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 29, 1998

                           Commission File No. 0-27742


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


          California                                             95-3891600
 (State or other jurisdiction                                 (I.R.S. Employer
of 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 7, 1998, there were 28,984,346 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
(in thousands, except share and per share data; unaudited)

<CAPTION>
                                                                                                     March 29,          December 31,
                                                                                                       1998                  1997 
                                                                                                     ---------            ---------
<S>                                                                                                  <C>                  <C>      
                                     Assets
Current assets:
   Cash and cash equivalents                                                                         $  58,078            $  22,977
   Accounts receivable, net of allowances of $309 and $278                                              21,840               15,557
   Inventories                                                                                           5,955                6,224
   Net assets of discontinued operations                                                                14,500               13,218
   Deferred income taxes                                                                                 1,760                1,533
   Other current assets                                                                                  2,323                2,190
                                                                                                     ---------            ---------
            Total current assets                                                                       104,456               61,699

Property and equipment, net                                                                              6,041                6,003
Acquired technology, goodwill and other intangibles, net                                                 7,338                8,017
Notes receivable from employees                                                                          4,318                3,473
Other assets                                                                                             3,989                  925
                                                                                                     ---------            ---------
                                                                                                     $ 126,142            $  80,117
                                                                                                     =========            =========
                      Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of lease obligations and long-term debt                                           $     196            $     210
   Accounts payable                                                                                      2,936                2,238
   Accrued liabilities                                                                                   6,435                6,194
   Accrued liabilities related to discontinued operations                                                6,773                 --   
   Income taxes payable                                                                                 14,405                1,898
   Deferred revenue                                                                                        839                  206
                                                                                                     ---------            ---------
            Total current liabilities                                                                   31,584               10,746
                                                                                                     ---------            ---------

Capital lease obligations and long-term debt                                                               215                  256
                                                                                                     ---------            ---------
Deferred income taxes                                                                                       13                   13
                                                                                                     ---------            ---------
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;
      28,887,000 and 28,695,000 shares issued and outstanding                                              289                  287
   Additional paid-in capital                                                                          121,575              120,092
   Deferred compensation related to stock options                                                         (229)                (250)
   Cumulative translation adjustment                                                                       (47)                 (63)
   Accumulated deficit                                                                                 (27,258)             (50,964)
                                                                                                     ---------            ---------
            Total shareholders' equity                                                                  94,330               69,102
                                                                                                     ---------            ---------
                                                                                                     $ 126,142            $  80,117
                                                                                                     =========            =========

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

                                                                  2

<PAGE>


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

<CAPTION>
                                                                                                           Three Months Ended     
                                                                                                     ------------------------------
                                                                                                     March 29,             March 28,
                                                                                                       1998                  1997 
                                                                                                     --------              --------
<S>                                                                                                  <C>                   <C>     
Revenue                                                                                              $ 15,829              $  9,352
Cost of revenue                                                                                         3,611                 2,810
                                                                                                     --------              --------
Gross profit                                                                                           12,218                 6,542
                                                                                                     --------              --------

Operating expenses:
   Research and development, net                                                                        3,045                 3,018
   Selling and marketing                                                                                5,573                 2,782
   General and administrative                                                                           1,408                 1,900
   Amortization of purchased intangibles                                                                  679                  --   
                                                                                                     --------              --------
            Total operating expenses                                                                   10,705                 7,700
                                                                                                     --------              --------

Income (loss) from operations                                                                           1,513                (1,158)

Other income:
   Interest income, net                                                                                   152                   942
   Royalty and other income (expense), net                                                               --                     131
                                                                                                     --------              --------

Income (loss) from continuing operations before income taxes                                            1,665                   (85)
Provision for income taxes                                                                                583                  --   
                                                                                                     --------              --------
Income (loss) from continuing operations                                                                1,082                   (85)
Income (loss) from discontinued operations,
   net of income tax expense (benefit) of $(89) and $474                                                 (166)                1,192
Gain on disposal of discontinued operations,
   net of income tax expense of $12,358                                                                22,790                  --   
                                                                                                     --------              --------
Net income                                                                                           $ 23,706              $  1,107
                                                                                                     ========              ========

Earnings per share - basic:
   Continuing operations                                                                             $   0.04              $   --
   Discontinued operations                                                                               0.78                  0.04
                                                                                                     --------              --------
   Net income                                                                                        $   0.82              $   0.04
                                                                                                     ========              ========

Earnings per share - diluted:
   Continuing operations                                                                             $   0.04              $   --
   Discontinued operations                                                                               0.74                  0.04
                                                                                                     --------              --------
   Net income                                                                                        $   0.78              $   0.04
                                                                                                     ========              ========

Shares used in per share calculation - basic                                                           28,820                25,701
                                                                                                     ========              ========

Shares used in per share calculation - diluted                                                         30,440                25,701
                                                                                                     ========              ========

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

                                                                 3

<PAGE>


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

<CAPTION>
                                                                                                          Three Months Ended     
                                                                                                      -----------------------------
                                                                                                      March 29,           March 28,
                                                                                                        1998                 1997 
                                                                                                      --------             --------
<S>                                                                                                   <C>                  <C>      
Cash flows from operating activities:
   Income (loss) from continuing operations                                                           $  1,082             $    (85)
   Adjustments to reconcile income (loss) to net
      cash used in continuing operations:
         Depreciation and amortization                                                                     988                  384
         Deferred compensation related to stock options                                                     21                   21
         Deferred income taxes                                                                            (227)                --   
         Changes in assets and liabilities:
            Accounts receivable                                                                         (6,283)                 (58)
            Inventories                                                                                    269                 (513)
            Other assets                                                                                  (197)              (1,281)
            Accounts payable                                                                               698                 (434)
            Accrued liabilities                                                                            241                  389
            Deferred revenue                                                                               633                  (19)
                                                                                                      --------             --------
            Net cash used in continuing operations                                                      (2,775)              (1,596)
            Net cash provided by (used in) discontinued operations                                      (4,293)                 326
                                                                                                      --------             --------
               Net cash used in operating activities                                                    (7,068)              (1,270)
                                                                                                      --------             --------

Cash flows from investing activities:
   Acquisition of property and equipment                                                                  (707)              (1,029)
   Loans to employees in exchange for notes receivable                                                    (845)              (3,473)
   Proceeds from sale of discontinued operations                                                        46,000                 --   
   Acquisition of preferred stock of Syndata Technologies                                               (3,000)                --   
                                                                                                      --------             --------
               Net cash provided by (used in) investing activities                                      41,448               (4,502)
                                                                                                      --------             --------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                                             760                  129
   Payment of notes receivable from shareholders                                                          --                    301
   Repayment of capital lease obligations and long-term debt                                               (55)                 (53)
                                                                                                      --------             --------
               Net cash provided by financing activities                                                   705                  377
                                                                                                      --------             --------
Effect of exchange rate changes on cash and cash equivalents                                                16                  (83)
                                                                                                      --------             --------
Net increase (decrease) in cash and cash equivalents                                                    35,101               (5,478)
Cash and cash equivalents at beginning of period                                                        22,977               78,849
                                                                                                      --------             --------
Cash and cash equivalents at end of period                                                            $ 58,078             $ 73,371
                                                                                                      ========             ========

Supplemental disclosures:
   Cash paid for income taxes                                                                         $     39             $      6
   Cash paid for interest                                                                                   15                   21

<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, 1997.  Interim  results
     of operations are not necessarily  indicative of the results to be expected
     for the full year.

         Beginning  in 1998,  the  Company's  interim  quarters  end on the last
     Sunday  preceding  the calendar  quarter  end.  Previously,  the  Company's
     interim  quarters ended on the last Friday  preceding the calendar  quarter
     end.

2.    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).  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 offset  against the gain on disposal.  Wireless  revenues were $6.8 and
     $4.5  million  in the first  quarter  of 1997 and 1998,  respectively.  Net
     assets of discontinued  operations at March 29, 1998,  relate  primarily to
     accounts receivable.

3.   Notes Receivable From Employees

         Pursuant to their employment  agreements and related  promissory notes,
     during  the  first  quarter  of 1997 and 1998 the  Company  loaned  certain
     employees  $3,473,000 and $845,000,  respectively,  towards the purchase of
     their principal residences. Of these amounts, $3,688,000 is receivable from
     officers of the Company. The notes are interest free and are due five years
     from the dates of the related notes, at which time the notes must be repaid
     or  convert  into,  and  become  subject  to,  the  terms  of  a  standard,
     interest-bearing  commercial  loan. The notes are secured by deeds of trust
     on the residences.  The loan agreements provide for accelerated  payment in
     the event of termination of employment under certain conditions and, in one
     instance, under certain circumstances will be forgiven to the extent of any
     decrease in the value of the  related  residence.  Subsequent  to March 29,
     1998,  the Company  loaned  officers an additional  $1,400,000  towards the
     purchase of principle residences under substantially similar terms.

4.  Inventories

                                                    March 29,    December 31,
                                                      1998           1997 
                                                     ------         ------
                                                         (in thousands)
Raw materials                                        $3,038         $2,191
Work in process and subassemblies                     2,026          1,858
Finished goods                                          891          2,175
                                                     ------         ------
                                                     $5,955         $6,224
                                                     ======         ======

                                       5

<PAGE>


5.   Earnings Per Share

         Basic earnings per share amounts were calculated by dividing net income
     (loss) by the weighted average number of common shares outstanding. For the
     first quarter of 1998, diluted earnings per share amounts were based on the
     same  reported  earnings but assumed the  issuance of  1,620,000  shares of
     common stock upon exercise of outstanding  stock options using the treasury
     stock method. For the first quarter of 1998,  weighted-average  unexercised
     stock options to purchase 225,000 shares of common stock were excluded from
     the  computation  of diluted  earnings  per share as the  options  exercise
     prices were greater than the average  market price of the Company's  common
     stock and were, therefore, antidilutive. For the first quarter of 1997, all
     3,647,000 weighted-average outstanding stock options were excluded from the
     computation of earnings per share as they were antidilutive.

6.    Change in Accounting Policy

         Effective  January 1, 1998, the Company adopted  Statement of Financial
     Accounting  Standards  No.  130,  "Reporting  Comprehensive  Income."  This
     Statement establishes standards for reporting  comprehensive income and its
     components in an annual financial statement that is displayed with the same
     prominence as other financial statements. Comprehensive income, as defined,
     includes all changes in equity (net assets)  during a period from  nonowner
     sources.  Examples of items to be included in comprehensive  income,  which
     are  excluded  from  net  income,   include  foreign  currency  translation
     adjustments  and  unrealized  gain/loss on  available-for-sale  securities.
     Annual  financial  statements  for prior periods will be  reclassified,  as
     required. The Company's total comprehensive earnings were as follows:

                                                           Three Months Ended   
                                                         ----------------------
                                                        March 29,      March 28,
                                                          1998            1997 
                                                         -------        -------
                                                             (in thousands)
Net income                                               $23,706        $ 1,107
Other comprehensive income (loss)                             16            (83)
                                                         -------        -------
Total comprehensive income                               $23,722        $ 1,024
                                                         =======        =======


         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
     Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise
     and Related  Information." This statement establishes standards for the way
     companies report  information about operating  segments in annual financial
     statements.  It also establishes  standards for related  disclosures  about
     products and services,  geographic areas, and major customers.  The Company
     has not yet  determined  the  impact of  adopting  this new  standard.  The
     disclosures  prescribed  by FAS 131 are  effective  for  1998,  and are not
     required   for  interim   periods.   The  Company   does  not  expect  this
     pronouncement to have a material impact on its financial statements.

                                       6

<PAGE>


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


         The  statements  contained  in this  Report  on Form  10-Q that are not
purely historical are  forward-looking  statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of  1934,   including  statements   regarding  Cylink's   expectations,   hopes,
intentions,   beliefs  or  strategies  regarding  the  future.   Forward-looking
statements  include:  the Company's  statements in Part I, Item 2  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
regarding  the  sufficiency  of the  Company's  existing  liquidity  and capital
resources,  management's belief that resolution of certain litigation  described
in Part II, Item 1 "Legal  Proceedings"  will not have a material adverse effect
on the Company's  financial  position and results of  operations,  the Company's
expectation that it will introduce a number of new products in 1998 and continue
to make a significant investment in engineering,  research and development,  its
intention  to  expand  its  foreign   sales   channels   and  enter   additional
international  markets,  and the  Company's  intention  to protect  itself  from
liability  arising out of "year 2000  errors."  All  forward-looking  statements
included in this document are based on  information  available to the Company as
of the date of this Report on Form 10-Q,  and the Company  assumes no obligation
to update any such  forward-looking  statements,  or to update the  reasons  why
actual  results  could  differ  from  those  projected  in  the  forward-looking
statements.  It is important to note that the  Company's  actual  results  could
differ materially from those in such forward-looking  statements for the reasons
detailed in "Risk Factors That May Affect Future  Results" and other sections of
this Report on Form 10-Q.  You should also consult the risk factors  listed from
time to time in the Company's Reports on Form 10-Q, 8-K, 10-K and Annual Reports
to the Shareholders.

BUSINESS ACQUISITION

         Pursuant  to an asset  purchase  agreement  dated March 27,  1998,  the
Company sold its Wireless business for approximately $46.0 million in cash and a
$14.5 million  unsecured note receivable due 100 days after closing,  subject to
closing  adjustments.  See Note 2 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

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

         The Company's  revenue increased by 69% from $9.4 million for the three
months  ended March 28, 1997 to $15.8  million for the three  months ended March
29, 1998.  Approximately  50% of the  increased  revenue  resulted from sales of
recently introduced  PrivateWire  products,  with the remainder due to increased
shipments  of  the  Company's   Link   Encryption  and   SecureFrame   products.
International  revenue was 41% and 34% of total revenue for the first quarter of
1997 and 1998, respectively.

         Gross Profit.  Gross profit  increased by 87% from $6.5 million for the
three  months  ended March 28, 1997 to $12.2  million for the three months ended
March  29,  1998.  The  increase  in  dollars  was  primarily  a  result  of the
significant  increase in revenue. As a percentage of sales, gross profit was 70%
and 77% for the first  quarter of 1997 and 1998,  respectively.  The increase in
gross margin resulted  primarily from the increased  percentage of total revenue
represented by software and  software-intensive  products,  such as PrivateWire,
which generally have higher gross margins than hardware-intensive products. To a
lesser degree,  the increase in gross margin was due to lower average unit costs
for existing 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  decreased  17% from $3.6  million for the three months ended March 28,
1997 to $3.0 million for the three months ended March 29, 1998.  Gross  research
and  development  expenses as a  percentage  of revenue were 38% and 19% for the
first quarter of 1997 and 1998,  respectively.  The percentage decrease resulted
primarily  from the  Company's  increased  revenue  base.  The  dollar  decrease
resulted from reduced contract and other variable expenses related to externally
funded  development  and to cost  containment  efforts.  From  time to time  the
Company

                                       7

<PAGE>


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.  The  amounts  recognized  under  non-recurring   engineering
contracts totaled $0.6 million for the first quarter of 1997.

         Selling and Marketing. Selling and marketing expenses consist primarily
of  personnel   expenses,   including  sales   commissions,   and  expenses  for
advertising,  public relations,  seminars and trade shows. Selling and marketing
expenses  increased  100% from $2.8 million for the three months ended March 28,
1997 to $5.6  million for the three  months  ended March 29,  1998.  Selling and
marketing  expenses as a  percentage  of revenue  were 30% and 35% for the first
quarter of 1997 and 1998,  respectively.  Sales and marketing expenses increased
from the  first  quarter  of 1997  primarily  to  support  the  launch of new or
enhanced products, as well as due to continued expansion of the Company's direct
sales   operations,   product  line   management,   marketing   development  and
international operations.  Additionally,  sales and marketing expenses increased
due to  integration  expenses  resulting  from the  acquisition  of  Algorithmic
Research ("ARL") in September 1997.

         General and Administrative. General and administrative expenses consist
primarily of personnel  and related  costs,  recruitment  expenses,  information
systems costs, and audit, legal and other professional service fees. General and
administrative  expenses  decreased  26% from $1.9  million for the three months
ended March 28, 1997 to $1.4  million for the three  months ended March 29, 1998
General and  administrative  expenses as a percentage of revenue were 20% and 9%
for the first quarter of 1997 and 1998,  respectively.  The dollar decrease from
the first quarter of 1997 was primarily due to decreases in consulting expenses,
recruiting and relocation  expenses related to senior management  transition and
legal fees.

         Other Income  (Expense),  Net. Other income  (expense),  net,  consists
primarily  of  interest  income and  interest  expense.  Interest  income,  net,
decreased  from $0.9  million for the first three months of 1997 to $0.2 million
for the first three months of 1998,  principally due to the decrease in cash and
cash  equivalents  resulting  from  investing  activities  and  working  capital
requirements.

LIQUIDITY AND CAPITAL RESOURCES

         At March 29, 1998,  the Company had cash and cash  equivalents of $58.1
million, working capital of $72.9 million and minimal long-term obligations. For
the three months ended March 29, 1998, the Company  recorded net income of $23.7
million,  largely  due to the  gain  on  sale  of  Wireless.  Net  cash  used in
continuing  operating  activities  for the first quarter of 1998 of $2.5 million
consisted  primarily of increases in accounts  receivable,  partially  offset by
income from continuing operations and an increase in current liabilities.

         Cash provided by investing  activities for the three months ended March
29, 1998 was $41.4 million, of which $46.0 million was attributed to the sale of
Wireless.  The funds  attributable to the Wireless sale were partially offset by
expenditures  for property and  equipment of $0.7  million,  long-term  loans to
employees of $0.8 million,  and a $3.0 million investment in the preferred stock
of Syndata Technologies, Inc.

         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 remainder
of 1998.  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.

                                       8

<PAGE>


RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

         The Company  incurred losses from continuing  operations in 1994, 1995,
1996 and 1997.  There can be no  assurances  that the Company  will  increase or
maintain its revenue or be  profitable  on a quarterly or an annual basis in the
future. The Company has historically experienced significant fluctuations in its
operating  results on an annual and a quarterly basis and could  experience such
fluctuations in the future.  The Company's  operating  results are affected by a
number  of  factors,  many  of  which  are  outside  of the  Company's  control,
including:  the timing of the  introduction  of new or enhanced  products by the
Company or its  competitors;  market  acceptance of new products of the Company,
its customers and its competitors; the timing, cancellation or delay of customer
orders,   including  cancellation  or  delay  in  anticipation  of  new  product
introduction   or  enhancement  or  resulting   from   uncertainty   related  to
intellectual property claims;  competitive factors, including pricing pressures;
changes  in  operating  expenses,  including  those  resulting  from  changes in
available  production capacity of independent  foundries and other suppliers and
the availability of raw materials; expenses associated with obtaining, enforcing
and defending claims with respect to intellectual  property  rights;  the mix of
products sold;  changes in the percentage of products sold through the Company's
direct  sales  force;  personnel  changes;  general  economic  conditions;   and
fluctuations  in  foreign  currency  exchange  rates.  The  Company  expects  to
introduce a number of new products in 1998.  The failure of such new products to
achieve market  acceptance at the time  anticipated  by the Company,  or at all,
would  materially  and adversely  affect the Company's  financial  condition and
results of operations.

Pending Litigation

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

Dependence on Key Personnel

         On November 13, 1996, the Company  announced the appointment of Fernand
B. Sarrat as President and Chief Executive Officer, and during the first half of
1997 the Company  hired a number of executives  to senior  management  positions
within the Company. The Company's future success will depend on the abilities of
Mr. Sarrat and the contributions by its executive  officers,  key management and
technical  personnel.  The loss of the services of one or more of the  Company's
executive officers or key personnel, or the inability to continue to attract and
retain qualified personnel,  could delay product development cycles or otherwise
have a material adverse effect on the Company's business and operating results.

Lengthy Sales Cycle

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

Dependence on Recently Introduced and New Information Security Products

         The Company's  future results of operations will be highly dependent on
the successful completion of the design,  development,  introduction,  marketing
and manufacture of the PrivateWire  and PrivaCy  Manager  products,  portions of
which are under  development,  and  SecureLink,  SecureFrame,  SecureDomain  and
PrivateWire products,  which were recently introduced.  To date, the Company has
made only  limited  commercial  shipments  of  certain of such

                                       9

<PAGE>


products and no  commercial  shipments of the  remainder  of such  products.  No
assurance  can be given that any of such  products  will not require  additional
development work, enhancement,  testing or further refinement before they can be
introduced  and made  commercially  available  by the  Company or that they will
achieve market  acceptance.  If such new and recently  introduced  products have
performance,  reliability,  quality or other  shortcomings,  then such  products
could fail to achieve market  acceptance and the Company may experience  reduced
orders, higher manufacturing costs, delays in collecting accounts receivable and
additional  warranty  and  service  expenses,  which in each case  could  have a
material  adverse  effect on the  Company's  financial  condition and results of
operations.

Competition

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

         The  Company's   competitors  in  the  information   security  markets,
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.,  SecureComputing  Corporation,
Security  Dynamics  Technologies,  Inc.,  Racal-Guardata,  Inc., and Information
Resource Engineering, Inc. In addition, Northern Telecom Limited, AT&T, Motorola
Corporation,  Digital  Equipment  Corporation and Sun  Microsystems,  Inc. offer
certain  information  security  products  as part of  their  overall  networking
solutions.  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 the  Company's  products,  the  Company'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 than (and incompatible with)
the method of implementing public key cryptography currently used by the Company
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 than those
currently used by the Company, to the exclusion of the Company's methods,  sales
of the  Company's  existing and planned  products in that market  segment may be
adversely impacted,  which could have a material adverse effect on the Company's
financial condition and results of operations.

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

Product Liability Risks

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

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

                                       10

<PAGE>


Year 2000

         Although the company believes that it has identified all risks of "year
2000  errors"  ("YK2  Errors") in its  products,  and is taking steps to repair,
replace or  end-of-life  all  products  which  contain  YK2  Errors,  there is a
continuing risk that some YK2 Errors will go undetected until after December 31,
1999.  The  Company  intends to attempt to protect  itself from  liability  with
appropriate  disclaimers  in its terms and  conditions of sale,  by  encouraging
customers  to  upgrade  their  products  to those  that  have  proven  to be YK2
compliant, and by discouraging continued use of those products known to have YK2
Errors.  However,  the Company may  be met with  unanticipated  liabilities  for
undiscovered  YK2  Errors  which  cannot  be limited  by any  of  the  foregoing
preventive actions, and conceivably could include an allegation of damages which
exceeds the terms or the amount of the  Company's  insurance  policies  covering
product liability.

         The Company is in the process of evaluating and  implementing  changes,
as necessary,  to its information systems and, accordingly,  does not anticipate
any material YK2 Errors from its own information systems, databases or programs.
However,  the Company's  financial  position and results of operations  could be
adversely  impacted by YK2 Errors faced by distributors,  suppliers,  customers,
vendors and financial service organizations with which the Company interacts.

Management of Growth And Reduction In Employees

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

         With the sale of its Wireless  business,  the Company has experienced a
significant  reduction  in  employees,  including  the  Company's  former  Chief
Technical  Officer,  Dr. Jim Omura. The sale of Wireless,  along with occasional
reductions in specific  engineering  programs in the network security  business,
may  create  a risk of  instability  within  the  existing  employee  population
resulting in departures of key  employees  critical to sustaining  growth in the
Company's  network  security  business.  Furthermore,  sudden  reductions on the
number of the  Company's  employees  places  greater  demands  on the  remaining
employees  which  may  distract  them  from  fulfilling  their  responsibilities
necessary to accomplishing the Company's financial goals.

         In September 1997, the Company acquired ARL and assumed  responsibility
for management of its worldwide operations of approximately sixty employees. The
Company  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.  Key factors which
will determine  ARL's success  include  whether the Company can integrate  ARL's
management,  employee  culture and  organizational  practices  into the Company,
whether the Company can adequately fund ARL's  development  objectives,  whether
the Company can can provide accurate information for ARL to focus its technology
on  significant  market  opportunities,  and whether the Company can predict the
most attractive features and functions for ARL's products. The Company's success
in realizing  the  anticipated  return from its  investment  in ARL also will be
determined by the Company's  ability to position and  introduce  ARL's  products
into the Company's  markets and channels,  and the Company's  ability to provide
adequate sales and customer  support for ARL's  products.  The Company 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 principle offices in Israel, a country which is vulnerable
to disruption due to the sudden  outbreak of hostilities  with its neighbors and
various indigenous factors.  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.

                                       11

<PAGE>


Intellectual Property and Other Proprietary Rights

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

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

Evolving Network Security Market

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

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

Rapid Technological Change

         The markets for the  Company's  products are  characterized  by rapidly
changing  technologies,  extensive research and new product  introductions.  The
Company believes that its future success will depend in part upon its ability to
continue to enhance its existing products and to develop, manufacture and market
new products. As a result,

                                       12

<PAGE>


the Company expects to continue to make a significant investment in engineering,
research and  development.  There can be no  assurance  that the Company will be
able to develop and  introduce  new  products or  enhancements  to its  existing
products  in a timely  manner  which  satisfy  customer  needs,  achieve  market
acceptance or address  technological  changes in its target markets. The failure
of the Company to develop  products and  introduce  them  successfully  and in a
timely  manner  could  adversely  affect  the  Company's  competitive  position,
financial condition and results of operations.

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

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

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

         Due  to  U.S.   government   regulations   restricting  the  export  of
cryptographic  devices and software,  including certain of the Company's network
security  products,  the  Company  may be at a  disadvantage  in  competing  for
international sales compared to companies located outside the United States that
are not subject to such restrictions.

Dependence  on  Component  Availability,   Subcontractor   Performance  and  Key
Suppliers

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


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

         On 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 Superior Court.  Following the remand,  the Company then
obtained an order consolidating CV764647 with CV767448 for purposes of discovery
and trial.  Both  matters  are  currently  in the  discovery  phase,  with trial
scheduled  for  December  1998.  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.

                                       13

<PAGE>


Item 2.   Changes in Securities

(c)  The Company's Registration Statement Form S-1 was declared effective by the
     Securities  and  Exchange   Commission  on  February  15,  1996  (Reg.  No.
     33-80719).  In February and March 1996 the Company issued  5,750,000 shares
     of its common stock to the public at a price of $15 per share.  The Company
     received  approximately  $78.9  million net of  underwriting  discounts and
     commissions  of $6.0 million and other  offering  expenses of $1.4 million.
     Through the period ended March 29, 1998, the net proceeds have been used as
     follows (in thousands):

         Purchase and installation of equipment                    $ 7,308
         Acquisition of Algorithmic Research                        45,913
         Acquisition of preferrred stock of Syndata Technologies     3,000
         Repayment of indebtedness                                   1,000
         Working capital                                            15,843
         Temporary investment in money market accounts               5,800
                                                                   -------
                                                                   $78,864
                                                                   =======


         None of the net  proceeds or expenses of issuance and  distribution  of
     the  securities  have  been,  either  directly  or  indirectly,  paid to or
     invested with any related party or shareholder of the Company.


Item 6.   Exhibits and Reports on Form 8-K

(a)   Exhibits Index:

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

       27.1      Financial Data Schedule

(b)  The Company  filed a report on Form 8-K on April 13, 1998  reporting  under
     Item 2 the  disposition  of the  Company's  Wireless  Communications  Group
     effective March 28, 1998.

                                       14

<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 13, 1998                          CYLINK CORPORATION

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

                                       15