<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K


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


                         Commission file number 0-21681

                         TRANSCRYPT INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                            47-0801192
     (State or other jurisdiction of     (I.R.S. Employer Identification No.)
    incorporation or organization)

                 4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
               (Address of principal executive offices)(Zip Code)

       Registrant's telephone number, including area code: (402) 474-4800

        Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.01 PAR VALUE
                                (Title of class)

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 ____  NO  X

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ X ]

The aggregate market value of the Common Stock held by non-affiliates, based
upon the closing sale price of the Common Stock on February 28, 1997, as
reported on the Nasdaq National Market System, was approximately $35,879,735.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates.  Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of February 28, 1997, 9,283,078 shares of the Registrant's Common Stock were
outstanding.

The Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders,
to be filed within 120 days after the end of the fiscal year ended December 31,
1996, is incorporated herein by reference in Part III of this Report on Form
10-K.

                   
                            


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                                     PART I

         Discussions of certain matters contained in this Annual Report on Form
10-K may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and as
such, may involve risks and uncertainties.  These forward-looking statements
relate to, among other things, expectations of the business environment in
which the Transcrypt International, Inc.  ("Transcrypt" or the "Company")
operates, projections of future performance, perceived opportunities in the
market and statements regarding the Company's mission and vision.  The
Company's actual results, performance and achievements may differ materially
from the results, performance and achievements expressed or implied in such
forward-looking statements.  For a discussion of some of the factors that might
cause such a difference, see "ITEM 1.  BUSINESS -- SUMMARY OF BUSINESS
CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
AND/OR STOCK PRICE."

ITEM 1.  BUSINESS.

GENERAL

         The Company designs and manufactures information security products
which prevent unauthorized access to sensitive voice and data communications.
The Company focuses on developing and providing information security products
for telecommunications markets, including the land mobile radio ("LMR"),
telephony and data security markets.  The Company's products are based
primarily on a wide range of proprietary analog scrambling and digital
encryption technologies. The Company's core technologies offer a number of
significant benefits, including high levels of information security and sound
quality, high-speed, real-time data transmission, low power consumption, small
size and cost effective manufacturing.

INDUSTRY BACKGROUND

         The electronic information security industry is comprised generally of
products designed to protect the transmission of voice and data communications
through both wireless and wireline mediums.  Wireless communication devices
operate in specific, designated frequency bands, and include cellular
telephones, LMRs, pagers and the new personal communication services devices.
Relatively inexpensive radio scanners, available from many consumer electronics
stores, can intercept or be easily modified to intercept most types of analog
wireless voice transmissions.  Without active electronic protection, many forms
of electronic communications are vulnerable to interception and theft.  The
Company's information security products prevent unauthorized access to wireless
voice communications.

         Today's information security industry originated from the need to
secure sensitive wireless military communications.  By the late 1970s, the
availability, quality and cost of information security devices had improved
such that the use of these devices by non-military governmental users (i.e.,
law enforcement, fire, emergency medical and public safety personnel) and large
commercial users became economically and functionally feasible.  Although a
variety of manufacturers introduced new products throughout this time period,
Motorola, Inc.  ("Motorola") emerged as the leader in wireless voice
communications and a developer of limited analog information security products.

         Initially, all electronic communications were transmitted in analog 
format. Analog transmissions





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typically consist of a voice or other signal modulated directly onto a
continuous radio "carrier" wave.  An analog transmission can be made secure by
"scrambling" or manipulating the original signal at the point of transmission
and reconstituting the original signal at the receiving end.  By the late
1980s, accelerating use of wireless communications devices, such as LMRs and
cellular telephones, resulted in increased demand for limited radio spectrum.
In response to this demand, and enabled by the low-cost availability of digital
signal processors ("DSPs"), electronics manufacturers developed spectrally
efficient (i.e., low-bandwidth) digital communications devices.  In digital
communications, an analog signal is "digitized," or converted into a series of
discrete information "bits" in the form of ones and zeroes prior to
transmission.  Digital transmissions can be made secure by a process known as
"encryption," which involves the use of a mathematical algorithm to rearrange
the bit-stream prior to transmission and a decoding algorithm to reconstitute
the transmitted information back into its original form at the receiving end.

         Land Mobile Radio Market

         One of the earliest applications of information security technology
outside of the military was in protecting LMR voice communications.  Land
mobile radios consist of hand-held or mobile (vehicle mounted) two-way radios
commonly used by public safety workers (e.g., police, fire and medical
emergency personnel), businesses (e.g., fleet operators, taxi dispatch,
construction and other commercial users) and a wide variety of United States
and foreign government agencies.  A typical LMR system consists of one or more
base control stations networked with each other and with multiple mobile
(vehicle-mounted) or hand-held portable LMRs.

         As with all other major forms of wireless communications devices, LMRs
transmit information in either analog or digital format, although the
substantial majority of LMRs currently in use operate in analog format only.
In 1995, as a result of increasing frequency spectrum capacity constraints, the
FCC mandated that all new LMR equipment utilize a more spectrally-efficient,
narrow-band (12.5 kHz) transmission system, which will effectively require all
LMR users to migrate to digital LMR systems.  In response to this mandate, an
advisory body of the Association of Public Safety Communications Officials
International, Inc. ("APCO"), including a number of LMR manufacturers,
recommended an industry standard for digital LMR devices which would both meet
the requirements of the FCC mandate and provide solutions for several actual or
potential problems which increasingly troubled public safety LMR users.  These
problems included: (i) the lack of interoperability, or the failure of existing
systems to communicate with other systems produced by the same or other
manufacturers; (ii) the lack of backwards compatibility between older analog
LMR systems and the new proposed digital LMR systems; and (iii) the
interception of sensitive public safety communications by third party
eavesdroppers.  As a result, the APCO advisory body eventually promulgated an
open standard for digital LMR products, which has come to be known as the "APCO
25 standard."

         In order to comply with the APCO 25 standard, a digital LMR system must
utilize a "common air interface" to achieve interoperability with other digital
systems, be compatible with existing analog LMR infrastructure and provide the
user with the ability to use advanced encryption technologies. Motorola, the
largest LMR manufacturer, played a significant role in the formulation of the
APCO 25 standard and has been a major proponent of its adoption by the LMR
public safety market.  Certain competitive LMR system standards have been
proposed by other LMR manufacturers, primarily the "EDACS" standard proposed by
Ericsson, Inc. ("Ericsson").  Ericsson's EDACS standard is based on time
division multiple access technology, compared with the APCO 25 frequency
division multiple access technology. See "ITEM 1. BUSINESS -- INTELLECTUAL
PROPERTY."





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         Telephony Market

         Since its inception in 1983, cellular telephone service has grown
rapidly and become available to the substantial majority of the population of
the United States.   Cellular telephone subscribers and revenues have grown
rapidly in recent years.  The increased volume has raised significant new
security and privacy issues and an increased sensitivity to the potential risks
involved in intercepted signals.  Unprotected cellular telephone transmissions
generally provide minimal or no security and allow eavesdropping by even casual
listeners with compatible scanners.

PRODUCTS AND CORE TECHNOLOGIES

         The Company first entered the information security market in 1978 with
simple, transistor-based add-on scrambling modules for use in analog LMRs
employing basic single-inversion scrambling techniques, which the Company
marketed primarily to public safety agencies and international governments.
Since that time, the Company has further developed and improved upon its core
information security technologies, which the Company has implemented into its
scrambler modules, as well as in other types of products within the Company's
two major product families, LMR Security and Telephony Security.  Such core
technologies currently include the following methods, listed in ascending order
of sophistication of security technique: (i) frequency inversion (inverting or
otherwise adjusting the phase of a signal based on a consistent method); (ii)
split-band transmission (spreading a signal across multiple channels); (iii)
rolling code transmission (incrementally stepping codes); (iv) hopping code
transmission (randomly setting codes based upon an algorithm); (v) frequency
hopping transmission (changing broadcast frequencies multiple times per second
based upon an algorithm); and (vi) digital encryption (encoding a digital
bit-stream based upon a mathematical encryption algorithm).

         The Company typically charges higher prices for devices featuring more
advanced levels of security.  Therefore, the types of end users at each level
of security tend to vary based upon the importance of the information for which
security is desired.  Typical users of the most basic form of scrambler, the
frequency inversion scrambler, include taxi dispatchers, other types of
consumer businesses and football and other sports teams that need to provide
real-time secure communications between players and coaches.  Typical users for
medium-level security devices include commercial and industrial users and
international customers for which an export license has not been obtained.
High-level scrambling devices are used primarily by public safety agencies and
federal government personnel.

         As with all of the Company's information security products, the use of
scrambling equipment is required on both the transmitting and receiving sides
of communications in order to operate in secure mode.  For example, in order to
achieve secure LMR communications, it would be necessary for both the
transmitting and receiving equipment, including hand-held and mobile devices
and base stations, to be equipped with one of the Company's scramblers, whether
as an add-on installation or in the form of one of the Company's complete LMRs.
In the Company's cellular telephony family, a scrambled cellular telephone may
communicate in secure mode only with another of the Company's secure cellular
telephones, a PBX interchange or cellular service provider that has installed
one of the Company's Voice Privacy Exchange Units, or a landline telephone
equipped with one of the Company's external desktop scrambling units.  However,
all of the Company's products can be used in the clear, non-scrambled mode with
equipment that does not contain a Transcrypt security device.





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         The Company offers a variety of add-on LMR scrambling products
featuring the Company's different core technologies and varying levels of
security.  Add-on scramblers are available in two packages, a modular package
consisting of a circuit board that is designed to be permanently soldered into
existing circuitry, and a socket package designed to be installed in sockets
with standard pin configurations installed by OEM manufacturers.  Motorola
currently stocks and sells directly one of the Company's socket modules
pursuant to an August 1995 agreement with the Company.  Other products sold by
the Company are compatible with sockets of other OEM manufacturers, including
Icom America, Inc. and Kenwood Radio.  The Company also produces modules that
add signaling features to OEM radios, including "man-down" (emergency signal
broadcast if radio position becomes horizontal), "stun-kill" (disables lost or
stolen radios remotely) and "over-the-air reprogramming" (changes encryption
and scrambling codes remotely).  Sales of LMR related products accounted for
approximately 69% and 80% of total revenues in the fiscal years ended
December 31, 1996 and in 1995, respectively.

         In August 1996, the Company introduced a complete hand-held digital LMR
complying with the APCO 25 "common air interface" standard and featuring the
Company's advanced core scrambling and digital encryption technologies.  The
Company intends to introduce additional secure LMR models, including mobile
radios, in 1997.   All of the Company's APCO 25 compliant "dual-mode" digital
radios are expected to be compatible and fully interoperable with older analog
radio systems, as well as optionally compatible with Motorola's proprietary
analog trunking technology (Smartnet(TM)) and proprietary digital encryption
algorithm.   See "ITEM 1. BUSINESS -- SUMMARY OF CERTAIN FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATION AND/OR STOCK PRICE -- TRANSITION FROM ADD-ON TO
STAND-ALONE WIRELESS SECURITY PRODUCTS."

         The Company's add-on scramblers for cellular telephones typically
consist of a modular circuit board designed to be permanently soldered into
existing telephone circuitry.  The add-on scrambler product line includes a
model designed specifically for Motorola's MicroTAC(TM) telephones as well as a
"generic" scrambler for use in a variety of OEM cellular telephone equipment
and featuring advanced digital signal processing technology.  Additionally, the
Company markets a complete, Transcrypt-branded, Motorola MicroTAC(TM) cellular
telephone upgraded to include the Company's advanced add-on scrambling modules.
The Company also provides Transcrypt-branded secure cellular telephones and
the Company's Voice Privacy Exchange Units to a regional Bell operating
company, which resells the telephones to its customers in one metropolitan area
and charges additional monthly fees for secure service.  In the area of
landline telephone voice security, the Company has, since 1995, produced
landline scrambling and encryption devices for installation between the handset
and telephone base, which have been purchased primarily by overseas government
and corporate users.

         The Company's plans to introduce in the future data security products
incorporating the Company's core digital encryption technologies, including the
real-time, high-speed digital encryption techniques originally developed for
the Company's digital radio products and landline encryption device.  Data
security products under development include a "T1" network server capable of
performing high speed, real-time authentication and encryption/decryption for
up to 24 simultaneous computer users, an encrypted landline modem, an encrypted
cellular modem, an encrypted fax/modem PCMCIA card and a desktop facsimile
encryption device.  The Company's data security products are in the initial
design and experimentation stage of development.  No assurance can be given
that the Company will be able to successfully develop any of these products or,
if developed, that any such products will be commercially viable or result in
material sales by the Company.

CUSTOMERS





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         The Company's customers use information security products in a variety
of situations involving differing security needs.  For example, domestic and
international police forces typically have a medium to high need for security,
while military users which are often faced with hostile and determined threats,
and therefore typically have a high need for security.  Purchasers of the
Company's products include public safety agencies and police forces, federal
government agencies, foreign governments, the military, cellular service
providers, LMR manufacturers and business and corporate users in finance,
manufacturing and media/entertainment, among other industries.  Other than
Motorola, no customer accounted for more than 10% of aggregate sales during the
year ended December 31, 1996.

MOTOROLA RELATIONSHIP

         The Company depends to a large extent on a number of significant
relationships with Motorola.  Motorola has been one of the Company's largest
customers since 1994, and the Company believes that Motorola is likely to
account for a significant portion of the Company's sales in the near future.
Sales to Motorola totaled $2.2 million in 1996, $460,000 in 1995 and $2.0
million in 1994.  Sales in 1996 consisted primarily of Motorola-labeled LMR
socket scrambling modules available for resale by Motorola as an accessory to
certain of Motorola's portable LMRs sold in North America.  In August 1995, the
Company entered into a three-year supply agreement with Motorola's Radio
Products Americas Group to provide socket scrambler modules at fixed prices in
lots of 100 or more.  Such agreement provides for minimum purchases by Motorola
of $3.7 million of socket scrambler modules during the 18-month period
beginning on April 1, 1996 (of which $2.1 million had been purchased as of
December 31, 1996), after which the agreement terminates in August 1998 or is
otherwise terminable at will by either party upon 60 days' prior notice.

         Motorola is also a key manufacturer of electronic components used by
the Company, including microprocessors used in most of the Company's
scramblers, which are supplied to the Company through an electronics
wholesaler.  In addition, Motorola has agreed to sell to the Company, at fixed
prices and upon the Company's request, radio frequency platforms for use
in various products.  Purchases by the Company of Motorola components totaled
approximately $1.9 million in 1996 and $726,000 in 1995.  Furthermore, pursuant
to a product sales agreement executed in June 1996 with Motorola, Motorola has
agreed to sell to the Company, upon the Company's request, original equipment
cellular telephones and related accessories from Motorola's MicroTAC(TM) line,
which the Company intends to resell equipped with the Company's DSP-based
encryption devices and labeled with the Transcrypt logo.  Such agreement
specifies fixed prices for purchases of such equipment, and its original term
expires on December 31, 1997, after which it is terminable at will by either
party upon 30 days' prior notice.  The Company has, as of December 31, 1996,
purchased $198,000 in cellular telephones from Motorola pursuant to such
agreement.

         The Company has obtained from Motorola a royalty-bearing, irrevocable,
non-exclusive, worldwide license (the "IPR License") to manufacture products
containing certain proprietary LMR and digital encryption technology.  The IPR
License includes rights to use Motorola's proprietary analog trunking technology
(Smartnet(TM)) and certain Motorola digital encryption algorithms in LMR
products.  The digital encryption technology may also be incorporated into
certain other information security products.  The IPR License was obtained
initially in August 1994 and was amended to cover a broader range of products in
June 1996.  The IPR License provides for minimum royalty payments and per unit
payments in amounts which the Company believes are standard for the LMR
industry. See "ITEM 1. BUSINESS -- SUMMARY OF BUSINESS CONSIDERATIONS AND
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND/OR STOCK PRICE
-- RELIANCE ON MOTOROLA."



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SALES, MARKETING AND DISTRIBUTION

         The Company sells its products domestically through six sales
managers.  Add-on products are sold domestically primarily to distributors,
OEMs and self-servicing end users, while complete radio products are sold
domestically primarily to end users.  The Company is actively seeking to hire
an additional eight sales persons for radio sales in the United States. The
Company also markets its radio and other complete products to its existing 
add-on customer base.

         The Company conducts international sales through four sales managers,
each of whom focuses on specific regions of the world outside of the United
States.  The majority of international sales are made by the sales managers in
conjunction with a Company-authorized distributor, which typically provides a
local contact and arranges for technical training in foreign countries.
International sales accounted for 49.0%, 71.4% and 57.3% of the Company's
revenues in the 1996, 1995 and 1994, respectively.  International sales have
been, in most cases, denominated in U.S.  dollars, and the Company seeks to
reduce the risks of payment in foreign sales by obtaining advance payment and
confirmed, irrevocable letters of credit.

         The Company distributes its add-on information security products to
both end users in the LMR and telephony markets and to distributors, such as
LMR dealers, that resell the Company's products to end users.  The Company has
sold its self-branded, complete, analog secure cellular telephone primarily
through distributors and cellular service resellers, and the Company intends in
the future to also sell such analog cellular telephone and the digital version
through cellular service providers.

         Sales to public safety agencies and other governmental entities have
comprised a significant portion of the Company's total sales.  Such sales often
involve competitive, open bidding characteristic of public sector procurement
programs.  Under the Company's plan to sell stand-alone communication devices,
such as LMR units, to such types of customers, the Company will likely be
required to increase its participation in public bidding and procurement
processes.  Among other requirements, suppliers of LMR units in quantity are
often required by public sector end-users issuing requests for bids to supply a
bond from an approved surety company at the time that the bid is submitted and
at the time that the contract is awarded.  The availability of such bonds is
limited by a number of factors, including the applicant's financial condition
and operating results, the applicant's record for completing similar systems
contracts in the past and the extent to which the applicant has bonds in place
for other projects.

         The Company's basic marketing strategy has been to increase market
awareness of the need for information security products and to convey the
technical capabilities of the Company's products.  The Company conducts
promotions through a mix of print advertising, trade shows, direct mail
campaigns, press releases, technical articles, white paper publication,
periodic newsletters, training and presentation material, and distribution of
demonstration and loaner equipment, which are sometimes coordinated with
product launches and trade shows.

         The Company provides toll-free telephone access for technical and
other calls, 24-hour voicemail and 24-hour emergency pager contact for
customers with technical or other problems.  Product training, which includes
classes, seminars and video programs, is available at both the customer's site
and the Company's Lincoln facility.  The Company offers a standard warranty on
all products, which covers parts and labor for a period of one year from
purchase, with an extended warranty service option available at an additional
cost.





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         The Company installs, for a fee, all models of the Company's scrambler
modules into customers' LMRs and telephones.  During 1996, the Company
performed installations in less than 10% of total units sold.  Scrambler
modules not installed by the Company are generally installed by local radio and
cellular telephone dealers.  The Company documents installation instructions
for its products in OEM devices ("application notes"), and has developed
application notes for more than 2,000 OEM products, including almost all
commercially available two-way radio models sold worldwide.

INTELLECTUAL PROPERTY

         The Company presently holds seven registered copyrights, which cover
software containing algorithms for frequency hopping, scrambling and signaling
technologies for LMR and cellular telephony, and one domestic patent, which
covers continuous synchronization methods used in analog scrambling products.
The Company has also applied for nine additional domestic patents relating to
high-end scrambling techniques and methods of integrating after-market devices,
such as the Company's modules, into OEM products.  These patent applications
were the result of the Company's expanded intellectual property program, which
is intended to enhance the patent protection afforded the Company's new and
advanced intellectual property rights.  The Company also holds three registered
trademarks related to the "Transcrypt" name and product names.

         In addition to copyright and patent laws, the Company relies on trade
secret law and employee and third-party non-disclosure agreements to protect
its proprietary intellectual property rights.  Furthermore, the Company designs
its information security devices to render the underlying software and
processes difficult to reverse engineer, providing an additional level of
protection.

         The information security and wireless communications industries in
which the Company sells its products are characterized by substantial
litigation and assertions of claims regarding patent and other intellectual
property rights.  At various times over the last several years, most recently
in December 1996, Ericsson has notified the APCO 25 Project Steering Committee
and certain current and proposed manufacturers of APCO 25 products (including
the Company, Motorola and E.F. Johnson Co.) that it believes that products
complying with the APCO 25 standard will necessarily infringe various Ericsson
patents and that APCO 25 manufacturers must obtain licenses under such patents.
The Company does not believe that the APCO 25 standard or any of the Company's
products infringe the relevant Ericsson patents or any valid intellectual
property right of others based, in part, on reliance upon the advice of the
Company's patent counsel.  However, there can be no assurance that Ericsson
will not continue to assert these or other claims of patent infringement or
other wrongful conduct against the APCO 25 standard, manufacturers of APCO 25
products, including the Company, or present or future products of the Company.
Further, there can be no assurance that any litigation which may be instituted
in the future by Ericsson or any other party alleging infringement of
intellectual property rights or other wrongful conduct will not have an adverse
effect upon the Company, including the imposition of monetary damages, expenses
of litigation, diversion of management and other resources and injunction
against continued manufacture, use or sale of certain processes or products.

         Under the terms of a July 1993 Memorandum of Understanding (the "MOU")
among various manufacturers involved in the APCO 25 project, signatories to the
MOU (which include the Company, Ericsson, Motorola, E.F. Johnson Co., DVSI,
Cycomm Corporation and Glenayre Technologies, among others) are required to
make available to other signatories licenses to intellectual property rights
that are essential to the implementation of the APCO 25 standard on "fair and
reasonable terms." Ericsson has





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offered a license to the Company with regard to its allegedly infringed
patents, and has notified the Company that if it fails to negotiate a license
to such patents, Ericsson may take the position that the Company's right to
obtain any license from Ericsson under the MOU would be lost.  If Ericsson were
successful in asserting infringement claims, there can be no assurance that a
license would be available from Ericsson under the MOU.  To the Company's
knowledge, none of the signatories to the MOU have recognized the validity of
Ericsson's position.

RESEARCH AND DEVELOPMENT

         Since December 1991, the Company has invested approximately $7.5
million in internal research and development related to its proprietary
advances in information security products.  During 1996, the Company increased
research and development staffing to 31 individuals, including 24 engineers,
from 22 individuals, including 18 engineers.  Research and development
personnel have expertise in various fields, including cryptography, analog
hardware, digital hardware, object-oriented software, RF design and mechanical
design.  The research and development staff designs and develops products
incorporating digital signal processing, voice coding (including improved
multi-band excitation), encryption, spectral manipulation and rotation, systems
simulation and mixed signal scrambling.  In 1995 and 1996, the Company's
research and development efforts increased significantly, as the Company
commenced development of APCO 25 compliant digital LMRs and expanded
development of secure telephony products.  As a result, research and
development expenses increased to $2.2 million in 1996 and $2.0 million in 1995
from $1.2 million in 1994.  In order to facilitate the Company's new product
line development plans, research and development staffing has been augmented
with additional expertise in the areas of data networking, communications
systems software, RF design, mechanical design, cryptography and digital signal
processing.  The Company believes that its research and development efforts
have been, and continue to be, sufficient to support planned new products lines
and enhancements to existing product lines.  Based on current projections,
management expects to continue to increase the Company's research and
development staff, primarily in the areas of radio, signal processing and
digital logic development.

MANUFACTURING AND SUPPLIERS

         The Company manufactures all of its products at its facility in
Lincoln, Nebraska, mostly from commercially available subassemblies, parts and
components, such as integrated circuits, printed circuit boards, and plastic
and metal parts, manufactured by the Company and by outside suppliers.  Certain
items manufactured by suppliers are made to the Company's specific design
criteria.  The Company's manufacturing processes utilize principles that
conform to ISO 9001 standards, for which the Company received full
certification in December 1995.  See "ITEM 2.  PROPERTIES."

         The Company obtains most of its electronic parts and components from
one principal distributor, Arrow/Schwebber Electronics Group.  The distributor
stores several months' supply of basic components, such as resistors,
capacitors and connectors, on-site at the Company's manufacturing location on a
consignment basis, reducing the Company's inventory maintenance costs.
Additionally, certain high-end subassemblies, such as RF boards for use in
complete LMR units manufactured by the Company, are expected to be purchased
from other manufacturers such as Motorola.

GOVERNMENT REGULATION AND EXPORT CONTROLS

The Company's information security products are subject to export restrictions
administered by





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the National Security Agency, the Department of State and the Department of
Commerce, which permit the export of encryption products only with the required
level of export license.  U.S. export laws also prohibit the export of
encryption products to a number of specified hostile countries.  Although to
date the Company has been able to secure most required U.S. export licenses,
including for export to 108 countries since 1978, there can be no assurance
that the Company will continue to be able to secure such licenses in a timely
manner in the future or at all.  Additionally, in certain foreign countries,
the Company's distributors are required to secure licenses or formal permission
before encryption products can be imported.

         The Company's radio and cellular telephone products are subject to FCC
regulations and regulations of the telecommunications regulatory authority in
each country where the Company sells its products.  These regulations are in
the form of general approval to sell products within a given country for
operation in a given frequency band, one-time equipment certification, and, at
times, local approval for installation.  In the United States, all Transcrypt
wireless products are subject to FCC Part 15 rules on unlicensed spread
spectrum operation.  In those countries that have accepted certain worldwide
standards, such as the FCC rulings or those from the European
Telecommunications Standards Institute, the Company has not experienced
significant regulatory issues in bringing its products to market.  Approval in
these markets involves retaining local testing agencies to verify specific
product compliance.  However, many developing countries, including certain
markets in Asia, have not fully developed or have no frequency allocation,
equipment certification or telecommunications regulatory standards.

         Recently, the Clinton administration and the Congress have reviewed
federal export control policies related to encryption control products.  On
November 15, 1996, President Clinton issued an Executive Order altering the
federal government's policies governing the export of encryption products, such
as those currently offered and proposed to be offered by the Company.  The
Executive Order shifts jurisdiction for export controls on, and licensing of,
encryption technology from the Department of State to the Department of Commerce
and removes from the "munitions" list most encryption products.  In addition,
the Executive Order establishes a key management control program, under which a
third party would hold "keys" to unlock encrypted information for legitimate law
enforcement and national security needs.  As a result of the Executive Order,
certain products featuring digital encryption technology that had not previously
been exportable can now be exported, which may increase competition for
international sales of the Company's analog scrambling products.  Under interim
regulations adopted in December 1996 by the Department of Commerce, during a
two-year transition period, non-key recoverable 56-bit digital encryption
products may be approved for export if the manufacturer commits to build and
market key recovery products and support key management infrastructure in the
future, and provide to the government interim reports detailing internal
development efforts.  During the 104th Congress, legislation was introduced in
the House of Representatives and the Senate to ease export controls on
encryption products, but the Congressional sponsors of the legislation opposed
the key management component of the Administration's plan. Legislation was
introduced recently to allow export of encrypted material on a higher level than
that contemplated by the Executive Order and without mandatory key recovery
features, and additional bills to address export controls on encryption products
are expected to be introduced in the current 105th Congress.  However,
management cannot predict whether such legislation will be enacted, what form it
will take or how the Executive Order or any such actual or proposed legislation
will impact international sales of the Company's products.

         The FCC, through the Public Safety Wireless Advisory Committee, is
considering regulatory measures to facilitate a transition by public safety
agencies to a more competitive, innovative environment so that the agencies may
gain access to higher quality transmission, emerging technologies, and broader





                                       9
<PAGE>   11
services, including interoperability.  As part of this process, the FCC is
reviewing the current use of the public safety wireless spectrum, reallocation
of additional spectrum for public safety use, and use of commercial service
providers for additional public safety capacity.  This FCC process could affect
products manufactured by the Company.  Management cannot predict the outcome of
the FCC review or any specific changes in the spectrum or FCC policies, or any
potential effect on the Company's sales.

COMPETITION

         The markets for information security and LMR products are highly
competitive.  Significant competitive factors in these markets include product
quality and performance, including the effectiveness of security features and
the quality of the resulting voice or data signal, the development of new
products and features, price, name recognition and the quality and experience
of sales, marketing and service personnel.  A number of companies currently
offer add-on scramblers for LMRs that compete with the Company's add-on
information security products, including Selectone Corp., Midian Electronics
Inc. and MX-COM Inc.  Also, Motorola and Ericsson offer high-end, proprietary
digital encryption for their LMR products.  Motorola and Transcrypt are
believed to be the only current suppliers of APCO 25 LMR products as of the
date of this Annual Report.  Other anticipated manufacturers of digital LMRs
include E.F. Johnson Co., Garmin Industries, Relm Communications, Midland
Systems and Stanilite Pacific Ltd., all of which have announced intentions to
produce hand-held, mobile and/or infrastructure products meeting the APCO 25
standard.  In addition, Ericsson has actively opposed the APCO 25 standard and
has promoted its "EDACS" system as an alternative standard for the public
safety marketplace.  Cycomm International Inc./Privaphone and Motorola offer
add-on security products for cellular telephones.  Competitors to the Company's
secure landline telephone products include AT&T Corporation/Datatek, Motorola,
Cycomm International Inc. and Cylink Corporation.

         Competition in the data security market is dynamic and growing, as new
companies seek to provide solutions to network and Internet data security.
There are a number of different approaches to data security, including
"firewall" protection, privilege control, data encryption and user
identification and authentication.  The Company expects that its planned data
security products will feature mostly data encryption and user authentication
features.  Competitors in the data security market include Check Point Software
Technologies Ltd., Cylink Corporation, Secure Computing Corporation, Trusted
Information Systems, Inc., Raptor Systems, Inc. and Sun Microsystems, Inc., all
of which provide firewall solutions. ActivCard Inc., CryptoCard Inc., Digital
Pathways, Inc., Security Dynamics Technologies, Inc., Vasco Corporation and
Racal Electronics, Inc. provide remote authentication products.

         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.

BACKLOG

         The Company presently ships only a small amount of products against
backlog, due to the typically short manufacturing cycle of the Company's
products.  As a result, backlog amounts have historically been





                                       10
<PAGE>   12
immaterial to the Company, and the Company does not believe that backlog
figures are necessarily indicative of actual sales for future periods.
However, to the extent that LMR sales increase as a percentage of the Company's
revenues, backlog may increase due to the generally longer manufacturing cycle
time required of its digital LMR products.

EMPLOYEES

         At December 31, 1996, the Company had 84 full-time equivalent
employees, substantially all of whom are employed at the Company's Lincoln,
Nebraska facility.  None of the Company's employees are covered by a collective
bargaining agreement.  Management believes that its employee relations are
good.

SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE

         Discussions of certain matters contained in this Annual Report on Form
10-K may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and as
such, may involve risks and uncertainties.  These forward-looking statements
relate to, among other things, expectations of the business environment in
which the Company operates, projections of future performance, perceived
opportunities in the market and statements regarding the Company's mission and
vision.  The Company's actual results, performance and achievements may differ
materially from the results, performance or achievements expressed or implied
in such forward- looking statements.  The following is a summary of some of the
important factors that could affect the Company's future results of operations
and/or its stock price, and should be considered carefully in evaluating the
Company.

         Reliance on Motorola.  Motorola is the Company's largest customer and
a key supplier.  The Company's dependence on Motorola, both as a customer and
supplier, is expected to continue.  Although the Company believes that its
relationship with Motorola is good, there can be no assurance that Motorola
will continue to purchase products from or supply components and technology to
the Company on the scale or at the prices that it now does.  Any reduction of
the Company's contractual relations with Motorola or a decision by Motorola to
reduce purchases of the Company's products or to reduce or eliminate the
provision of components and technology to the Company would have a material
adverse effect on the Company.

         Transition from Add-on to Stand-alone Wireless Security Products.  The
Company has historically sold add-on products for use with LMRs and cellular
telephones manufactured by other companies.  The Company recently introduced its
first stand-alone Transcrypt-branded LMRs and cellular telephones, and intends
to develop and place increasing emphasis on stand-alone products in the future.
This represents a fundamental change in the nature of the Company's products and
necessitates the development of new manufacturing and sales and marketing
strategies and capabilities.  Furthermore, the end-user market for APCO 25 LMR
products began in 1996 and is still in the early stages of development.
Additionally, sales of LMR products are frequently made to public safety
agencies and other governmental entities, which are often subject to competitive
public bidding and procurement processes resulting in relatively long sales
cycles. There can be no assurance that the Company will be successful in making
the transition from add-on products to stand-alone products or that its new
position in the market will not cause other companies, with which it has
historically dealt, to discontinue or limit their dealings with the Company.  In
addition, the transition to digital communications in the wireless
communications market generally could lead to a decrease in demand for
stand-alone add-on analog security modules, which accounted for approximately
73% of the Company's revenues in 1996.

         Management of Growth.  The Company has recently expanded and intends
to continue to expand the scope of its operations and the products which it
offers.  Such expansion has resulted and will continue to result in an
expansion of the Company's facilities and work force.  This growth can be 
expected to place a significant strain on the Company's financial, managerial 
and other resources.





                                       11
<PAGE>   13

         Competition.  The information security and wireless communications
equipment industries, and the LMR market segment in particular, are highly
competitive.  Most of the Company's competitors or potential competitors have
significantly greater financial, managerial, technical and marketing resources
than the Company.  There can be no assurance that the Company will be able to
continue to compete effectively in its markets, that competition will not
intensify or that future competition will not have a material adverse effect on
the Company.

         Rapidly Evolving Industry.  The market for analog and digital
information security products is an emerging market and can be expected to
evolve rapidly in the future as a result of changing technology, industry
standards and customer requirements.  The Company's ability to compete
effectively in this rapidly evolving industry will depend upon its ability to
anticipate and react to these changes in a timely manner.

         Risks Associated with International Sales.  International sales have
historically constituted and are expected to constitute in the future a large
percentage of the Company's revenues.  International sales are subject to a
number of risks not found in domestic sales, including (i) unexpected changes
in regulatory requirements, (ii) tariffs and other trade barriers, (iii)
political and economic instability in foreign markets, (iv) difficulties in
establishing foreign distribution channels, (v) longer payment cycles, (vi)
uncertainty in the collection of accounts receivable, (vii) increased costs
associated with maintaining international marketing efforts, (viii) effects on
product competitiveness due to fluctuations in the value of the U.S. dollar and
(ix) difficulties in protecting intellectual property.  The Company's products
are subject to export controls under U.S.  law, which in some cases require the
approval of the National Security Agency and the Department of Commerce.

         Dependence on Suppliers.  Most of the Company's current and proposed
products require essential electronic components supplied by outside vendors.
Certain components may be available from only one supplier and may occasionally
be in short supply.  The Company's inability to obtain key components could
result in lost sales, the need to maintain excessive inventory levels and
higher component costs, which could increase the cost of producing the
Company's products and result in a material adverse effect on the Company.

         Regulatory Environment.  Wireless communications and data encryption
products are subject to regulation by United States and foreign laws and
international treaties.  The regulatory environment is inherently uncertain and
changes in the regulatory structure and laws and regulations can adversely
affect the Company and its customers.

         Other Risks.  From time to time, the Company details other risks with
respect to its businesses and/or financial results and condition in its filings
with the Commission.













                                       12
<PAGE>   14
ITEM 2.  PROPERTIES.

         The Company conducts its business primarily through a 43,500 square
foot two-story administrative and manufacturing facility located at 4800 NW 1st
Street, Lincoln, Nebraska, 68521, which is located in the University of
Nebraska Technology Park. The Company owns this facility and approximately 10
acres of surrounding land.  The Company believes that its current and planned
facilities are adequate to meet its present and immediately foreseeable needs.

ITEM 3.  LEGAL PROCEEDINGS.

         From time to time, the Company is involved in certain legal
proceedings arising in the normal course of its business. Management believes
that the outcome of these matters will not have a material adverse effect on
the Company.  For discussion of an assertion by Ericsson that the APCO 25
standard infringes certain Ericsson patents, see "ITEM 1. BUSINESS --
INTELLECTUAL PROPERTY."

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matters were submitted to a vote of security holders during the
fourth quarter of 1996.

ITEM 4(A)        EXECUTIVE OFFICERS OF THE REGISTRANT.

         In addition to the executive officers listed in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the Company's 1996 fiscal year, which information is
incorporated herein by reference, the following persons are considered
executive officers of the Company:

         RANDAL P. HANSEN, 33, joined the Company as Vice President of Finance
and Chief Financial Officer in August 1996.  From January 1986 to August 1996,
he held numerous positions with KPMG Peat Marwick LLP, an international public
accounting firm, serving most recently as a Senior Audit Manager.  Mr. Hansen
is a licensed Certified Public Accountant.

         MICHAEL P. WALLACE, 35, joined the Company as Vice President of
Operations in February 1994.  From December 1989 to February 1994, he served as
the Electric Card Assembly and Test Engineering Manager of Scientific Atlanta
Inc., a manufacturer and distributor of broadband communications products.

         JOEL K. YOUNG, 32, joined the Company as Vice President of Engineering
in February 1996.  From 1986 to January 1996, he held numerous positions with
the former AT&T Bell Laboratories, a telecommunications research company, and
specialized in signaling, network implementation and voice processing.  He
served most recently as District Manager, AT&T Business Communication Services.
Mr. Young has been awarded five patents on various telecommunications systems
and techniques.





                                       13
<PAGE>   15
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         As of the completion of the Company's initial public offering on
January 22, 1997, the Common Stock of the Company has been traded on The Nasdaq
Stock Market as a National Market issue under the symbol "TRII."  Since
such time, Dain Bosworth Incorporated and Furman Selz LLC have made a market in
the Company's stock.  The Company estimates that the number of stockholders of
record of the Company at February 28, 1997 was approximately 1,600.

         The high and low sales prices for the Company's common stock for the
period from January 22, 1997 through February 28, 1997, as reported by The
Nasdaq Stock Market, Inc., was  $10.50 and $8.00, respectively.  To date, the
Company has not declared any cash dividends.

         In connection with the merger of Transcrypt International, Ltd., a
Nebraska limited partnership (the "Partnership"), with and into the Company
effective June 30, 1996, pursuant to an Agreement of Merger between the
Partnership and the Company, the Company issued, in a transaction that was not
registered under the Securities Act of 1933, as amended (the "Act"), 5,175,434
shares (before giving effect to the 1.3106311-for-1 stock split effected by the
Company in November 1996) of its Common Stock, $0.01 par value, as consideration
for the merger.

         In connection with the merger of Transcrypt International, Inc., a
Nebraska corporation ("Transcrypt Nebraska"), the former general partner of the
Partnership, with and into the Company effective September 30, 1996, pursuant to
an Agreement of Merger between Transcrypt Nebraska and the Company, the Company
issued, in a transaction that was not registered under the Act, 52,010 shares
(pre-split) of its Common Stock, $0.01 par value, as consideration for the
merger.

         In September 1994, the Partnership issued 200,000 limited partnership
units for $5.00 per unit, or aggregate consideration of $1,000,000, to certain
of the limited partners of the Partnership.

         The sales and issuances of securities in the transactions described
above were deemed to be exempt from registration under the Act in reliance upon
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering.  Appropriate legends were affixed to the securities issued
in connection with such transactions.










                                       14
<PAGE>   16

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA.

         The following selected consolidated financial data of the Company is
qualified by reference to, and should be read in conjunction with, the
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included
elsewhere herein.  The Consolidated Statements of Income (Loss) data for the
years ended December 31, 1996, 1995 and 1994 and the Consolidated Balance Sheet
data as of December 31, 1996 and 1995 are derived from, and are qualified by
reference to, the audited Consolidated Financial Statements of the Company
included elsewhere in this Form 10-K.  The Consolidated Statements of Income
(Loss) data for the years ended December 31, 1993 and 1992 and the Consolidated
Balance Sheet data as of December 31, 1994, 1993 and 1992 are derived from
audited financial statements not included herein.

<TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                                 ----------------------------------------------------------------------
                                                     1996          1995           1994             1993          1992
                                                 ---------      ---------       ---------       ---------     ---------
                                                                       (In thousands, except per share data)
 <S>                                               <C>           <C>             <C>            <C>            <C>
 STATEMENT OF INCOME (LOSS) DATA:
 Revenues  . . . . . . . . . . . . . . . .        $ 13,775      $   8,128        $  9,155        $  6,900       $ 4,974
 Cost of sales . . . . . . . . . . . . . .           4,864          2,983           2,901           1,616         1,236
                                                 ---------      ---------       ---------       ---------     ---------
 Gross profit  . . . . . . . . . . . . . .           8,911          5,145           6,254           5,284         3,738
 Operating expenses:
      Research and development . . . . . .           2,234          1,953           1,180           1,138           963
      Sales and marketing  . . . . . . . .           2,103          2,109           1,590             982           656
      General and administrative . . . . .           1,413          1,191           1,074           1,151         1,472
      Amortization of intangible assets (1)          1,001          1,093           1,092           1,092         1,100

      Special compensation expense (2) . .           5,568             --              --              --            --
                                                 ---------      ---------       ---------       ---------     ---------
           Total operating expenses  . . .          12,319          6,346           4,936           4,363         4,191
                                                 ---------      ---------       ---------       ---------     ---------
 Income (loss) from operations (3) . . . .          (3,408)        (1,201)          1,318             921          (453)
 Interest expense, net . . . . . . . . . .             131            137             111             133           143
 Provision (benefit) for income taxes (4)           (1,528)            --              --              --            --
                                                 ---------      ---------       ---------       ---------     ---------
 Net income (loss) (3) . . . . . . . . . .        $ (2,011)      $ (1,338)       $  1,207        $    788       $  (596)
                                                 =========      =========       =========       =========     =========
 Income (loss) before pro forma taxes             $ (3,539)      $ (1,338)
 Pro forma provision (benefit) for
      income taxes (4) . . . . . . . . . .          (1,393)          (497)
                                                 ---------      ---------
 Pro forma net loss (3)  . . . . . . . . .        $ (2,146)     $    (841)
                                                 =========      =========
 Pro forma net loss per share (3) (5)  . .       $   (0.31)       $ (0.12)
                                                 =========      =========
 Shares used to compute net loss per share           6,969          6,969
 (5) . . . . . . . . . . . . . . . . . . .
</TABLE>


                        


     



                                       15
<PAGE>   17



<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                              -----------------------------------------------------------------------
                                                 1996           1995            1994          1993             1992
                                              ---------      ---------       ---------      ---------       ---------
                                                                          (In thousands)
 <S>                                              <C>           <C>             <C>            <C>             <C>
 BALANCE SHEET DATA:
 Working capital . . . . . . . . . . . . .       $2,468        $1,684           $3,353         $1,726          $  436
 Total assets  . . . . . . . . . . . . . .       13,981         7,523            9,627          7,908           7,741
 Long-term debt and capitalized lease             2,632         1,847            2,164          2,035           2,552
      obligations, net of current portion
 Stockholders' equity  . . . . . . . . . .        7,073         3,907            5,945          4,599           3,821
---------------------------------------------------------------------------------------------------------------------
</TABLE>

_____________________________
(1)      Reflects the amortization of intangible assets related to the
         acquisition of the Company's business in December 1991.  These
         intangible assets were fully amortized as of November 30, 1996, and
         thus no such amortization expense will be incurred subsequent to
         November 30, 1996.  See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- RESULTS OF
         OPERATIONS -- Amortization of Intangible Assets."
(2)      Represents a non-recurring, non-cash compensation expense of $5.4
         million resulting from the vesting in September 1996 of 716,916 stock
         options for 10 executive officers and key employees of the Company at
         a weighted average exercise price of $1.81 per share, and the accrual
         of a special compensation expense of $210,000 in September 1996, which
         is payable to the Company's Chief Executive Officer.
(3)      Excluding the special compensation expense of $5.6 million, income
         (loss) from operations, net income (loss), pro forma net income (loss)
         and pro forma net income (loss) per share would have been $2.2
         million, $1.7 million, $1.6 million and $0.23, respectively, for 1996.
(4)      Prior to June 30, 1996, the Company operated as a partnership.  The
         pro forma provision for income taxes reflects the provision for income
         taxes as if the Company had been taxed as a Subchapter "C" corporation
         under the Internal Revenue Code.
(5)      See Note 1 of Notes to Consolidated Financial Statements for an
         explanation of the method used to determine the number of shares used
         to compute pro forma net income (loss) per share.

         The following table sets forth certain Consolidated Statements of
Income (Loss) information as a percentage of revenues during the periods
indicated:

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                 -----------------------------------------------
                                                                    1996                1995              1994
                                                                 ---------           ---------         ---------
 <S>                                                                 <C>             <C>                <C>
 Revenues  . . . . . . . . . . . . . . . . . . . . . . .             100.0%              100.0%           100.0%
 Cost of sales . . . . . . . . . . . . . . . . . . . . .              35.3                36.7             31.7
                                                                 ---------           ---------        ---------
 Gross profit  . . . . . . . . . . . . . . . . . . . . .              64.7                63.3             68.3
 Operating expenses:
      Research and development . . . . . . . . . . . . .              16.2                24.0             12.9
      Sales and marketing  . . . . . . . . . . . . . . .              15.3                26.0             17.4
      General and administrative . . . . . . . . . . . .              10.2                14.7             11.7
      Amortization of intangible assets  . . . . . . . .               7.3                13.4             11.9
      Special compensation expense . . . . . . . . . . .               40.4                --               --
                                                                 ---------           ---------        ---------
           Total operating expenses  . . . . . . . . . .              89.4                78.1             53.9
                                                                 ---------           ---------        ---------
 Income (loss) from operations . . . . . . . . . . . . .             (24.7)              (14.8)            14.4
 Interest expense, net . . . . . . . . . . . . . . . . .               1.0                 1.7              1.2
 Provision (benefit) for income taxes  . . . . . . . . .             (11.1)                --               --
                                                                 ---------           ---------        ---------
 Net income (loss) . . . . . . . . . . . . . . . . . . .             (14.6)%             (16.5)%           13.2%
                                                                 =========           =========        =========
 Income (loss) before pro forma income taxes . . . . . .             (25.7)              (16.5)
 Pro forma provision (benefit) for income taxes  . . . .             (10.1)               (6.1)
                                                                 ---------           ---------
 Pro forma net loss  . . . . . . . . . . . . . . . . . .             (15.6)%             (10.4)%
                                                                 =========           =========                
</TABLE>







                                       16


<PAGE>   18
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         The following discussion is intended to provide a better understanding
of the significant changes in trends relating to the Company's financial
condition and results of operations.   Management's Discussion and Analysis
should be read in conjunction with the accompanying Consolidated Financial
Statements of the Company and related notes.

         Discussions of certain matters contained under this caption may
constitute "forward-looking statements" for purposes of the Reform Act, which
involve certain risks and uncertainties.  The Company's actual results may
differ materially from the results discussed in such forward- looking
statements.  For a discussion of some of the factors that might cause such a
difference, see "ITEM 1. BUSINESS -- SUMMARY OF BUSINESS CONSIDERATIONS AND
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND/OR STOCK
PRICE."

OVERVIEW

         The Company commenced operations in 1978 to manufacture and distribute
embedded voice privacy and specialized signaling add-on devices for LMR users.
In December 1991, an investor group led by John T. Connor, the Company's
current Chairman and Chief Executive Officer, acquired substantially all of the
assets of the Company and certain intellectual property rights held by the
Company's founders, creating intangible assets of approximately $5.5 million,
which the Company amortized on a straight-line basis over a 60-month period
ended November 30, 1996.  Following the acquisition, management took steps to
diversify the Company's product lines and further exploit the Company's core
competencies in information security technologies.

         In late 1993, the Company began marketing system-wide security
upgrades to large users of wireless communications, particularly foreign public
safety and government users.  Primarily as a result of such sales to these
foreign customers, revenues in 1994 and 1995 generally increased while gross
margins were reduced by the lower unit prices associated with these larger
orders.  The Company's gross margins were also negatively impacted during this
period by a worldwide shortage of surface-mount microprocessors of the type
used in the Company's add-on scrambling modules, which increased the Company's
component costs.  In mid-1994, the Company began purchasing components from a
large electronics component distributor, which contributed to a gradual
improvement in the Company's access to such components and reduced component
costs.

         In order to take advantage of the growing demand for digital
communications, in 1993 the Company started to invest in digital product and
technology research and development. In September 1994, the Company began
developing an APCO 25 compliant hand-held digital LMR. In connection with the
development of this new product, the Company hired 11 additional technical
personnel to focus on basic digital research and product development.  In order
to help finance these additional research and development expenditures, in
September 1994, the Company raised $1.0 million through the sale of additional
equity to its existing equityholders.  As a result of these development
efforts, the Company introduced a digital landline telephone encryptor in
October 1995 and an APCO 25 compliant digital hand-held radio in August 1996,
and plans to introduce additional digital products in 1997.

         In 1995, the Company's growth was interrupted when the Company
experienced a reduction in





                                       17
<PAGE>   19
annual revenues and profitability before amortization of intangible assets.
The Company believes that these results were primarily attributable to
management conflict over the future direction and control of the Company, which
led to a management restructuring commencing in the second quarter of 1995 that
resulted in the departure of five executive officers.  The Company believes
that these factors diverted management attention from day-to-day operations,
which negatively impacted operating results, particularly in the first half of
1995. In addition, the Company incurred direct expenditures in 1995 of
approximately $305,000 in severance payments and recruiting and relocation
costs for new executives in connection with the restructuring.

         The Company has benefited and continues to benefit from state tax
credits arising from a 1993 agreement with the State of Nebraska, which results
in annual state income tax credits through 1999.  In addition, the Company
utilizes its foreign sales corporation subsidiary located in Guam to exempt
from income taxation a portion of the Company's foreign sales income.  See
"Provision for Income Taxes."

RESULTS OF OPERATIONS

         Revenues

         The Company recognizes revenues upon shipment of products to its
customers.  Revenues increased to $13.8 million in 1996 from $8.1 million in
1995.  This increase was attributable primarily to revenues in 1996 associated
with several large new sales contracts, including the commencement of shipments
of socket scramblers to Motorola. The Company also began shipment of its first
stand-alone radio and cellular products in September 1996, which contributed to
the increase in 1996 revenue.  In addition, revenues for 1995 were negatively
impacted due to management conflicts over the future direction and control of
the Company, which led to a management restructuring commencing in the second
quarter of 1995 and resulted in the departure of five senior executive
officers.

         Revenues declined to $8.1 million in 1995 from $9.2 million in 1994,
due primarily to lower sales volumes in the first half of 1995, which
management believes resulted primarily from the internal management conflicts
discussed above.

         International sales as a percentage of revenues were 49.0%, 71.4% and
57.3%  in 1996, 1995 and 1994, respectively.  The Company believes that the
proportion of international sales in 1995 was unusually high, reflecting large
sales to Egypt and Turkey and lower domestic sales.  The Company anticipates
that international sales will continue to represent a significant portion of
revenues in the future, although domestic sales may increase as a percentage of
revenues in the future due to an increased marketing emphasis on domestic
sales, including scrambler sales to Motorola, and the introduction and expanded
marketing domestically of the Company's current and proposed digital radio
products in 1997.

         Gross Profit

         Cost of sales includes materials, labor, depreciation and overhead
costs associated with the production of the Company's products, as well as
shipping, royalty and warranty product costs.  Gross profit increased to $8.9
million in 1996 from $5.1 million in 1995. In addition, gross margin increased
slightly to 64.7% in 1996 from 63.3% in 1995.  The Company began shipment of 
its first stand-alone products





                                       18
<PAGE>   20
in September 1996, which generally have lower gross margins than add-on
products. To the extent that sales of stand-alone products increase in the
future relative to add-on product sales, gross margins are likely to decline.

         Gross profit was $5.1 million in 1995 and $6.3 million in 1994.  Gross
margin declined to 63.3% in 1995 from 68.3% in 1994, due primarily to lower
sales volumes during the first six months of 1995 without a comparable decline
in fixed overhead costs.

         Research and Development

         Research and development expenses consist primarily of the costs
associated with research and development personnel, materials and the
depreciation of research and development equipment and facilities.  The Company
expenses all research and development costs as they are incurred.  Research and
development expenses increased to $2.2 million in 1996 from $2.0 million in
1995.  This increase was due primarily to expenses related to the continued
development of the Company's APCO 25 digital LMRs and the related development
of internal manufacturing capabilities for certain radio components.  Research
and development expenses as a percentage of revenues decreased to 16.2% in 1996
from 24.0% in 1995, due to greater revenues in 1996.  Research and development
expenses as a percentage of revenues were 12.9% in 1994.  The Company
anticipates that it will continue to devote increased resources to research and
development during 1997 compared to 1996.

         Research and development expenses increased to $2.0 million in 1995
from $1.2 million in 1994.  This dollar increase was due primarily to the
commencement of development of the Company's APCO 25 compliant digital LMRs,
which began in September 1994, and the expanded development of telephone
security product lines.

         Sales and Marketing

         Sales and marketing expenses consist primarily of salaries and related
costs of sales personnel, including sales commissions and travel expenses, and
costs of advertising, public relations, seminars and trade show participation.
Sales and marketing expenses remained constant at $2.1 million in both 1996 and
1995, although the expense figure for 1995 includes severance payments and 
recruiting and relocation costs for new sales executives related to the 
Company's management restructuring.  Sales and marketing expenses decreased as a
percentage of revenues to 15.3% in 1996 from 26.0% in 1995, due primarily to the
increase in revenues in 1996.  The Company expects to increase its sales and
marketing expenditures during 1997 through the addition of direct sales and
marketing personnel, primarily to support the introduction of new products,
including digital radios.

         Sales and marketing expenses increased to $2.1 million in 1995 from
$1.6 million in 1994.  This increase was due primarily to an increase in
personnel and associated expenses relating to the development of international
markets and distribution channels.  Sales and marketing expenses as a
percentage of revenues were 26.0% in 1995 and 17.4% in 1994.  The percentage
increase from 1994 to 1995 was also due in part to the Company's lower revenues
in 1995.

         General and Administrative

         General and administrative expenses consist primarily of salaries and
other expenses associated





                                       19
<PAGE>   21
with the Company's management, accounting, finance and administrative
functions.  General and administrative expenses increased to $1.4 million in
1996 from $1.2 million in 1995.  This increase was attributable primarily to
salaries, recruiting and relocation expenses associated with hiring several key
management employees and additional bad debt provisions for accounts
receivable reserves.  The Company expects to incur additional increases in
general and administrative expenses in 1997 due to costs associated with
maintaining its status as a publicly-held company and upgrades to the Company's
management information systems.  General and administrative expenses as a
percentage of revenues decreased to 10.2% in 1996 from 14.7% in 1995, due
primarily to the increase in revenues in 1996.

         General and administrative expenses remained generally constant at
$1.2 million in 1995 and $1.1 million in 1994.  General and administrative
expenses as a percentage of revenues were 14.7% in 1995 and 11.7% in 1994.

         Amortization of Intangible Assets

         Intangible assets consist primarily of the costs associated with the
acquisition of the Company's business in December 1991, including proprietary
technology licenses, non-competition agreements and goodwill.  The Company
amortized these intangible assets on a straight-line basis over a 60-month
period ended November 30, 1996, which resulted in an amortization expense of
$1.0 in 1996 and $1.1 million in each of 1995 and 1994.  These intangible
assets were fully amortized as of November 30, 1996, and thus no such
amortization expense will be incurred subsequent to November 30, 1996.

         Special Compensation Expense

         In September 1996, the Company incurred a non-recurring, non-cash
compensation expense of $5.4 million, resulting from the vesting in September
1996 of 716,916 stock options for 10 executive officers and key employees of
the Company at a weighted average exercise price of $1.81 per share, and a
special compensation expense of $210,000 payable to the Company's Chief
Executive Officer, for services rendered related to the original purchase in
1991.  Excluding the special compensation expense of $5.6 million, income
(loss) from operations, net income (loss), pro forma net income (loss) and pro
forma net income (loss) per share for 1996 would have been $2.2 million, $1.7
million, $1.6 million and $0.23, respectively.

         Interest Expense, Net

         Net interest expense consists of interest expense, including amounts
payable on the Company's term loans and bank line of credit, net of interest
income earned on cash and investable funds.  Net interest expense was $131,000,
$137,000 and $111,000 in 1996, 1995 and 1994, respectively.

         Provision for Income Taxes

         Prior to June 1996, the Company was organized as a partnership, and
therefore was not subject to income taxation except to the extent that its
earnings were attributed to its partners.  The Company's benefit for income
taxes subsequent to reorganization as a corporation for the six-month period
ended December 31, 1996 was $(1.5) million, primarily resulting from a deferred
tax benefit of $(1.8) in connection with the stock option related special
compensation expense of $5.4 million.





                                       20
<PAGE>   22

         The Company benefits from state tax credits arising from a 1993
agreement with the State of Nebraska (the "Nebraska Agreement") to create at
least 30 new jobs and invest at least $3.0 million in new equipment prior to
December 31, 1999.  This agreement results in annual state income tax credits
through 1999 of ten percent of the purchase price of new equipment and a refund
of Nebraska sales taxes (currently at a rate of 6.5%) paid on purchases of new
equipment during each year and, beginning on January 1, 1996, a credit of five
percent of the annual compensation paid to the new employees exceeding the base
year's aggregate compensation.  The Company believes that sufficient tax
credits will be available through the life of the Nebraska Agreement to offset
the Company's expected Nebraska state income tax liability during such period.
In addition, the Company utilizes its foreign sales corporation ("FSC")
subsidiary located in Guam to exempt from income taxation a portion of the
Company's foreign sales income.

         Recently Issued Accounting Standards

         In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation." SFAS No. 123 allows companies to continue the current
method of accounting for stock-based compensation plans under APB Opinion No. 25
or adopt the fair value based method contained in SFAS No. 123. The Company has
adopted SFAS No. 123 and has elected to provide disclosure of the relevant
information in the Notes to Consolidated Financial Statements.

















                                       21
<PAGE>   23

QUARTERLY RESULTS OF OPERATIONS

         The following tables set forth certain unaudited financial information
in dollars and as a percentage of revenues for the eight quarters ended
December 31, 1996.   In the opinion of the Company's management, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements appearing elsewhere in this Form 10-K and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the unaudited results set forth herein.  The operating results
for any quarter are not necessarily indicative of results for any subsequent
period or for the entire fiscal year.

<TABLE>
<CAPTION>
                                                                                   Quarter Ended
                                                            ------------------------------------------------------
                                                            March 31,       June 30,     September 30,  December 31,
                                                              1995            1995           1995           1995   
                                                            ----------     ----------     ----------    ---------- 
                                                                     (In thousands, except per share data)
<S>                                                         <C>            <C>            <C>          <C>         
Revenues  . . . . . . . . . . . . . . . . . . . . . ..      $    1,460     $    1,562     $    2,336    $    2,770 
Cost of sales . . . . . . . . . . . . . . . . . . . ..             646            761            859           716 
                                                            ----------     ----------     ----------    ---------- 
Gross profit  . . . . . . . . . . . . . . . . . . . ..             814            801          1,477         2,054 
Operating expenses:                                    
     Research and development . . . . . . . . . . . ..             397            457            508           591 
     Sales and marketing  . . . . . . . . . . . . . ..             509            411            535           654 
     General and administrative . . . . . . . . . . ..             285            265            258           383 
     Amortization of intangible assets (1)  . . . . ..             273            280            277           263 
     Special compensation expense (2) . . . . . . . ..              --             --             --            -- 
                                                            ----------     ----------     ----------    ---------- 
          Total operating expenses  . . . . . . . . ..           1,464          1,413          1,578         1,891 
                                                            ----------     ----------     ----------    ---------- 
Income (loss) from operations (3) . . . . . . . . . ..            (650)          (612)          (101)          163 
Interest expense, net . . . . . . . . . . . . . . . ..              29             24             42            43 
Provision (benefit) for income taxes (4)  . . . . . ..              --             --             --            -- 
                                                            ----------     ----------     ----------    ---------- 
Net income (loss) (3) . . . . . . . . . . . . . . . ..      $     (679)    $     (636)    $     (143)   $      120 
                                                            ==========     ==========     ==========    ========== 
Income (loss) before pro forma taxes  . . . . . . . ..      $     (679)    $     (636     $     (143)   $      120 
Pro forma provision (benefit) for income taxes                    (252)          (236)           (53)           45 
                                                            ----------     ----------     ----------    ---------- 
Pro forma net income (loss) (3) . . . . . . . . . . ..      $     (427)    $     (400)           (90)   $       75 
                                                            ==========     ==========     ==========    ========== 
Pro forma net income (loss) per share (3) (5) . . . ..      $  (0.06)      $    (0.06)    $    (0.01)   $     0.01 
                                                            ==========     ==========     ==========    ========== 
Shares used to compute net income (loss)               
     per share (5)  . . . . . . . . . . . . . . . . ..           6,969          6,969          6,969         6,969 
                                                            ==========     ==========     ==========    ========== 


                                                                                Quarter Ended                    
                                                           ----------------------------------------------------- 
                                                             March 31,   June 30,    September 30,   December 31,
                                                                1996        1996          1996            1996   
                                                           ----------   ----------     ----------     ---------- 
                                                                   (In thousands, except per share data)         
<S>                                                        <C>          <C>           <C>             <C>        
Revenues  . . . . . . . . . . . . . . . . . . . . . ..     $    2,580   $    3,148     $    3,547     $    4,500 
Cost of sales . . . . . . . . . . . . . . . . . . . ..            911          939          1,036          1,978 
                                                           ----------   ----------     ----------     ---------- 
Gross profit  . . . . . . . . . . . . . . . . . . . ..          1,669        2,209          2,511          2,522 
Operating expenses:                                                                                              
     Research and development . . . . . . . . . . . ..            436          649            601            548 
     Sales and marketing  . . . . . . . . . . . . . ..            431          404            671            597 
     General and administrative . . . . . . . . . . ..            350          345            357            361 
     Amortization of intangible assets (1)  . . . . ..            276          270            273            182 
     Special compensation expense (2) . . . . . . . ..             --           --          5,568             -- 
                                                           ----------   ----------     ----------     ---------- 
          Total operating expenses  . . . . . . . . ..          1,493        1,668          7,470          1,688 
                                                           ----------   ----------     ----------     ---------- 
Income (loss) from operations (3) . . . . . . . . . ..            176          541         (4,959)           834 
Interest expense, net . . . . . . . . . . . . . . . ..             18           32             29             52 
Provision (benefit) for income taxes (4)  . . . . . ..             --           --         (1,758)           230 
                                                           ----------   ----------     ----------     ---------- 
Net income (loss) (3) . . . . . . . . . . . . . . . ..     $      158   $      509     $   (3,230)    $      552 
                                                           ==========   ==========     ==========     ========== 
Income (loss) before pro forma taxes  . . . . . . . ..     $      158         $509         (4,988)    $      782 
                                                                   38           97         (1,758)           230 
Pro forma provision (benefit) for income taxes             ----------   ----------     ----------     ---------- 
Pro forma net income (loss) (3) . . . . . . . . . . ..     $      120         $41      $   (3,230)    $      552 
                                                           ==========   ==========     ==========     ========== 
Pro forma net income (loss) per share (3) (5) . . . ..           0.02         0.06          (0.46)          0.08 
                                                           ==========   ==========     ==========     ========== 
Shares used to compute net income (loss)                                                                         
     per share (5)  . . . . . . . . . . . . . . . . ..          6,969        6,969          6,969          6,969 
                                                           ==========   ==========     ==========     ========== 
                                                           
                                                           
</TABLE>

<TABLE>
<CAPTION>
                                                                       As a percentage of revenues
                                                        ---------------------------------------------------------
<S>                                                     <C>            <C>             <C>             <C>         
Revenues  . . . . . . . . . . . . . . . . . . . . . .        100.0%         100.0%          100.0%          100.0% 
Cost of sales . . . . . . . . . . . . . . . . . . . .         44.3           48.7            36.8            25.9  
                                                        ----------     ----------      ----------      ----------  
Gross margin  . . . . . . . . . . . . . . . . . . . .         55.7           51.3            63.2            74.1  
Operating expenses:                                   
     Research and development . . . . . . . . . . . .         27.2           29.3            21.7            21.3  
     Sales and marketing  . . . . . . . . . . . . . .         34.8           26.3            23.0            23.6  
                                                      
     General and administrative . . . . . . . . . . .         19.5           17.0            11.0            13.8  
     Amortization of intangible assets (1)  . . . . .         18.7           17.9            11.8             9.5  
     Special compensation expense (2) . . . . . . . .           --             --              --              --  
                                                        ----------     ----------      ----------      ----------  
          Total operating expenses  . . . . . . . . .        100.2           90.5            67.5            68.2  
                                                        ----------     ----------      ----------      ----------  
Income (loss) from operations (3) . . . . . . . . . .        (44.5)         (39.2)           (4.3)            5.9  
Interest expense, net . . . . . . . . . . . . . . . .          2.0            1.5             1.8             1.6  
Provision for income taxes (4)  . . . . . . . . . . .         --             --              --              --    
                                                        ----------     ----------      ----------      ----------  
Net income (loss) (3) . . . . . . . . . . . . . . . .        (46.5)%        (40.7)%          (6.1)%          4.3%  
                                                        ==========     ==========      ==========      ==========  


                                                                                                                           
                                                                     As a percentage of revenues             
                                                        ---------------------------------------------------- 
<S>                                                     <C>         <C>            <C>            <C>        
Revenues  . . . . . . . . . . . . . . . . . . . . . .        100.0%      100.0%         100.0%         100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . .         35.3        29.8           29.2           44.0 
                                                        ----------  ----------     ----------     ---------- 
Gross margin  . . . . . . . . . . . . . . . . . . . .         64.7        70.2           70.8           56.0 
Operating expenses:                                                                                          
     Research and development . . . . . . . . . . . .         16.9        20.6           16.9           12.2 
     Sales and marketing  . . . . . . . . . . . . . .         16.7        12.8           18.9           13.3 
                                                                                                             
     General and administrative . . . . . . . . . . .         13.6        11.0           10.1            8.0 
     Amortization of intangible assets (1)  . . . . .         10.7         8.6            7.7            4.0 
     Special compensation expense (2) . . . . . . . .           --          --          157.0             -- 
                                                        ----------  ----------     ----------     ---------- 
          Total operating expenses  . . . . . . . . .         57.9        53.0          210.6           37.5 
                                                        ----------  ----------     ----------     ---------- 
Income (loss) from operations (3) . . . . . . . . . .          6.8        17.2         (139.8)          18.5 
Interest expense, net . . . . . . . . . . . . . . . .          0.7         1.0            0.8            1.1 
Provision for income taxes (4)  . . . . . . . . . . .         --          --            (49.6)           5.1 
                                                        ----------  ----------     ----------     ---------- 
Net income (loss) (3) . . . . . . . . . . . . . . . .         6.1%       16.2%          (91.0)%         12.3% 
                                                        ==========  ==========     ==========     ========== 

</TABLE>











                                       22
<PAGE>   24

-----------------

(1)      Reflects the amortization of intangible assets related to the
         acquisition of the Company's business in December 1991.  These
         intangible assets were fully amortized as of November 30, 1996, and
         thus no such amortization expenses will be incurred subsequent to
         November 30, 1996.  See "-- RESULTS OF OPERATIONS -- Amortization of
         Intangible Assets."
(2)      Represents a non-recurring, non-cash compensation expense of $5.4
         million resulting from the vesting in September 1996 of 716,916 stock
         options for 10 executive officers and employees of the Company at a
         weighted average exercise price of $1.81 per shares, and the accrual
         of a special compensation expense of $210,000 in September 1996, which
         is payable to the Company's Chief Executive Officer.
(3)      Excluding the special compensation expense of $5.6 million, income
         (loss) from operations, net income (loss), pro forma net income (loss)
         and pro forma net income (loss) per share would have been $609,000,
         $517,000, $517,000 and $0.07, respectively, for the three months ended
         September 30, 1996.
(4)      Prior to June 30, 1996, the Company operated as a partnership.  The
         pro forma provision for income taxes reflects the provision for income
         taxes as if the Company had been taxed as a Subchapter "C" corporation
         under the Internal Revenue Code.
(5)      See Note 1 of Notes to Consolidated Financial Statements for an
         explanation of the method used to determine the number of shares used
         to compute pro forma net income (loss) per share.

         The Company historically has experienced, and in the future expects to
continue to experience, substantial variability in its revenues and
profitability from quarter to quarter.  The level of revenues in a particular
quarter vary primarily based upon the timing of large purchase orders, due
principally to the seasonal nature of governmental budgeting processes and the
needs of competing budgetary concerns of its customers during the year.  Other
factors which affect the level of revenues in a particular quarter include the
timing of the introduction of new products, general economic conditions, the
timing and mix of product sales and specific economic conditions in the
information security and wireless communications industries.  In addition, due
to the buying patterns of the Company's federal and state agency customers,
revenues for the first quarter of the Company's fiscal year tend to be lower
than revenues for the fourth quarter of the preceding year.  The Company
believes that its quarterly results are likely to vary for the foreseeable
future.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations and met its capital
requirements primarily through cash flow generated from operations, short-term
borrowings, long-term debt and an additional capital investment from its
investors.  The Company's operating activities generated cash of $377,000,
$55,000 and $2.9 million in 1996, 1995 and 1994, respectively.  Cash provided
by operating activities in 1996 consisted primarily of a net loss plus
depreciation and amortization and the special compensation expense and an
increase in accounts payable and accrued expenses, offset in part by an
increase in accounts receivable, inventory and deferred tax assets.  Cash
provided by operating activities in 1995 consisted primarily of a net loss plus
depreciation and amortization and an increase in accrued expenses, offset in
part by an increase in accounts receivable and a decrease in accounts payable.
Cash provided by operating activities in 1994 consisted primarily of net income
plus depreciation and amortization and a decrease in accrued expenses, offset
in part by increases in accounts receivable, inventory and prepaid and other
assets.

         The deferred tax assets totaling $1.9 million (which resulted
primarily from the stock option related special compensation expense of $5.4
million incurred in September 1996) were 13.7% and 27.1% of total assets and
stockholders' equity, respectively, at December 31, 1996.  Based on the current
level of taxable income, management believes that it is more likely than not
that future taxable income will be sufficient to fully utilize all deferred tax
assets recorded.

         Cash used for investing activities, attributable primarily to capital
expenditures, totaled $2.5 million, $1.3 million and $1.7 million in 1996, 1995
and 1994, respectively.  Capital expenditures









                                       23
<PAGE>   25
consisted primarily of computer and networking equipment, office furniture and
manufacturing equipment and, in 1996 and 1994, expenses related to the
construction of the Company's Lincoln facility.  In August 1996, the Company
began construction of a 21,000 square foot expansion of its existing Lincoln
facility at an estimated final cost of $1.0 million, primarily to accommodate
additional manufacturing capacity, which expansion was completed in the first
quarter of 1997.  As of December 31, 1996, the Company had no material firm
commitments for capital expenditures, except a commitment to purchase
approximately $400,000 of office furniture and equipment related primarily to
the new premises, and the Company expects to purchase additional computer 
equipment and replace its current management information system in 1997.

         Financing activities, attributable primarily to cash provided by
borrowings on term loans and operating lines of credit and cash used for
partnership distributions, totaled $1.8 million, $(564,000) and $744,000  in
1996, 1995 and 1994, respectively.  Financing activities have consisted
primarily of borrowings under and payments on an industrial development revenue
bond issue (the "IDR") arranged through the Nebraska Investment Finance
Authority, two term notes, an installment note secured by equipment and a bank
line of credit. Additionally, in September 1994, the Company received an
additional $1.0 million equity investment from existing investors to help the
Company finance the development of its APCO 25 digital radio project.

         The IDR bears interest at a fixed rate of 6.25%, is non-amortizing and
matures in January 2004.  At December 31, 1996, the outstanding principal
amount under the IDR was $850,000.  Both of the term notes bear interest at the
bank's regional money market rate plus 0.5% and are secured by substantially
all of the Company's assets.  At December 31, 1996, the outstanding principal
amounts under the two term notes were $251,000 and $376,000, respectively.  The
installment note is secured specifically by equipment and bears interest at the
bank's national prime rate plus 0.5%.  At December 31, 1996, the outstanding
principal amount under the installment note was $359,000.  The bank line of
credit provides for working capital and capital advances not to exceed $4.0
million, with specific advances calculated based upon a percentage of eligible
inventories, accounts receivable and fixed assets.  Interest is payable monthly
on the bank line at the bank's money market rate and is collateralized by
substantially all of the Company's assets.  At December 31, 1996, the
outstanding principal amount under the bank line of credit was $1.8 million.
On January 25, 1997, the Company paid off all of the outstanding balances on
the two term notes, the installment note and the bank line of credit with
proceeds from the Company's initial public offering.

         In November 1996, the Company obtained a $1.0 million construction
loan to fund the expansion of its existing Lincoln facility.  Interest on the
loan is payable monthly at the bank's national money market rate plus 0.5%
(8.75% at December 31, 1996), with the principal balance maturing in August
1997.  At February 28, 1997, the principal balance outstanding on the
construction loan was $892,000.

         Prior to June 1996, the Company was organized as a partnership and, as
such, made distributions to its partners of $181,000, $700,000 and $861,000 in
the six months ended June 30, 1996 and in 1995 and 1994, respectively,
primarily to cover its partners' attributed tax liabilities.  The Company
currently intends to retain earnings, if any, to support its growth strategy
and does not anticipate paying cash dividends in the foreseeable future.

         The Company believes that cash generated from operations and the net
proceeds of $17.7 million from the sale of Common Stock in the Company's
initial public offering completed in January 1997, together with the Company's
cash, cash equivalents and lines of credit, will be sufficient to meet its
anticipated cash needs for working capital, capital expenditures and business
expansion plans at least through 1997.





                                       24
<PAGE>   26

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See Index to Consolidated Financial Statements included at page 27
of this Annual Report on Form 10-K.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.
























                                       25
<PAGE>   27
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information concerning directors and executive officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the last fiscal year.  For information concerning other executive officers
of the Company, see "ITEM 4(A).  EXECUTIVE OFFICERS OF THE COMPANY."


ITEM 11. EXECUTIVE COMPENSATION.

         Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the last fiscal year.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information concerning certain relationships and related transactions
with management and others is incorporated by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.















                                       26
<PAGE>   28
                                    PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON   FORM 8-K.

         (a)     The following documents are included in this report at the
page numbers indicated.

<TABLE>
<CAPTION>
                 1.       Financial Statements                                                     Page No.
                          --------------------                                                     --------
                          <S>                                                                       <C>
                          Report of Independent Accountants                                            F-1

                          Consolidated Balance Sheets as of                                            F-2
                          December 31, 1996 and 1995

                          Consolidated Statements of Income (Loss) for the                             F-3
                          Years ended December 31, 1996, 1995 and 1994

                          Consolidated Statements of Changes in Stockholders' Equity                   F-4
                          for the Years ended December 31, 1996, 1995 and 1994

                          Consolidated Statements of Cash Flows for the Years ended                    F-5
                          December 31, 1996, 1995 and 1994

                          Notes to Consolidated Financial Statements                                 F-6 to F-17


                 2.       FINANCIAL STATEMENT SCHEDULES:
                          
                          Report of Independent Accountants                                            S-1
                          
                          Schedule III - Valuation and Qualifying Accounts and Reserves                S-2

                          Schedules not listed above have been omitted because the information
                          required to be set forth therein is not applicable or is shown in
                          the financial statements or notes thereto.


                 3.       Exhibits

                          (i)     Executive Compensation Plans and Arrangements:

                          The following is a summary of the Company's executive
                          compensation plans and arrangements which are required to be
                          filed as exhibits to this Report on Form 10-K:

                 1.       Employment Agreement between the Company and John T.
                          Connor dated as of September 10, 1996 (incorporated
                          herein by reference to Exhibit 10.1 to the Company's
                          Form S-1 Registration No. 333-14351 declared
                          effective on January 22, 1997).
                 2.       Employment Agreement between the Company and Jeffery
                          L. Fuller dated as of July 18, 1996 (incorporated
                          herein by reference to Exhibit 10.2 to the Company's
                          Form S-1 Registration No. 333-14351 declared
                          effective on January 22, 1997).
                 3.       Form of Employment Agreement between the Company and
                          C. Eric Baumann, Michael P. Wallace and Joel K. Young
                          (incorporated herein by reference to

</TABLE>









                                       27
<PAGE>   29
                          Exhibit 10.3 to the Company's Form S-1 Registration
                          No. 333-14351 declared effective on January 
                          22, 1997).
                 4.       Form of 1996 Stock Incentive Plan, together with
                          forms of stock option agreements (incorporated herein
                          by reference to Exhibit 10.4 to the Company's Form
                          S-1 Registration No. 333-14351 declared effective on
                          January 22, 1997).

                          (ii)    Exhibit Index:
Exhibit
  No.    Description

3.1      Second Amended and Restated Certificate of Incorporation of the
         Company filed on September 30, 1996 with the Secretary of State of the
         State of Delaware  (incorporated herein by reference to Exhibit 3.1 to
         the Company's Form S-1 Registration No. 333-14351 declared effective
         on January 22, 1997 (hereinafter "1997 Registration Statement")).
3.2      Amended and Restated Bylaws of the Company (incorporated herein by
         reference to Exhibit 3.2 to 1997 Registration Statement).
3.3      Certificate of Merger of Transcrypt International, Ltd., a Nebraska
         limited  partnership, with and into the Company, filed on June 28,
         1996 with the Secretary of State of the State of Delaware
         (incorporated herein by reference to Exhibit 3.3 to 1997 Registration
         Statement).
3.4      Certificate of Merger of Transcrypt International, Inc., a Nebraska
         corporation, with and into the Company, filed on September 30, 1996
         with  the Secretary of State of the State of Delaware (incorporated
         herein by reference to Exhibit 3.4 to 1997 Registration Statement).
4.1      Specimen Certificate for Common Stock (incorporated herein by
         reference to Exhibit 4.1 to 1997 Registration Statement).
10.1     Employment Agreement between the Company and John T. Connor dated as
         of September 10, 1996 (incorporated herein by reference to Exhibit
         10.1 to 1997 Registration Statement).
10.2     Employment Agreement between the Company and Jeffery L. Fuller dated
         as of July 18, 1996 (incorporated herein by reference to Exhibit 10.2
         to 1997 Registration Statement).
10.3     Form of Employment Agreement between the Company and C. Eric Baumann,
         Michael P. Wallace and Joel K. Young (incorporated herein by reference
         to Exhibit 10.3 to 1997 Registration Statement).
10.4     Form of 1996 Stock Incentive Plan, together with forms of stock option
         agreements (incorporated herein by reference to Exhibit 10.4 to 1997
         Registration Statement).
10.5     Form of Indemnification Agreement between the Company and each
         executive officer and director of the Company (incorporated herein by
         reference to Exhibit 10.5 to 1997 Registration Statement).
10.6     License Agreement for APCO Project 25 Compliant Product between
         Motorola, Inc. and the Company dated as of August 2, 1994
         (incorporated herein by reference to Exhibit 10.6 to 1997 Registration
         Statement).
10.7*    Amendment, dated as of June 28, 1996, to License Agreement for APCO
         Project 25 Compliant Product between Motorola, Inc. and the Company
         dated as of August 2, 1994 (incorporated herein by reference to
         Exhibit 10.7 to 1997 Registration Statement).
10.8     OEM Agreement between Motorola, Inc. and the Company dated as of
         August 2, 1994 (incorporated herein by reference to Exhibit 10.8 to
         1997 Registration Statement).
10.9*    Amendment, dated as of July 15, 1996, to OEM Agreement between
         Motorola, Inc. and the Company dated as of August 2, 1994
         (incorporated herein by reference to Exhibit 10.9 to 1997 Registration
         Statement).
10.10*   Private Label/Supplier Agreement for Analog Scrambling Modules between
         Motorola, Inc. and the Company dated as of August 8, 1995
         (incorporated herein by reference to Exhibit 10.10 to 1997
         Registration Statement).
10.11*   Motorola Cellular Subscriber Products Sales Agreement, dated as of
         June 13, 1996, by and between Motorola, Inc. and the Company
         (incorporated herein by reference to Exhibit 10.11 to 1997
         Registration Statement).
10.12    License Agreement for APCO Fed Project 25 Algorithm between Digital
         Voice Systems, Inc. and the Company, dated as of August 14, 1995
         (incorporated herein by reference to Exhibit 10.12 to 1997
         Registration Statement).
10.13    Consigned Inventory Agreement between Arrow/Schweber Electronics Group
         and the Company, dated as of June 22, 1994 (incorporated herein by
         reference to Exhibit 10.13 to 1997 Registration Statement).
10.14    Nebraska Investment Finance Authority $850,000 Industrial Revenue Bond
         (Transcrypt International, Ltd. Project), Series 1994, dated as of
         January 15, 1994, and Note (incorporated herein by reference to
         Exhibit 10.14 to 1997 Registration Statement).
10.15    Trust Indenture, dated as of January 15, 1994, for $850,000 Industrial
         Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
         between  Nebraska Investment Finance Authority as Issuer and Norwest
         Bank Nebraska, N.A. as Trustee (incorporated herein by reference to
         Exhibit 10.15 to 1997 Registration Statement).
10.16    Loan Agreement, dated as of January 15, 1994, for $850,000 Industrial
         Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
         between Nebraska Investment Finance Authority as Issuer and the
         Company (incorporated herein by reference to Exhibit 10.16 to 1997
         Registration Statement).
10.17    Amended and Restated Loan Agreement, dated as of May 18, 1994, by and
         between Norwest Bank Nebraska, N.A., and the Company (incorporated
         herein by reference to Exhibit 10.17 to 1997 Registration Statement).
10.18    First Amendment, dated as of June 1, 1995, to Amended and Restated
         Loan  Agreement, dated as of May 18, 1994, by and between Norwest Bank
         Nebraska, N.A., and the Company (incorporated herein by reference to
         Exhibit 10.18 to 1997 Registration Statement).
10.19    Second Amendment, dated as of April 10, 1996, to Amended and Restated
         Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
         Nebraska, N.A., and the Company (incorporated herein by reference to
         Exhibit 10.19 to 1997 Registration Statement).
10.20    Promissory Note, dated as of May 11, 1995, between West Gate Bank and
         the Company (incorporated herein by reference to Exhibit 10.20 to 1997
         Registration Statement).
10.21    RESERVED.
10.22    RESERVED.
10.23    RESERVED.
10.24    Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing
         Plan (incorporated herein by reference to Exhibit 10.24 to 1997
         Registration Statement).
10.25    Defined Contribution Master Plan and Trust Agreement of Norwest Bank
         Nebraska, N.A., Master Plan Sponsor (incorporated herein by reference
         to Exhibit 10.25 to 1997 Registration Statement).
10.26    Third Amendment, dated as of October 22, 1996, to Amended and Restated
         Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
         Nebraska, N.A., and the Company, together with Modification of Note
         (incorporated herein by reference to Exhibit 10.26 to 1997
         Registration Statement).
10.27    Fourth Amendment, dated as of November 19, 1996, to Amended and
         Restated Loan Agreement, dated as of May 18, 1994, by and between
         Norwest Bank Nebraska, N.A., and the Company, together with Commercial
         Installment Note, dated November 19, 1996 (incorporated herein by
         reference to Exhibit 10.27 to 1997 Registration Statement).
10.28    Construction Loan, dated November 15, 1996, by and between Norwest
         Bank Nebraska, N.A., and the Company, together with related 
         documents.
10.29    Commercial Installment Note, dated January 9, 1997, related to Amended
         and Restated Loan Agreement, dated as of May 18, 1994, by and between 
         Norwest Bank Nebraska, N.A., and the Company.
10.30    Commercial Installment Note secured by equipment, dated December 23,
         1996, by and between Norwest Bank Nebraska, N.A., and the Company,
         together with Security Agreement.
11.1     Statement re: Computation of Per Share Earnings.  
27.1     Financial Data Schedule.

*        Confidential treatment has been granted as to a portion of this
         exhibit.

         (b)     Reports on Form 8-K

         No reports on Form 8-K were filed during the fourth quarter of 1996.

         (c)     Exhibits Required by Item 601 of Regulation S-K

         See Item 14(a)(3) above.

         (d)     Additional Financial Statements

         See page S-2 to this Annual Report on Form 10-K for Schedule III --
         Valuation and Qualifying Accounts and Reserves.














                                       28
<PAGE>   30


                                   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, on the 3rd day
of March, 1997.


                                      TRANSCRYPT INTERNATIONAL, INC.
                                      (Registrant)


                                      By /s/ JOHN T. CONNOR
                                         --------------------------------------
                                         John T. Connor
                                         Chairman of the Board and
                                         Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

Signature                                  Title
Date

/s/ JOHN T. CONNOR              Chairman of the                March 3, 1997
-----------------------         Board and Chief Executive
John T. Connor                  Officer (Principal
                                Executive Officer)

/s/ RANDAL P. HANSEN            Chief Financial                March 3, 1997
-----------------------         Officer (Principal
Randal P. Hansen                Financial and Accounting
                                Officer)

/s/ TERRY L. FAIRFIELD          Director                       March 3, 1997
-----------------------
Terry L. Fairfield

/s/ JEFFERY L. FULLER           Director                       March 3, 1997
-----------------------
Jeffery L. Fuller

/s/ THOMAS E. HENNING           Director                       March 3, 1997
-----------------------
Thomas E. Henning










<PAGE>   31
Signature                               Title                    Date


/s/ THOMAS R. LARSEN            Director                       March 3, 1997
-----------------------
Thomas R. Larsen

/s/ THOMAS C. SMITH             Director                       March 3, 1997
-----------------------
Thomas C. Smith

/s/ THOMAS R. THOMSEN           Director                       March 3, 1997
----------------------- 
Thomas R. Thomsen

/s/ WINSTON J. WADE             Director                       March 3, 1997
-----------------------
Winston J. Wade







<PAGE>   32
REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholders and Board of Directors
Transcrypt International, Inc.

We have audited the accompanying consolidated balance sheets of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income (loss), changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. 

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.
Lincoln, Nebraska
February 3, 1997





                                      F-1
<PAGE>   33
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                ASSETS                                                       1996               1995
                                                                                         ------------      ------------
<S>                                                                                      <C>               <C> 
Current assets:
         Cash and cash equivalents                                                       $          0      $    291,712
         Accounts receivable, net of allowance for doubtful accounts of
                  $430,251 and $181,659 in 1996 and 1995, respectively                      4,215,403         1,923,441
         Receivable - employees and affiliate                                                  11,247            57,791
         Inventory, net                                                                     2,261,381         1,119,763
         Prepaid expenses                                                                      59,949            60,323
         Deferred tax assets                                                                  196,234                 0
                                                                                         ------------      ------------

                   Total current assets                                                     6,744,214         3,453,030

Property, plant and equipment, at cost, net of accumulated depreciation                     4,907,438         3,066,740
Deferred tax assets                                                                         1,723,190                 0
Intangible assets, net of accumulated amortization                                             38,137         1,002,860
Deferred initial public offering costs                                                        568,049                 0
                                                                                         ------------      ------------

                                                                                         $ 13,981,028      $  7,522,630
                                                                                         ============      ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
         Bank overdraft                                                                  $    385,694      $          0
         Revolving line of credit                                                           1,022,000                 0
         Current portion of capitalized lease obligations                                      13,803            15,570
         Current portion of long-term debt                                                    581,959           412,656
         Obligations under noncompete agreements                                                    0           340,000
         Accounts payable                                                                   1,174,364           176,985
         Income taxes payable                                                                 151,894                 0
         Accrued expenses                                                                     946,406           767,246
         Deferred revenue                                                                           0            56,814
                                                                                         ------------      ------------

                   Total current liabilities                                                4,276,120         1,769,271

Capitalized lease obligations, net of current portion                                           1,296            15,099
Long-term debt, net of current portion                                                      1,838,646         1,831,493
Revolving line of credit                                                                      792,070                 0
                                                                                         ------------      ------------

                                                                                            6,908,132         3,615,863
                                                                                         ------------      ------------
Commitments and contingencies (Note 10)

Stockholders' equity:
         Partners' capital                                                                                    3,906,767
         Preferred stock, ($.01 par value; 3,000,000 shares authorized; none issued)
         Common stock ($.01 par value; 19,400,000 voting shares authorized,
                  6,565,536 issued and outstanding; 600,000 nonvoting shares
                  authorized, 217,542 issued and outstanding)                                  67,831                 0
         Additional paid-in capital                                                         9,683,381                 0
         Retained deficit                                                                  (2,678,316)                0
                                                                                         ------------      ------------

                                                                                            7,072,896         3,906,767
                                                                                         ------------      ------------

                                                                                         $ 13,981,028      $  7,522,630
                                                                                         ============      ============
</TABLE>



The accompanying notes are an integral part of the consolidated financial
statements.



                                      F-2
<PAGE>   34
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
for the years ended December 31, 1996, 1995 and 1994



<TABLE>
<CAPTION>
                                                                            1996              1995              1994
                                                                       ------------      ------------      ------------
<S>                                                                    <C>               <C>               <C>         
Revenues                                                               $ 13,775,597      $  8,128,200      $  9,155,164
Cost of sales                                                             4,864,589         2,982,942         2,901,577
                                                                       ------------      ------------      ------------

      Gross profit                                                        8,911,008         5,145,258         6,253,587

Operating costs and expenses:
  Research and development                                                2,233,753         1,953,068         1,179,540
  Sales and marketing                                                     2,102,753         2,109,393         1,589,632
  General and administrative                                              1,412,856         1,190,751         1,074,408
  Special compensation expense                                            5,568,250                 0                 0
  Amortization of acquisition related expense                             1,001,666         1,092,680         1,092,426
                                                                       ------------      ------------      ------------

      Total operating costs and expenses                                 12,319,278         6,345,892         4,936,006
                                                                       ------------      ------------      ------------

Income (loss) from operations                                            (3,408,270)       (1,200,634)        1,317,581
Interest income                                                              30,567            53,297            34,147
Interest expense                                                           (161,905)         (190,403)         (144,940)
                                                                       ------------      ------------      ------------

Income (loss) before income taxes                                        (3,539,608)       (1,337,740)        1,206,788
Provision (benefit) for income taxes                                     (1,528,488)                0                 0
                                                                       ------------      ------------      ------------

Net income (loss)                                                      $ (2,011,120)     $ (1,337,740)     $  1,206,788
                                                                       ============      ============      ============

Pro forma information:
  Loss before income taxes                                             $ (3,539,608)     $ (1,337,740)
  Pro forma  provision (benefit) for income taxes                        (1,393,209)         (496,316)
                                                                       ------------      ------------ 

  Pro forma net loss                                                   $ (2,146,399)     $   (841,424)
                                                                       ============      ============ 

  Pro forma net loss per share                                         $       (.31)     $       (.12)
                                                                       ============      ============ 

  Weighted average common and common equivalent shares outstanding        6,968,712         6,968,712
                                                                       ============      ============ 
</TABLE>




The accompanying notes are an integral part of the consolidated financial
statements.



                                      F-3
<PAGE>   35
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>

                                                           Common Stock 
                                                       ------------------------     Additional
                                                                        Par          Paid-in       
                                        Units          Shares          Value         Capital       
                                    ----------        ---------     -----------     -----------    
<S>                                 <C>               <C>           <C>             <C>            
Balance, December 31, 1993           4,975,434                0     $         0     $         0    

Additional investment                  200,000                0               0               0    

Distributions                                0                0               0               0    

Net income                                   0                0               0               0    
                                    ----------        ---------     -----------     -----------    

Balance, December 31, 1994           5,175,434                0               0               0    

Distributions                                0                0               0               0    

Net loss                                     0                0               0               0    
                                    ----------        ---------     -----------     -----------    

Balance, December 31, 1995           5,175,434                0               0               0    

Distributions                                0                0               0               0    

Net income (loss)                            0                0               0               0    

Issuance of stock in exchange
  for units of the Predecessor      (5,175,434)       5,175,434          51,754       4,341,208    

Additional shares issued in
  1.3106311-for-1 stock split
  effected in the form of a
  stock dividend                             0        1,607,644          16,077         (16,077)   
Special compensation - options
  issued                                     0                0               0       5,358,250    
                                    ----------        ---------     -----------     -----------    

Balance, December 31, 1996                   0        6,783,078     $    67,831     $ 9,683,381    
                                    ==========        =========     ===========     ===========    
</TABLE>



<TABLE>
<CAPTION>
                                        Retained         Partners'                  
                                         Deficit          Capital           Total   
                                      -----------      -----------      ----------- 
                                      <C>              <C>              <C>         
Balance, December 31, 1993            $         0      $ 4,599,191      $ 4,599,191 
                                                                                    
Additional investment                           0        1,000,007        1,000,007 
                                                                                    
Distributions                                   0         (861,482)        (861,482)
                                                                                    
Net income                                      0        1,206,788        1,206,788 
                                      -----------      -----------      ----------- 
                                                                                    
Balance, December 31, 1994                      0        5,944,504        5,944,504 
                                                                                    
Distributions                                   0         (699,997)        (699,997)
                                                                                    
Net loss                                        0       (1,337,740)      (1,337,740)
                                      -----------      -----------      ----------- 
                                                                                    
Balance, December 31, 1995                      0        3,906,767        3,906,767 
                                                                                    
Distributions                                   0         (181,001)        (181,001)
                                                                                    
Net income (loss)                      (2,678,316)         667,196       (2,011,120)
                                                                                    
Issuance of stock in exchange                                                       
  for units of the Predecessor                  0       (4,392,962)               0 
                                                                                    
Additional shares issued in                                                         
  1.3106311-for-1 stock split                                                       
  effected in the form of a                                                         
  stock dividend                                0                0                0 
Special compensation - options                                                      
  issued                                        0                0        5,358,250 
                                      -----------      -----------      ----------- 
                                                                                    
Balance, December 31, 1996            $(2,678,316)     $         0      $ 7,072,896 
                                      ===========      ===========      =========== 
</TABLE>
                                    




The accompanying notes are an integral part of the consolidated financial
statements.



                                       F-4
<PAGE>   36
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>

                                                                            1996           1995           1994
<S>                                                                     <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss)                                                     $(2,011,120)   $(1,337,740)   $ 1,206,788
                                                                        -----------    -----------    -----------
  Adjustments to reconcile net income (loss) to net cash
           provided by operating activities:
             Special compensation expense                                 5,358,250              0              0
             Depreciation                                                   615,112        532,288        350,188
             Amortization                                                 1,001,666      1,092,680      1,092,426
             Loss (gain) on sale of fixed assets                              5,526         (2,446)        42,449
             Provisions for warranty, bad debt and inventory reserves       413,705        195,824        314,589
             Deferred tax benefit                                        (1,919,424)             0              0
             Changes in:
               Accounts receivable                                       (2,540,554)      (672,929)       (63,090)
               Related party receivables                                     46,544         (4,290)        44,571
               Inventory                                                 (1,282,589)        82,850       (174,916)
               Prepaid expenses and other assets                                374        117,499       (125,026)
               Accounts payable                                             570,339       (116,470)        10,794
               Income taxes payable                                         151,894              0              0
               Accrued expenses                                              23,960        264,010        195,147
               Deferred revenue                                             (56,814)       (96,204)       (35,394)
                                                                        -----------    -----------    -----------

                 Total adjustments                                        2,387,989      1,392,812      1,651,738
                                                                        -----------    -----------    -----------

                 Net cash provided by operating activities                  376,869         55,072      2,858,526
                                                                        -----------    -----------    -----------

Cash flows from investing activities:
  Issue notes receivable                                                          0        (11,846)        (1,833)
  Payments received on note receivable                                            0         10,394          5,000
  Proceeds from sale of fixed assets                                         30,833         37,089        591,084
  Purchase of fixed assets                                               (2,118,400)    (1,029,471)    (1,992,017)
  Increase in patents and trademarks                                        (36,943)          (904)        (2,993)
  Payments under noncompete agreement                                      (340,000)      (340,000)      (340,000)
                                                                        -----------    -----------    -----------

                 Net cash used in investing activities                   (2,464,510)    (1,334,738)    (1,740,759)
                                                                        -----------    -----------    -----------

Cash flows from financing activities:
  Borrowings on term loan and operating line of credit                    2,398,867      1,016,000      2,363,000
  Payments on term loan and operating line of credit                       (408,341)      (866,708)    (1,743,792)
  Principal payments on capitalized leases                                  (15,570)       (13,377)       (13,648)
  Proceeds from issuance of partnership interests                                 0              0      1,000,007
  Partnership distributions paid                                           (181,001)      (699,997)      (861,482)
  Bank overdraft                                                            385,694              0              0
  Deferred initial public offering costs                                   (383,720)             0              0
                                                                        -----------    -----------    -----------

                 Net cash provided by (used in) financing activities      1,795,929       (564,082)       744,085
                                                                        -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents                       (291,712)    (1,843,748)     1,861,852

Cash and cash equivalents, beginning of period                              291,712      2,135,460        273,608
                                                                        -----------    -----------    -----------

Cash and cash equivalents, end of period                                $         0    $   291,712    $ 2,135,460
                                                                        ===========    ===========    ===========


Supplemental disclosures of cash flow information:
  Interest paid, net of amounts capitalized                             $   162,649    $   190,403    $   137,481
  Income taxes paid                                                     $   293,700    $         0    $         0

Supplemental disclosure of noncash investing activities:
  Additions to fixed assets included in accounts payable                $   173,769
  Additions to deferred initial public offering costs included
    in accounts payable and accrued liabilities                         $   184,329
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.



                                       F-5
<PAGE>   37
TRANSCRYPT INTERNATIONAL, INC. AND SBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SIGNIFICANT ACCOUNTING POLICIES:

         The following is a summary of significant accounting policies followed
         in the preparation of these consolidated financial statements. Certain
         prior period amounts have been reclassified to conform to the current
         period presentation.

         ORGANIZATION

         Transcrypt International, Ltd. (the "Predecessor") was a limited
         partnership formed in 1991 composed of the general partner, Transcrypt
         International, Inc. (a Nebraska corporation) and various limited
         partners. One percent of the profits or losses was allocated to the
         general partner and the remaining 99% was allocated to the limited
         partners based on their respective units of partnership interest.


         Effective June 30, 1996, the assets and liabilities of the partnership
         were merged tax-free into a Delaware corporation, Transcrypt
         International, Inc. (the "Company"). Each respective partnership unit
         was converted pro rata into common shares of the Company.

         The Company is engaged in the design, manufacture and marketing of
         information security products for the land mobile radio and cellular
         telephone markets. The Company markets its products to customers
         worldwide.

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
         Company and its wholly-owned subsidiaries. All significant intercompany
         accounts and transactions have been eliminated in the consolidation.

         CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid investments with original
         maturities less than 90 days as cash equivalents. The Company places
         its temporary cash investments with high credit qualified financial
         institutions.

         INVENTORY

         Inventory is recorded at the lower of cost or market. Cost is
         determined by the first-in, first-out (FIFO) method.



                                       F-6
<PAGE>   38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


1.       SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are recorded at cost. The Company's
         policy is to capitalize expenditures for major improvements and to
         charge to operating expenses the cost of current maintenance and
         repairs. Depreciation is computed on the straight-line method over the
         estimated useful lives of the assets. The cost and related accumulated
         depreciation of assets retired or otherwise disposed of are eliminated
         from the respective accounts at the time of disposition. Any resulting
         gain or loss is included in current operating results. For the years
         ended December 31, 1996, 1995 and 1994, $7,210, $0 and $28,776 of
         interest expense was capitalized, respectively.


         INTANGIBLE ASSETS

         Intangibles are carried at cost less applicable amortization. Provision
         for amortization of intangible assets is based upon the estimated
         useful lives of the related assets and is computed using the
         straight-line method. All intangible assets are being amortized over
         five years. Management reviews intangible assets whenever events or
         changes in circumstances indicate that the carrying amount of the
         assets may not be fully recoverable.


         INCOME TAXES

         The Predecessor as a partnership was not subject to Federal or state
         income taxes. Any tax liabilities arising from the Predecessor's
         operations were the direct responsibility of the individual partners.

         Deferred tax assets and liabilities are determined based on the
         differences between the financial statement and tax bases of assets and
         liabilities using enacted tax rates and laws applicable to the years in
         which the differences are expected to reverse. Valuation allowances, if
         any, are established when necessary to reduce deferred tax assets to
         the amount that is more likely than not to be realized. Income tax
         expense is comprised of the tax payable for the period and the change
         during the period in deferred tax assets and liabilities.

         PRO FORMA PROVISION FOR INCOME TAXES


         The pro forma provision for income taxes reflects the provision for
         income taxes as if the Company had been taxed as a C Corporation under
         the Internal Revenue Code for the entire year. The actual provision for
         income taxes for 1996 included in the consolidated statement of income
         (loss) is reflective only of the results of operations for the period
         that the Company was a C Corporation, July 1, 1996 through December 31,
         1996.

         REVENUE RECOGNITION

         Revenues are recorded when products are shipped or services are
         rendered. Costs associated with the installation and servicing of
         equipment are charged to expense as incurred and allowances are
         provided for returns. The Company defers income for prepayments of
         significant initial engineering costs which are components of the
         selling price of certain products sold. Also included in deferred
         revenue are prepayments from foreign customers for which goods cannot
         be shipped until certain export regulations are met.



                                       F-7
<PAGE>   39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


1.       SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         EXPORT SALES

         A significant portion of the Company's sales are made to customers
         outside of the United States. Export sales are recorded and settled in
         U.S. dollars. Total export sales by geographic area were as follows:

<TABLE>
<CAPTION>
                                     1996          1995         1994
                                  ----------   ----------   ----------
                  <S>             <C>          <C>          <C>       
                  Europe          $2,501,000   $2,464,000   $2,580,000
                  Middle East      1,831,000    2,276,000    1,692,000
                  Latin America    2,412,000    1,060,000      978,000
                                  ----------   ----------   ----------

                                  $6,744,000   $5,800,000   $5,250,000
                                  ==========   ==========   ==========
</TABLE>

         WARRANTY COSTS

         The Company provides for warranty costs based on estimated future
         expenditures that will be incurred under product guarantees and
         warranties presently in force.

         PRO FORMA NET INCOME (LOSS) PER SHARE

         Pro forma net income (loss) per share is computed on the basis of the
         weighted average number of partnership interest units outstanding
         during the year converted into common shares on a one-to-one ratio,
         adjusted for a stock dividend and including common stock equivalents.

<TABLE>
                  <S>                                        <C>      
                  Common stock                               6,783,078
                  Common stock equivalents - stock options     185,634
                                                             ---------
                                                             6,968,712
                                                             =========
</TABLE>

         Pursuant to Securities and Exchange Commission Staff Accounting
         Bulletin No. 83, options to purchase common stock granted with exercise
         prices below the assumed initial public offering price per share during
         the 12 months preceding the date of the initial filing of the
         Registration Statement are included in the calculation of common
         equivalent shares, using the treasury stock method, as if they were
         outstanding for all periods presented.

         STOCK SPLIT

         On September 30, 1996, the Board of Directors and the shareholders
         approved an increase in the Company's authorized common shares from 10
         million to 20 million shares. On November 18, 1996, the Company
         declared a 1.3106311-for-1 stock split in the form of a stock dividend.
         All shares and per share information has been restated to reflect the
         split.



                                      F-8
<PAGE>   40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


1.       SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         MANAGEMENT ESTIMATES

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make certain
         estimates and assumptions that affect carrying amounts of assets and
         liabilities and disclosures of contingent assets and liabilities as of
         financial statement dates, as well as the reported revenues and
         expenses for the years then ended. Actual results may differ from
         management's estimates.

2.       INVENTORY:

         The following is a summary of inventory at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                  1996         1995
                                                                               ----------   ----------
              <S>                                                              <C>          <C>       
              Raw materials and supplies, net of reserve for obsolescence
                       of $38,848 and $82,041 in 1996 and 1995, respectively   $1,316,932   $  879,587
              Work in process                                                     715,032      101,092
              Finished goods                                                      229,417      139,084
                                                                               ----------   ----------
                                                                               $2,261,381   $1,119,763
                                                                               ==========   ==========
</TABLE>

3.       PROPERTY, PLANT AND EQUIPMENT:

         Property, plant and equipment consists of the following at December 31,
         1996 and 1995:

<TABLE>
<CAPTION>
                                                                                   1996          1995
                                                                                ----------   ----------
              <S>                                                               <C>          <C>       
              Land                                                              $  150,000   $  150,000
              Building                                                           1,302,388    1,302,388
              Equipment                                                          3,921,095    2,325,690
              Leased equipment                                                      74,329       74,329
              Automobiles                                                           31,598       64,647
              Furniture and fixtures                                               396,362      371,160
              Construction in progress                                             797,060            0
                                                                                ----------   ----------

                                                                                 6,672,832    4,288,214

                 Less accumulated depreciation and amortization                  1,765,394    1,221,474
                                                                                ----------   ----------
                                                                                $4,907,438   $3,066,740
                                                                                ==========   ==========
</TABLE>




                                      F-9
<PAGE>   41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


4.       INTANGIBLE ASSETS:

         Intangible assets consist of the following at December 31, 1996 and
         1995:


<TABLE>
<CAPTION>
                                                                                1996         1995
                                                                            ----------   ----------

              <S>                                                           <C>          <C>
              Proprietary technology                                        $3,355,630   $3,355,630
              Noncompete agreements                                          1,700,000    1,700,000
              Goodwill                                                         290,516      290,516
              Organization costs                                               116,910      116,910
              Patents and trademarks                                            42,465        5,522
                                                                            ----------   ----------

                                                                             5,505,521    5,468,578

                 Less accumulated amortization                               5,467,384    4,465,718
                                                                            ----------   ----------

                                                                            $   38,137   $1,002,860
                                                                            ==========   ==========
</TABLE>


5.       REVOLVING LINES OF CREDIT:

         The Company has a working capital revolving line of credit not to
         exceed $2,000,000 calculated using a specified borrowing base of
         eligible inventories and accounts receivable. In addition, the Company
         has a second revolving capital line of credit not to exceed $1,000,000,
         calculated using a specified borrowing base of certain eligible fixed
         assets. Interest for both lines of credit is payable monthly at a
         regional bank's national money market rate. The working capital line is
         collateralized by substantially all the Company's assets and the
         capital line is collateralized by certain fixed assets. At December 31,
         1996, the Company had $1,022,000 outstanding on the working capital
         line of credit and $792,070 on the capital line of credit. The capital
         line of credit is due January 2002. In January 1997, the Company
         increased the working capital revolving line of credit not to exceed
         $3,000,000.

         Average borrowings under the Company's lines of credit and the weighted
         average interest rate during 1996 were $256,000 and 8.27%.

         As described in Note 15, the revolving lines of credit were repaid
         using a portion of the net proceeds from the initial public offering.



                                      F-10
<PAGE>   42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6.       LONG-TERM DEBT:

         Long-term debt at December 31, 1996 and 1995 consists of the following:


<TABLE>
<CAPTION>
                                                                                            1996               1995

         <S>                                                                          <C>    
         Term note payable to bank due in monthly installments of $18,141
          including interest at 7.75% beginning in March 1993 until March 1996
          when it can be adjusted to a specified rate of a regional bank (8.75%
          at December 31, 1996). Principal is due in full in February 1998. The
          note is collateralized by essentially all the assets of the Company in
          addition to the personal guarantees of certain stockholders.               $        251,068    $        437,358

         Term note payable to bank due in monthly installments of $14,231
          including interest at 8% beginning June 1994 until May 1996, when it
          can be adjusted to a specified rate of a regional bank (8.75% at
          December 31, 1996). Principal is due in full in May 1999. The note is
          collateralized by essentially all the assets of the Company in
          addition to personal guarantees of certain stockholders.                            375,723             507,653


         Installment note for equipment purchase payable to bank due in monthly
          installments of $10,506 including daily adjusted interest at a
          specified rate above the prime rate (8.25% at December 31, 1996). The
          note is collateralized by specific equipment and inventory. The note
          is guaranteed by a stockholder.                                                     359,017             449,138

         Industrial development revenue bonds payable to bank with quarterly
          interest only payments beginning April 15, 1994 at 6.25% with
          principal due on January 15, 2004. This note is collateralized by a
          deed of trust.                                                                      850,000             850,000

         Construction note payable to bank, due in August 1997, including
          interest at 8.75%                                                                   584,797                   0
                                                                                     ----------------      --------------
                                                                                            2,420,605           2,244,149
                  Less current portion                                                        581,959             412,656
                                                                                     ----------------      --------------
                                                                                     $      1,838,646      $    1,831,493
                                                                                     ================      ==============
</TABLE>


         The agreements of the term notes payable and the revolving bank notes
         payable discussed in Note 5 require, among other things, that the
         Company maintain certain levels of working capital, net worth and
         debt-to-equity ratios and limit capital expenditures, investments,
         other indebtedness, distributions, mergers and acquisitions.


         The construction note payable has been classified as long-term as the
         Company has received a letter of intent to refinance the note through
         issuance of industrial development revenue bonds upon completion of the
         construction project on terms similar to the existing industrial
         development revenue bonds payable.


         As described in Note 15, the term and installment notes payable were
         retired using a portion of the net proceeds from the initial public
         offering.



                                      F-11
<PAGE>   43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


7.       OBLIGATIONS UNDER NON-COMPETE AGREEMENTS:

         In connection with the purchase of the net assets of Transcrypt
         International, Incorporated in 1991, the Company entered into
         non-compete agreements with the former owners which called for the
         Company to pay a total of $1,700,000 in consideration for the former
         owners' agreement not to compete for a period of five years. The
         remaining payments of $340,000 were paid in 1996.


8.       INCOME TAXES:

         The components of the provision (benefit) for income taxes for the
         period ending December 31, 1996 are as follows:


<TABLE>
<CAPTION>
            <S>        <C>        
            Current    $   390,936
            Deferred    (1,919,424)
                       -----------
                       $(1,528,488)
                       ===========
</TABLE>

         The entire provision is comprised of federal taxes, as no state taxes
         are expected to be paid as a result of various state incentive tax
         credits for which the Company has qualified.


         The Company's tax provision effective tax rate on pretax income (loss)
         differs from U.S. federal statutory tax rate as follows:


<TABLE>
            <S>                                                      <C>               <C>     
            U.S. federal tax at statutory tax rate                   $(1,203,467)      (34.00)%
            Income taxable directly to partners of the Predecessor      (226,847)       (6.41)
            Benefit of foreign sales corporation                         (52,969)       (1.49)
            Other                                                        (45,205)       (1.28)
                                                                     -----------       ------
                                                                     $(1,528,488)      (43.18)%
                                                                     ===========       ======  
</TABLE>

         Temporary differences between the financial statement carrying amounts
         and tax bases of assets and liabilities that give rise to deferred
         income taxes at December 31, 1996 relate to the following:


<TABLE>
            Deferred tax assets:
            <S>                                                          <C>       
                    Special compensation expense                         $1,821,805
                    Allowance for bad debts                                 146,285
                    Reserves for warranties and inventory obsolescence       38,136
                    Difference between tax and book liability accruals       11,813
                                                                         ----------
                                                                          2,018,039
                                                                         ----------
            Deferred tax liabilities:
                    Difference between tax and book depreciation             98,615
                                                                         ----------
            Net deferred asset                                           $1,919,424
                                                                         ==========
</TABLE>


         Management believes it is more likely than not that future taxable
         income will be sufficient to fully utilize all deferred tax assets
         recorded.



                                      F-12
<PAGE>   44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



9.       ACCRUED EXPENSES:

                  Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                    1996       1995
                                                  --------   --------
         <S>                                      <C>        <C>     
         Payroll, bonuses and employee benefits   $304,297   $211,193
         Warranty reserve                           73,316     64,455
         Commissions                               101,163    265,440
         Special compensation expense              210,000          0
         Other expenses                            257,630    226,158
                                                  --------   --------
                                                  $946,406   $767,246
                                                  ========   ========
</TABLE>

10.      COMMITMENTS AND CONTINGENCIES:

         The Company has agreed to pay fees totaling $350,000 to its chairman
         and chief executive officer for initiating the purchase of the net
         assets of Transcrypt International, Incorporated in 1991. Payment is
         contingent upon the original limited partners receiving capital
         distributions equal to their original capital contributions or upon the
         approval of the Board of Directors of the Company for the sale of
         equity interests in the Company to the public. Payments of $70,000 have
         been made as of December 31, 1995 and an additional payment of $70,000
         was approved and paid during February 1996. These payments were
         accounted for as a bonus and the officer has waived rights to receive
         fees to the extent of such payments. The Board of Directors approved
         the payment of the remaining $210,000 fees on September 30, 1996. These
         remaining fees are included in special compensation expense in the
         consolidated statements of income (loss). The $210,000 was paid in
         February 1997.

         In the normal course of its business activities, the Company is
         required under a contract with foreign governmental authorities to
         provide letters of credit that may be drawn upon if the Company fails
         to perform under their contracts. The letters of credit, which expire
         on various dates in 1997, have a total undrawn balance of $43,564 at
         December 31, 1996.

         The Company is involved in certain disputes as part of the ordinary
         course of its business. Management believes that the ultimate
         resolution of these disputes will not have a material adverse effect on
         its financial position, results of operations or cash flows.



                                      F-13

<PAGE>   45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



11.      OPTION PLANS:

         In January 1992, the Board of Directors approved a 1992 Partnership
         Interest Option Plan which provided for the granting of up to 1,297,525
         units of non-qualified interest options to certain officers and key
         employees. Under the Plan, the exercise price for the options was the
         fair market value at the date of grant as determined by the Board of
         Directors. The term of each option granted will in no event exceed 10
         years from the date of grant. Effective June 30, 1996, the unit options
         were converted to stock options on a one to one ratio. No options were
         exercisable under the Plan provisions until the Board of Directors
         approved granting of all reserved options and full vesting of the
         716,916 stock options on September 30, 1996. The vesting resulted in a
         special compensation charge of $5,358,250 in the quarter ended
         September 30, 1996.

         Effective as of September 6, 1996, the Company established the 1996
         Stock Incentive Plan (the "Plan"). Any employee, including any director
         of the Company, and any nonemployee director or independent contractor
         of the Company is eligible to be considered for the issuance of shares
         of common stock, $0.01 par value per share, of the Company or of any
         other class of security or right of the Company which is convertible
         into common stock. The aggregate number of shares issued under the Plan
         shall not exceed 1,200,000. The aforementioned 716,916 options have
         been issued under the Plan, all of which are vested and compensation
         recognized. The Plan provides that unless otherwise provided by the
         Plan committee any stock option granted shall have an exercise price
         not less than 100% of the market value of a share of common stock on
         the date the option is granted and that the term of such option shall
         be ten years from date of grant. In January 1997, the Company granted
         stock options for an additional 325,000 shares, with an exercise price
         equal to the price per share in the initial public offering.


         The Company has adopted the disclosure-only provisions of Statement of
         Financial Accounting Standards No. 123, "Accounting for Stock-Based
         Compensation." Had compensation cost for the Company's stock option
         plans been determined based on the fair value at the grant date for
         awards in 1996 consistent with the provisions of SFAS No. 123, the
         Company's pro forma net loss and pro forma loss per share would have
         been as follows:



                                      F-14

<PAGE>   46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



11.      OPTION PLANS, CONTINUED:

<TABLE>
         <S>                                                           <C> 
         Pro forma net loss - as reported                              $ (2,146,399)
         Pro forma net loss - as adjusted under SFAS No. 123             (2,211,519)
         Pro forma net loss per share - as reported                            (.31)
         Pro forma net loss per share - as adjusted under SFAS No. 123         (.32)
</TABLE>

         Fair value of the options was not determinable prior to September 30,
         1996 when the Board of Directors approved full vesting of the
         outstanding options.

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes option-pricing model with the following
         weighted-average assumptions for options vested in 1996:

<TABLE>
         <S>                                     <C>      
         Expected option life                    9.0 years
         Expected annual volatility                0%
         Risk-free interest rate                6.50%
         Dividend yield                            0%
</TABLE>

         The status of stock options under the Plan are summarized as follows:

<TABLE>
<CAPTION>
                                                              WEIGHTED
                                                               AVERAGE
                                             NUMBER OF        PRICE PER         OPTIONS
                                               SHARES           SHARE         EXERCISABLE
                                             ---------        ---------       -----------
         <S>                                  <C>             <C>             <C> 
         Balance at December 31, 1993         908,267         $    .77              -
                  Granted                      53,081             1.67
                  Exercised                         0
                  Forfeited                         0
                                              -------         --------           -------

         Balance at December 31, 1994         961,348              .82              -
                  Granted                      27,523             3.05
                  Exercised                         0
                  Forfeited                  (572,090)             .87
                                              -------         --------           -------

         Balance at December 31, 1995         416,781              .91              -
                  Granted                     300,135             3.05
                  Exercised                         0
                  Forfeited                         0
                                              -------         --------           -------

         Balance at December 31, 1996         716,916         $   1.81           716,916
                                              =======         ========           =======

</TABLE>




                                      F-15

<PAGE>   47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



11.      OPTION PLANS, CONTINUED:


<TABLE>
<CAPTION>
                                              WEIGHTED
                               NUMBER          AVERAGE      WEIGHTED      NUMBER        WEIGHTED
                           OUTSTANDING AT    REMAINING      AVERAGE    EXERCISABLE AT   AVERAGE
            RANGE OF        DECEMBER 31,    CONTRACTUAL    EXERCISE     DECEMBER 31,    EXERCISE
       EXERCISABLE PRICES      1996            LIFE          PRICE          1996          PRICE
       ------------------  --------------   -----------    ---------   --------------   --------
         <S>                  <C>            <C>            <C>            <C>          <C>
         $         .76        389,258        5.1 years      $    .76       389,258      $    .76
         $        3.05        327,658        8.6 years          3.05       327,658          3.05
         -------------        -------        ---------      --------       -------      --------
         $.76 to $3.05        716,916        6.7 years      $   1.81       716,916      $   1.81
         =============        =======        =========      ========       =======      ========
</TABLE>


12.      BENEFIT PLANS:

         The Company has a profit sharing plan which covers substantially all
         employees. Contribution levels are determined by the Board of Directors
         annually. Profit sharing expense approximated $60,000, $27,500 and
         $45,000 for the years ended December 31, 1996, 1995 and 1994,
         respectively.

         The Company also has a 401(k) plan which covers substantially all
         employees. Participants may contribute up to 10% of their annual
         compensation and the Company makes matching contributions of 25% of the
         amount contributed by participants. Contributions may not exceed the
         maximum allowable by law. Company contributions approximated $15,700,
         $13,000 and $11,000 for the years ended December 31, 1996, 1995 and
         1994, respectively.



                                      F-16

<PAGE>   48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



13.      CONCENTRATIONS:

         Sales to major customers totaling over $200,000 each were as follows:



<TABLE>
<CAPTION>
                                                                      1996            1995          1994
          <S>                                                        <C>           <C>           <C>
          Percent of total sales                                           50%            44%            49%
          Number of major customers                                        12              7              6
          Individual customers representing 10% or
                   more of consolidated sales in each year:
                              Motorola-Poland                              -              -      $2,044,350
                              Ministry of Interior-Egypt                   -      $  849,134            -
                              Motorola, Inc.                        $2,180,022            -             -
</TABLE>

         In addition, a substantial portion of the Company's revenue is from
         customers in the governmental sector, both domestic and foreign. As of
         December 31, 1996, approximately 53% of the Company's accounts
         receivable were from seven customers. The Company's policy does not
         require significant collateral or other security to support such
         receivables, however, export sales are generally shipped against
         prepayments or backed by irrevocable letters of credit confirmed by
         U.S. banks.


         In addition to being a major customer, Motorola is also a key
         manufacturer of electronic components used by the Company. Purchases by
         the Company from Motorola totaled approximately $1,878,000 and $726,000
         in 1996 and 1995, respectively.

14.      FAIR VALUE OF FINANCIAL INSTRUMENTS:

         The carrying amounts of all financial instruments in the consolidated
         balance sheets approximate fair values.

15.      SUBSEQUENT EVENT:

         On January 22, 1997, the Company completed an initial public offering
         of 2,900,000 shares of common stock at a price of $8.00 per share. Of
         the 2,900,000 shares offered, 2,500,000 shares were sold by the Company
         and 400,000 were sold by certain of the Company's stockholders. The
         Company's net proceeds from the offering, after underwriting
         commissions and expenses, were approximately $17,700,000.


         A portion of the Company's net proceeds from the offering was used to
         retire the term and installment notes payable and the revolving lines
         of credit. The remaining net proceeds are to be used for general
         working capital purposes and to support the Company's growth and
         business strategy.




                                      F-17



<PAGE>   49
                       REPORT OF INDEPENDENT ACCOUNTANTS


Our report on the consolidated financial statements of Transcrypt
International, Inc. is included on page F-1 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 27 on this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.



                                                COOPERS & LYBRAND L.L.P.


Lincoln, Nebraska
February 3, 1997








                                       S-1
<PAGE>   50
         SCHEDULE III -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                                        Balance at     Charged to      Charged                  Balance
                                        beginning      expenses        to other Deductions      at end
     Description                        of period      (Provisions)    accounts (Write-offs)    of period
     -----------                        ----------     ------------    ---------------------    ---------
<S>                                     <C>            <C>               <C>     <C>            <C>
Allowance for Bad Debts for the:
  Year Ended December 31, 1994........  $  68,973        $139,059        0       $ 20,018       $188,014
  Year Ended December 31, 1995........    188,014          94,285        0        100,640        181,659
  Year Ended December 31, 1996........    181,659         288,596        0         40,004        430,251

Inventory Obsolescence Reserves for the:
  Year Ended December 31, 1994........   $  6,966        $168,309        0       $134,747       $ 33,562
  Year Ended December 31, 1995........     33,562          61,495        0         13,016         82,041
  Year Ended December 31, 1996........     82,041         127,650        0        171,343         38,848

</TABLE>



                                      S-2
<PAGE>   51
                                 EXHIBIT INDEX

Exhibit
  No.    Description

3.1      Second Amended and Restated Certificate of Incorporation of the
         Company filed on September 30, 1996 with the Secretary of State of the
         State of Delaware  (incorporated herein by reference to Exhibit 3.1 to
         the Company's Form S-1 Registration No. 333-14351 declared effective
         on January 22, 1997 (hereinafter "1997 Registration Statement")).
3.2      Amended and Restated Bylaws of the Company (incorporated herein by
         reference to Exhibit 3.2 to 1997 Registration Statement).
3.3      Certificate of Merger of Transcrypt International, Ltd., a Nebraska
         limited  partnership, with and into the Company, filed on June 28,
         1996 with the Secretary of State of the State of Delaware
         (incorporated herein by reference to Exhibit 3.3 to 1997 Registration
         Statement).
3.4      Certificate of Merger of Transcrypt International, Inc., a Nebraska
         corporation, with and into the Company, filed on September 30, 1996
         with  the Secretary of State of the State of Delaware (incorporated
         herein by reference to Exhibit 3.4 to 1997 Registration Statement).
4.1      Specimen Certificate for Common Stock (incorporated herein by
         reference to Exhibit 4.1 to 1997 Registration Statement).
10.1     Employment Agreement between the Company and John T. Connor dated as
         of September 10, 1996 (incorporated herein by reference to Exhibit
         10.1 to 1997 Registration Statement).
10.2     Employment Agreement between the Company and Jeffery L. Fuller dated
         as of July 18, 1996 (incorporated herein by reference to Exhibit 10.2
         to 1997 Registration Statement).
10.3     Form of Employment Agreement between the Company and C. Eric Baumann,
         Michael P. Wallace and Joel K. Young (incorporated herein by reference
         to Exhibit 10.3 to 1997 Registration Statement).
10.4     Form of 1996 Stock Incentive Plan, together with forms of stock option
         agreements (incorporated herein by reference to Exhibit 10.4 to 1997
         Registration Statement).
10.5     Form of Indemnification Agreement between the Company and each
         executive officer and director of the Company (incorporated herein by
         reference to Exhibit 10.5 to 1997 Registration Statement).
10.6     License Agreement for APCO Project 25 Compliant Product between
         Motorola, Inc. and the Company dated as of August 2, 1994
         (incorporated herein by reference to Exhibit 10.6 to 1997 Registration
         Statement).
10.7*    Amendment, dated as of June 28, 1996, to License Agreement for APCO
         Project 25 Compliant Product between Motorola, Inc. and the Company
         dated as of August 2, 1994 (incorporated herein by reference to
         Exhibit 10.7 to 1997 Registration Statement).
10.8     OEM Agreement between Motorola, Inc. and the Company dated as of
         August 2, 1994 (incorporated herein by reference to Exhibit 10.8 to
         1997 Registration Statement).
10.9*    Amendment, dated as of July 15, 1996, to OEM Agreement between
         Motorola, Inc. and the Company dated as of August 2, 1994
         (incorporated herein by reference to Exhibit 10.9 to 1997 Registration
         Statement).
10.10*   Private Label/Supplier Agreement for Analog Scrambling Modules between
         Motorola, Inc. and the Company dated as of August 8, 1995
         (incorporated herein by reference to Exhibit 10.10 to 1997
         Registration Statement).
10.11*   Motorola Cellular Subscriber Products Sales Agreement, dated as of
         June 13, 1996, by and between Motorola, Inc. and the Company
         (incorporated herein by reference to Exhibit 10.11 to 1997
         Registration Statement).
10.12    License Agreement for APCO Fed Project 25 Algorithm between Digital
         Voice Systems, Inc. and the Company, dated as of August 14, 1995
         (incorporated herein by reference to Exhibit 10.12 to 1997
         Registration Statement).
<PAGE>   52
10.13    Consigned Inventory Agreement between Arrow/Schweber Electronics Group
         and the Company, dated as of June 22, 1994 (incorporated herein by
         reference to Exhibit 10.13 to 1997 Registration Statement).
10.14    Nebraska Investment Finance Authority $850,000 Industrial Revenue Bond
         (Transcrypt International, Ltd. Project), Series 1994, dated as of
         January 15, 1994, and Note (incorporated herein by reference to
         Exhibit 10.14 to 1997 Registration Statement).
10.15    Trust Indenture, dated as of January 15, 1994, for $850,000 Industrial
         Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
         between  Nebraska Investment Finance Authority as Issuer and Norwest
         Bank Nebraska, N.A. as Trustee (incorporated herein by reference to
         Exhibit 10.15 to 1997 Registration Statement).
10.16    Loan Agreement, dated as of January 15, 1994, for $850,000 Industrial
         Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
         between Nebraska Investment Finance Authority as Issuer and the
         Company (incorporated herein by reference to Exhibit 10.16 to 1997
         Registration Statement).
10.17    Amended and Restated Loan Agreement, dated as of May 18, 1994, by and
         between Norwest Bank Nebraska, N.A., and the Company (incorporated
         herein by reference to Exhibit 10.17 to 1997 Registration Statement).
10.18    First Amendment, dated as of June 1, 1995, to Amended and Restated
         Loan  Agreement, dated as of May 18, 1994, by and between Norwest Bank
         Nebraska, N.A., and the Company (incorporated herein by reference to
         Exhibit 10.18 to 1997 Registration Statement).
10.19    Second Amendment, dated as of April 10, 1996, to Amended and Restated
         Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
         Nebraska, N.A., and the Company (incorporated herein by reference to
         Exhibit 10.19 to 1997 Registration Statement).
10.20    Promissory Note, dated as of May 11, 1995, between West Gate Bank and
         the Company (incorporated herein by reference to Exhibit 10.20 to 1997
         Registration Statement).
10.21    RESERVED.
10.22    RESERVED.
10.23    RESERVED.
10.24    Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing
         Plan (incorporated herein by reference to Exhibit 10.24 to 1997
         Registration Statement).
10.25    Defined Contribution Master Plan and Trust Agreement of Norwest Bank
         Nebraska, N.A., Master Plan Sponsor (incorporated herein by reference
         to Exhibit 10.25 to 1997 Registration Statement).
10.26    Third Amendment, dated as of October 22, 1996, to Amended and Restated
         Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
         Nebraska, N.A., and the Company, together with Modification of Note
         (incorporated herein by reference to Exhibit 10.26 to 1997
         Registration Statement).
10.27    Fourth Amendment, dated as of November 19, 1996, to Amended and
         Restated Loan Agreement, dated as of May 18, 1994, by and between
         Norwest Bank Nebraska, N.A., and the Company, together with Commercial
         Installment Note, dated November 19, 1996 (incorporated herein by
         reference to Exhibit 10.27 to 1997 Registration Statement).
10.28    Construction Loan, dated November 15, 1996, by and between Norwest
         Bank Nebraska, N.A., and the Company, together with related 
         documents.  
10.29    Commercial Installment Note, dated January 9, 1997, related to Amended
         and Restated Loan Agreement, dated as of May 18, 1994, by and between 
         Norwest Bank Nebraska, N.A., and the Company.
10.30    Commercial Installment Note secured by equipment, dated December 23,
         1996, by and between Norwest Bank Nebraska, N.A., and the Company,
         together with Security Agreement.
11.1     Statement re: Computation of Per Share Earnings.  
27.1     Financial Data Schedule.

*        Confidential treatment has been granted as to a portion of this
         exhibit.