product,
NetAuthority,  competes  with  numerous PKI products  offered by other  vendors,
including Baltimore Technologies, Entrust Technologies, Inc., and VeriSign Inc.,
that  already  have  numerous   customers  and   significantly   greater  market
recognition than the Company.  Our NetHawk VPN appliance  competes with numerous
other products,  including those offered or under  development by Cisco Systems,
Inc., Newbridge Networks  Corporation,  Netscreen  Technologies,  Inc. and Nokia
Corp. Our  professional  services  business  competes with very large consulting
organizations  such as  Andersen  Consulting,  PricewaterhouseCoopers  and other
entities  which have  formidable  resources to market and support their security
consulting businesses. Our smart cards and tokens compete with numerous vendors,
including  Datakey,   Inc.,  Gemplus,  S.A,  Rainbow   Technologies,   Inc.  and
Schlumberger  Ltd.  A  number  of  significant   vendors,   including  Microsoft
Corporation,  America On Line,  Inc.  and Cisco  Systems,  Inc.,  have  embedded
security  solutions  in their  software.  To the extent  that these  embedded or
optional  security  capabilities  provide all or a portion of the  functionality
provided by our products, our products may no longer be required by customers to
attain network security.

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

     Many of our competitors have substantially  greater  financial,  technical,
marketing, distribution and other resources, greater name recognition and longer
standing relationships with customers than we possess.  Competitors with greater
financial  resources  are  better  able to engage in more  aggressive  marketing
campaigns and  sustained  price  reductions  in order to gain market share.  Any
period of sustained price reductions would have a material adverse effect on our
financial  condition  and results of  operations.  We may not be able to compete
successfully  in the  future  and  competitive  pressures  may  result  in price
reductions,  loss of market share or otherwise have a material adverse effect on
our financial condition and results of operations.

We face the risks from tort and warranty claims that may be made against us.

     Customers  rely on our network  security  products to prevent  unauthorized
access to their networks and data transmissions. A malfunction or the inadequate
design of our products  could result in tort or warranty  claims.  A breach of a
customer's network by an unauthorized party, which is attributable to an alleged
defect in our products,  may cause substantial damages due to loss or compromise
of the customer's valuable information.  Furthermore,  there is inadequate legal
precedent for allocating  responsibility  for such losses caused by the wrongful
acts of third  parties.  Although  we attempt to reduce the risk of such  losses
through warranty  disclaimers and liability  limitation clauses in our sales and
license agreements and by maintaining product liability insurance,  there can be
no assurance  that such measures will be effective in limiting our liability for
any such damages.  Any liability for damages  resulting  from security  breaches
could be substantial  and could have a material  adverse effect on our business,
financial condition and results of operations.

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

We may continue to  experience  turnover  among our  executive  officers and key
personnel that are critical to our business.

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

     In addition to Mr.  Barnes,  our Vice President of  Professional  Services,
Vice  President of Marketing,  the CEO of our Israeli  subsidiary,  ARL, and our
Chief Scientist recently ended their employment  relationships with us. Although
we filled the position of CEO for ARL, it is  uncertain  whether and how quickly
we will fill the remaining positions.


                                       14

<PAGE>

     Our  future  success  will  depend in large  part on the  abilities  of Mr.
Crowell and the  contributions by our other executive  officers,  key management
and  technical  personnel.  The  loss  of the  services  of one or  more  of our
remaining  executive officers or key personnel,  or the inability to attract and
retain additional executives and other qualified personnel,  could delay product
development  cycles or otherwise have a material  adverse effect on our business
and operating results.

We may not be able  to hire  and  retain  sufficient  technical,  marketing  and
management personnel that we need to succeed because these people are limited in
number and in high demand.

     We  recently  experienced,  and may  continue  to  experience,  substantial
fluctuations  in the number of employees and the scope of our  operations in the
network  security  business,   resulting  in  increased   responsibilities   for
management.  To manage our  business  effectively,  we will need to  continue to
improve our  operational,  financial and management  information  systems and to
hire,  train,  motivate  and manage our  employees.  Competition  is intense for
qualified  technical,  marketing and management  personnel.  In particular,  the
current  availability of qualified  engineers is quite limited,  and competition
among  companies,   academic   institutions,   government   entities  and  other
organizations for skilled and experienced engineering personnel is very intense.
We have  experienced  delays in filling  positions for engineering and marketing
personnel and expect to experience  continued difficulty in filling our need for
qualified  engineers and other personnel.  Furthermore,  the recent reduction in
our workforce and executive departures will create greater uncertainty among our
existing and prospective  employees to accept or continue their  employment with
the  Company.  There can be no  assurance  that we will be able  effectively  to
manage our reduction in the work force, or any future growth, and our failure to
do so could  delay  product  development  cycles or  otherwise  have a  material
adverse effect on our financial condition and results of operations.

Any inability to protect our intellectual  property could reduce our competitive
advantage, divert management attention, require additional intellectual property
to be developed or cause us to incur expenses to enforce our rights.

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

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

If we are unable to adapt our services to rapidly changing technology, or if the
market for our network  security  products  fails to develop,  our  business and
operating results could suffer.


                                       15

<PAGE>

     The market for our network  security  products is  characterized by rapidly
changing technology,  emerging industry standards, new product introductions and
changes in customer requirements and preferences. Our future success will depend
in part upon end-users'  demand for network  security  products in general,  and
upon our ability to enhance our existing  products and to develop and  introduce
new  products  and  technologies  that  meet  customer  requirements.   We  face
continuing  challenges  to  educate  customers  as to the value of our  security
products  and  security  consulting  services.  We believe  that many  potential
customers do not appreciate the need for our security  products unless and until
they have faced a major security breach.  Many potential customers prefer not to
disclose  significant  security  breaches of their  networks or are reluctant to
invest in the  development of a professional  security  architecture  to protect
their networks. This market resistance is compounded by our limited resources to
invest in marketing campaigns for our products and services.

     If we are unable  successfully  to educate  potential  customers  as to the
value of, and thereby  obtain  broad  market  acceptance  for,  our products and
services,  we will  continue  to rely  primarily  on  selling  new and  existing
products to our base of existing  customers,  which will significantly limit any
opportunity for growth. In addition, any significant advance in technologies for
attacking cryptographic systems could render some or all of our existing and new
products  obsolete or  unmarketable.  To the extent that a specific method other
than ours is adopted as the standard for  implementing  network  security in any
segment of the  network  security  market,  sales of our  existing  and  planned
products in that market  segment may be adversely  impacted,  which could have a
material  adverse  effect on our  business,  financial  condition and results of
operations. Also, network security-related products or technologies developed by
others may adversely  affect our competitive  position or render our products or
technologies noncompetitive or obsolete.

     In addition,  a portion of the sales of our network security  products will
depend upon a robust industry and  infrastructure for providing access to public
switched  networks,  such as the Internet.  The  infrastructure or complementary
products  necessary to make these networks into viable  commercial  marketplaces
may take  longer than  anticipated  before  they are fully  developed,  and once
developed,  these  networks  may not  require  our  products  to  become  viable
commercial marketplaces.

If our research and development activities are unsuccessful, we will not be able
to market new products and services and our business  operations  and  financial
results could be harmed.

     The  markets  for  our  products  are  characterized  by  rapidly  changing
technologies,  extensive research and new product introductions. We believe that
our future  success  will depend in part upon our ability to continue to enhance
our existing products and to develop,  manufacture and market new products. As a
result,  we expect to continue to make a significant  investment in engineering,
research  and  development.  We may not be able to  develop  and  introduce  new
products or  enhancements  to our  existing  products in a timely  manner  which
satisfy  customer  needs,  achieve  market  acceptance or address  technological
changes in our target markets. If we fail to develop products and introduce them
successfully and in a timely manner, this could adversely affect our competitive
position, financial condition and results of operations.

We face risks associated with international operations.

      We plan to  continue  to expand our foreign  sales  channels  and to enter
additional  international  markets,  both  of  which  will  require  significant
management attention and financial resources. International sales are subject to
a number of risks,  including  unexpected  changes in  regulatory  requirements,
export control laws,  tariffs and other trade  barriers,  political and economic
instability in foreign  markets,  difficulties  in the staffing,  management and
integration of foreign operations,  longer payment cycles, greater difficulty in
collecting accounts  receivable,  currency  fluctuations and potentially adverse
tax  consequences.  Since  most of our  foreign  sales are  denominated  in U.S.
dollars,  our products become less price competitive in countries in which local
currencies  decline in value  relative to the U.S.  dollar.  The  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.

     Our ability to compete  successfully  in foreign  countries is dependent in
part on our ability to obtain and retain  reliable  and  experienced  in-country
distributors   and  other   strategic   partners.   We  do  not  have  long-term
relationships  with many of our  value-added  resellers  and  distributors  and,
therefore, have no assurance of a continuing relationship within a given market.


                                       16

<PAGE>

     Due to U.S. and Israeli  government  regulations  restricting the export of
cryptographic  devices and software,  including sales to foreign  governments of
certain of our network  security  products,  we are often at a  disadvantage  in
competing for  international  sales  compared to companies  located  outside the
United States and Israel that are not subject to such restrictions. Although the
Department of Commerce  continues to relax the export control laws as they apply
to sales of our  products to our  commercial  customers,  we still face  certain
export controls on sales to foreign  governments and transfers of our technology
to foreign partners, as well as considerable  administrative time and expense in
complying with these export regulations.

     Our Israeli subsidiary,  ARL, is vulnerable to disruption in its operations
due to political unrest concerning well publicized territorial claims by some of
its residents,  as well within  neighboring  countries.  These disruptions could
include  delays in  communications  with our  principal  offices  as well as the
operation of ARL's engineering and sales' activities.  Furthermore,  a number of
ARL's employees owe continuing  service  obligations to the Israeli military and
these  obligations  may cause  significant  suspension  of their  employment  or
unscheduled leaves of absence.

We face risks from our dependence on third party subcontractors and suppliers.

     Our ability to deliver our products in a timely  manner is  dependent  upon
the availability of quality components and subsystems used in these products. We
depend in part upon subcontractors to manufacture,  assemble and deliver certain
items in a timely and  satisfactory  manner.  We obtain  certain  components and
subsystems from single, or a limited number of, sources. We rely on a single OEM
supplier for our ISDN  Encryptor.  A significant  delay in obtaining a source of
supply for components  selected by our design  engineers or  interruption in the
delivery of such items  could have a material  adverse  effect on our  financial
condition and results of operations.

We face risks  associated  with our recently  completed  acquisition  of Celotek
Corporation.

     On August 30,  2000 we closed our  acquisition  of Celotek  Corporation,  a
privately  held  company  in  the  ATM  encryption  business,  in  exchange  for
$21,500,000  of our Common Stock minus  certain  expenses.  The shares issued in
this  acquisition  have  increased  the  number of shares  of our  common  stock
outstanding,  and therefore will result in earnings per share dilution unless we
are able to realize sufficient financial benefits from the transaction. While we
believe we will  achieve  financial  benefits  that will  offset  the  dilution,
acquisitions inherently involve risks and uncertainties. These include potential
costs and management  distractions associated with integrating the operations of
the two companies,  the potential loss of key employees of the acquired company,
the potential loss of key customers,  and potential operational  challenges that
the acquired  company may have and which are sometimes  unforeseeable.  Any such
circumstances  could result in the acquisition not rendering  financial benefits
to offset the cost of the acquisition.

Revisions in accounting  estimates could adversely affect the calculation of our
future operating results.

     In connection  with the  acquisition of ARL in September 1997, we 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 we are required by the SEC Staff  retroactively  to revise
our  estimate  of  the  value  of  IPR&D,  such  revision  could  result  in the
capitalization  of additional  goodwill,  the amortization of which would reduce
future operating results.


                                       17

<PAGE>

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     As of October 1,  2000,  we held a total of $15.3  million of cash and cash
equivalents.  These  securities  consist  primarily  of money  market  funds and
high-grade,  short-term corporate  obligations.  Certain of these securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10 percent  from levels as of October 1, 2000,  the decline in fair value of the
portfolio would not be material.

     We transact substantially all of our revenues and costs in U.S. dollars and
our results of operations  would not be materially  affected by  fluctuations in
foreign exchange rates. Accordingly,  to date, we have not used material amounts
of derivative financial instruments. As of October 1, 2000, we had no fixed rate
obligations  except for capitalized  leases and long-term debt of  approximately
$269,000.  As such, the fair value of our fixed rate  obligations is not subject
to a material adverse impact from changes in interest rates.

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

     On September  14, 1998,  Cylink  announced  that its earnings for the third
quarter  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  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,  1998 and  December  14,  1998,  several
securities class action  complaints were filed against Cylink and certain of its
current and former directors and officers in federal courts in California. These
complaints allege, among other things, that Cylink's previously issued financial
statements were materially  false and misleading and that the defendants knew or
should have known that these financial  statements  caused Cylink's common stock
price to rise  artificially.  The actions variously allege violations of Section
10(b) of the Securities  Exchange Act of 1934 (the "Exchange  Act"), as amended,
and SEC Rule 10b-5 promulgated thereunder, and Section 20 of the Exchange Act.

     The securities class action lawsuits have been ordered  consolidated into a
single  action  pending in the United  States  District  Court for the  Northern
District  of  California,  captioned  In Re Cylink  Securities  Litigation,  No.
C98-4292  (VRW).  On  November 6, 2000,  the Court  dismissed  the  consolidated
complaint  on the  ground  it  failed  to  properly  plead a claim  and  allowed
plaintiffs thirty (30) days to amend and refile a compliant.

     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.

     On September  27,  2000,  the Company  entered  into a settlement  with the
Securities and Exchange  Commission  under which the Commission  enjoined Cylink
from violating certain of the Commission's regulations, without requiring Cylink
to admit the occurrence of any such  violations,  and without imposing any fines
or penalties.

     There is currently an action proceeding in the United States District Court
for the  Northern  District of  California,  captioned  Securities  and Exchange
Commission vs. John Daws, Thomas Butler and Mark Folit, No. C -00-2099, in which
the  Commission  seeks to enjoin  violations  of the  Commission's  regulations,
impose civil  penalties and  disgorgement  of certain  benefits  while  formerly
employed by Cylink.  Although  neither Cylink or any of its current officers are
parties to this  proceeding,  two of the defendants in this action have demanded
indemnification  by the Cylink for the costs of their defense.  Although  Cylink
has placed its insurance  carriers on notice of the Commission's  recent action,
the extent of Cylink's continuing  obligations to these defendants,  if any, has
not been determined.  At this time, the Company believes its insurance  coverage
is  adequate  for  any  indemnity  obligations  it may  legally  have  to  these
defendants,  and intends to defend itself  vigorously with respect to any claims
that exceed Cylink's  obligations under the law. However,  in the event Cylink's
insurance coverage for these claims is inadequate or unavailable for any reason,
Cylink's  financial  condition,  cash flows and results of  operations  could be
adversely affected.


                                       18

<PAGE>

Item 6.   Exhibits and Reports on Form 8-K

(a) Exhibits Index:

         Exhibit

         Number   Description of Exhibit

                  27.1     Financial Data Schedule

(b)      Reports on Form 8-K:

         On August 4,  2000,  Cylink  filed a report on Form 8-K dated  July 31,
         2000 as required by Item 2 of Form 8-K with respect to an Agreement and
         Plan of  Reorganization  to acquire Celotek  Corporation for a value of
         $21,500,000 in Cylink Common Stock minus certain expenses.

         On September  11, 2000,  Cylink filed a report on Form 8-K dated August
         30,  2000 as required  by Item 2 of Form 8-K which  disclosed  that the
         Merger with Celotek  Corporation  was  consummated  on August 30, 2000.
         Under the terms of the Merger,  an  aggregate  of  1,610,545  shares of
         Cylink  common  stock  were  exchanged  for all  outstanding  shares of
         Celotek stock and 300,000  shares of Cylink common stock were set aside
         for  the  conversion  of  Celotek  options  assumed  by  Cylink  in the
         transaction.  241,582 of the 1,664,329  shares of Cylink's common stock
         issuable in exchange for the Celotek stock at the closing of the Merger
         were  placed in escrow  for up to 12 months  from the date of Merger to
         compensate  Cylink  for losses  resulting  form any  inaccuracy  in the
         representations   or  warranties  of  Celotek  in  the   Reorganization
         Agreement or any failure to comply with any  covenant  contained in the
         Reorganization Agreement.

         On November 6, 2000,  Cylink  filed a report on Form 8-K as required by
         Item 5 of Form 8-K. On October 31, 2000, Cylink Corporation  ("Cylink")
         announced  that it has reduced its  workforce by  approximately  12% as
         part of its  program to bring  costs into line with  near-term  revenue
         expectations. In addition, effective November 6, 2000, Roger A. Barnes,
         chief financial officer of Cylink, left Cylink to join another company.
         Christopher Chillingworth,  formerly Cylink's Corporate Controller, has
         been appointed Acting Chief Financial Officer.

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


                                       19

<PAGE>


                                    SIGNATURE

     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 14, 2000                   CYLINK CORPORATION

                                          By:  /s/  R. CHRISTOPHER CHILLINGWORTH
                                               ---------------------------------
                                               R. Christopher Chillingworth
                                               Acting Chief Financial Officer
                                               (Duly Authorized Officer and
                                               Principal Financial Officer)



                                       20