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 April 1, 2001

                           Commission File No. 0-27742


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




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



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


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



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

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


   As of May 11, 2001, there were 32,707,677  shares of the Registrant's  common
stock outstanding.






<PAGE>


<TABLE>

                                                CYLINK CORPORATION

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

                                                       INDEX


<CAPTION>

                                                                                                       Page
                                                                                                       ----


<S>                                                                                                      <C>
         Index                                                                                           1

Part I   Financial information

Item 1   Financial Statements

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

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

         c)   Condensed Consolidated Statement of Cashflows for the three months ended
              April 1, 2001 and April 2, 2000                                                            4

         d)   Notes to Condensed Consolidated Financial Statements                                       5

Item 2   Management's discussion and analysis of financial condition and results of operations           7

Part II  Other Information                                                                              19

         Signature                                                                                      20

</TABLE>

                                       1
<PAGE>



PART I.  FINANCIAL INFORMATION
Item 1.    Financial Statements

CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data; unaudited)

<TABLE>
<CAPTION>


                                                                                                     April 1,           December 31,
                                                                                                       2001                  2000
                                                                                                     ---------            ---------
<S>                                                                                                  <C>                  <C>
Assets
Current assets:
   Cash and cash equivalents                                                                         $  11,928            $  15,250
   Accounts receivable, net of allowances of $1,466 and $1,499                                          12,451               14,927
   Inventories                                                                                           9,653               10,741
   Deferred income taxes                                                                                   800                  800
   Other current assets                                                                                  2,612                1,697
                                                                                                     ---------            ---------
            Total current assets                                                                        37,444               43,415

Restricted cash                                                                                          1,400                1,400
Property and equipment, net                                                                              9,545               10,241
Acquired technology, goodwill and other intangibles                                                     20,076               20,707
Notes receivable from employees or former employees                                                      2,321                2,310
Other assets                                                                                               838                  811
                                                                                                     ---------            ---------
                                                                                                     $  71,624            $  78,884
                                                                                                     =========            =========
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and equipment line of credit                                 $     253            $     288
   Accounts payable                                                                                      3,765                5,137
   Accrued liabilities                                                                                   8,107                9,346
   Income taxes payable                                                                                    603                  359
   Deferred revenue                                                                                      5,064                3,147
                                                                                                     ---------            ---------
         Total current liabilities                                                                      17,792               18,277
                                                                                                     ---------            ---------

Capital lease obligations and equipment line of credit                                                      77                   86
Deferred revenue and other accruals, less current portion                                                1,370                1,368
                                                                                                     ---------            ---------
                                                                                                         1,447                1,454

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;
      32,698,000 and 32,681,000 shares issued and outstanding                                              327                  327
   Additional paid-in capital                                                                          158,812              158,805
   Deferred compensation related to stock options                                                         (959)              (1,231)
   Accumulated other comprehensive income (loss)                                                            69                  (16)
   Accumulated deficit                                                                                (105,864)             (98,732)
                                                                                                     ---------            ---------
            Total shareholders' equity                                                                  52,385               59,153
                                                                                                     ---------            ---------
                                                                                                     $  71,624            $  78,884
                                                                                                     =========            =========
<FN>

                      See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>

                                       2
<PAGE>



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


                                                            Three Months Ended
                                                           April 1,     April 2,
                                                             2001        2000
                                                           --------    --------

Revenue                                                    $ 12,612    $ 17,378
Cost of revenue                                               4,345       6,101
                                                           --------    --------
Gross profit                                                  8,267      11,277
                                                           --------    --------

Operating expenses:
   Research and development, net                              5,945       4,430
   Selling and marketing                                      5,749       8,469
   General and administrative                                 3,014       4,219
   Amortization of purchased intangibles                        862         720
                                                           --------    --------
            Total operating expenses                         15,570      17,838
                                                           --------    --------

Loss from operations                                         (7,303)     (6,561)

Other income (expense):
         Interest income, net                                   190         287
         Royalty and other income (expense), net                (19)         27
                                                           --------    --------
                                                                171         314
                                                           --------    --------

Loss before income taxes                                     (7,132)     (6,247)
Provision for income taxes                                     --             8
                                                           --------    --------
Net loss                                                   $ (7,132)   $ (6,255)
                                                           ========    ========


Loss per share - basic & diluted                           $  (0.22)   $  (0.21)
                                                           ========    ========

Shares used in per share calculation - basic & diluted       32,262      30,051
                                                           ========    ========


     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>
<TABLE>

CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)

<CAPTION>
                                                                                                            Three months ended
                                                                                                       April 1,             April 2,
                                                                                                        2001                  2000
                                                                                                      --------             --------

<S>                                                                                                   <C>                  <C>
Cash flows from operating activities:
   Net loss                                                                                           $ (7,132)            $ (6,255)
   Adjustments to reconcile net loss to net
      cash used in operating activities:
         Depreciation                                                                                      825                  811
         Amortization                                                                                      862                  799
         Deferred income taxes                                                                            --                     (4)
         Amortization of imputed interest on note receivable                                              --                    (62)
         Deferred compensation related to stock options                                                    272                  184
         Changes in assets and liabilities (net of effects of
          acquisition):
            Accounts receivable                                                                          2,476               (1,269)
            Inventories                                                                                  1,088               (4,105)
            Other assets                                                                                  (953)                (742)
            Accounts payable                                                                            (1,372)               1,042
            Accrued liabilities                                                                         (1,239)                 782
            Income taxes payable                                                                           244                  (35)
            Deferred revenue                                                                             1,919                  430
                                                                                                      --------             --------
         Net cash used in operating activities                                                          (3,010)              (8,424)

Cash flows from investing activities:
   Acquisition of property and equipment                                                                  (129)              (1,007)
   Adjustments to acquisition price of Celotek Corporation                                                (231)                --
                                                                                                      --------             --------
               Net cash used in
                   investing activities                                                                   (360)              (1,007)
                                                                                                      --------             --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                                               7                4,111
   Other                                                                                                   (44)                  (7)
                                                                                                      --------             --------
               Net cash provided by (used in) financing activities                                         (37)               4,104
                                                                                                      --------             --------
Effect of exchange rate changes on
   cash and cash equivalents                                                                                85                   20
                                                                                                      --------             --------
Net decrease in cash and cash equivalents                                                               (3,322)              (5,307)
Cash and cash equivalents at beginning of period                                                        15,250               33,170
                                                                                                      --------             --------
Cash and cash equivalents at end of period                                                            $ 11,928             $ 27,863
                                                                                                      ========             ========

<FN>

                      See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>

                                       4
<PAGE>

CYLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.       Basis of Presentation

     The unaudited condensed  consolidated  financial statements included herein
contain all adjustments,  consisting only of normal recurring adjustments which,
in the opinion of  management,  are  necessary to state fairly the  consolidated
financial  position,  results of operations and cash flows of Cylink Corporation
("Cylink"  or  the  "Company")  for  the  periods  presented.   These  financial
statements  should be read in conjunction with the Company's  audited  financial
statements  included in the  Company's  Annual  Report on Form 10-K for the year
ended  December 31, 2000.  Interim  results of  operations  are not  necessarily
indicative of the results to be expected for the full year.

     Certain 2000 financial  statement amounts were reclassified to conform with
2001  classifications.  These  reclassifications  had no  effect  on net loss or
shareholders' equity as previously reported.

2.       Accounting Changes

     Effective  January 1, 2001, the Company  adopted SFAS 133,  "Accounting for
Derivative  Instruments  and  Hedging  Activities,"  as amended.  The  statement
requires that all derivatives,  whether  designated in hedging  relationships or
not, are to be recorded on the balance sheet at fair value. If the derivative is
designated  as a fair value hedge,  changes in the fair value of the  derivative
and of the  hedged  item  attributable  to the  hedged  risk are  recognized  in
earnings.  If the  derivative is designated as a cash flow hedge,  the effective
portions  of the  changes in the fair value of the  derivative  are  recorded in
other comprehensive income (OCI) and are recognized in the income statement when
the hedged item affects  earnings.  Ineffective  portions of changes in the fair
value of cash flow hedges are  recognized in earnings.  The adoption of SFAS 133
did not result in a transition adjustment at January 1, 2001.

     The  Company  uses  derivative  instruments,   primarily  forward  exchange
contracts,  to manage the foreign  currency  exchange rate risk  associated with
certain assets and forecasted  transactions  which are denominated in currencies
other than the U.S. Dollar.  The Company monitors its foreign currency exposures
regularly to maximize the overall  effectiveness  of its foreign  currency hedge
positions,  with the  principal  currency  hedged being the British  Pound.  The
Company has not  designated  any of its forward  exchange  contracts  as hedging
instruments  under SFAS 133,  and  therefore  the changes in fair value of these
forward  contracts has been included in interest and other income in the quarter
ended April 1, 2001. The fair value of these instruments as of April 1, 2001 was
not significant.

3.       Inventories

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

        Raw materials                                    $ 5,390         $ 5,708
        Work in process and subassemblies                  2,011           2,768
        Finished goods                                     2,252           2,265
                                                         -------         -------
                                                         $ 9,653         $10,741
                                                         =======         =======

4.       Loss Per Share

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

                                       5
<PAGE>

     As of April 1,  2001 and April 2,  2000,  the  Company  had  7,156,000  and
6,917,500 stock options  outstanding  with a weighted  average exercise price of
$6.32 and $6.06,  respectively.  These  options  expire on various dates through
2008.

5.       Comprehensive Loss

     The components of comprehensive loss,  consisting of the Company's reported
net  loss  and  unrealized  gains  or  losses  in  the  translation  of  foreign
currencies, are as follows:

                                                          Three Months Ended
                                                          ------------------
                                                         April 1,     April 2,
                                                           2001        2000
                                                         -------      -------
               Net loss                                  $(7,132)     $(6,255)
               Other comprehensive income                     85           20
                                                         -------      -------
               Total comprehensive loss                  $(7,047)     $(6,235)
                                                         =======      =======

6.       Contingencies

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

7.       Working Capital Loan

     On September 29, 2000,  Cylink  entered into a loan and security  agreement
with a bank  under  which it can borrow up to $10  million  by way of  revolving
advances.  The loan is secured by substantially all of Cylink's tangible assets.
The revolving loan provides for advances up to 80% of Cylink's eligible accounts
receivable,  bears  interest at a rate not  exceeding  the Bank's  prime rate of
interest (8% as of April 1, 2001) or 2.5% above LIBOR and is due  September  29,
2001. There have been no borrowings under the loan since its inception.

     In conjunction with the acquisition of Celotek  Corporation in August 2000,
Cylink assumed an equipment loan with an outstanding  balance of $324,253.  This
loan matures  December 1, 2002 and bears  interest at the prime rate plus 1%. As
of April 1, 2001, the outstanding balance under the equipment line was $243,122.

     Both these facilities require the Company to maintain certain liquidity and
profitability  covenants,  with which the  Company was not in  compliance  as of
April 1, 2001.  Accordingly  all amounts  outstanding at April 1, 2001 have been
classified as short term. See Footnote 8 "Subsequent  Events" for replacement of
this facility.

8.       Subsequent Events

     Financial Restructuring. On April 5, 2001, Cylink announced further expense
reduction   actions,   including  a  further   reduction  in  its  workforce  by
approximately 8%, elimination of all management bonuses for 2001, and a "Planned
Hours  Reduction"  program  requiring  all  employees to take an  additional  20
designated  days off during the remainder of 2001 either  without pay or through
utilization of accrued vacation. The severance related costs associated with the
reduction will be recorded in the second quarter of 2001.

     Divestiture.  The Company  announced the sale of its  subsidiary,  Security
Design  International,  effective April 9, 2001, in a private stock transaction.
No significant gain or loss is expected on the sale.

     Working  Capital  Loan.  In April 2001,  the  Company  has  obtained a loan
commitment  of $7.5 million from the lender under the above  referenced  working
capital  facility to replace that facility.  This loan will be secured by all of
Cylink's  tangible  assets.  The revolving loan provides for loan advances up to
85% of Cylink's eligible accounts receivable, bears interest at the Bank's prime
rate (8% as of April 1, 2001) of  interest  plus 1.75% and will be due April 30,
2002. The loan contains a tangible net worth covenant.

                                       6
<PAGE>


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

     The following  Management's  Discussion and Analysis of Financial Condition
and  Results of  Operations  should be read in  conjunction  with the  unaudited
condensed  financial  statements and notes thereto  included in Part I Item 1 of
this Report on Form 10-Q and the audited financial  statements and notes thereto
and Management's  Discussion and Analysis of Financial  Condition and Results of
Operations  included in the Company's  2001 Report on Form 10-K.  This Report on
Form 10-Q includes  statements that reflect  Cylink's belief  concerning  future
events and financial performance.  Statements which are not purely historical in
nature are called "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities  Exchange Act of
1934.  We  generally  identify  forward-looking  statements  with such  words as
"expects",  "anticipates",  "intends",  "believes" or similar  words  concerning
future events.

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

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

RESULTS OF OPERATIONS

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

                                                            Three months ended
                                                            ------------------
                                                           April 1,     April 2,
                                                            2001          2000
                                                           -----         -----
Revenue                                                    100.0%        100.0%
Cost of revenue                                             34.5          35.1
                                                           -----         -----

Gross profit                                                65.5          64.9
                                                           -----         -----

Operating expenses:
  Research and development, net                             47.1          25.5
  Selling and marketing                                     45.6          48.7
  General and administrative                                23.9          24.3
  Amortization of purchased intangibles                      6.8           4.1
                                                           -----         -----

     Total operating expenses                              123.4         102.6
                                                           -----         -----

Loss from operations                                       (57.9)        (37.7)

Other income, net                                            1.4           1.8
                                                           -----         -----

Loss before income taxes                                   (56.5)        (35.9)
Provision for income taxes                                   --            --
                                                           -----         -----
Net loss                                                   (56.5)%       (35.9)%
                                                           =====         =====

                                       7
<PAGE>

     Revenue.  Revenue  decreased  27% from $17.4  million for the three  months
ended April 2, 2000 to $12.6  million for the three  months ended April 1, 2001.
The decrease is primarily due to a market  slowdown.  This decline was partially
offset by increased  revenues  from both customer  support  services and our PKI
business.  International  revenue was 39% and 41% of total revenue for the first
quarter of 2001 and 2000, 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  decreased  from $11.3  million for the three
months  ended April 2, 2000 to $8.3  million for the three months ended April 1,
2001. The decrease in dollars was primarily a result of the decrease in revenue.
As a percentage  of sales,  gross profit was  approximately  65% and 66% for the
quarters  ended April 2, 2000 and April 1, 2001,  respectively.  The increase in
gross profit as a percentage  of revenue was due to margin  improvements  within
our ATM encryptor  business  resulting  from our recent  acquisition  of Celotek
Corporation, PKI product margin improvements, and margin improvements within our
customer  support  and  professional   service  businesses,   offset  by  higher
provisions for inventory reserves due to lower product sales.

     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  31% from $4.5  million for the three  months ended April 2,
2000 to $5.9 million for the three months  ended April 1, 2001.  Gross  research
and  development  expenses  as a  percentage  of revenue  were 26% for the first
quarter of 2000 and 47% for the first quarter 2001. The dollar increase resulted
from increased  spending for development costs of new products,  the acquisition
of  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 first quarter of 2001 is due to lower revenues for
the period coupled with 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 $0.1 million for
the first quarter of 2000 and $0.0 million for first quarter of 2001.

     Selling and Marketing.  Selling and marketing expenses consist primarily of
personnel  expenses,  including sales commissions and bonuses,  and expenses for
advertising,  public relations,  seminars and trade shows. Selling and marketing
expenses  decreased  32% from $8.5  million for the three  months ended April 2,
2000 to $5.7  million  for the three  months  ended  April 1, 2001.  Selling and
marketing  expenses as a  percentage  of revenue  were 49% and 46% for the first
quarter of 2000 and 2001,  respectively.  Sales expenses decreased for the first
quarter of 2001  compared to the first  quarter of 2000  primarily  due to lower
commission  spending  driven by decreased  revenues,  lower  headcount  spending
driven by the  reduction in force  actions  taken  during the fourth  quarter of
2000, and lower marketing and bonus spending due to the  implementation  of cost
savings initiatives.  Selling and marketing expenses,  expressed as a percentage
of revenue,  decreased as a result of the above spending  reductions  which were
greater than the percentage revenue declines for the same period.

                                       8
<PAGE>


     General and  Administrative.  General and  administrative  expenses consist
primarily of personnel  and related  costs,  recruitment  expenses,  information
systems costs, and audit, legal and other professional service fees. General and
administrative  expenses  decreased  29% from $4.2  million for the three months
ended April 2, 2000 to $3.0  million for the three  months  ended April 1, 2001.
General and administrative  expenses as a percentage of revenue were 24% for the
first quarter of both 2000 and 2001. The dollar decrease in the first quarter of
2001 versus the first quarter of 2000 was primarily due to lower legal spending,
lower  headcount  spending driven by the reduction in force actions taken during
the fourth quarter of 2000,  and lower bonus spending due to the  implementation
of cost savings initiatives. General and Administrative expenses as a percentage
of revenue were flat due proportional decreases in both spending and revenue.

     Amortization of Goodwill and Other  Intangibles.  Amortization  relating to
goodwill  and other  intangibles  increased  20% from $0.7 million for the first
three  months  ended April 2, 2000 to $0.9  million for the three  months  ended
April 1, 2001. The dollar increase in the first quarter of 2001 versus the first
quarter of 2000 was primarily due to the  acquisition of Celotek  Corporation in
the third quarter of 2000, offset in part by reduced amortization of intangibles
related to the  acquisition  of Algorithmic  Research,  Ltd ("ARL") in September
1997 and  continued  amortization  of the  acquisition  of  S.D.I.  in the third
quarter of 1999.

     Provision for Income Taxes.  No  significant  provision for or benefit from
income taxes was  recognized  in the quarter  ended April 1, 2001 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 $0.3 million for the first
three  months  of 2000 to $0.2  million  for the  first  three  months  of 2001,
principally  due to interest  income on decreased cash and cash  equivalents and
reduced royalty and other income.

LIQUIDITY AND CAPITAL RESOURCES

     At April 1,  2001,  the  Company  had  cash and cash  equivalents  of $11.9
million, working capital of $19.7 million and minimal long-term obligations. For
the three  months ended April 1, 2001,  the Company  recorded a net loss of $7.1
million.  Net cash used in  operating  activities  for the first three months of
2001 was $3.0 million consisting primarily of the loss from operations partially
offset by a decrease in working capital  requirements  which included a decrease
in  accounts  receivable  of $2.5  million,  a decrease in  inventories  of $1.1
million, an increase in deferred revenue of $1.9 million,  partially offset by a
decrease in accounts  payable and  accrued  liabilities  of $2.6  million and an
increase in other assets of $1.0  million.  The decrease in accounts  receivable
was due to lower than  average  shipments  during the  quarter.  The decrease in
inventories  and the  decrease in accounts  payable  were the result of stricter
purchasing controls.  The decrease in accrued liabilities was due principally to
decreased commission,  bonus, and legal liabilities.  Net cash used in operating
activities  for the  first  three  months  of 2000 was $8.4  million  consisting
primarily of the loss from operations of $6.3 million and an increase in working
capital requirements which included an increase in inventory of $4.1 million, an
increase in accounts  receivable of $1.3 million,  offset in part by an increase
in accounts payable and accrued liabilities of $1.8 million.

     Cash used in investing  activities for the three months ended April 1, 2001
and April 2, 2000 was $0.4 million and $1.0 million, respectively,  primarily to
fund  the   acquisition   of  property,   plant  and   equipment  and  corporate
acquisitions.

     Cash provided by financing  activities  for the three months ended April 1,
2001  and  April  2,  2000 was $0.0  million  and  $4.1  million,  respectively,
resulting  from  proceeds  from the sale of 17,000  shares and 564,000  share of
stock, respectively, pursuant to the exercise of stock options.

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

     Assuming the Company's  financial  restructuring plan provides the intended
beneficial cost reduction,  the Company believes that existing cash balances and
prospective borrowing will be sufficient to fund operations through 2001. Cylink
has renegotiated a $7.5 million  revolving line of credit with its bank in order
to obtain more favorable

                                       9
<PAGE>


covenants.  The  renegotiated  line  of  credit  will  assist  the  Company,  if
necessary,  in meeting its working capital requirements.  The new line of credit
will be subject to the Company's  satisfaction  of certain  financial  covenants
during the term of the loan.  There have been no  advances  under the  Company's
existing  line since  inception.  In the event the Company's  financial  plan is
unsuccessful,  or it is otherwise  unable to satisfy the  conditions  for use of
this revolving line of credit,  the Company may require  additional funds in the
near term to support working capital  requirements or for other purposes and may
seek to raise such  additional  funds through  public or private  equity or debt
financing,  sales of assets,  or from other  sources.  No assurance can be given
that  additional  financing will be available or that, if available,  will be on
terms favorable to the Company or its shareholders.


                                       10
<PAGE>

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     We have incurred significant net losses in the first quarter of 2001 and in
prior years. The Company had an accumulated  deficit of $106 million as of April
1, 2001.  We expect to continue to incur net losses at least  through  2001.  We
might not increase or maintain our revenue or be profitable on a quarterly or an
annual basis for the  foreseeable  future.  Our continuing  losses may adversely
impact our ability to raise additional capital when required.  Our restructuring
plans  may  not  succeed,  or may  not be  sufficient  to  allow  us to  achieve
break-even.

     The Company believes that its principal sources of liquidity, which include
cash and cash  equivalents of $11.9 million as of April 1, 2001 and  prospective
borrowing via the  Company's  working  capital loan,  will satisfy the Company's
current anticipated working capital and capital expenditure requirements through
at least the next twelve months. In addition,  the Company has a credit facility
that provides for up to $7.5 million of borrowings, dependent upon the amount of
eligible domestic accounts receivable,  as defined in the agreement. The Company
has  renegotiated  its  credit  facility  in  order  to  obtain  more  favorable
covenants. If the Company fails to satisfy these covenants, however, the line of
credit will not be available to fund our operations if it is needed.

     During  the  fourth  quarter  of 2000 and the first  quarter  of 2001,  the
Company began to realize the benefits of the actions  taken to reduce  operating
costs in its core business,  and believes such cost  reductions are  sustainable
for the rest of 2001.  However,  there can be no assurance that the Company will
be able to  continue  reducing  costs  at a pace  that  reflects  reductions  in
revenues,  and no assurance  that the Company will not need to raise  additional
capital to fund  operations  within this period.  There can be no assurance that
additional  financing  can be  obtained  on  acceptable  terms,  or at  all.  If
additional  funds  are  raised  by  issuing  equity   securities,   dilution  to
shareholders  may result.  If adequate funds are not available,  the Company and
its business and the price of our Common Stock will be adversely affected.

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

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

     o   our inability to accurately  forecast  revenues and respond in a timely
         manner to changes in revenue levels;

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

     o   market acceptance of our new products and those of our competitors;

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

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

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

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

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

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

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

     o   loss of an important customer;

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

                                       11
<PAGE>

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

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

     o   customer discounts and credits; and

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

     Many of these factors are outside of our control.  Unforeseen reductions in
revenue can  materially  and  adversely  affect our ability to raise  capital or
sustain ongoing operations.

     We introduced a number of new products during 2000, and plan to release new
versions of  existing  products  in 2001.  The  failure of any such  products to
achieve market  acceptance  when  anticipated,  or at all, would  materially and
adversely affect our financial condition and results of operations.

Pending Litigation

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

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

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

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

     Our future results of operations will be highly dependent on the successful
marketing and manufacture of the NetAuthority and NetHawk  products,  as well as
successful  marketing and  manufacture  of the Cylink Link  Encryptors,  PrivaCy
Manager,  Cylink ATM, Cylink ISDN and Cylink Frame Encryptor products.  To date,
we have made only limited commercial shipments of certain of these products. Our
NetHawk  product began  shipping in mid-year  2000.  NetAuthority  is based on a
pilot  system  that  was  delivered  for  the  first  time in  mid-1999  under a
development  contract  with the  United  States  Postal  Service.  Both of these
products may require additional  development work,  enhancement,  and testing or
further refinement before they achieve widespread  commercial  success. If these
new and/or other recently  introduced  products have  performance,  reliability,
quality  or other  shortcomings,  they could  fail to  achieve  adequate  market
acceptance.  The  failure of our new or  existing  products  to achieve or enjoy
market  acceptance,  whether  for  these or  other  reasons,  could  cause us to
experience  reduced orders,  higher  manufacturing  costs,  delays in collecting
accounts receivable and additional warranty and service expenses,  which in each
case could

                                       12
<PAGE>

have a material adverse effect on our business,  financial condition and results
of  operations.  Furthermore,  we  rely  on a  third  party  original  equipment
manufacturer to supply our ISDN Encryptor  product,  and we have limited control
over the supply of this product.

We face significant competition from other providers of network security systems

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

     o   the development of new products and features;

     o   product quality and performance;

     o   customer  perception  regarding  the  adequacy of security  provided by
         existing software and routers;

     o   adoption of embedded security  solutions in other vendor's hardware and
         software products;

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

     o   product price;

     o   name recognition; and

     o   perception of our stability and long-term viability.

Many of these factors are beyond our control.

     Our competitors in the information  security markets,  including  companies
that offer products  similar to or as an alternative to the Company's  products,
include  Axent  Technologies,  Inc.,  Checkpoint  Software  Technologies,  Ltd.,
Network  Associates,  Inc.,  SafeNet,  Inc., Secure Computing  Corporation,  RSA
Security,  Inc., and Thales  e-Security,  Inc (formerly  Zaxus,  Inc.).  Our PKI
product,  NetAuthority,  will be competing 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.  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  Accenture,   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 Security,  Inc.,  license various methods of
implementing  public key  cryptography,  including  some that are different from
(and  incompatible  with) the method of  implementing  public  key  cryptography
currently used in most of our products. Although we have a license to use all of
the public key methods  promoted by Certicom  and RSA,  (and some of the methods
promoted  by RSA have  entered  the public  domain),  to the extent  significant
segments of the network security market adopt technical standards different from
those  currently  used by us,  to the  exclusion  of our  methods,  sales of our
existing and planned products in that market segment may be adversely  impacted,
which  could have a  material  adverse  effect on our  financial  condition  and
results of operations.

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

                                       13
<PAGE>

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

     We face the risks from tort and  warranty  claims that may be made  against
us.  Customers  rely on our network  security  products to prevent  unauthorized
access to their networks and data transmissions. A malfunction or the inadequate
design of our products  could result in tort or warranty  claims.  A breach of a
customer's network by an unauthorized party, which is attributable to an alleged
defect in our products,  may cause substantial damages due to loss or compromise
of the customer's valuable information.  Furthermore,  there is inadequate legal
precedent for allocating  responsibility  for such losses caused by the wrongful
acts of third  parties.  Although  we attempt to reduce the risk of such  losses
through warranty  disclaimers and liability  limitation clauses in its 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 be unable to retain our  executive  officers and key  personnel  that are
critical to our business.

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

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

     Our  future  success  will  depend in large  part on the  abilities  of Mr.
Crowell,  the contributions by our other executive officers,  key management and
technical  personnel and our ability to replace our departed  executive officers
and key technical personnel with qualified and competent  individuals.  There is
no guarantee  that our present  executive  management  and technical  staff will
remain  with  the  Company,  particularly  if  our  performance  is  not  up  to
expectations. The loss of the services of one or more of our remaining executive
officers or key  personnel,  or the  inability to attract and retain  additional
executives and other qualified personnel, could delay product development cycles
or  otherwise  have a material  adverse  effect on our  business  and  operating
results

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 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 in
our field is quite  limited,  and we  compete  with  other  companies,  academic
institutions,  government  entities  and other  organizations  for  skilled  and
experienced  engineers.  We have  experienced  delays in filling  positions  for
engineering  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  fluctuations  in our stock price,  may create
greater  uncertainty  amongst our existing and  prospective  employees,  who may
decide not to continue or accept  employment  with the Company.  There can be no
assurance  that we will be able  effectively  to  achieve  or manage  any future
growth,  and our  failure to do so could  delay  product  development  cycles or
otherwise have a material adverse effect on our financial  condition and results
of operations.

                                       14
<PAGE>

     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 there under
will provide  competitive  advantages to us or that any of our pending or future
patent applications will be issued with the scope of the claims sought by us, if
at all.  Further,  there  can be no  assurance  that  others  will  not  develop
technologies  that are  similar or  superior to our  technology,  duplicate  our
technology, misappropriate our trade secrets, or design around the patents owned
by us. Resort to the courts to protect our  intellectual  property would require
significant financial and management resources. In addition, the laws of certain
countries in which our products are or may be  developed,  manufactured  or sold
may not protect our products and intellectual property rights to the same extent
as the laws of the United  States.  Our  inability  to protect our  intellectual
property  adequately  could  have a  material  adverse  effect on our  financial
condition and results of operations.

     The computer, communications,  software and network security industries are
characterized by substantial  litigation regarding patent and other intellectual
property rights.  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 acquired in
August 2000.  Any  litigation,  whether or not  determined  in our favor,  could
result in  significant  expense  to us and  could  divert  management  and other
resources.  In the  event  of an  adverse  ruling  in any  litigation  involving
intellectual  property,  we might be required to discontinue  the use of certain
processes,  cease the manufacture,  use and sale of infringing products,  expend
significant resources to develop non-infringing technology or obtain licenses to
the infringing  technology and may suffer  significant  monetary damages,  which
could  include  treble  damages.  There  can be no  assurance  that  under  such
circumstances a license would be available to us on reasonable  terms or at all.
In the event of a  successful  claim  against  us and our  failure to develop or
license a substitute technology on commercially  reasonable terms, our financial
condition and results of operations would be adversely affected. There can be no
assurance that existing claims or any other  assertions (or claims for indemnity
from  customers  resulting  from  infringement  claims) will not  materially and
adversely affect our financial condition and results of operations.

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

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

     If we are unable  successfully  to educate  potential  customers  as to the
value of, and thereby  obtain  broad  market  acceptance  for,  our products and
services,  we will  continue  to rely  primarily  on  selling  new and  existing
products to our base of existing  customers,  which will significantly limit any
opportunity for growth. In addition, any significant advance in technologies for
attacking cryptographic systems could render some or all of our existing and new
products  obsolete or  unmarketable.  To the extent that a specific method other
than ours is adopted as the standard for  implementing  network  security in any
segment of the  network  security  market,  sales of our  existing  and  planned
products in that market  segment may be adversely  impacted,  which could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.  The National  Institute of Standards  and  Technology  has recently
announced that it will adopt a new Advanced Encryption  Standard,  or AES, which
we expect to integrate  into

                                       15
<PAGE>

our  products.  Our  ability to timely  implement  the AES in our  products  may
materially  affect  our  development  costs and  ability  to timely  market  our
solutions. Network security-related products or technologies developed by others
may  adversely  affect  our  competitive  position  or render  our  products  or
technologies noncompetitive or obsolete.

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

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

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

We face risks associated with our international operations.

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

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

     Due to U.S. 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  export
controls on sales to certain foreign governments and transfers of our technology
to foreign partners.

     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 as 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,  which we offer to our

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customers  with our own  management  solution.  We have no  guarantee  that this
supplier will be willing or able to continue to supply products in a timely way.
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,  or
Celotek, a privately held developer of  high-performance  Asynchronous  Transfer
Mode network security appliances, in exchange for 1,590,137 shares of our common
stock with a fair value of $22,386,000 and cash of  approximately  $515,000.  In
addition, we converted outstanding options to purchase Celotek common stock into
options to purchase  307,500  shares of our common stock with an aggregate  fair
value of  $2,329,000.  Celotek  employees who became our  employees  were issued
40,913  shares,  which  vest to the  concerned  employees  if they  continue  in
employment for a period of 12 months. The shares issued in this acquisition have
increased  the number of shares of our common stock  outstanding,  and therefore
will  result in  earnings  per  share  dilution  unless  we are able to  realize
sufficient  financial  benefits from the  transaction.  While we believe we will
achieve  financial   benefits  that  will  offset  the  dilution,   acquisitions
inherently  involve risks and  uncertainties.  These include potential costs and
management  distractions  associated with  integrating the operations of the two
companies,  the  potential  loss of key employees of 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.

Changes in accounting  practices could  adversely  affect the calculation of our
future operating results.

     In connection with the acquisition of Algorithmic Research Limited, or ARL,
in  September  1997,  we  allocated  $63.9  million  of the  purchase  price  to
in-process research and development,  or IPR&D, and in accordance with 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,  or SEC,  stated the SEC Staff's  concerns  about  certain
appraisal  practices  generally employed in determining the fair value of IPR&D.
As a result,  it is possible that the SEC staff may require that any  enterprise
that recorded an IPR&D charge revise its estimate of the value of the IPR&D.  To
the extent we are required by the SEC Staff to retroactively revise our estimate
of the value of IPR&D,  such  revision  could  result in the  capitalization  of
additional  goodwill,  the  amortization of which would reduce future  operating
results.

     In  November  1998,  Cylink  announced  that its first and  second  quarter
earnings would have to be restated and that it would have  operating  losses for
each of the first three quarters of that year.  During the ensuing review by the
company and its independent  accountants,  certain facts became known indicating
that revenue  would have to be restated for the fourth  quarter of 1997 as well.
As a result,  Cylink filed amended Forms 10Q/A for the first and second quarters
of 1998,  and an amended  Form  10-K/A  for 1997.  Shortly  thereafter,  the SEC
instituted an investigation of Cylink's accounting  policies and practices,  and
the events leading to the restatements.

     On  September  27, 2000,  the SEC issued an order by consent,  finding that
former Cylink executives had engaged in fraudulent  accounting  practices in the
fourth  quarter  of 1997 and the first and  second  quarters  of 1998,  that the
Company had failed to maintain adequate accounting controls, and that Cylink had
promptly undertaken remedial measures.  Cylink consented to entry of a cease and
desist order ensuring  maintenance of strict accounting  controls in the future.
As a result, we must be diligent in our decisions regarding whether to recognize
revenue in connection with certain transactions.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     As of April 1,  2001,  we held a total  of $11.9  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

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<PAGE>

increase  immediately  and  uniformly  by 10 percent  from levels as of April 1,
2001, the decline in fair value of the portfolio would not be material.

     We transact substantially all of our revenues and costs in U.S. dollars and
our results of operations  would not be materially  affected by  fluctuations in
foreign exchange rates. Accordingly,  to date, we have not used material amounts
of derivative financial  instruments.  As of April 1, 2001, we had no fixed rate
obligations  except for capitalized  leases and long-term debt of  approximately
$330,000.  As such, the fair value of our fixed rate  obligations is not subject
to a material adverse impact from changes in interest rates.


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<PAGE>

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

     In 1998,  Cylink filed amended Forms 10-Q for the first and second quarters
of 1998 and an amended Form 10K for 1997,  reflecting restated financial results
for those quarters, and for the fourth quarter of 1997. Between November 6, 1998
and December 14, 1998,  several  securities  class action  complaints were filed
against  Cylink and certain of its current and former  directors and officers in
federal courts in California.  These complaints allege, among other things, that
Cylink's  previously  issued  financial  statements  were  materially  false and
misleading  and that  the  defendants  knew or  should  have  known  that  these
financial  statements  caused Cylink's common stock price to rise  artificially.
The actions  variously  allege  violations  of Section  10(b) of the  Securities
Exchange  Act of 1934 (the  "Exchange  Act"),  as  amended,  and SEC Rule  10b-5
promulgated thereunder, and Section 20 of the Exchange Act.

     The securities class action lawsuits have been ordered  consolidated into a
single  action  pending in the United  States  District  Court for the  Northern
District  of  California,  captioned  In Re Cylink  Securities  Litigation,  No.
C98-4292 (VRW).  Plaintiffs recently filed an amended consolidated complaint and
our motion to dismiss the complaint is pending before the Court.

     Cylink believes it has meritorious defenses to 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 2.   Changes in Securities and Use of Proceeds.
None

Item 3.   Defaults Upon Senior Securities
None

Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security  holders through the  solicitation
of proxies or otherwise, for the quarter ended April 1, 2001.

Item 5.   Other Information.
None



Item 6.   Exhibits and Reports on Form 8-K

(a)   Exhibits Index:

          None

(b)   Reports on Form 8-K:

          None




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<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: May 15, 2001                     CYLINK CORPORATION

                                       By:      /s/ R. Christopher Chillingworth
                                                --------------------------------
                                                R. Christopher Chillingworth
                                                Vice President of Finance
                                                and Chief Financial Officer
                                                (Duly Authorized Officer and
                                                Principal Financial Officer)




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