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, 1999

                           Commission File No. 0-27742


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



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



                                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 12, 1999, there were 29,126,000 shares of the Registrant's common
     stock outstanding.



                                       1
<PAGE>


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data; unaudited)
<CAPTION>
                                                                    March 28,     December 31,
                                                                       1999          1998
                                                                    ---------      ---------
<S>                                                                 <C>            <C>
                                   Assets                                        
                                                                                 
Current assets:                                                                  
   Cash and cash equivalents                                        $  42,884      $  46,575
   Accounts receivable, net of allowances of $1,363 and $1,251         10,500          7,958
   Note Receivable                                                      3,545          3,545
   Inventories                                                          7,935         10,289
   Deferred income taxes                                                4,495          4,495
   Other current assets                                                 6,597          6,675
                                                                    ---------      ---------
            Total current assets                                       75,956         79,537
                                                                                  
Property and equipment, net                                             5,287          5,731
Acquired technology, goodwill and other intangibles, net                4,657          5,341
Notes receivable from employees or former employees                     2,609          2,558
Other assets                                                            1,085          1,151
                                                                    ---------      ---------
                                                                    $  89,594      $  94,318
                                                                    =========      =========
                    Liabilities and Shareholders' Equity                          
                                                                                  
Current liabilities:                                                              
   Current portion of lease obligations and long-term debt          $     100      $     120
   Accounts payable                                                     2,763          3,656
   Accrued liabilities                                                  8,273          8,230
   Accrued liabilities related to discontinued operations               3,626          3,878
   Income taxes payable                                                 1,085          1,091
   Deferred revenue                                                     2,426          1,975
                                                                    ---------      ---------
            Total current liabilities                                  18,273         18,950
                                                                    ---------      ---------
                                                                                  
Capital lease obligations and long-term debt                              128            147
                                                                    ---------      ---------
                                                                                  
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;                   
      29,119,000 and 29,115,000 shares issued and outstanding             291            291
   Additional paid-in capital                                         123,957        123,929
   Deferred compensation related to stock options                        (146)          (167)
   Accumulated other comprehensive loss                                   (73)           (61)
   Accumulated deficit                                                (52,836)       (48,771)
                                                                    ---------      ---------
            Total shareholders' equity                                 71,193         75,221
                                                                    ---------      ---------
                                                                    $  89,594      $  94,318
                                                                    =========      =========
                                                                                 
<FN>                                                                             
           See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>


                                       2
<PAGE>

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

 <CAPTION>
                                                                  Three Months Ended
                                                           ------------------------------
                                                            March 28,           March 29,
                                                              1999                1998
                                                           --------             --=-----
                                                                           (restated-see Note 2)
<S>                                                        <C>                  <C>
Revenue                                                    $ 11,885             $  8,062
Cost of revenue                                               4,112                2,631
                                                           --------             --------
Gross profit                                                  7,773                5,431
                                                           --------             --------
                                                                          
Operating expenses:                                                       
   Research and development, net                              3,553                3,045
   Selling and marketing                                      5,419                5,573
   General and administrative                                 2,613                1,478
   Amortization of purchased intangibles                        680                  679
                                                           --------             --------
            Total operating expenses                         12,265               10,775
                                                           --------             --------
                                                                          
Loss from operations                                         (4,492)              (5,344)
                                                                          
Other income (expense):                                                   
   Interest income, net                                         308                  167
   Royalty and other income (expense), net                      119                  (15)
                                                           --------             --------
                                                                          
Loss from continuing operations before income taxes          (4,065)              (5,192)
Benefit from income taxes                                      --                 (1,817)
                                                           --------             --------
Loss from continuing operations                              (4,065)              (3,375)
Income (loss) from discontinued operations,                               
   net of income tax benefit of $139                           --                   (259)
Gain on disposal of discontinued operations,                              
   net of income tax expense of $12,358                        --                 22,776
                                                           --------             --------
Net income (loss)                                          $ (4,065)            $ 19,142
                                                           ========             ========
Earnings (loss) per share - basic:                                        
   Continuing operations                                   $  (0.14)            $  (0.12)
   Discontinued operations                                     --                   0.78
                                                           --------             --------
   Net income (loss)                                       $  (0.14)            $   0.66
                                                           ========             ========
Earnings (loss) per share - diluted:                                      
   Continuing operations                                   $  (0.14)            $  (0.12)
   Discontinued operations                                     --                   0.78
                                                           --------             --------
   Net income (loss)                                       $  (0.14)            $   0.66
                                                           ========             ========
                                                                          
Shares used in per share calculation - basic                 29,117               28,820
                                                           ========             ========
                                                                          
Shares used in per share calculation - diluted               29,117               28,820
                                                           ========             ========
                                                                      
<FN>
         See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>


                                        3
<PAGE>
<TABLE>
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands; unaudited)
<CAPTION>
                                                                                  Three Months Ended
                                                                              --------------------------
                                                                              March 28,        March 29,
                                                                                1999             1998
                                                                              --------         --------
Cash flows from operating activities:                                                    (restated-see Note 2)
<S>                                                                           <C>              <C>
   Net income (loss)                                                          $ (4,065)        $ (3,375)
   Adjustments to reconcile net income (loss) to net
      cash used in operating activities:
         Depreciation                                                              635              309
         Amortization                                                              683              679
         Deferred income taxes                                                    --               (227)
         Amortization of imputed interest on employee notes receivable             (66)            --
         Deferred compensation related to stock options                             21               21
         Deferred compensation related to employee notes receivable                 66             --
         Changes in assets and liabilities:
            Accounts receivable                                                 (2,408)           1,158
            Inventories                                                          2,354             (711)
            Other assets                                                           (40)            (197)
            Accounts payable                                                      (893)             698
            Accrued liabilities                                                     43              311
            Income taxes payable                                                    (6)          (2,450)
            Deferred revenue                                                       451              959
                                                                              --------         --------
         Net cash used in continuing operations                                 (3,225)          (2,825)
         Net cash provided by (used in) discontinued operations                   (252)          (4,243)
                                                                              --------         --------
               Net cash used in operating activities                            (3,477)          (7,068)
                                                                              --------         --------

Cash flows from investing activities:
   Acquisition of property and equipment                                          (191)            (707)
   Loans to employees in exchange for notes receivable                            --               (845)
   Proceeds from sale of discontinued operations                                  --             46,000
   Acquisition of preferred stock of unaffiliated company                         --             (3,000)
                                                                              --------         --------
               Net cash provided by (used in) investing activities                (191)          41,448
                                                                              --------         --------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                      28              760
   Repayment of capital lease obligations and long-term debt                       (39)             (55)
                                                                              --------         --------
               Net cash provided by (used in) financing activities                 (11)             705
                                                                              --------         --------
Effect of exchange rate changes on cash and cash equivalents                       (12)              16
                                                                              --------         --------
Net increase (decrease) in cash and cash equivalents                            (3,691)          35,101
Cash and cash equivalents at beginning of period                                46,575           22,977
                                                                              --------         --------
Cash and cash equivalents at end of period                                    $ 42,884         $ 58,078
                                                                              ========         ========

<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 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,
      1998. Interim results of operations are not necessarily  indicative of the
      results to be expected for the full year.
 
      2.       Restatement of Financial Results
 
               On November 5, 1998, the Company  publicly  announced that it and
      its independent  accountants had initiated a review of revenue recognition
      practices  which would result in a restatement of previously  issued first
      and second  quarter 1998 results and that all three  quarters of 1998 were
      expected to show substantial operating losses. During the review,  certain
      facts became known  indicating  errors had been made in the application of
      revenue  recognition  policies  which also impacted the fourth  quarter of
      1997,  and as a result,  1997  full-year  results have been restated along
      with first and second quarter 1998 results.  These  restated  results were
      announced in a press release dated December 16, 1998.
 
               As a result of the restatement,  the statements of operations and
      financial  position  for the three  months  ended March 29, 1998 have been
      restated as follows:

                                                      Three Months Ended
                                                      ------------------
                                                        March 29, 1998
                                                        --------------
                                              As Originally
                                              -------------
                                                 Reported         As Restated
                                                 --------         -----------
                                                       (in thousands)
      
      Revenue                                    $ 15,829         $  8,062
      
      Operating expenses                           10,705           10,775
      
      Income (loss) from
          continuing operations                     1,082           (3,375)
      
      Net income (loss)                          $ 23,706         $ 19,142
                                                 ========         ========
      
      Earnings (loss) per share - diluted
         Continuing operations                   $   0.04         $  (0.12)
         Discontinued operations                     0.74             0.78
                                                 --------         --------
         Net Income                              $   0.78         $   0.66
                                                 ========         ========
      
                                                     As of March 29, 1998
                                                     --------------------
      Accumulated Deficit                        $(27,258)        $(34,790)
                                                 ========         ========


                                        5
<PAGE>


     3.   Discontinued Operations

              On March 28, 1998,  the Company  sold its Wireless  Communications
     Group  ("Wireless") to P-Com, Inc. for $60.5 million ($46.0 million in cash
     and an  unsecured  promissory  note in the amount of $14.5  million due 100
     days after closing,  subject to closing adjustments).  The sale resulted in
     an  after  tax  gain of  approximately  $22.8  million.  As a  result,  the
     operations of Wireless have been classified as  discontinued  operations in
     the accompanying  Condensed  Consolidated  Financial Statements and related
     Notes.  Accrued  expenses  in the  amount of  approximately  $6.8  million,
     primarily  for  professional   services,   anticipated   excess  facilities
     expenses,  and certain other  transaction-related  accruals were charged to
     discontinued  operations and reduced the gain on disposal.  Pursuant to the
     restatement  referred to in Note 2, certain revenues of Wireless previously
     recognized in the fourth quarter of 1997 and the first quarter of 1998 were
     adjusted.  On July 14, 1998, P-Com made a partial payment on its promissory
     note,  which  along with other  credits,  totaled  $8.9  million.  P-Com is
     disputing  the  remaining  balance of the note which the Company  presently
     records at $3.5 million.  Wireless  revenues were $4.4 million in the first
     quarter of 1998 through the date of disposal.



     4.  Inventories



                                                   March 28,        December 31,
                                                     1999              1998
                                                 -------------------------------
                                                         (in thousands)
                                             
     Raw materials                                $ 2,705             $ 2,813
     Work in process and subassemblies              1,510               1,877
     Finished goods                                 3,720               5,599
                                                  -------             --------
                                                  $ 7,935             $10,289
                                                  =======             ========

                                       6
<PAGE>


     5.  Earnings (Loss) Per Share

              Basic earnings  (loss) per share is based on the  weighted-average
     number of common shares  outstanding.  Diluted earnings (loss) per share is
     based on the  weighted-average  number of shares  outstanding  and dilutive
     potential  common  shares  outstanding.   The  Company's  only  potentially
     dilutive securities are stock options.  All potentially dilutive securities
     have been  excluded from the  computation  of diluted  earnings  (loss) per
     share  as  their  effect  is  anti-dilutive  on the  loss  from  continuing
     operations for the periods presented.

              As of March 28, 1999 and March 29, 1998, the Company had 5,898,000
     and 4,972,000 stock options  outstanding  with a weighted  average exercise
     price of $5.21 and $8.70,  respectively.  These  options  expire on various
     dates beginning in 1999 through 2008.


     6. Comprehensive Income (Loss)



              The components of comprehensive income (loss) are as follows:


                                                  Three Months Ended
                                              -------------------------
                                              March 28,        March 29,
                                                1999             1998
                                              --------         --------
                                                         (restated-See Note 2)
                                                   (in thousands)
     Net income (loss)                        $(4,065)          $19,142
     Other comprehensive income (loss)            (12)               16
                                              -------           -------
     Total comprehensive income (loss)        $(4,077)          $19,158
                                              =======           =======

     7. Subsequent Event

              On  May  10,  1999,  the  Company   reached   agreement  to  lease
     approximately  96,000 square feet of office and manufacturing space located
     in Santa Clara, California for use as it principal office and manufacturing
     facility.  The  lease  term  is for  120  months  commencing  approximately
     September  1,  1999,  and  includes  an option  to extend  the lease for an
     additional  5 years on  commercially  reasonable  terms.  The  Landlord  is
     obligated to contribute up to $2.4 million for the construction of tenant's
     interior improvements; however, tenant's interior improvements are expected
     to exceed this allowance by approximately $1.5 million. The lease agreement
     provides for the payment of rent on a net industrial lease basis commencing
     at $174,000  per month for the first year and  escalating  to $228,000  per
     month in the tenth year of the lease.  The  Company's  lease on its present
     86,000 square foot  headquarters  facility  expires in 1999,  and it is the
     Company's  intention to sublease its present  manufacturing  facility which
     occupies 34,500 square feet.



                                       7
<PAGE>


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



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

              You  should  not  rely  too  heavily  on  these  forward   looking
     statements.  They are subject to certain risks and  uncertainties  that may
     cause  actual  results to differ  materially  from past results or Cylink's
     predictions.  For a description of these risks see 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/A, 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.

     RESTATEMENT OF FINANCIAL RESULTS

              On November 5, 1998,  the Company  publicly  announced that it and
     its independent  accountants had initiated a review of revenue  recognition
     practices  which would result in a restatement  of previously  issued first
     and second  quarter 1998  results and that all three  quarters of 1998 were
     expected to show substantial  operating losses.  First quarter 1998 results
     reported in this Form 10-Q reflect the results of the restatement.

      DISCONTINUED OPERATIONS

              Pursuant to an asset purchase  agreement dated March 27, 1998, the
     Company  sold its Wireless  business to P-Com,  Inc. See Note 3 of Notes to
     Condensed Consolidated Financial Statements.  The sale resulted in an after
     tax gain of approximately $22.8 million.  Except where noted, the following
     comments are associated with the continuing network security business.

     RESULTS OF OPERATIONS

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


                                       8
<PAGE>


                                                         Three months ended
                                                         ------------------
                                                   Mar 28, 1999   March 29, 1998
                                                   ------------   --------------
                                                                    (restated)
     
     Revenue                                          100.0%           100.0%
     Cost of revenue                                   34.6             32.6
                                                    --------         --------
     Gross profit                                      65.4             67.4
                                                    --------         --------
     Operating expenses:                                          
       Research and development, net                   29.9             37.8
       Selling and marketing                           45.6             69.1
       General and administrative                      22.0             18.3
       Amortization of purchased intangibles            5.7              8.4
                                                    --------         --------
          Total operating expenses                    103.2            133.6
                                                    --------         --------
     Loss from operations                             (37.8)           (66.3)
                                                                  
     Other income, net                                  3.6              1.9
                                                    --------         --------
          before income taxes                         (34.2)           (64.4)
     Benefit from income taxes                          --             (22.5)
                                                    --------         --------
     Loss  from continuing operations                 (34.2)%          (41.9)%
                                                    ========         ========


              Revenue.  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.  Fees for  maintenance  and support
     services  are charged  separately.  Revenue  arising from sales of hardware
     products  is  recognized  upon  shipment  to  customers.   Concurrently,  a
     provision is made for estimated  cost to repair or replace  products  under
     warranty  arrangements.  Revenue from sales to  distributors  is recognized
     upon shipment;  no right of return,  stock rotation or price  protection is
     given.  Revenue  from sales to value added  resellers  is  recognized  upon
     shipment and  concurrently  a provision for  estimated  returns is recorded
     based on historical and anticipated experience.

              The Company also derives  revenue from the license of its software
     products as well as fees for  software  maintenance  and  support.  License
     revenues  are  recognized  upon  shipment of the product if no  significant
     vendor  obligations  remain and  collection of the resulting  receivable is
     probable.  In  instances  where a  significant  vendor  obligation  exists,
     revenue  recognition is delayed until the  obligation  has been  satisfied.
     Allowances  for  estimated   future  returns,   which  to  date  have  been
     immaterial,   are  provided  upon  shipment  and  revised  periodically  by
     management based on historical and anticipated experience.  Maintenance and
     support  fees  consist of  ongoing  support  and  product  updates  and are
     recognized ratably over the term of the contract, which is typically twelve
     months.  The Company has  recognized  software  revenue in accordance  with
     Statement  of  Position  97-2  entitled  "Software  Revenue   Recognition."
     Software revenue,  including related  maintenance and support fees, was not
     material in any period presented.

              Revenue increased 47% from $8.1 million for the three months ended
     March 29, 1998 to $11.9  million for the three months ended March 28, 1999.
     The increase is  attributable  to  increases in unit  shipments of existing
     products,  the introduction of products with higher average selling prices,
     and increased  revenues  associated with maintenance and support  services.
     International  revenue  was 50%  and 40% of  total  revenue  for the  first
     quarter of 1998 and 1999, respectively.


                                       9
<PAGE>

              Gross Profit. Gross profit increased 43% from $5.4 million for the
     three  months  ended  March 29, 1998 to $7.8  million for the three  months
     ended March 28, 1999. The increase in dollars was primarily a result of the
     increase in revenue. As a percentage of sales, gross profit was 67% and 65%
     for the first quarter of 1998 and 1999, respectively. The decrease in gross
     margin resulted primarily from unplanned excess manufacturing  capacity and
     the introduction of lower margin OEM products.

              Research  and  Development.   Research  and  development  expenses
     consist  primarily  of  salaries  and  other  personnel  related  expenses,
     depreciation  of  development  equipment,  facilities  and supplies.  Gross
     research and development  expenses  increased 33% from $3.0 million for the
     three  months  ended  March 29, 1998 to $4.0  million for the three  months
     ended  March  28,  1999.  Gross  research  and  development  expenses  as a
     percentage  of revenue  were 38% for the first  quarter of 1998 and 34% for
     the first quarter of 1999.  The dollar  increase  resulted  from  increased
     spending  on  externally  funded  contracts  and  development  costs of new
     products,  particularly in Israel.  The decrease in expense as a percentage
     of revenue is due to the increased revenue base.

              From time to time the  Company  receives  engineering  funding for
     development  of projects to apply or enhance the Company's  technology to a
     particular customer's need. The amounts recognized under these research and
     development contracts are offset against research and development expenses.
     No  engineering  funding was  recognized  during the first quarter of 1998.
     Amounts recognized under non-recurring  engineering  contracts totaled $0.4
     million for the first quarter of 1999.

              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  decreased  3% from $5.6  million for the three  months
     ended March 29, 1998 to $5.4  million for the three  months ended March 28,
     1999.  Selling and  marketing  expenses as a percentage of revenue were 69%
     and 46% for the first  quarter  of 1998 and 1999,  respectively.  Sales and
     marketing expenses decreased for the first quarter of 1999 primarily due to
     reduced  travel,  headcount  and  payroll  related  costs  undertaken  as a
     streamlining  measure,  offset by  increased  advertising,  trade shows and
     other  marketing  costs.  Selling and  marketing  expenses,  expressed as a
     percentage of revenue,  also decreased as a result of the increased revenue
     base.

              General and  Administrative.  General and administrative  expenses
     consist  primarily of personnel and related  costs,  recruitment  expenses,
     information systems costs, and audit, legal and other professional  service
     fees. General and  administrative  expenses increased 77% from $1.5 million
     for the three  months  ended March 29,  1998 to $2.6  million for the three
     months  ended  March 28,  1999.  General and  administrative  expenses as a
     percentage  of revenue  were 18% and 22% for the first  quarter of 1998 and
     1999,  respectively.  The dollar and percentage of revenue increases in the
     first  quarter of 1999 were  primarily  due to  increases in legal fees for
     litigation  defense,  and accounting and consulting expenses resulting from
     the restatement,  as well as recruiting and relocation  expenses related to
     senior management transition.

              Amortization  of  Goodwill  and  Other  Intangibles.  Amortization
     relating to goodwill and other  intangibles was $0.7 million in each period
     presented and relates to the acquisition of Algorithmic  Research,  Ltd and
     Algart Holdings, Ltd. (collectively "ARL") in September 1997.

              Benefit from Income Taxes. No provision for or benefit from income
     taxes was  recognized  in the  quarter  ended March 28, 1999 as the Company
     incurred a net operating  loss for income tax purposes and had no carryback
     potential.

              Other Income (Expense), Net. Other income (expense), net, consists
     primarily of interest income and interest  expense.  Interest income,  net,
     increased  from $0.2  million  for the first  three  months of 1998 to $0.3
     million for the first three months of 1999, principally due to the increase
     in cash and cash equivalents  resulting from proceeds of the Wireless Group
     divestiture.

     LIQUIDITY AND CAPITAL RESOURCES


              At March 28, 1999,  the Company had cash and cash  equivalents  of
     $42.9  million,  working  capital of $57.7  million and  minimal  long-term
     obligations.  For the three  months  ended  March  28,  1999,  the  Company
     recorded a net loss of $4.1 million.  Net cash used in continuing operating
     activities  for  the  first  quarter  of 1999  of  $3.6  million  consisted
     primarily  of the  loss  from  continuing  operations  and an  increase  in
     accounts  receivable  of $2.6  million, offset  in  part  by a  decrease in


                                       10
<PAGE>

     inventories of $2.4 million.  Both the increase in accounts  receivable and
     the decrease in  inventories  were the result of increased  sales.  For the
     three months ended March 29, 1998, the Company recorded net income of $19.1
     million due to the gain on sale of  Wireless.  Net cash used in  continuing
     operating  activities  for the  first  quarter  of  1998  of  $2.8  million
     consisted primarily of the loss from continuing  operations of $3.4 million
     and a decrease in income taxes payable of $2.4 million, offset in part by a
     decrease in accounts  receivable  of $1.2 million and increases in accounts
     payable and accrued  liabilities  of $1.0 million and  deferred  revenue of
     $1.0 million.

              Cash used in investing activities for the three months ended March
     28, 1999 was $0.1 million,  primarily to fund the  acquisition of property,
     plant and  equipment.  Cash provided by investing  activities for the three
     months ended March 29, 1998 was $41.4  million,  of which $46.0 million was
     attributable  to the  sale  of  Wireless.  The  funds  attributable  to the
     Wireless  sale were  partially  offset by  expenditures  for  property  and
     equipment of $0.7  million,  long-term  loans to employees of $0.8 million,
     and a $3.0 million  investment  in the preferred  stock of an  unaffiliated
     company.

              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.

              The  Company   believes  that  existing  cash  balances  and  cash
     generated  from  operations,  if any, will be sufficient to fund  necessary
     purchases of capital  equipment and to provide  working  capital through at
     least the next twelve months.  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 on  terms
     favorable to the Company or its shareholders.

     Year 2000 Compliance

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

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

              Cylink has  initiated  a review of its mission  critical  internal
     information systems (including the third-party  software for its management
     information systems,  networks and desktop  applications,  and its hardware
     telecommunications  technology).  Cylink expects to complete that review by
     mid 1999. When deficiencies are identified in critical  components,  Cylink
     is purchasing  new or upgraded  versions which have been certified by their
     vendors as compliant.

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

              Cylink  has not  developed  a  comprehensive  contingency  plan to
     address situations that may result if Cylink is unable to achieve Year 2000
     readiness  of  its  critical   operations.   The  cost  of  developing  and
     implementing such a plan may itself be material.


                                       11
<PAGE>

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

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


                                       12
<PAGE>






     RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

              Cylink has historically  experienced  significant  fluctuations in
     its  operating  results  on a  quarterly  basis and could  experience  such
     fluctuations in the future.  Cylink's  operating  results are affected by a
     number  of  factors,  many  of  which  are  outside  of  Cylink's  control,
     including:  the timing of the  introduction of new or enhanced  products by
     Cylink or its competitors; market acceptance of new products of Cylink, 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  Cylink's  direct sales  force;  personnel  changes;
     general economic conditions;  and fluctuations in foreign currency exchange
     rates.  Cylink  expects to introduce a number of new products  during 1999.
     The failure of such new products to achieve  market  acceptance at the time
     anticipated  by Cylink,  or at all, would  materially and adversely  affect
     Cylink's financial condition and results of operations.

              In connection  with the  acquisition of ARL in September 1997, the
     Company  allocated  $63.9  million  of the  purchase  price  to  in-process
     research  and  development  ("IPR&D"),  and in  accordance  with  generally
     accepted  accounting  principles  recorded an immediate  charge off of that
     amount  on the date of  acquisition.  The  amount  allocated  to IPR&D  was
     determined  in  a  manner  consistent  with  widely  recognized   appraisal
     practices  and reviewed by our  independent  accountants  in the context of
     their examination of the financial statements taken as a whole.

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


     Pending Litigation

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

     Dependence on Key Personnel

              On November 4, Mr. William C. Crowell,  formerly Vice President of
     Product  Strategy,  was promoted to President and Chief Executive  Officer,
     and on November 16, Mr. Roger A. Barnes  became  Cylink's  Chief  Financial
     Officer.  Cylink's  future  success  will  depend on the  abilities  of Mr.
     Crowell  and  the  contributions  by  its  other  executive  officers,  key
     management and technical personnel. The loss of the services of one or more
     of  Cylink's  executive  officers or key  personnel,  or the  inability  to
     continue to attract and retain  qualified  personnel,  could delay  product
     development  cycles or otherwise have a material adverse effect on Cylink's
     business and operating results. Retention and attraction of such  qualified


                                       13
<PAGE>

     personnel  may become even more  difficult  for Cylink  following  Cylink's
     recent  restatement  of its financial  statements  and recently  determined
     losses.

     Lengthy Sales Cycle

              Sales  of  Cylink's  products   generally  involve  a  significant
     commitment of capital by customers,  with the attendant  delays  frequently
     associated  with large capital  expenditures.  For these and other reasons,
     the sales cycle associated with Cylink's  products is typically lengthy and
     subject to a number of significant risks over which Cylink has little or no
     control.  Cylink  is  often  required  to ship  products  shortly  after it
     receives  orders and,  consequently,  order backlog at the beginning of any
     period has in the past  represented  only a small  portion of that period's
     expected  revenue.   As  a  result,   product  revenue  in  any  period  is
     substantially dependent on orders booked and shipped in that period. Cylink
     typically  plans its  production  and  inventory  levels  based on internal
     forecasts  of  customer  demand,  which are  highly  unpredictable  and can
     fluctuate substantially.  In addition, Cylink's current or future customers
     may curtail or suspend  investments in securing their existing  networks as
     the Year 2000 approaches,  or divert technology  expenditures  reserved for
     enterprise  security  products  in order to  address  Year 2000  compliance
     problems (see further  discussion under Year 2000 below).  If revenue falls
     significantly  below  anticipated  levels,  as it has at times in the past,
     Cylink's financial  condition and results of operations would be materially
     and adversely affected. In addition,  Cylink's operating expenses are based
     on anticipated  revenue levels and a high  percentage of Cylink's  expenses
     are  generally  fixed in the short term.  Based on these  factors,  a small
     fluctuation  in the  timing of sales can cause  operating  results  to vary
     significantly  from period to period.  For example,  on September 14, 1998,
     Cylink  announced  that its earnings for the third quarter of 1998 would be
     below  consensus  estimates.  It is  possible  that in the future  Cylink's
     operating  results  will  again be below  the  expectations  of  securities
     analysts  and  investors.  In such an event,  or in the event that  adverse
     conditions prevail or are perceived to prevail generally or with respect to
     Cylink's  business,  the price of Cylink's  Common  Stock  would  likely be
     materially adversely affected.

     Dependence on Recently Introduced and New Information Security Products

              Cylink's future results of operations will be highly  dependent on
     the  successful  completion  of  the  design,  development,   introduction,
     marketing and manufacture of the Cylink Link  Encryptors,  PrivaCy Manager,
     PrivateWire  and Cylink  Frame  Encryptor  products,  which  were  recently
     introduced. To date,  Cylink has made only  limited and, in some cases,  no
     commercial  shipments of certain  versions of such  products.  Furthermore,
     Cylink relies on a third party original  equipment  manufacturer  to supply
     Cylink's ATM Encryptor product, and Cylink is dependent on this supplier to
     complete  successful  integration of Cylink's  PrivaCy Manager with the ATM
     Encryptor.   These  products  may  require  additional   development  work,
     enhancement,  testing or further  refinement  before they can be introduced
     and made commercially available by Cylink or 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.  The  failure by Cylink's  new or existing  products to
     achieve or enjoy  market  acceptance,  whether for these or other  reasons,
     could cause  Cylink to  experience  reduced  orders,  higher  manufacturing
     costs, delays in collecting accounts receivable and additional warranty and
     service  expenses,  which in each case could have a material adverse effect
     on Cylink's business, financial condition and results of operations.

     Competition

              Competition  is  intense  among  providers  of  network   security
     systems,  and Cylink  expects such  competition  to increase in the future.
     Significant competitive factors in these markets include the development of
     new products and features, product quality and performance, the quality and
     experience of sales,  marketing and service  organizations,  product price,
     name  recognition  and  perception  of  Company   stability  and  long-term
     viability.  Many of these factors are beyond Cylink's control. In addition,
     some factors,  such as the  perception of Cylink's  stability and viability
     over  the  long  term  may  have  been  adversely  affected  by the  recent
     restatement  of Cylink's 1997 and first and second  quarter 1998  financial
     statements,  which could  materially  adversely  impact Cylink's ability to
     compete.

              Cylink's   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., Secure Computing
     Corporation,  Security Dynamics Technologies,  Inc., Racal-Guardata,  Inc.,
     and Information Resource Engineering, Inc. Cylink's OEM supplier


                                       14
<PAGE>

     of its ATM Encryptor  product also competes with Cylink,  both directly and
     through other channels,  for sales of this product.  In addition,  Northern
     Telecom Limited,  AT&T, Motorola  Corporation,  and Sun Microsystems,  Inc.
     offer  certain  information  security  products  as part of  their  overall
     networking solutions. A number of significant vendors,  including Microsoft
     Corporation,  Netscape Communications  Corporation and Cisco Systems, Inc.,
     have  embedded  security  solutions in their  software.  To the extent that
     these embedded or optional security  capabilities  provide all or a portion
     of the functionality  provided by Cylink's products,  Cylink's products may
     no longer be required by customers to attain network security.

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

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

     Product Liability Risks

              Customers rely on Cylink's  network  security  products to prevent
     unauthorized access to their networks and data transmissions. A malfunction
     or the  inadequate  design of  Cylink's  products  could  result in tort or
     warranty claims. Although Cylink attempts to reduce the risk of such losses
     through warranty  disclaimers and liability limitation clauses in its sales
     and license  agreements and by  maintaining  product  liability  insurance,
     there can be no assurance  that such measures will be effective in limiting
     Cylink's  liability  for  any  such  damages.  Any  liability  for  damages
     resulting  from security  breaches  could be  substantial  and could have a
     material  adverse  effect on Cylink's  business,  financial  condition  and
     results of operations.

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

     Year 2000

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

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

              Cylink has largely  completed  all phases of its plan,  except for
     contingency  planning,  with respect to the current  versions of all of its
     products.  As a  result,  the  current  versions  of each  of its  products
     currently  offered for sale are "Year 2000  Compliant"  as  defined  below,
     when configured and used in accordance with the related documentation,  and
     provided that the underlying  operating  system of the host machine and any
     other  software  used with or in the host machine or Cylink's  products are
     also  Year 2000  Compliant.  In  some cases,  Cylink's products  require an


                                       15
<PAGE>

     upgrade provided by Cylink which is either sold as a complete substitute or
     as a kit sold with the product in order to be Year 2000 Compliant.

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

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

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

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

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

              Cylink has  initiated  a review of its mission  critical  internal
     information systems (including the third-party  software for its management
     information systems,  networks and desktop  applications,  and its hardware
     telecommunications  technology).  Cylink expects to complete that review by
     mid 1999.  To the  extent  that  Cylink is not able to test the  technology
     provided by third-party vendors, Cylink is purchasing upgrades for versions
     which have been certified by their vendors as compliant. Although Cylink is
     not currently aware of any material  operational issues or costs associated
     with preparing its internal  information  systems for the Year 2000, Cylink
     may  experience  material   unanticipated  problems  and  costs  caused  by
     undetected  errors or defects  in the  technology  used in its  information
     systems.

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

              Cylink  has not  developed  a  comprehensive  contingency  plan to
     address situations that may result if Cylink is unable to achieve Year 2000
     readiness  of  its  critical   operations.   The  cost  of  developing  and
     implementing  such a plan may itself be material.  Finally,  Cylink is also
     subject  to  external  forces  that might  generally  affect  industry  and
     commerce,  such as utility or  transportation  company Year 2000 compliance
     failures and related service interruptions.

              Were Cylink to experience an unanticipated Year 2000 interruption,
     business operations could be seriously impaired for an indefinite period of
     time until remedial efforts could be achieved.


                                       16
<PAGE>

     Management of Growth And Reduction In Employees

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

              With the sale of its Wireless  Communications Group (the "Wireless
     Group") in March,  1998, Cylink has experienced a significant  reduction in
     employees,  including  Cylink's  former Chief  Technical  Officer,  Dr. Jim
     Omura. The sale of its Wireless Group, the uncertainty  created by Cylink's
     recent  restatements  of its financial  results,  the  initiation of highly
     publicized  class actions  securities  litigation  against Cylink,  and the
     occasional  reductions  in  specific  engineering  programs  in the network
     security  business,  has  created  some  instability  within  the  existing
     employee  population  resulting  in  departures  of certain  key  employees
     critical  to  sustaining  growth in  Cylink's  network  security  business.
     Furthermore,  sudden reductions in the number of Cylink's  employees places
     greater  demands on the  remaining  employees  which may distract them from
     fulfilling  their  responsibilities  necessary  to  accomplishing  Cylink's
     financial goals.

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

     Intellectual Property and Other Proprietary Rights

              Cylink  relies on patents,  trademarks,  copyrights,  licenses and
     trade  secret law to  establish  and  preserve  its  intellectual  property
     rights.  The Company owns a number of U.S. patents covering certain aspects
     of its network  security  product  designs,  and has additional U.S. patent
     applications pending. There can be no assurance that any patent, trademark,
     copyright  or  license  owned or held by  Cylink  will not be  invalidated,


                                       17
<PAGE>

     circumvented or challenged, that the rights granted thereunder will provide
     competitive  advantages to Cylink or that any of Cylink's pending or future
     patent  applications  will be issued with the scope of the claims sought by
     Cylink, if at all. Further,  there can be no assurance that others will not
     develop  technologies that are similar or superior to Cylink's  technology,
     duplicate Cylink's technology or design around the patents owned by Cylink.
     Cylink may be subject to or may initiate  interference  proceedings  in the
     U.S. Patent Office, which can require significant  financial and management
     resources.  In addition,  the laws of certain  countries in which  Cylink's
     products  are or may be  developed,  manufactured  or sold may not  protect
     Cylink's  products and  intellectual  property rights to the same extent as
     the laws of the United  States.  The  inability  of Cylink to  protect  its
     intellectual  property  adequately  could have a material adverse effect on
     its financial condition and results of operations.

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

     Evolving Network Security Market; Market Acceptance Risks

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

              In addition,  a portion of the sales of Cylink's  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.

     Rapid Technological Change

              The markets for  Cylink's  products are  characterized  by rapidly
     changing  technologies,  extensive research and new product  introductions.
     Cylink  believes  that its  future  success  will  depend  in part upon its


                                       18
<PAGE>
     ability to  continue  to enhance  its  existing  products  and to  develop,
     manufacture  and  market  new  products.  As a result,  Cylink  expects  to
     continue to make a  significant  investment  in  engineering,  research and
     development.  Cylink may not be able to develop and  introduce new products
     or enhancements  to its existing  products in a timely manner which satisfy
     customer needs, achieve market acceptance or address  technological changes
     in its  target  markets.  The  failure of Cylink to  develop  products  and
     introduce them  successfully  and in a timely manner could adversely affect
     Cylink's   competitive   position,   financial  condition  and  results  of
     operations.

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

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

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

              Due to U.S. and Israeli  government  regulations  restricting  the
     export of cryptographic devices and software, including certain of Cylink's
     network security  products,  Cylink is often at a disadvantage in competing
     for  international  sales compared to companies  located outside the United
     States and Israel that are not subject to such restrictions. The regulatory
     environment  in the  United  States for export of  encryption  products  is
     particularly  unsettled,  with various pending  legislative initiatives and
     conflicting  judicial  decisions,  all causing  substantial  uncertainty in
     Cylink's  international market. This confusion is often exacerbated by U.S.
     vendors' incomplete or inaccurate press releases concerning export licenses
     for their  products,  and foreign  competitors  marketing  campaigns  which
     stress  the  restrictions  on  purchasing  encryption  products  from  U.S.
     vendors. There is no assurance that this disruption will end anytime within
     the near future.

     Dependence on Component  Availability,  Subcontractor  Performance  and Key
     Suppliers

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


     Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

     PART II.  OTHER INFORMATION

     Item 1.   Legal Proceedings

              On March 7, 1997,  ten former  employees of the Company filed suit
     in action No. CV764647 in the Superior Court of California, County of Santa
     Clara, against the Company,  each of its Directors and its General Counsel,
     asserting  claims for wrongful  termination,  fraud,  libel,  slander,  age
     discrimination,  invasion of privacy,  and  violation  of the federal  RICO
     statute.  On July 11, 1997, an eleventh  employee  filed suit in action no.
     CV767448  in the  Superior  Court of  California,  County  of Santa  Clara,
     alleging  similar  claims  against  the  Company  and its  Chief  Executive
     Officer. The Company removed CV764647 to the Federal District Court for the
     Northern  District of California  and, after the Company  obtained an order
     dismissing certain of the plaintiff's claims, including the claims of libel
     and RICO violations,  the Court remanded the action back to the Santa Clara

                                       19
<PAGE>

     Superior Court. Following mediation efforts in October, 1998, the plaintiff
     in  CV767448  accepted  a  settlement  and  dismissed  his  complaint  with
     prejudice. The remaining plaintiffs subsequently dismissed, with prejudice,
     all of the  outside  Directors  except the  Chairman. On  December 4, 1998,
     December 18, 1998,  March 26, 1999,  and April 5, 1999,  the Court  granted
     various  motions by Cylink for summary  judgement  and for dismissal of the
     majority  of the  claims in  CV764647,  including  all claims  against  the
     Chairman.  Discovery  with respect to the remaining  claims is  continuing,
     with trial  expected  by late 1999.  Although  the  Company  has placed its
     insurers on notice of these claims, all of its insurers have reserved their
     rights and defenses under their  policies,  and the extent of the insurers'
     liability  under their  respective  policies is  undetermined.  The Company
     believes the terminations were lawful, in the best interest of the Company,
     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.

              After  asserting  certain  deductions  arising  under the contract
     dated March 28, 1998, for the purchase of Cylink's  Wireless  Group,  P-Com
     made a partial  payment on July 14, 1998,  in the amount of $8.9 million on
     its  promissory  note dated April 1, 1998.  Cylink is presently  discussing
     with P-Com the basis of its deductions and, failing an amicable  resolution
     of P-Com's contentions, the matter may proceed to litigation.

              On  September  3, 1998,  P-Com put Cylink on notice  that  certain
     shipments  in the fourth  quarter of 1997 and the first  quarter of 1998 by
     the  Company's  former  Wireless  Group  and  having  an  invoice  value of
     approximately  $3.5  million  had been  seized by an  agency of the  United
     States  Department  of the Treasury  and that P-Com  intends to hold Cylink
     responsible  for  the  consequences  of  this  event.  P-Com  is  currently
     petitioning for release of the goods.  Based on Cylink's  investigation  to
     date, Cylink believes either that the grounds for the seizure are unfounded
     or that P-Com is responsible for this action.  Cylink has no reason at this
     time to believe  that it is the subject of any official  investigation  and
     Cylink  has been  informed  that  P-Com is  presently  petitioning  for the
     release of the seized  goods.  A failure by P-com to obtain  release of the
     shipment  due to a violation of law by Cylink  might  adversely  affect the
     amount  collected  from  P-Com on its  outstanding  obligations  under  the
     promissory note, including payment of any relevant fines or penalties.

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

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


     Item 6.   Exhibits and Reports on Form 8-K

     (a) Exhibits Index:

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

          27.1     Financial Data Schedule

     (b) Reports on Form 8-K;
          
             Cylink filed a report on Form 8-K, with respect  to  Items five and
             seven, on January 29, 1999.

     Items 3, 4, and 5 are not applicable and have been omitted.
          
                                       20
<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, 1999                      CYLINK CORPORATION

                                             By:  /s/  ROGER A. BARNES 
                                                  ------------------------------
                                                  Roger A. Barnes
                                                  Vice President of Finance
                                                    and Administration and
                                                    Chief Financial Officer
                                                    (Duly Authorized Officer and
                                                    Principal Financial Officer)


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