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 March 28, 1997

                           Commission File No. 0-27742


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


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



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


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



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


As of May 5, 1997, there were 25,868,732 shares of the Registrant's Common Stock
outstanding.


<PAGE>


PART I.  FINANCIAL INFORMATION
Item 1.   Financial Statements


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

                                                         March 28,  December 31,
                                                           1997        1996 
                                                        ----------  ------------
                                     Assets
Current assets:
   Cash and cash equivalents                            $  73,371     $  78,849
   Accounts receivable, net of allowance
      for doubtful accounts of $447 and $644               14,017        12,682
   Inventories                                              9,657         8,828
   Deferred income taxes                                    1,432         1,432
   Other current assets                                     1,924         1,351
                                                        ---------     ---------
            Total current assets                          100,401       103,142

Property and equipment, net                                 4,358         3,760
Notes receivable from employees                             3,473          --  
Other assets                                                  922           186
                                                        ---------     ---------
                                                        $ 109,154     $ 107,088
                                                        =========     =========

                      Liabilities and Shareholders' Equity

Current liabilities:
   Current portion of capital lease obligations         $     167     $     167
   Accounts payable                                         4,184         3,954
   Accrued liabilities                                      5,583         5,150
   Deferred revenue                                           334           353
                                                        ---------     ---------
         Total current liabilities                         10,268         9,624
                                                        ---------     ---------

Capital lease obligations, long-term                          188           241
                                                        ---------     ---------
Deferred income taxes                                          12            12
                                                        ---------     ---------
Shareholders' equity:
   Preferred stock, $0.01 par value; 5,000,000
       shares authorized; none issued and outstanding         --            --
   Common stock, $0.01 par value; 40,000,000 shares
       authorized; 25,815,000 and 25,597,000 shares
       issued and outstanding                                 259           257
   Additional paid-in capital                              90,171        89,772
   Notes receivable from shareholders                        (272)         (301)
   Deferred compensation related to stock options            (313)         (334)
   Cumulative translation adjustment                          (79)            4
   Retained earnings                                        8,920         7,813
                                                        ---------     ---------
            Total shareholders' equity                     98,686        97,211
                                                        ---------     ---------
                                                        $ 109,154     $ 107,088
                                                        =========     =========




     See accompanying notes to Condensed Consolidated Financial Statements.


                                       2

<PAGE>


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

                                                          Three Months Ended
                                                       -----------------------
                                                       March 28,      March 29,
                                                         1997          1996 
                                                       ---------     --------
Revenue                                                $ 16,182      $  8,483
Cost of revenue                                           5,875         3,877
                                                       --------      --------
Gross profit                                             10,307         4,606
                                                       --------      --------
Operating expenses:
   Research and development, net                          3,908         2,602
   Selling and marketing                                  4,027         2,727
   General and administrative                             1,978         1,135
                                                       --------      --------
            Total operating expenses                      9,913         6,464
                                                       --------      --------

Income (loss) from operations                               394        (1,858)

Other income (expense):
   Interest income, net                                     941           364
   Royalty and other income (expense), net                  246          (374)
                                                       --------      --------

Income (loss) before income taxes                         1,581        (1,868)
Provision (benefit) for income taxes                        474          (635)
                                                       --------      --------
Net income (loss)                                      $  1,107      $ (1,233)
                                                       ========      ========

Net income (loss) per share                            $   0.04      $  (0.05)
                                                       ========      =========
Shares used to compute net income (loss)
   per share                                             26,524        22,432
                                                       ========      =========


     See accompanying notes to Condensed Consolidated Financial Statements.


                                       3
<PAGE>


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

                                                            Three Months Ended
                                                          ----------------------
                                                           March 28,   March 29,
                                                             1997         1996 
                                                           --------    --------
Cash flows from operating activities:
   Net income (loss)                                       $  1,107    $ (1,233)
   Adjustments to reconcile net income (loss) to net
      cash provided by (used in) operating activities:
         Write-down of short-term investments                  --           441
         Depreciation and amortization                          431         211
         Deferred compensation related to stock options          21          21
         Deferred income taxes                                 --          (653)
         Changes in assets and liabilities:
            Accounts receivable                              (1,335)         77
            Inventories                                        (829)     (1,016)
            Other assets                                     (1,309)        181
            Accounts payable                                    230       1,210
            Accrued liabilities                                 433         884
            Deferred revenue                                    (19)        (73)
                                                           --------    --------
               Net cash provided by (used in)
                  operating activities                       (1,270)         50
                                                           --------    --------

Cash flows from investing activities:
   Acquisition of property and equipment                     (1,029)       (318)
   Loans to employees in exchange for notes receivable       (3,473)       --   
                                                           --------    --------
               Net cash used in investing activities         (4,502)       (318)
                                                           --------    --------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net                  129      79,380
   Payment of notes receivable from shareholders                301        --   
   Repayment of capital lease obligations                       (53)       (133)
   Repayment of borrowings under bank line of credit           --        (1,000)
                                                           --------    --------
               Net cash provided by financing activities        377      78,247
                                                           --------    --------
Effect of exchange rate changes on
   cash and cash equivalents                                    (83)         (4)
                                                           --------    --------
Net increase (decrease) in cash and cash equivalents         (5,478)     77,975
Cash and cash equivalents at beginning of period             78,849       3,240
                                                           --------    --------
Cash and cash equivalents at end of period                 $ 73,371    $ 81,215
                                                           ========    ========

Supplemental disclosures:
   Cash paid for income taxes                              $      6    $     --
   Cash paid for interest                                        21          42
   Equipment acquired under capital lease obligations            --          43


     See accompanying notes to Condensed Consolidated Financial Statements.


                                       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 fairly
     state the consolidated  financial position,  results of operations and cash
     flows of Cylink  Corporation  ("Cylink" or the  "Company")  for the periods
     presented.  These financial  statements  should be read in conjunction with
     the Company's audited financial statements included in the Company's Annual
     Report on Form 10-K for the year ended December 31, 1996.  Interim  results
     of operations are not necessarily  indicative of the results to be expected
     for the full year.

2.   Notes Receivable From Employees

         Pursuant to their  employment  agreements,  the Company  loaned certain
     employees $3,473,000 towards the purchase of their principal residences. Of
     this amount,  $2,843,000  is receivable  from officers of the Company.  The
     notes  are  interest  free and are due  five  years  from the  dates of the
     related notes,  at which time the notes must be repaid or convert into, and
     become  subject  to, the terms of a standard,  interest-bearing  commercial
     loan. The notes are secured by deeds of trust on the  residences.  The loan
     agreements  provide for accelerated  payment in the event of termination of
     employment  under certain  conditions  and, in one instance,  under certain
     circumstances  will be forgiven to the extent of any  decrease in the value
     of the related residence.

3.   Inventory


                                                       March 28,    December 31,
                                                         1997           1996 
                                                       ---------    ------------
     Inventories:                                           (in thousands)
        Raw materials                                  $5,063            $4,126
        Work in process and subassemblies               2,966             3,196
        Finished goods                                  1,628             1,506
                                                       ------            ------
                                                       $9,657            $8,828
                                                       ======            ======

4.   Recent Accounting Pronouncement

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


                                                           Three Months Ended
                                                         -----------------------
                                                         March 28,     March 29,
                                                           1997          1996 
                                                         ---------     --------
     Primary earnings per share as reported             $   0.04    $   (0.05)
     Pro forma basic net income per share                   0.04        (0.06)
     Pro forma diluted net income per share                 0.04        (0.05)


                                       5


<PAGE>



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

         The  statements  contained  in this  Report  on Form  10-Q that are not
purely historical are  forward-looking  statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of  1934,   including  statements   regarding  Cylink's   expectations,   hopes,
intentions,   beliefs  or  strategies  regarding  the  future.   Forward-looking
statements  include:  the Company's  statements  in Part I, Item 2  "Managements
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
regarding  the  sufficiency  of the  Company's  existing  liquidity  and capital
resources,  management's belief that resolution of certain litigation  described
in Part II, Item 1 "Legal  Proceedings"  will not have a material adverse effect
on the Company's  financial  position and results of  operations,  the Company's
expectation that it will introduce a number of new products in 1997 and continue
to make a significant investment in engineering,  research and development,  and
its  intention  to expand  its  foreign  sales  channels  and  enter  additional
international markets. All forward-looking  statements included in this document
are based on information  available to the Company as of the date of this Report
on Form  10-Q,  and the  Company  assumes  no  obligation  to  update  any  such
forward-looking  statements,  or to update the reasons why actual  results could
differ from those projected in the forward-looking  statements.  It is important
to note that the Company's actual results could differ  materially from those in
such  forward-looking  statements for the reasons detailed in "Risk Factors That
May Affect Future  Results" and other  sections of this Report on Form 10-Q. You
should also consult the risk factors  listed from time to time in the  Company's
Reports on Form 10-Q, 8-K, 10-K and Annual Reports to the Shareholders.


RESULTS OF OPERATIONS

         Revenue.  The Company's  revenue is derived primarily from sales of its
family of commercial  information  security products and its medium speed spread
spectrum radio products.  Fees for maintenance and support  services are charged
separately.  Revenue  from  product  sales is  recognized  upon  shipment to the
customer.  Concurrently,  a provision  is made for  estimated  cost to repair or
replace products under warranty arrangements. Revenue from sales to distributors
is  recognized  upon  shipment;  no right of  return,  stock  rotation  or price
protection is given.  Revenue from sales to value added  resellers is recognized
upon shipment and concurrently a provision for estimated returns is recorded.

         The  Company's  revenue  increased  91% from $8.5 million for the three
months  ended March 29, 1996 to $16.2  million for the three  months ended March
28, 1997.  Sales of information  security  products  increased by 124% from $4.2
million for the first  quarter of 1996 to $9.4 million for the first  quarter of
1997.  The  increase  in revenue  resulted  from new  product  shipments  in the
SecureWan,  SecureLan and SecureAccess  encryption product lines, which are used
in  public  and  private  linked  networks.  Most of  these  new  products  were
introduced in the second quarter of 1996. Revenue from the Company's older CIDEC
encryption products reflected increased average selling prices as well as higher
unit sales.  Sales of wireless  communications  products increased 58% from $4.3
million for the first  quarter of 1996 to $6.8 million for the first  quarter of
1997. This increase was primarily due to higher unit sales, particularly for the
Company's AirLink S-Band radios.

         International revenue was 57% of total revenue for the first quarter of
1996 and was 58% of total revenue for the first quarter of 1997. As a percentage
of respective product line revenue,  international  revenue for both information
security and wireless  communications products increased marginally in the first
quarter of 1997 as compared with the same period last year.

         Gross  Profit.  Gross profit  increased  124% from $4.6 million for the
three  months  ended March 29, 1996 to $10.3  million for the three months ended
March 28, 1997 primarily as a result of the significant  increase in revenue. As
a percentage  of sales,  gross  profit was 54% and 64% for the first  quarter of
1996 and 1997, respectively.  The increase in gross margin compared to the first
quarter of 1996 is primarily due to reduced unit costs of the  Company's  S-Band
radios and a decrease in expenses for maintenance and support  services  related
to information  security  products.  To a lesser  extent,  the increase in gross
margin  results from the increased  percentage of total revenue  represented  by
information  security  products,  which generally have higher gross margins than
wireless communications products.

                                       6

<PAGE>

         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  22% from $3.7 million for the first quarter of 1996 to $4.5
million for the first quarter of 1997.  Gross research and development  expenses
as a percentage  of revenue  were 44% and 28% for the first  quarter of 1996 and
1997,  respectively.  The increase in dollar  amount from last year results from
the Company's expanded product development efforts,  partially offset by reduced
contract and other variable  expenses related to externally  funded research and
development.  From time to time the  Company  receives  engineering  funding for
development  of  projects  to apply or enhance  the  Company's  technology  to a
particular  customer's  need.  The amounts  recognized  under these research and
development  contracts are offset  against  research and  development  expenses.
Amounts  recognized  under  non-recurring  engineering  contracts  totaled  $1.1
million and $0.6 million for the first quarter of 1996 and 1997, respectively.

         Selling and Marketing. Selling and marketing expenses consist primarily
of  personnel   expenses,   including  sales   commissions,   and  expenses  for
advertising,  public relations,  seminars and trade shows. Selling and marketing
expenses  increased  48% from $2.7 million for the first quarter of 1996 to $4.0
million  for the first  quarter of 1997.  Selling  and  marketing  expenses as a
percentage  of revenue were 32% and 25% for the first  quarter of 1996 and 1997,
respectively.  The increase in dollar amount was due to expenses associated with
expansion  of the  Company's  direct  sales  force,  personnel  increases in the
marketing  group, and increased  expenses  associated with  advertising,  public
relations and trade shows.

         General and Administrative. General and administrative expenses consist
primarily of personnel  and related  costs,  recruitment  expenses,  information
system costs, and audit, legal and other professional  service fees. General and
administrative expenses increased 74% from $1.1 million for the first quarter of
1996 to $2.0 million for the first quarter of 1997.  General and  administrative
expenses as a percentage of sales were 13% and 12% for the first quarter of 1996
and 1997,  respectively.  The dollar  increase  was  primarily  due to increased
staffing and  professional  fees  necessary to manage and support the  Company's
recent growth and provide infrastructure required for a public company.

         Other Income  (Expense),  Net.  Other income  (expense),  net primarily
consists of royalties,  interest  income,  interest expense and investment gains
and losses.  Interest income,  net increased from $364,000 for the first quarter
of 1996 to $941,000 for the first  quarter of 1997  principally  due to interest
income  resulting from funds derived from the Company's  initial public offering
in  February  and  March of 1996.  In the first  quarter  of 1997,  the  Company
recorded a benefit of $632,000 primarily related to the reversal of an allowance
provided on the  receivable  related to the  Company's  interest in the residual
value of a former  partnership known as Public Key Partners ("PKP").  Management
considers the uncertainty regarding ultimate collection to have been resolved as
a result of the settlement  agreement between the Company and RSA Data Security,
Inc., a subsidiary of Security  Dynamics  ("RSA DSI").  The assets of the former
partnership,  consisting  primarily of cash, are being held in trust pending the
resolution  of  certain   litigation   described  in  Part  II,  Item  1  "Legal
Proceedings."  Management does not believe that the ultimate  resolution of this
matter will have a material adverse effect of the Company's  financial  position
or results of  operations.  The first quarter of 1996 includes a $441,000  write
down of the Company's short-term investments as management concluded the decline
in value  was  permanent.  These  investments  were  sold at an  actual  loss of
$432,000 in the third quarter of 1996. The Company also experienced a decline in
royalty  income  during the first quarter of 1997 as compared to the same period
in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         At March 28, 1997,  the Company had cash and cash  equivalents of $73.4
million, working capital of $90.1 million and minimal long-term obligations. Net
cash used in operating  activities  consisted  primarily of increases in current
assets other than cash, partially offset by net income and increases in accounts
payable and accrued liabilities.

         The Company made capital  expenditures of approximately $1.0 million in
the three months ended March 28, 1997. The Company also made long-term  loans to
employees of approximately $3.5 million.

                                       7
 


<PAGE>

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

         The Company  believes that  existing  cash balances and cash  generated
from  operations,  if any,  will be sufficient  to fund  necessary  purchases of
capital  equipment and to provide working capital through at least the remainder
of 1997.  However,  the  Company  may  require  additional  funds to support its
working  capital  requirements  or for other purposes and may seek to raise such
additional  funds  through  public or  private  equity  financing  or from other
sources.  No assurance can be given that additional  financing will be available
or that,  if available,  will be available on terms  favorable to the Company or
its shareholders.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

          Due  primarily  to  increased  research  and  development,  sales  and
marketing, and litigation expenses, the Company incurred losses in 1994 and 1995
and the first six months of 1996.  There can be no  assurances  that the Company
will  increase or maintain  its revenue or be  profitable  on a quarterly  or an
annual basis in the future.

         The Company has historically  experienced  significant  fluctuations in
its operating  results on an annual and a quarterly  basis and could  experience
such fluctuations in the future. The Company's operating results are affected by
a number  of  factors,  many of which  are  outside  of the  Company's  control,
including:  the timing of the  introduction  of new or enhanced  products by the
Company or its  competitors;  market  acceptance of new products of the Company,
its customers and its competitors; the timing, cancellation or delay of customer
orders,   including  cancellation  or  delay  in  anticipation  of  new  product
introduction   or  enhancement  or  resulting  from   uncertainty   relating  to
intellectual property claims;  competitive factors, including pricing pressures;
changes  in  operating  expenses,  including  those  resulting  from  changes in
available  production capacity of independent  foundries and other suppliers and
the availability of raw materials; expenses associated with obtaining, enforcing
and defending claims with respect to intellectual  property  rights;  the mix of
products sold;  changes in the percentage of products sold through the Company's
direct  sales  force;  personnel  changes;  general  economic  conditions;   and
fluctuations  in  foreign  currency  exchange  rates.  The  Company  expects  to
introduce a number of new products in 1997.  The failure of such new products to
achieve market  acceptance at the time  anticipated  by the Company,  or at all,
would  materially  and adversely  affect the Company's  financial  condition and
results of operations.

Potential Volatility of Stock Price

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

Pending Litigation

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

Dependence on Key Personnel

         The  Company's  future  success  will  depend to a large  extent on the
abilities and successful contributions of its executive officers, key management
and technical  personnel.  The Company has been able to

                                       8

<PAGE>


recruit  several  senior  managers  in the last year and its  future is  closely
linked to the ability to  successfully  integrate  these key employees  into the
Company, and to maintain and extend its base of talented  management,  technical
and  other  personnel.   Competition  for   highly-skilled   business,   product
development,  technical  and other  personnel  is  intense,  and the loss of the
services of one or more of the Company's executive officers or key personnel, or
the inability to continue to attract  qualified  personnel,  could delay product
development  cycles or otherwise have a material adverse effect on the Company's
financial position and results of operations.

Lengthy Sales Cycle

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

Dependence on Recently Introduced and New Information Security Products

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

Competition

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

         The Company's  competitors in the information  security markets include
Security  Dynamics,   Semaphore,  Cray  Research,   Racal-Guardata,   Inc.,  and
Information Resource Engineering,  Inc. Northern Telecom Limited, AT&T, Motorola
Corporation,  Digital  Equipment  Corporation and Sun  Microsystems,  Inc. offer
certain  information  security  products  as part of  their  overall  networking
solutions.  In addition,  a number of significant  vendors,  including Microsoft
Corporation, Netscape Communications Corporation and Cisco Systems have embedded
security  solutions  in their  software.  To the extent  that these  embedded or
optional

                                       9

<PAGE>


security capabilities provide all or a portion of the functionality  provided by
the  Company's  products,  the  Company's  products may no longer be required by
customers to attain information security.

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

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

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

Product Liability Risks

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

Management of Growth

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

                                       10

<PAGE>


Intellectual Property and Other Proprietary Rights

         The Company  relies on patents,  trademarks,  copyrights,  licenses and
trade secret law to establish and preserve its intellectual property rights. The
Company owns twelve U.S. patents covering certain aspects of its product designs
and has one additional U.S. patent application pending. The Company also has the
exclusive  right to  sublicense  certain  patents  that were granted to Stanford
University  with  respect to the  original  Public Key  methods  (the  "Stanford
Patents"), which expire in the United States in the third quarter of 1997. There
can be no assurance  that any patent,  trademark,  copyright or license owned or
held by the Company will not be invalidated,  circumvented  or challenged,  that
the rights granted thereunder will provide competitive advantages to the Company
or that any of the  Company's  pending  or future  patent  applications  will be
issued with the scope of the claims sought by the Company,  if at all.  Further,
there can be no  assurance  that others will not develop  technologies  that are
similar  or  superior  to the  Company's  technology,  duplicate  the  Company's
technology or design around the patents owned by the Company. The Company may be
subject to or may initiate  interference  proceedings in the U.S. Patent Office,
which can require significant financial and management  resources.  In addition,
the laws of certain  countries  in which the  Company's  products  are or may be
developed,  manufactured  or sold may not protect  the  Company's  products  and
intellectual  property  rights  to the same  extent  as the  laws of the  United
States.  The  inability  of the  Company to protect  its  intellectual  property
adequately could have a material  adverse effect on its financial  condition and
results of operations.

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

Evolving Information Security Market

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

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

                                       11

<PAGE>


viable commercial marketplaces will be developed,  or, if developed,  that these
networks will become viable commercial marketplaces.

Rapid Technological Change

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

Wireless Communications Industry Regulatory Environment

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

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

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

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

         International product sales represented approximately 35%, 47%, 59% and
58% of revenue in 1994,  1995,  1996 and for the three  months  ended  March 28,
1997,   respectively.   In   particular,   sales  of  the   Company's   wireless
communications products are currently concentrated in developing countries.  The
Company  plans to  continue to expand its foreign  sales  channels  and to enter
additional  international  markets,  both  of  which  will  require  significant
management attention and financial resources. International sales are subject to
a number of risks,  including  unexpected  changes in  regulatory  requirements,
tariffs and other trade barriers,  political and economic instability in foreign
markets,  difficulties  in the staffing,  management and  integration of foreign
operations,  longer payment cycles,  greater  difficulty in collecting  accounts
receivable,  currency  fluctuations  and potentially  adverse tax  consequences.
Since most of the Company's foreign sales are denominated in U.S.  dollars,  the
Company's  products  become less price  competitive  in countries in which local
currencies  decline in value  relative to the U.S.  dollar.  The  uncertainty of
monetary  exchange values has caused,  and may in the future cause, some foreign
customers  to delay  new  orders  or delay  payment  for  existing  orders.  The
long-term  impact of such  devaluation,  including  any  possible  effect on the
business outlook in other developing countries, cannot be predicted.

         The Company's  ability to compete  successfully in foreign countries is
dependent  in part on the  Company's  ability to obtain and retain  reliable and
experienced  in-country  distributors and other strategic

                                       12

<PAGE>


partners.  The  Company  does not have long term  relationships  with any of its
value-added  resellers and distributors  and,  therefore,  has no assurance of a
continuing relationship within a given market.

         United  States  government  regulations  restrict the export of certain
cryptographic  devices,  including certain of the Company's information security
products.  As a result,  the Company may be at a  disadvantage  in competing for
international sales compared to companies located outside the United States that
are not subject to such restrictions.

Dependence  on  Component  Availability,   Subcontractor   Performance  and  Key
Suppliers

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


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

         On  September  6, 1995,  the  Company  obtained  an  arbitration  award
dissolving  a  former   partnership,   known  as  PKP,   between  the  Company's
wholly-owned  subsidiary,  Caro-Kann Corporation,  and RSA DSI. Although various
claims  between the Company and RSA DSI were  settled on December  31,  1996,  a
third  party  continues  to pursue  various  claims  against PKP and RSA DSI for
wrongful  business  practices in action  C-94-20512  SW before the United States
District Court for the Northern District of California.  An unfavorable  outcome
might  affect  the  residual  value the  Company  may  receive  from the  former
partnership.

         On March 7, 1997,  ten former  employees  of the Company  filed suit in
action No. CV764647 in the Superior Court of California,  County of Santa Clara,
against the Company,  each of its Directors and its General  Counsel,  asserting
claims for wrongful  termination,  fraud,  libel,  slander,  age discrimination,
invasion of privacy,  and violation of the federal RICO statute. The Company has
removed the action to the United  States  District  Court,  Nothern  District of
California,  No. C-97-20331 PVT. Although the Company has placed its insurers on
notice  of these  claims,  none of them  have  admitted  coverage.  The  Company
believes  the  terminations  were  lawful  and  intends  to  defend  the  matter
vigorously.  The  defense  of this  matter  may  divert  a  material  amount  of
management's attention and require the expenditure of significant legal fees and
costs. An unfavorable outcome which exceeds the Company's insurance coverage, if
any, could also result in a material  adverse effect on the Company's  financial
condition.


Item 6.   Exhibits and Reports on Form 8-K
          --------------------------------
(a)  Exhibits Index:

     Exhibit
     Number      Description of Exhibit
     ------      ----------------------
       27.1      Financial Data Schedule

(b) No reports on Form 8-K were filed during the quarter ended March 28, 1997.

                                       13

<PAGE>


                                   SIGNATURES

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


Date:  May 12, 1997                          CYLINK CORPORATION


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

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