<PAGE>



AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1999.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------

                                    FORM 10-K

 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE 
                        SECURITIES EXCHANGE ACT OF 1934

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
         FOR THE TRANSITION PERIOD FROM _____________ TO ______________.


                         COMMISSION FILE NUMBER: 0-21681

                         TRANSCRYPT INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               DELAWARE                                      47-0801192
     (STATE OR OTHER JURISDICTION                         (I.R.S. EMPLOYEE
 OF INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

                               4800 NW 1ST 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, PAR VALUE $0.01 PER SHARE
                                (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 [X] No [ ]

     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 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 voting and non-voting Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock on March 26, 1999, as reported in the Over the Counter Bulletin Board
market was approximately $26,286,336. Shares of Common Stock held by each
executive officer and director and each person owning more than 5% of the
outstanding Common Stock of the Registrant have been excluded in that such
persons may be deemed to be affiliates of the Registrant. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. Number of shares outstanding of the Registrant's Common Stock, as of
March 26, 1999: 12,946,624.


                       DOCUMENTS INCORPORATED BY REFERENCE


Portions of the definitive Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders to be filed within 120 days of the fiscal year ended
December 31, 1998 are incorporated by reference in Items 10, 11, 12 and 13 of
Part III of this Annual Report on Form 10-K.


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



<PAGE>



                                     PART I

ITEM 1. BUSINESS

     Unless the context otherwise provides, all references in this Annual Report
on Form 10-K to the "Company" includes Transcrypt International, Inc.
("Transcrypt"), its predecessor entities, and its subsidiaries, including E.F.
Johnson Company, on a combined basis, and all references to "E.F. Johnson" refer
to E.F. Johnson Company.

    In addition to the historical information contained herein, certain matters
discussed in this Annual Report may constitute forward-looking statements under
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These statements may involve risks and uncertainties. These
forward-looking statements relate to, among other things, the outcome of pending
class action litigation involving the Company, the outcome of the pending
investigation by the Securities and Exchange Commission (the "SEC"), the effects
of the Company's restatement of its financial statements on the Company's
product development efforts, future sales levels and customer confidence, the
Company's future financial condition, liquidity and business prospects
generally, perceived opportunities in the marketplace for the Company's products
and its products under development, expectations regarding the Company's efforts
to resolve Year 2000 issues and the effects of a failure to resolve such issues
and the Company's other business plans for the future. The actual outcomes of
these matters may differ significantly from the outcomes expressed or implied in
these forward-looking statements. For a discussion of some of the factors that
might cause such a difference, see "-- Summary of Business Considerations and
Certain Factors That May Affect Future Results of Operations and/or Stock Price"
below.

GENERAL

    The Company is a manufacturer of information security products and wireless
communications products and systems. The Company designs and manufactures
information security products which prevent unauthorized access to sensitive
voice communications. These products are based on a wide range of analog
scrambling and digital encryption technologies and are sold mainly to the land
mobile radio ("LMR") and telephony security markets. Through its E.F. Johnson
subsidiary, the Company designs, develops, manufactures and markets (1)
stationary LMR transmitters/receivers (base stations or repeaters) and (2)
mobile and portable radios. The Company sells its LMR products and systems
mainly to two broad markets: (1) business and industrial ("B&I") users and (2)
public safety and other governmental users.

    In July 1997, the Company expanded its presence in the wireless
communications market by acquiring E.F. Johnson, an established provider of
products and systems for the LMR market. This acquisition was made through the
issuance of shares of Transcrypt common stock ("Common Stock"), the payment of
cash and the assumption of certain indebtedness of E.F. Johnson. The total value
of the cash and shares paid at the time of acquisition was approximately $10.4
million.

    In December 1991, the Company acquired the business of its predecessor,
which was founded in 1978. Prior to June 30, 1996, the Company operated as a
partnership. The Company's principal business offices are located at 4800 NW 1st
Street, Lincoln, Nebraska 68521, and its phone number is (402) 474-4800.

RESTATEMENT OF FINANCIAL STATEMENTS AND RELATED EVENTS

    In 1998, the Company restated its previously released results for the year
ended December 31, 1997, the Company's financial statements for the year ended
December 31, 1996 and the financial statements as of and for each of the
quarterly periods ended March 31, June 30, September 30 and December 31 during
1997 and 1996. The restatement of the Company's financial statements and other
events relating to the restatement, including the filing of class action
lawsuits against the Company and the initiation of an SEC investigation (See
"Item 3. Legal Proceedings.") which occurred subsequent to March 31, 1998, have
had and continue to have an adverse impact on the Company's business, financial
condition, results of operations, liquidity and cash flows.

RECENT DEVELOPMENTS

     On March 1, 1999, the Company hired Michael E. Jalbert as President and
Chief Executive Officer of the Company. On March 25, 1999, Mr. Jalbert became
Chairman of the Board of the Company.


                                       2

<PAGE>


INFORMATION SECURITY INDUSTRY

OVERVIEW

    The electronic information security industry is generally comprised of
products designed to protect the transmission of sensitive voice and data
communications through both wireless and wireline mediums. Without such
protection, many forms of electronic communications, such as LMR and telephone
conversations and remote data communications, are vulnerable to interception and
theft.

    The 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 so that the use of
these devices became economically and functionally feasible for non-military
governmental users (such as law enforcement, fire, emergency medical and other
public safety personnel) and large commercial users (such as railroads,
construction and oil companies).

    Initially, all electronic communications were transmitted in analog format.
Analog transmissions typically consist of a voice or other signal modulated
directly onto a continuous radio "carrier" wave. An analog transmission can be
made secure by (1) "scrambling" or manipulating the original signal at the point
of transmission and (2) 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 (1) the use of a mathematical algorithm to
rearrange the bit-stream prior to transmission and (2) a decoding algorithm to
reconstitute the transmitted information back into its original form at the
receiving end.

    Manufacturers of information security products such as the Company typically
charge 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 that the end-user wants to secure.
Typical users of the most basic form of scrambler, the frequency inversion
scrambler, include taxi dispatchers, other types of consumer businesses and
transportation companies. Typical users for medium-level security devices
include B&I users and international customers who do not need an export license.
High-level scrambling and encryption devices are used primarily by public safety
agencies, federal government personnel and international customers who have
obtained the required export license.

LAND MOBILE RADIO SECURITY MARKET

    One of the earliest applications of information security technology outside
of the military was in protecting LMR voice communications. LMRs consist of (1)
hand-held or (2) mobile (vehicle mounted) two-way radios. A typical LMR system
consists of one or more base control stations networked with each other and with
hand-held and/or mobile LMRs. As with all other major forms of wireless
communications devices, LMRs transmit information in either analog or digital
format, although there is an increasing migration to the digital format.

TELEPHONY SECURITY MARKET

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

    In recent years, the cellular industry has been migrating, on an accelerated
basis, away from analog devices towards digital forms of communications, which
are commonly referred to as Personal Communication Services ("PCS"). Similar to
the LMR industry, this migration has occurred principally due to (1) increased
spectrum efficiency, (2) perception of greater voice security and (3) additional
capabilities for advanced features and data communications. PCS technology
typically uses variable rate voice coding, which maximizes the efficiency of
transmissions by only transmitting critical pieces of information and omitting
other information, such as pauses in a conversation. In the area of voice
security, digital telephony is functionally more secure than analog telephony.
While there are some characteristics that make digital transmissions more
difficult to intercept, most digital services do not use any type of active
encryption technology. However, unlike analog scanning technology, digital
scanners are not yet widely available. The 


                                       3
<PAGE>


increased use of digital devices has resulted and will likely continue to result
in reduced demand for add-on voice security devices, such as those produced by
the Company.

WIRELESS PRIVACY ACT OF 1999

    On February 25, 1999, House Resolution Bill - H.R.514 passed in the House of
Representatives and is likely to be approved by the Senate and signed by the
President. H.R.514 - Wireless Privacy Act of 1999, amends the Communications Act
of 1934 to prohibit modifying any electronic communication device, equipment, or
system in a manner which causes it to fail to comply with regulations governing
electronic eavesdropping devices. The bill empowers the Federal Communications
Commission ("FCC") to prescribe regulations, and to review and revise them as
necessary in response to changes in technology and behavior, denying equipment
authorization for any scanning receiver capable of (1) receiving transmissions
in frequencies allocated to the domestic cellular or personal communication
service; (2) being readily altered to receive such transmissions; (3) being
equipped with decoders that convert protected specialized mobile radio service
transmissions to analog voice audio, or which convert protected paging service
transmissions to alphanumeric text; or (4) being equipped with devices that
otherwise encode encrypted radio transmissions for purposes of unauthorized
interception.

     H.R. 514 directs the FCC, with respect to scanning receivers capable of
receiving transmissions in frequencies used by commercial mobile services and
that are shared by public safety users, to examine methods and prescribe
regulations to enhance the privacy of such frequency users. H.R. 514 also
requires tampering prevention measures and warning labels to be considered by
the FCC in prescribing such regulations.

    The Company's encryption devices are designed to provide secure wireless and
wireline communications regardless of the level of restrictions which may be
imposed upon monitoring or scanning equipment providers as outlined in H.R. 514.
It may be possible that the enactment of H.R. 514 could lead some wireless
communication users in the United States to feel that their communications are
more secure, and thus lessen their desire for additional means of providing
secure voice transmissions.

WIRELESS COMMUNICATIONS INDUSTRY

OVERVIEW

    The mobile wireless communications industry began in the mid-1930s when
police departments began using LMR systems to enable immediate communication
between headquarters and officers patrolling the community. As (1) other public
safety agencies and commercial enterprises recognized the benefit of immediate
communications with their field personnel, (2) technological advances made LMR
systems more affordable and (3) increasing amounts of spectrum were allocated
for LMR use, LMR dispatch service expanded beyond its traditional police and
fire applications to become an integral communications service for a variety of
government and commercial enterprises. Today, in addition to dispatch-oriented
LMR service, many other forms of mobile wireless communication technologies have
emerged and are continuing to be developed to meet the varied communication
needs of an increasingly mobile society. These include paging, mobile data,
cellular telephone and personal communication services.

BUSINESS AND INDUSTRIAL SYSTEMS MARKET

    B&I users include large commercial, industrial and other private
enterprises, such as utility, construction and oil companies, railroads and
universities which require rapid communications among personnel spread out over
relatively large geographic areas. While many B&I LMR users purchase and operate
entire systems for their own use, a large segment of the B&I market consists of
specialized mobile radio ("SMR") operators such as NEXTEL Corp. and Centennial
Communications, and their customers. SMR operators build and lease private LMR
systems on a for-profit basis. They sell airtime to end-users whose mobile
communication needs can be served by renting or purchasing subscriber units as
opposed to purchasing an entire system, or who are unable to obtain a FCC
license to operate their own system. Traditionally, end-users of SMR services
have included taxi fleets and smaller construction and delivery service
companies. Currently, many SMR operators in the larger metropolitan markets,
such as NEXTEL Corp., are also offering more consumer-oriented, cellular-like
SMR services.

    There are two general types of LMR systems serving B&I users, (1)
conventional and (2) trunked. Both operate on the specific frequency bands which
the FCC has allocated for such types of systems. Conventional LMR systems use a
single channel to transmit and receive information. All users have unrestricted
access, similar to a "party" telephone line, and the user must monitor the
system and wait until the channel is unoccupied. Trunked systems, including the
Company's logic trunked radio ("LTR-Registered Trademark-") product, combine 



                                       4
<PAGE>


multiple channels so that when a user begins transmitting, an unoccupied channel
is automatically selected. Conventional LMR systems are relatively inefficient
compared to trunked systems.

    The development of trunked LMR systems and the allocation of additional
frequency spectrum in the 1970s triggered significant growth in LMR use for B&I
applications. In recent years, technological developments by E.F. Johnson and
others have enabled LMR systems to be "networked," involving multiple "sites"
linked together through a switch to provide extended geographical coverage. In
addition, many trunked subscriber units are capable of functioning as mobile
telephones through interconnections to the public switched telephone network.
The Company has responded to changes in the standard LTR-Registered 
Trademark- protocol with the creation of LTR-Net(TM) in 1997, which allows 
systems operators to link sites together and provide telephone 
interconnection, electronic serial numbers and improved system security in an 
advanced B&I focused trunking system.

PUBLIC SAFETY AND OTHER GOVERNMENT USERS MARKET

    Public safety and other government users include state and local agencies,
such as law enforcement, fire and emergency medical personnel, and military and
non-military federal governmental agencies. Many of these users operate LMR
equipment which complies with specifications established by the Association of
Public Safety Communications Officials International Inc. ("APCO"), while the
remainder operate mostly conventional and non-APCO trunked LMRs. The most widely
used APCO standard is the "APCO 16" standard established in 1979, which includes
specifications for 800 MHz transmission, analog voice modulation and trunking
functions for using the frequency spectrum. In 1988, E.F. Johnson entered the
market for APCO 16 products with its Multi-Net -Registered Trademark- system.

    In 1995, the APCO Advisory Board promulgated a new standard known as APCO
25. Although public safety agencies are not currently required by the FCC or
APCO to purchase APCO 25 compliant LMR systems or otherwise adopt the APCO 25
standard, the Company believes that APCO 25 compatibility will be one of the key
purchasing factors for public safety and other government LMR users.
Furthermore, as LMR users upgrade their existing APCO 16 systems to comply with
FCC-imposed bandwidth limitations, the Company expects that demand for APCO 25
compliant LMR systems will increase, due in part to the fact that APCO 25
systems can potentially be configured for compatibility with older APCO 16
mobile and portable radios, allowing early adopters of the APCO 25 standard to
purchase new equipment without replacing all of their subscriber radios.
Additionally, the Company's APCO 25 radios can be used on existing E.F. Johnson
and most Motorola APCO 16 systems. However, to date the APCO 25 market is
developing slowly which the Company believes is primarily due to the high cost
and limited availability of APCO 25 compliant system infrastructure and radios.

INFORMATION SECURITY PRODUCTS

OVERVIEW

    Transcrypt first entered the information security market in 1978 with
simple, transistor-based add-on scrambling modules for use in analog LMRs using
basic single-inversion scrambling techniques. Transcrypt marketed these products
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 have at various times been implemented into the
Company's scrambler modules and other products within its major information
security product families, (1) LMR Security and (2) Telephony Security.

    The core technologies currently available to the Company for incorporation
in its products include the following methods, which are listed in increasing
order of sophistication of security technique: (1) frequency inversion
(inverting or otherwise adjusting the phase of a signal based on a consistent
method), (2) rolling code transmission (incrementally stepping codes), (3)
frequency hopping transmission (changing broadcast frequencies multiple times
per second based upon an algorithm) and (4) digital encryption (encoding a
digital bit-stream based upon a mathematical encryption algorithm).

    As with all of the Company's information security products, the use of
scrambling and encryption 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, mobile
devices and base stations, to be equipped with one of the Company's modules,
whether as an add-on installation or in the form of one of the Company's
complete LMRs. In the Company's telephony family, a scrambled cellular telephone
may communicate in secure mode only with (1) another of the Company's secure
cellular telephones, (2) a PBX interchange or cellular service provider that has
installed one of the Company's Voice Privacy Exchange Units or (3) a landline
telephone equipped with one of the Company's external desktop



                                       5
<PAGE>


units. However, all of the Company's products can be used in the clear,
non-scrambled mode with equipment that does not contain a security device.

LAND MOBILE RADIO SECURITY

    The Company offers a variety of add-on LMR scrambling products featuring its
core technologies at varying levels of security. Add-on scramblers are available
in two packages, (1) a modular package consisting of a circuit board that is
designed to be permanently soldered into existing circuitry and (2) a socket
package designed for installation in sockets with standard pin configurations
which original equipment manufacturers ("OEM") may install.

    Products sold by the Company are compatible with sockets of OEM
manufacturers, including ICOM America, Inc. and Motorola. The Company also
produces modules that add signaling features to 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). In December 1997, the
Company introduced an LMR encryption module for use as an add-on or in OEM
equipment that uses the digital encryption standard called "DES." This module
uses the widely recognized DES algorithm for encoding transmissions.

TELEPHONY SECURITY

    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 telephones, which features advanced digital signal
processing technology. With the increased deployment of digital or PCS systems
by cellular service providers, the demand for add-on voice security products for
analog equipment has resulted and will likely continue to result in reduced
demand for add-on voice security devices for analog telephones, such as those
produced by the Company.

    The Company offers cellular telephones upgraded to include the Company's
advanced add-on scrambling modules. The Company believes that offering cellular
telephone security through a complete telephone product offers certain
advantages over add-on scrambler sales. These advantages include (1) presenting
the customer with a single vendor, (2) overcoming customer resistance to
surrendering their telephones during installations and (3) allowing the Company
to market cellular security directly to cellular service providers. 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. In 1997, the Company introduced a line of complete landline
telephones with built-in voice security capability.

     Due to a lack of demand, the Company determined in mid-1998 to discontinue
offering its "Secure Office" product line. This product allowed a company-wide
telephony and data security solution based upon products using real-time
high-speed encryption techniques.

WIRELESS COMMUNICATIONS PRODUCTS

    The Company sells its wireless communications products primarily to LMR
dealers, SMR operators, governmental entities and the utility industry.
End-users include B&I concerns and public safety and other government users
desiring point to multi-point communications. Most of these types of products
are sold under the "E.F. Johnson" brand name. To increase its product offering
to its wireless customers, the Company has incorporated its encryption
technology into its wireless communications radio products. The following
discussion summarizes the types of products typically sold to both of these
types of users.

BUSINESS AND INDUSTRIAL USERS

    The Company serves the B&I market primarily with its LTR-Registered 
Trademark- and analog conventional LMR product lines. The Company's analog 
conventional LMR product line is sold into all of the LMR markets which the 
Company serves. Management believes that significant niche markets continue 
to exist for analog conventional LMR products with value added technology, 
such as signaling protocols, security features and scrambling technology.

    The LTR-Registered Trademark- product line incorporates the E.F. Johnson 
LTR-Registered Trademark- trunking protocols and includes (1) sub-audible 
signaling, which automatically selects a clear or unoccupied channel, (2) 
open architecture that is compatible with other analog products and (3)

                                       6
<PAGE>


transmission trunking which provides efficient use of the channels. In December
1997, the Company completed the design of a trunked LMR system known as
"LTR-Net(TM)," which uses its LTR-Registered Trademark- trunking system in a 
wide-area configuration, allowing linked communications over a much larger 
geographic area than a single trunked system while also providing a much 
needed array of user security functions.

    The Company's products for the SMR market include mobile radios, portable
radios and repeaters, along with other infrastructure to provide a complete SMR
system. The Company targets smaller regional SMR operators which offer a
combination of dispatch and interconnect services and the traditional local SMR
operators and dealers who serve local businesses primarily with dispatch
service. In serving this market, the Company relies heavily on its network of
dealers, many of whom are authorized by the Company as service centers and
provide installation, maintenance, repair and warranty service. The Company
believes that the end-users of these products value (1) the low cost of point to
multi-point communications, (2) flexibility of networking and (3) support and
responsiveness of the Company and its dealers.

    Competition in the domestic business and industrial market has been
increasing. New 800 MHz SMR frequencies are not available and existing channels
are filling up. SMR operator's with licenses for 900 MHz channels have been slow
to develop their build outs. There has been consolidation in both of these SMR
marketplaces. A large number of SMR systems have been converting from analog to
digital, which has resulted in the increasing availability of used analog radios
and repeaters in the marketplace. These factors have contributed to reduced
market demand for new and existing products. Competitors have been reducing
their prices and therefore putting pressure on the Company's prices and margins
in this market.

    PUBLIC SAFETY AND OTHER GOVERNMENT USERS

    The Company serves public safety and other government users primarily 
with its APCO 16 Multi-Net(TM) analog and APCO 25 digital product lines. The 
APCO 16 Multi-Net(TM) was built upon the success of the E.F. Johnson 
LTR-Registered Trademark- trunking protocol. The Company believes that its 
Multi-Net(TM) system, which links together multiple sites for wide-area 
coverage using a proprietary architecture, is a high-quality, cost-effective 
alternative to comparable APCO 16 systems produced by other manufacturers. 
The Company's system offers many features specifically designed for public 
safety users, such as (1) emergency queuing, (2) over 8,000 unique 
identification codes, (3) automatic subscriber identification, (4) five 
levels of priority access, (5) simulcast, and (6) a wide area system 
configuration. The Company provides a broad line of Multi-Net(TM) products, 
including repeaters, radio network terminals, system management modules, 
duplex subscriber units, dispatcher consoles, audio and data link and related 
accessories. E.F. Johnson Multi-Net(TM) systems are sold both domestically 
and internationally. The Company's APCO 25 compliant analog/digital radios 
are compatible and interoperable with older analog radio systems, as well as 
with Motorola's proprietary analog APCO 16 trunking technology (SmartNet(TM) 
and Smartzone(TM)) and proprietary digital encryption algorithms. In August 
1996, the Company introduced a hand held digital LMR complying with the APCO 
25 "common air interface" standard and also featuring advanced core 
scrambling and digital encryption technologies. All of the Company's APCO 25 
radios contain as standard features voice scrambling and/or digital 
encryption technology. The Company believes that such backward compatibility 
with most Motorola's APCO 16 trunking technology will provide early adopters 
of the APCO 25 standard, such as the federal government and many public 
safety agencies, with the ability to purchase new equipment without replacing 
entire older systems.

PRODUCTS UNDER DEVELOPMENT

    Consistent with the Company's development efforts for its existing products,
the Company designs new products around common core scrambling and encryption
technologies using common signal processing platforms and circuitry. Using this
approach, the Company has generally been able to incorporate improvements in
core technologies into its new products more quickly and with relatively lower
development costs compared to developing entire products separately. The
following discussion contains a summary of the Company's principal products
under development. The Company cannot assure that it 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.

LAND MOBILE RADIO SECURITY

    The LMR security products under development are new versions of the
Company's SC20-DES module for deployment in different models of radios,
including sockets in certain new model Motorola radios introduced in late 1998.
From time to time, the Company also has under development a number of custom
security modules, including those incorporating custom encryption and scrambling
algorithms.



                                       7
<PAGE>


TELEPHONY SECURITY

    Telephony security products under development include voice security modules
for Nokia and Qualcomm phones.

WIRELESS COMMUNICATIONS

    The Company plans to introduce in 1999 additional models of its hand-held
digital LMRs containing different features, as well as a line of mobile digital
LMRs, which are intended to comply with the APCO 25 standard. The Company also
plans to introduce additional mobile radio models that transmit in analog format
(E.G., APCO 16 and conventional LMRs) for the existing analog market, which can
be upgraded to complete APCO 25 functionality. These radios will contain as
optional features voice scrambling and/or digital encryption technology. These
radios will also be compatible and interoperable with older analog LMRs, and
some of the radios will offer compatibility with most of Motorola's proprietary
analog APCO 16 trunking technology (SmartNet(TM)/SmartZone(TM)) and Motorola's
digital encryption algorithms. At this time, the Company has not undertaken the
development of APCO 25 infrastructure equipment, but has entered into an OEM
agreement with a third party vendor for conventional APCO 25 repeater products.
The Company also plans to introduce a new line of cost effective radios
primarily for its LTR-Net(TM) system, but also capable of analog voice
transmissions in LTR-Registered Trademark- and conventional modes of operation.

CUSTOMERS

    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
typically have a very high need for security. Purchasers of the Company's
information security and wireless communications 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. No customer accounted for more than 10% of the Company's revenues
during 1998.

SALES AND MARKETING

    The following discussion summarizes the Company's current sales and
marketing approaches for its different products:

INFORMATION SECURITY

    The Company sells its add-on products domestically primarily to
distributors, OEMs and self-servicing end-users, through sales managers while
complete radio products are sold domestically primarily to end-users.
Furthermore, the Company is continuing to market radio and other complete
products to its existing add-on customer base.

    The Company conducts international sales through its sales managers, who
focus 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. See "-- Summary of
Business Considerations and Certain Factors That May Affect Future Results of
Operations and/or Stock Price -- Risks Associated with International Sales."

    The Company distributes its add-on information security products to both (1)
end-users in the LMR and telephony markets and (2) distributors, such as LMR
dealers, that resell these products to end-users. Currently, the Company sells
self-branded, complete, analog secure cellular telephones primarily through
distributors and cellular service resellers.

    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 its products. The telephony security products marketing staff
conducts promotions through a mix of print advertising, trade shows, direct mail
campaigns, press releases and presentation material, and distribution of
demonstration and loaner equipment, which are sometimes coordinated with product
launches and trade shows.



                                       8
<PAGE>


WIRELESS COMMUNICATIONS

    The Company's sales and marketing functions for LMR systems focus on (1) the
North American market and (2) the international market. For North American
sales, the Company uses a direct sales force of account executives and sales
managers, who sell Company products primarily (1) in the APCO market and (2) to
larger dealers, SMR operators, and telemarketing personnel who sell primarily to
smaller dealers and SMR operators. The Company's international sales are made
through a specialized international direct sales force and by Company authorized
dealer/distributors.

    LTR(R) and conventional LMR products are sold in North America primarily to
independently owned and operated dealers, some of which are also SMR operators.
The dealers typically carry other competitive product lines as well. These
products are distributed internationally primarily through dealers and
distributors located in more than 45 countries. Many of the dealers also are
authorized as service centers and provide installation, maintenance, repair and
warranty service. The Company provides comprehensive dealer support, including
cooperative advertising programs, advertising materials, sales and service
training, and technical support.

    The majority of system sales of LMR products to both commercial and
governmental purchasers involves soliciting and responding to "requests for
proposals," commonly referred to as "RFPs." The RFP process for system sales has
a relatively long cycle time. The period from proposal requirements to contract
award typically takes at least one year, and depending on the size of the
system, it can take multiple years for complete installation and acceptance of
the project. Public sector end-users issuing RFPs often require suppliers of LMR
systems 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.

    A number of factors can limit the availability of such bonds, 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. During 1998, the Company
experienced problems with the completion of systems contracts for certain E.F.
Johnson projects begun prior to the Company's acquisition of E.F. Johnson. The
Company believes that it has corrected most of these systems problems and is
working to correct the remaining problems. If a customer for a systems contract
declares an event of default under the outstanding bond related to the system
contract, the issuer of the Company's bonds could reduce the maximum amount of
bond coverage available to the Company or impose additional restrictions with
respect to the issuance of bonds on behalf of the Company. A reduction in the
amount of bond coverage available to the Company or any restrictions imposed in
connection with the issuance of bonds would adversely affect the Company's
ability to bid on new system contracts in the future.

CUSTOMER SERVICE

    For the Transcrypt product line, the Company provides toll-free telephone
access for customers with technical or other problems. The Company will
customize product training for its customers using a classroom approach or
seminars at either or 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.

    The Company installs, for a fee, all models of scrambler modules into
customers' LMRs and telephones. Scrambler modules that the Company does not
install are generally installed by local radio and cellular telephone dealers.
The Company documents installation instructions for its products in OEM devices
and has developed these instructions for more than 2,000 OEM products, including
almost all commercially available two-way radio models sold worldwide.

    For the E.F. Johnson product line, the Company's customer service group
provides worldwide after-sales service and support, including technical support
through a toll-free telephone number, on-site technical personnel for repairs
and applications issues, 24-hour turnaround for spare parts and extensive
product training. Product training includes classes and seminars available at
both the customer's site and Waseca manufacturing facility. Such training
provides assistance to the end-user in the use, operation and application of LMR
products and systems, and trains other end-users and dealers to perform network
programming changes and preventive maintenance and repair to products and
systems. LMR products and systems are generally sold with a one year warranty
which covers parts and labor in North America and parts internationally. Broader
warranty and service coverage is provided in certain instances to private
systems customers on a contractual basis, usually for an additional charge.



                                       9
<PAGE>


MOTOROLA RELATIONSHIP

    Motorola is a key manufacturer of electronic components used by the Company.
These components include microprocessors and components used in most of the
Company's scramblers and LMRs, which the Company purchases through an
electronics wholesaler. Furthermore, pursuant to a product sales agreement
executed in June 1996, Motorola sells to the Company, upon the Company's
request, original equipment cellular telephones and related accessories from
Motorola's MicroTAC(TM) line, which the Company resells equipped with its
DSP-based encryption devices and labeled with the Transcrypt logo. This
agreement with Motorola specifies fixed prices for purchases of such equipment,
and provides that after December 31, 1997, either party may terminate the
agreement upon 30 days' prior notice. The Company may also purchase from
Motorola base stations, repeaters and other LMR infrastructure components in
order to fulfill systems contracts requiring compatibility with these devices.

    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
Company believes this technology will be important to the success of certain of
its existing and proposed APCO 25 compliant LMR products. The IPR License
includes rights to use Motorola's proprietary analog APCO 16 trunking technology
(SmartNet(TM)), APCO 25 required products and certain Motorola digital
encryption algorithms in LMR products. The digital encryption technology may
also be incorporated into certain other information security products. In
addition, E.F. Johnson, prior to its acquisition by the Company, obtained a
license to certain proprietary technology from Motorola relating to the
development of APCO 25 compliant digital LMRs. This license covered
infrastructure and other APCO 25 technology. Subsequent to the acquisition,
Motorola agreed to expand the coverage of Transcrypt's license to SmartNet(TM)
to cover E.F. Johnson's products.

    In addition to the direct benefits of the IPR License to the Company's APCO
25 development efforts, the Company believes that sales of its APCO 25 digital
LMR products have been, and expect that such sales will in the foreseeable
future be, substantially dependent upon Motorola's dominant position as a market
leader in the APCO 25 marketplace. Motorola is the largest manufacturer of APCO
25 compliant LMR products and has been the principal public supporter of the
APCO 25 digital transmission standard for the LMR market. Any reduction in such
support could lead to reduced demand for APCO 25 compliant LMR systems
generally. See "-- Summary of Business Considerations and Certain Factors That
May Affect Future Results of Operations and/or Stock Price -- Reliance on
Motorola."

INTELLECTUAL PROPERTY

    Transcrypt presently holds 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.
Transcrypt has been granted 8 patents relating to high-end scrambling and
encryption techniques and methods of integrating after-market devices, such as
the Company's modules, into OEM products, and has applied for 28 additional
domestic patents in this area. Transcrypt also holds three registered trademarks
related to the "Transcrypt" name and product names. In addition to the rights
held by Transcrypt, E.F. Johnson currently holds or has been assigned at least
23 U.S. patents, 10 pending applications for U.S. patents, 11 patents in foreign
countries and 8 pending applications for patents in foreign countries. These
patents and applications cover a broad range of technologies, including trunking
protocols and a high-speed data interface for LMR communications. Furthermore,
E.F. Johnson holds numerous registered trademarks related to the "E.F. Johnson"
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.

RESEARCH AND DEVELOPMENT

    As of December 31, 1998, the Company had a research and development staff of
78 individuals, including 75 engineers. The Company organizes research and
development efforts along its two main product lines, (1) information security
and (2) wireless communications products. As part of the integration of E.F.
Johnson's research and development team with Transcrypt's research and
development efforts, the Company has focused significantly on integrating
technologies in order to offer new advanced products by taking advantage of the
competencies of each of the engineering staffs of Transcrypt and E.F. Johnson.
For example, the combined staffs have worked on projects to integrate digital
signal processing technology into the E.F. Johnson radios to make them
interoperable with Multi-Net(TM), SmartNet(TM) and APCO 25.



                                       10
<PAGE>


INFORMATION SECURITY

    The Company's research and development personnel in the information security
area have expertise in various fields, including cryptography, analog hardware,
digital hardware, and object-oriented software. 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.

WIRELESS COMMUNICATIONS

    The Company's wireless communications research and development organization
have expertise in radio frequency technology, computer architecture, switch
architecture, networking, software and analog and digital hardware designs.
Ongoing engineering efforts are focused on adding additional features to
existing product lines and developing new and innovative platforms.
Cross-disciplinary planning groups involving marketing, manufacturing and
engineering are used for product planning and definition. Present research and
development efforts are involved in upgrading existing product lines, including
the development of next generation repeaters and mobile radios for the Company's
principal product lines. The Company also has a staff of systems applications
design, manufacturing and customer service engineers that focuses on design and
implementation of customized radio systems.

MANUFACTURING

    The Company's manufacturing operation generally consists of the procurement
of commercially available (1) subassemblies, (2) parts and (3) components, such
as integrated circuits, printed circuit boards and plastic and metal parts, and
their assembly into finished products. Certain components and subassemblies are
manufactured by vendors to the Company's specific design criteria. The Company
inspects all components and subassemblies for mechanical and electrical
compliance to its specifications in order to ensure high yield and quality.

    The Company produces many of its wireless communications products, including
its APCO 25 compliant products, at its Waseca, Minnesota facility. The Company
manufactures all of its information security products at its facility in
Lincoln, Nebraska. The Company is currently evaluating alternative manufacturing
strategies to reduce costs and improve efficiencies.

MATERIALS AND SUPPLIERS

INFORMATION SECURITY

    The Company obtains most of its electronic parts and components for
information security and radio products from one principal distributor,
Arrow/Schwebber Electronics Group. The Company believes that concentrating its
purchases through one principal distributor lowers procurement costs and
enhances the ability to control the quality of these components and
subassemblies. The distributor stores several months' supply of basic
components, such as microprocessors, flash, and digital signaling processors,
on-site at the Company's manufacturing location on a consignment basis, which
reduces inventory maintenance costs. Additionally, the Company acquires from
other manufacturers certain high-end subassemblies, such as radio frequency
boards for use in complete LMR units that the Company manufactures. See
"-Summary of Business Considerations and Certain Factors That May Affect Future
Results of Operations and/or Stock Price -- Dependence on Suppliers."

WIRELESS COMMUNICATIONS

    Certain components and subassemblies used in the Company's wireless
communications products are presently available only from a single supplier or a
limited group of suppliers. To date, the Company has been able to obtain
adequate supplies of key components and subassemblies in a timely manner from
existing sources. Currently, Motorola is the sole supplier of a majority of the
semiconductors used in certain of the Company's LMR products. Although
historically the Company has not experienced a disruption of Motorola's supply
of this product, disruption or termination of Motorola's supply of this product
would have a material adverse effect on the Company's operations.



                                       11
<PAGE>


    Most of the Company's newer analog LMRs for the B&I market have been
manufactured by Icom Japan ("ICOM") under contract by the Company. Products
produced by ICOM have included hand-held portable radios that operate in both
conventional and trunked mode and more recently, mobile units as well. In
general, the Company and ICOM have jointly developed new products produced by
ICOM for the Company. Although historically the Company has not experienced a
disruption in ICOM's ability to supply these products, disruption or termination
would have a material adverse effect on the Company's ability to supply certain
LMRs to its B&I customers. ICOM requires that the Company supply a letter of
credit before products are shipped to the Company.

    With respect to other electronic parts, components and subassemblies, the
Company believes that alternative sources could be obtained to supply these
products, if necessary. Nevertheless, a prolonged inability to obtain certain
components and subassemblies could impair customer relationships and could have
an adverse effect on the Company's operating results. See "-- Summary of
Business Considerations and Certain Factors That May Affect Future Results of
Operations and/or Stock Price -- Dependence on Suppliers."

GOVERNMENT REGULATION AND EXPORT CONTROLS

INFORMATION SECURITY

    The Company's information security products have been subject to export
restrictions administered by 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 approximately 116 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. Based on prior experience in securing export
approvals, the Company believes that it maintains good relations with federal
government agencies with jurisdiction over its products. Additionally, in
certain foreign countries, the Company's distributors are required to secure
licenses or formal permission before encryption products can be imported.

    In November 1996, President Clinton issued an Executive Order (the
"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 and licensing relating to 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. This development 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 (1) commits to build and market key recovery
products and support key management infrastructure in the future and (2)
provides to the government interim reports detailing internal development
efforts.

    In September 1998, the Clinton Administration announced plans to ease export
restrictions on encryption products for U.S. companies in the finance,
healthcare, insurance and electronic commerce industries. The plan would allow
the export of 56-bit encryption products without requiring provisions for key
recovery, after a one-time review, to interested parties outside of designated
terrorist nations. The new policy would allow export of encryption products of
any strength if key recovery or access to plaintext is provided to a third
party. The Clinton Administration will also support the Federal Bureau of
Investigation's proposal to create a technical support center to aid law
enforcement in staying abreast of new encryption technologies. While industry is
usually supportive of any easing of export restrictions, they argue that 56-bit
encryption has been broken and that stronger encryption is now necessary.

    In response to industry opposition to the Clinton Administration's policies,
Members of Congress have taken aggressive steps to further expand exports of
encryption products. In the 106th Congress, Members of the House of
Representatives and Senate have introduced legislation to loosen export
restrictions on export technology. In the House, pro-strong encryption
legislation sponsored by Rep. Bob Goodlatte (R-VA) currently has the backing of
much of the Republican and Democratic leadership, as well as over 300 sponsors.
Rep. Goodlatte's bill H.R. 850, would allow for the export of any mass-market
encryption software or hardware and allow for the export of customized products
equal in strength to what is available in foreign markets. However, the Clinton
Administration opposed similar legislation during the 105th Congress. Also, the
FBI and national security officials continue to argue that lifting current
controls would give criminals and terrorists access to unbreakable encryption
products.



                                       12
<PAGE>


    In the Senate, Senator Conrad Burns has announced plans to introduce
legislation similar to his bill from the 105th Congress, the Promotion of
Commerce On-Line in the Digital Era Act. The bill prohibited mandatory key
recovery and established an Information Security Board as a forum to foster
communication and coordination between industry and government. Additional bills
in both the House and Senate are expected to be introduced.

    Management cannot predict whether any legislation easing export controls
will be enacted, what form it will take or how the Executive Order or any such
legislation will impact international sales of the Company's products.

WIRELESS COMMUNICATIONS

    The Company's stand alone wireless products are subject to regulation by the
FCC under the Communications Act of 1934, as amended, and the FCC's rules and
policies as well as the 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 addition, the
construction, operation and acquisition of wireless communications systems, as
well as certain aspects of the performance of mobile communications products,
are regulated by the FCC and foreign regulatory authorities. Many of these
governmental regulations are highly technical and subject to change. The Company
believes that it and its products are in material compliance with all
governmental rules and policies in the jurisdictions where the Company sells its
products.

    In the United States, all of Transcrypt's 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, Transcrypt 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.

    The majority of the systems operated by E.F. Johnson's customers must comply
with the rules and regulations governing what has traditionally been
characterized as "private radio" or private carrier communications systems.
Licenses are issued to use frequencies on either a shared or exclusive basis,
depending upon the frequency band in which the system operates. Some of the
channels designated for exclusive use are employed on a for-profit basis; others
are used to satisfy internal communications requirements. Most SMR systems in
operation today use 800 MHz channels. Within the top 50 metropolitan markets,
900 MHz frequencies licensed for exclusive use systems have been made available
to both SMR and non-SMR licensees. Additional channels designated for exclusive
use were made available in the 220 MHz band for both commercial and
non-commercial systems.

    Generally, SMR licenses are issued for five-year terms, initially in blocks
of five channels, and may be renewed upon showing compliance with FCC rules and
may be revoked for cause. Such licenses typically are subject to channel
"loading" or usage requirements, such as loading a minimum of 70 subscriber
units for each channel within the initial five-year term. If an SMR licensee
fails to meet its loading requirements in an area where existing applications
are pending on a wait list, the FCC may cancel the license, in whole or in part,
or deny a request to renew or expand the license. Other than loading
requirements, private systems are subject to similar restrictions. For example,
licenses for private systems are also issued for five-year terms, may be renewed
upon showing compliance with FCC rules and may be revoked for cause.

    E.F. Johnson also offers products in bands below 800 MHz where channels are
shared by multiple users in the same geographic area. In this "shared" or
conventional spectrum, there is no requirement for loading the channel to any
particular level in order to retain use of the frequencies. These channels are
generally used by entities satisfying traditional dispatch requirements in,
among others, the transportation and services industries.

    The FCC is considering a number of regulatory changes that could affect the
wireless communications industry and the Company's business. Therefore, the
regulatory environment is inherently uncertain and changes in the regulatory
structure and laws and regulations, both in the United States and
internationally, can adversely affect the Company and its customers. Such
changes could make existing or planned products of the Company obsolete or
unsaleable in one or more markets, which could have a material adverse effect on
the Company.

    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
services, including interoperability. In August 1998, the FCC adopted rules for



                                       13
<PAGE>


licensing the largest block of spectrum ever allocated at one time for public
safety. The FCC established rules for licensing 24 megahertz in the 700 MHz band
and established a band plan for use of this spectrum. In accordance with this
rule, in January 1999 the FCC established a Public Safety National Coordination
Committee to advise it on issues relating to the use of the 700 MHz public
safety spectrum. The Committee would be responsible for formulating a national
interoperability plan, recommending technical standards to achieve
interoperability spectrum, and providing policy recommendations on an advisory
basis to the regional planning committees in order to facilitate the development
of coordinated plans. The Committee's recommendations could affect products
manufactured by the Company. Management cannot predict the outcome of the FCC
review or any specific changes in the spectrum of FCC policies, or any potential
effect on the Company's sales.

COMPETITION

INFORMATION SECURITY

    The markets for information security products are highly competitive.
Significant competitive factors in these markets include product quality and
performance, including (1) the effectiveness of security features, (2) the
quality of the resulting voice or data signal, (3) the development of new
products and features, (4) price, (5) name recognition and (6) 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. 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., Cylink
Corporation and TCC (Technical Communications Corporation).

WIRELESS COMMUNICATIONS

    In North America, Motorola, Kenwood and Ericsson are the leading providers
of LMR equipment. The remainder of the LMR market is divided among a large
number of suppliers who focus on particular segments of the market. The Company
believes it is the third largest provider of specialized radio systems in North
America. However, the Company's share of this market is relatively small in
comparison to sales by Motorola and Ericsson.

    The Company competes in the wireless communications market on the basis of
price, technology and the flexibility, support and responsiveness provided by
the Company and its dealers. The Company is also experiencing reduced demand for
and downward pricing pressure on its wireless communication analog products sold
to business and industrial users. Management believes that this is due to
several factors. These include the fact that (1) no new 800 MHz SMR frequencies
are being made available and existing channels are filling up; (2) SMR
operator's with licenses for 900 MHz channels have been slow to develop their
build outs; (3) there has been consolidation in both of these SMR marketplaces;
and (4) a large number of SMR systems have been converting from analog to
digital which has resulted in the increasing availability of used analog radios
and repeaters in the marketplace. Most of the Company's competitors in wireless
communications have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than those of the
Company.

    In addition, many of the Company's competitors also possess entrenched
market positions, other intellectual property rights and substantial
technological capabilities. In the North American SMR market, the Company's
competitors include Motorola, Ericsson, Uniden America Corporation ("Uniden"),
Kenwood U.S.A. Corp., ICOM America, Inc., Relm Corporation and Midland
International Corp. The Company believes that cellular telephones and personal
communication services devices provide, to some extent, the same functionality
as SMRs and other LMRs and, as such, may compete with its products. The Company
believes that the international wireless communications market is fragmented,
with Motorola, Kenwood, Nokia, and Ericsson the dominant suppliers. The Company
also competes with Uniden, Hitachi Denshi, Ltd. and Tait in Asia.

    As of March 26, 1999, the Company, Motorola, Relm Communications, Racal
Communications and Kenwood are believed to be the current suppliers of APCO 25
LMR products. Companies which have announced or are anticipated to announce the
availability of APCO 25 compliant products or digital LMRs include ADI, AMP,
Midland Systems and Daniels Communications.

    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. The Company cannot



                                       14
<PAGE>


assure that it will be able to compete successfully in the future or that
competitive pressures will not materially and adversely affect its financial
condition and results of operations.

BACKLOG

    The Company presently ships a small amount of information security products
against backlog, due to the typically short manufacturing cycle of these
products. Because of generally longer manufacturing cycle times required for the
production of complete wireless communication products, the Company's backlog
for wireless communication products has been larger than for its security
products. The Company does not believe that its backlog figures are indicative
of actual sales of products in future periods.

EMPLOYEES

    At December 31, 1998, the Company had 354 full-time equivalent employees,
including 106 at its Lincoln, Nebraska facility, 217 at its Waseca, Minnesota
facility, 8 at its Burnsville, Minnesota sales office and approximately 23 field
sales people, sales managers or staff located in the sales territories in which
they serve. The Company also uses temporary employees, independent contractors
and consultants when necessary to manage fluctuations in demand. None of the
Company's employees are covered by a collective bargaining agreement.

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

    Certain matters discussed in this Annual Report may constitute
forward-looking statements under Section 27A of the Securities Act and 21E of
the Exchange Act. These forward-looking statements relate to, among other
things, the outcome of pending class action litigation involving the Company,
the outcome of the pending investigation by the SEC, the effects of the
Company's restatement of its financial statements on the Company's product
development efforts, future sales levels and customer confidence, the Company's
future financial condition, liquidity and business prospects generally,
perceived opportunities in the marketplace for the Company's products and its
products under development, expectations regarding the Company's efforts to
resolve Year 2000 issues and the effects of a failure to resolve such issues and
the Company's other business plans for the future. The actual outcomes of these
matters may differ significantly from the outcomes expressed or implied in these
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 its
stock price, and should be considered carefully.

SECURITIES CLASS ACTION CLAIMS

    The Company has been named as a defendant in class action lawsuits that were
filed subsequent to the Company's announcement on March 27, 1998 that the filing
of its Annual Report on Form 10-K for year ended December 31, 1997 would be
delayed and that adjustments would be made to the Company's previously announced
financial results. Between March 31, 1998 and May 27, 1998, twelve purported
class action lawsuits were filed against the Company in the United States
District Court for the District of Nebraska, and one complaint was filed in the
District Court of Scotts Bluff County, Nebraska. Certain of the complaints, as
amended, also name one or more current and former officers of the Company and
PriceWaterhouseCoopers, LLP as additional defendants. The longest class period
alleged in any of the class complaints is the period from January 22, 1997
through April 24, 1998.

    Although the class action lawsuits do not allege the amount of damages and
other relief that the plaintiffs are seeking, the Company believes the amount of
damages ultimately sought by the plaintiffs will be material. In light of the
Company's restatement of financial information contained in its various
registration statements and prospectuses, the Company believes that there may be
an unfavorable outcome for at least some of the claims asserted in the lawsuits
or which may be asserted in the future against the Company.

    On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000.

    Many factors will ultimately affect and determine the results of the
litigation. The Company can provide no assurance that the outcomes will not have
a material adverse effect on the Company's business, financial condition,
liquidity, results of operations and cash flows.



                                       15
<PAGE>


    The pending litigation, SEC investigation and any future litigation against
the Company and its officers or directors, regardless of outcome, has resulted,
and will continue to result, in costs and expenses to the Company for legal and
related assistance not covered by insurance. Accordingly, any such pending or
future litigation could have a material adverse effect on the Company,
regardless of the outcome of the litigation. For further information regarding
legal proceedings see "ITEM 3. LEGAL PROCEEDINGS."

SEC INVESTIGATION

    In April 1998, the SEC issued a formal order of investigation to determine
whether violations of certain aspects of the Federal securities laws had
occurred in connection with the Company. While it is not possible at this time
to determine whether the SEC is likely to initiate enforcement action against
the Company or the outcome of the SEC's investigation, the SEC has the authority
to impose a variety of sanctions against the Company and Company-affiliated
parties. Such sanctions could include monetary penalties, imposition of a cease
and desist order and issuance of removal and prohibition orders against
Company-affiliated persons, among other things.

EFFECTS OF RESTATEMENT, CLASS ACTION LAWSUITS AND SEC INVESTIGATION ON THE
COMPANY'S BUSINESS

    The restatement of the Company's financial statements, class action lawsuits
and the SEC investigation have had an adverse impact on the Company's business,
financial condition, results of operations, liquidity and cash flows. Subsequent
to March 31, 1998, the Company has experienced declining revenues, substantial
operating losses, and substantially reduced liquidity.

    Because of the uncertainties resulting from those events, the Company is
also evaluating all of its product lines, and has implemented and is continuing
to look at various initiatives to reduce operating expenses in order to keep
them in line with revenues. Implementation of any plan resulting from these
initiatives may result at some future date in substantial up front cost.

    The Company can provide no assurance that the restatement of its financial
statements and the ongoing class action lawsuits and SEC investigation,
regardless of their outcomes, will not continue to have a material adverse
effect on the Company's business, financial condition, results of operations,
liquidity and cash flows. See "ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

COMPETITION

    The information security and wireless communications equipment industries,
and the LMR market segment in particular, are highly competitive. Competition in
the sale of stand-alone and digital products is more intense than for add-on and
analog products. In addition, other wireless communication technologies,
including cellular telephone, paging, SMR, satellite communications and PCS
(personal communication services) currently compete and are expected to compete
in the future with certain of the Company's stand-alone products. Furthermore,
other manufacturers have announced or are anticipated to announce the
availability of APCO 25 compliant products or digital LMRs.

    In addition, the competition in the domestic B&I market has been increasing
because of reduced demand for radios due to the absence of new 800 MHz SMR
frequencies being made available, the slow build out of 900 MHz channels and the
consolidation in both 800 MHz and 900 MHz SMR marketplaces reducing the number
of potential buyers. There are also a large number of SMR systems converting
from analog to digital which has resulted in the increasing availability of used
analog radios and repeaters in the marketplace.

    Many of the Company's competitors or potential competitors have
significantly greater financial, managerial, technical and marketing resources
than the Company. Accordingly, the Company cannot assure that (1) it will be
able to continue to compete effectively in its markets, (2) competition will not
intensify or (3) future competition will not have a material adverse effect on
the Company. In addition, the Company cannot assure that new competitors will
not arise and begin to compete in the markets for the Company's products.

    Motorola, Nokia, Kenwood, and Ericsson hold a dominant position in the
market for wireless communication products, especially in the LMR and cellular
telephone market segments. In North America, Motorola, Kenwood and Ericsson are
the leading providers of LMR equipment. While the Company believes that it is
the third-largest supplier in the North American specialized LMR equipment
market, the Company's share of this market is relatively small in comparison to
Motorola and Ericsson. In addition to providing equipment to the industry,
Motorola is one of the largest SMR operators in the United States. Motorola,
Kenwood, and Ericsson have



                                       16
<PAGE>


financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than those of the Company, and have entrenched
market positions in certain segments of the North American LMR market. Certain
of the Company's competitors, including Motorola and Ericsson, have established
trade names, trademarks, patents and other intellectual property rights and
substantial technological capabilities.

    The Company believes that the wireless communications equipment industry is
undergoing a period of consolidation which (1) may involve the acquisition or
merger of some of the significant manufacturers of these types of products and
(2) a concentration of market share in a relatively few companies. The Company
cannot assure that consolidations in the industry would not result in the
strengthening of its existing competitors or the creation of new competitors,
some of which may have significantly greater financial, managerial, technical
and marketing resources than the Company. See "-- Competition."

RELIANCE ON MOTOROLA

    The Company is dependent on continuing access to certain Motorola products,
electrical components and proprietary intellectual property. Although the
Company believes that its relationship with Motorola is good, the Company cannot
assure that Motorola will continue to supply products, electrical components and
proprietary intellectual property to the Company on the scale or at the price
that it now does. In addition, Motorola may increasingly perceive the Company as
a competitor. This perception could impact Motorola's willingness to do business
with the Company. Although the Company has certain contractual relationships
with Motorola as a customer, most of these agreements are subject to termination
in certain circumstances and expire by their terms within one to ten years. Any
reduction of the Company's contractual relations with Motorola or a decision by
Motorola to reduce or eliminate the provision of products, components and
technology to the Company could have a material adverse effect on the Company.
See "-- Motorola Relationship."

TRANSITION FROM ANALOG TO DIGITAL PRODUCTS

    The LMR and cellular telephone markets are migrating from analog to digital
equipment. This migration is primarily due to bandwidth capacity constraints and
the perception that digital transmissions are more secure than analog
transmissions. As a result, the Company is seeking to upgrade many of E.F.
Johnson's LMR products to be compatible with digital LMR communications
standards, including APCO 25. However, the Company cannot assure that it will be
able to effect this transition on a timely basis or that digital products will
compete successfully in the LMR marketplace. The failure of products to compete
successfully in the marketplace would have a material adverse effect on the
Company. In addition, there has been delay in the marketplace acceptance of
digital LMR communications standards. This delay may continue to adversely
affect sales of the Company's APCO 25 products. Furthermore, the transition from
analog to digital communications is resulting in, and in the future is likely to
continue to result in, a decrease in demand for the Company's add-on security
modules, as customers may perceive digital communications to be more secure than
communications using analog devices.

RAPIDLY EVOLVING MARKETS

    The information security and wireless communications products markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The Company may not have, either currently or in the future, adequate capital or
human resources to respond to these changes.

    The development of new technologies by existing or future competitors may
place the Company at a competitive disadvantage by rendering some or all of its
existing or new products obsolete. The Company has invested heavily in the
introduction of LMR radios that comply with the APCO 25 standard. Some
manufacturers have adopted and actively support other digital LMR transmission
standards for the public safety marketplace. The widespread acceptance of one or
more other standards in the public safety market would have a material adverse
effect on the Company. See "-- Competition."

    A recent technological development in the digital LMR industry has been the
use of digital trunking, digital simulcast and digital voting technologies.
These technologies have led a number of manufacturers to change the
architectures and methodologies used in designing, developing and implementing
large LMR systems. In order for the Company to develop and integrate these new
technologies into its products, the Company would be required to make a
substantial investment of capital and human resources, which resources may not
be available to the Company.



                                       17
<PAGE>


The failure of the Company to incorporate these technologies into its LMR
products could in the future place the Company's LMR products at a competitive
disadvantage to those offered by other manufacturers and possibly make the
Company's hand-held and mobile LMRs incompatible with systems developed by other
manufacturers, which would have a material adverse effect on the Company.

RISKS ASSOCIATED WITH INTERNATIONAL SALES

    In 1998 and 1997, international sales constituted approximately 36.6% and
38.1% of revenues, respectively. International sales are subject to a number of
risks not found in domestic sales. These risks include (1) unexpected changes in
regulatory requirements, (2) tariffs and other trade barriers, (3) political and
economic instability in foreign markets, (4) difficulties in establishing
foreign distribution channels, (5) longer payment cycles, (6) uncertainty in the
collection of accounts receivable, (7) increased costs associated with
maintaining international marketing efforts and (8) difficulties in protecting
intellectual property. In particular, the purchase of Company products by
international customers presents increased risks of, among other things, delayed
or reduced collection of revenues. Because most of the Company's sales are
denominated in U.S. dollars, fluctuations in the value of international
currencies relative to the U.S. dollar may also affect the price,
competitiveness and profitability of the Company's products sold in
international markets. Furthermore, the uncertainty of monetary exchange values
has caused, and may in the future cause, some foreign customers to delay new
orders or delay payment for existing orders. Troubled economic conditions, such
as that being currently experienced in Asia and in Latin America, could result
in lower revenues for the Company.

    Some of the Company's information security products are subject to export
controls under U.S. law, which in most cases requires the approval of the
Department of Commerce in order to ship internationally. The Company cannot
assure that such approvals will be available to it or its products in the future
in a timely manner or at all or that the federal government will not revise its
export policies or the list of products and countries for which export approval
is required. The Company's inability to obtain required export approvals would
adversely affect the Company's international sales, which would have a material
adverse effect on the Company. In addition, foreign companies not subject to
United States export restrictions may have a competitive advantage in the
international information security market. The Company cannot predict the impact
of these factors on the international market for its products. See "-Government
Regulation and Export Controls."

RELIANCE ON PUBLIC SECTOR MARKETS

    Public safety agencies and other governmental entities comprise a
significant portion of the Company's current and anticipated customer base.
Because there is an unknown amount of governmental customers purchase through
dealers for the Company's Information Security segment, the Company cannot
determine the percentage of its products that are ultimately sold to
governmental agencies. However, the Company believes that domestic and
international governments are the end-users of most of its products. As the
transition in the Company's Information Security product line from add-on to
stand-alone products progresses and as competition for such sales intensifies,
the Company expects that it will increasingly be subject to competitive bidding
requirements for sales to governmental customers, which can be expected to
result in lower prices and longer sales cycles with resulting lower margins.

    The Company's wireless communication segment public safety sales accounted
for approximately 35% of total sales for the Company in 1998. The Company did
not enter into any major new domestic systems contracts during 1998. The RFP
bidding cycle and contract award stage can take six months to two years before a
contract is awarded and the governmental customers funding process for these
systems can delay the bidding cycle as well.

DEPENDENCE ON KEY PERSONNEL

    The Company believes that its future success will depend in part on its
ability to attract, motivate and retain highly skilled engineering, technical,
managerial and marketing personnel. Competition for such personnel is intense
and the Company competes in the market for such personnel against numerous
companies, including larger, more established companies with significantly
greater financial resources than the Company. The Company cannot assure that it
will be successful in attracting, motivating or retaining such personnel.

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. For
example, in late 1993 and early 1994, there was a shortage of certain Motorola
surface-mount microprocessors, which resulted in a substantial increase in the



                                       18
<PAGE>


cost of these components. 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 have a material adverse effect on the Company.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

    The Company has experienced and expects to continue to experience quarterly
variations in its results of operations as a result of many factors. These
factors include the timing of customer orders, the timing of the receipt of cash
payment on sales which are recorded on a cash basis, the timing of the
introduction of new products, the timing and mix of product sales, general
economic conditions and specific economic conditions in the information security
and wireless communications industry. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Quarterly Results
of Operations."

REGULATORY ENVIRONMENT

    Wireless communications and encryption products are subject to regulation by
United States and foreign laws and international treaties. The regulatory
environment is uncertain and changes in the regulatory structure and laws and
regulations can adversely affect the Company and its customers. Such changes
could make the Company's existing or planned products obsolete or unsaleable in
one or more markets, which could have a material adverse effect on the Company.
See "-- Risks Associated with International Sales" and "-- Government Regulation
and Export Controls."

ENVIRONMENTAL REGULATION

    The Company is subject to various federal, state and local environmental
statutes, ordinances and regulations relating to the use, storage, handling and
disposal of certain toxic, volatile or otherwise hazardous substances and wastes
used or generated in the manufacturing and assembly of the Company's products.
Under these laws, the Company may become liable for the costs of removal or
remediation of certain hazardous substances or wastes that have been or are
being released on or in the Company's facilities, or have been or are being
disposed of offsite as wastes. Such laws may impose liability without regard to
whether the Company knew of, or caused, the release of such hazardous substances
or wastes.

    The Company cannot assure that any environmental assessments the Company has
undertaken with respect to its facilities have revealed all potential
environmental liabilities, that any prior owner or operator of the Company's
properties did not create any material environmental condition not known to the
Company, or that an environmental condition that could result in penalties,
expenses, or liability to the Company does not otherwise exist in any one or
more of the Company's facilities. In addition, the amount of hazardous
substances or wastes produced or generated by the Company may increase in the
future depending on changes in the Company's operations. Any failure by the
Company to comply with present or future environmental laws could subject it to
the imposition of substantial fines, suspension of production, alteration of
manufacturing processes or cessation of operations, any of which could have a
material adverse effect on the Company. Compliance with such environmental laws
could require the Company to acquire expensive remediation equipment or to incur
substantial expenses. Furthermore, the presence of hazardous substances on a
property or at certain offsite locations could result in the Company incurring
substantial liabilities as a result of a claim by a private third-party for
personal injury or a claim by an adjacent property owner for property damage.
The imposition of any of the foregoing liabilities could materially adversely
affect the Company.

LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF THIRD-PARTY CLAIMS
OF INFRINGEMENT

    The Company currently holds a number of domestic and international patents
and has on file applications for additional patents. Although the Company
assesses the advisability of patenting any technological development, the
Company has historically relied, in the information security area, primarily on
(1) copyright and trade secret law and (2) employee and third-party
non-disclosure agreements to protect its proprietary intellectual property and
rights. The protection afforded by such means may not be as complete as patent
protection. In addition, the laws of some countries do not protect trade
secrets. There are limitations on the availability of patent protection as a
means to protect the Company's products. Even when patent protection can be
obtained, there are often limitations on the enforceability of such patent
rights. The Company's inability to preserve all of its proprietary intellectual
property and rights could have a material adverse effect on the Company. See
"-Intellectual Property."



                                       19
<PAGE>


RISKS PRESENTED BY THE YEAR 2000 ISSUE

         Many companies face potentially serious problems because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the year 2000. This problem could force
information, manufacturing and engineering systems to fail causing disruption of
operations, including among other things, a temporary failure to process
transactions or engage in similar normal business activities. Accordingly, many
companies, including the Company's customers, potential customers, suppliers,
vendors and strategic partners, may need to upgrade their systems to comply with
applicable year 2000 requirements.

         A failure of the Company's internal computerized systems or its
suppliers' systems to correctly recognize dates beyond December 31, 1999 could
materially disrupt the Company's operations, which could materially and
adversely affect the Company's business, results of operations and financial
condition. Additionally, the Company's failure to provide year 2000 compliant
products and services to its clients could result in financial loss,
reputational harm and legal liability. Likewise, the failure of the computer
systems and products of the third parties with which the Company transacts
business to be year 2000 compliant could materially disrupt the Company's
operations, which could materially adversely affect its business, results of
operations and financial condition.

         The Company is unable at this time to fully assess the possible impact
on its financial condition, results of operations and cash flows that may result
from any disruptions to its business caused by the year 2000 problems in any
systems controlled by the Company or any third party with whom the Company has a
material relationship. The Company cannot assure that its systems or those of
third parties with whom it interacts will be free of year 2000 problems. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Impact of the Year 2000 Issue."

ITEM 2. PROPERTIES

    The Company occupies a 76,500 square foot multi-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. On January 28,
1998, the Company purchased the 250,000 square-foot manufacturing facility
located on a 20-acre site in Waseca, Minnesota. The Company also leases
additional sales and service facilities in Burnsville, Minnesota, Miami,
Florida, and Hong Kong.


ITEM 3. LEGAL PROCEEDINGS

    The Company has been named as a defendant in class action lawsuits that were
filed subsequent to the Company's announcement on March 27, 1998 that the filing
of its Annual Report on Form 10-K for year ended December 31, 1997 would be
delayed and that adjustments would be made to the Company's previously announced
financial results. Between March 31, 1998 and May 27, 1998, twelve purported
class action lawsuits were filed against the Company in the United States
District Court for the District of Nebraska, and one complaint was filed in the
District Court of Scotts Bluff County, Nebraska. Certain of the complaints, as
amended, also name one or more current and former officers of the Company and
PriceWaterhouseCoopers, LLP as additional defendants. The longest class period
alleged in any of the class complaints is the period from January 22, 1997
through April 24, 1998.

    The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10 and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and relate primarily
to allegations of false and misleading financial statements and representations
and material omissions by the Company. The Nebraska action alleges violations of
Nebraska securities laws. The class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed. The amended federal class action
complaint was filed on March 4, 1999 and the Company is required to answer or
otherwise respond to the complaint by March 27, 1999.

    Although the class action complaints do not allege the amount of damages and
other relief that the plaintiffs are seeking, the Company believes the amount of
damages ultimately sought by the plaintiffs will be material. In light of the
Company's restatement of financial information contained in its various
registration statements and prospectuses, the Company believes that there may be
an unfavorable outcome for at least some of the claims asserted in the lawsuits
or which may be asserted in the future against the Company.

    The Company is attempting to settle the class action lawsuits with a
combination of Company stock and cash up to the limits of its directors' and
officers' liability insurance. In the quarter ended December 31, 1998, the
Company recorded a special provision of 



                                       20
<PAGE>


$10.0 million relating to the federal and state class action lawsuits. The
Company is in ongoing settlement discussions regarding these lawsuits. While no
settlement agreement has been reached, the $10.0 million special provision is
the Company's best estimate of the amount that would be necessary for the
Company to contribute to settle the class actions. The Company would anticipate
satisfying any settlement by issuing shares of common stock to the class members
rather than using its cash reserves. Despite the taking of the special
provision, the Company can give no assurances whether any settlement can be
reached, what the terms of any settlement would be or whether the Company would
be required to contribute more than $10.0 million. Many factors will ultimately
affect and determine the results of the litigation however, and the Company can
provide no assurances that the outcome will not have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flows.

    On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the
Company. The complaint contains common law causes of action for fraudulent
misrepresentation, fraudulent concealment and negligent misrepresentation
against the defendants arising from the same facts and circumstances underlying
the class actions. The complaint seeks damages in an amount to be proved at
trial, but which is currently alleged to be approximately $850,000. The Company
is unable to predict the likelihood of the outcome or range or amount of
potential liability that may arise therefrom.

    The Company may in the future be the subject of additional lawsuits or
claims in connection with the events or facts surrounding its restatement of
previously announced financial results. The Company is unable to predict when or
whether such additional lawsuits or claims may be initiated or the likelihood of
the outcome or range or amount of potential liability that may arise therefrom.

    In April 1998, the SEC issued a formal order of investigation to determine
whether violations of certain aspects of the federal securities laws had
occurred in connection with the Company. At the present time, the Company is
unable to predict whether the SEC is likely to initiate enforcement action
against the Company or its affiliated parties relating to these events.

    The Company is involved in certain other legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to such other legal proceedings are likely to be,
individually or in the aggregate, material to the Company's business, financial
condition, results of operations or cash flows.


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

    The Annual Meeting of Stockholders of the Company was held on October 27,
1998.
          At the Annual Meeting, the Board of Directors' nominees as set forth
in the proxy statement for the Annual Meeting, Thomas E. Thomsen and Thomas C.
Smith, were elected as Class II Directors. The election of Mr. Thomsen was
approved by a vote of 11,882,732 shares in favor and 254,013 shares withheld,
and Mr. Smith was approved by a vote of 11,882,022 shares in favor and 254,723
shares withheld.

    The proposal to approve the amendment to the 1996 Stock Incentive Plan to
increase the number shares of common stock reserved for issuance under the Plan
from 1,200,000 to 2,000,000 and the amended Plan was approved by a vote of
6,763,994 shares in favor, 1,277,033 shares against and 89,024 shares abstained.

    The proposal to ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent public accountants for 1998 was approved by a vote of
12,021,917 shares in favor, 75,340 shares against and 39,488 shares abstained.

    There were 4,056,644 broker non-votes for the approval of the amendment to
the 1996 Stock Incentive Plan and the amended Plan. There were no broker
non-votes for the election of directors or ratification of independent public
accountants at the Annual Meeting.



                                       21
<PAGE>


                                     PART II

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

    The Company's Common Stock was quoted on The Nasdaq Stock Market as a
National Market issue under the symbol "TRII" from the completion of the
Company's initial public offering on January 22, 1997 through May 11, 1998. The
Nasdaq Stock Market halted trading in the Company's Common Stock effective April
27, 1998 and delisted the Common Stock on May 11, 1998 based on its review of
events regarding the Company and as a result of the Company's failure to timely
file its periodic reports and audited financial statements for the 1997 fiscal
year. The Common Stock on August 28, 1998 began trading on the Over the Counter
("OTC") Bulletin Board under the symbol "TRII".

    The following table sets forth, in the periods indicated, the high and low
sales prices per share of the Common Stock, as reported by all markets for the
periods presented. As of December 31, 1998, the Company had 155 stockholders of
record.

<TABLE>
<CAPTION>

                                                         High             Low
                                                       --------         --------
<S>                                                    <C>          <C>

1997
First Quarter ................................         $ 10.06      $  7.00
Second Quarter ...............................         $ 14.75      $  6.75
Third Quarter ................................         $ 21.75      $ 10.00
Fourth Quarter ...............................         $ 26.00      $ 20.12

1998
First Quarter ................................         $ 27.25      $  8.87
Second Quarter ...............................         $ 11.06      $  3.00
Third Quarter ................................         $  7.00      $  1.50
Fourth Quarter ...............................         $  3.69      $  1.88
</TABLE>


    The last sale price of the Common Stock on December 31, 1998, as reported in
the OTC Bulletin Board, was $2.813.

DIVIDENDS

    The Company has never paid and has no present intention of paying cash
dividends on its Common Stock. Any determination in the future to pay dividends
will depend on the Company's financial condition, capital requirements, results
of operations, contractual limitations and any other factors deemed relevant by
the Company's Board of Directors.



                                       22
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

    The following selected consolidated financial data of the Company is
qualified by reference to, and should be read together with, the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K. The Consolidated Statement of Operations data for
the years ended December 31, 1998, 1997 and 1996 and the Consolidated Balance
Sheet data as of December 31, 1998 and 1997 are derived from the Consolidated
Financial Statements of the Company included elsewhere in this Annual Report on
Form 10-K. The Consolidated Statement of Operations data for the years ended
December 31, 1995 and 1994 and the Consolidated Balance Sheet data as of
December 31, 1996, 1995, and 1994 are derived from financial statements not
included herein.

<TABLE>
<CAPTION>

                                                                                        YEAR ENDED DECEMBER 31,
                                                                   --------------------------------------------
                                                                      1994         1995        1996        1997(8)       1998
                                                                   ----------  ----------- -----------  -----------  --------

                                                                          (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:                                                                            

<S>                                                                  <C>       <C>         <C>          <C>          <C>         
Revenues.......................................................      $ 9,155   $    8,128  $    10,619  $    40,423  $     62,041
Cost of sales..................................................        2,901        2,983        4,274       26,106        44,905
                                                                     -------   ----------  -----------  -----------  ------------
Gross profit...................................................        6,254        5,145        6,345       14,317        17,136
                                                                     -------   ----------  -----------  -----------  ------------
Operating costs and expenses:                                                                                         
  Research and development.....................................        1,180        1,953        2,234        4,469         8,812
  Sales and marketing..........................................        1,590        2,109        2,187        7,031        11,476
  General and administrative(1)................................        2,166        2,284        2,529        4,711        12,529
  Special compensation expense(2)..............................           --          --         5,568           --            --
  In-process research and development costs(3).................           --          --            --        9,828            --
  Restructuring charge (4) ....................................           --          --            --           --         1,230
  Provision for litigation settlement (5) .....................           --          --            --           --        10,000
                                                                     -------   ----------  -----------  -----------  ------------
          Total operating costs and expenses...................        4,936        6,346       12,518       26,039        44,047
                                                                     -------   ----------  -----------  -----------  ------------
Income (loss) from operations..................................        1,318       (1,201)      (6,173)     (11,722)      (26,911)
Interest income (expense), net.................................         (111)        (137)        (131)         231           655
Other income...................................................           --           --           --           18            46
Benefit for income taxes.......................................           --           --       (2,186)        (524)       (3,916)
                                                                     -------   ----------  -----------  -----------  -------------
Net income (loss)..............................................      $ 1,207   $   (1,338) $    (4,118) $   (10,949) $    (22,294)
                                                                     -------   ----------  -----------  -----------  ------------
                                                                     -------   ----------  -----------  -----------  ------------
Loss before pro forma taxes....................................                $   (1,338) $    (6,304) $   (11,473) $    (26,210)
Pro forma and provision (benefit) for taxes(6).................                      (496)      (2,190)        (524)       (3,916)
                                                                               ----------  -----------  -----------  -------------
Pro forma net loss.............................................                $     (842) $    (4,114) $   (10,949) $    (22,294)
                                                                               ----------  -----------  -----------  ------------
                                                                               ----------  -----------  -----------  ------------
Pro forma net loss per share(7)-- Basic and Diluted............                $     (0.12)$     (0.61) $      (1.09)$      (1.72)
                                                                               ----------  -----------  -----------  ------------
                                                                               ----------  -----------  -----------  ------------
Weighted average common shares-- Basic and Diluted(7)..........                 6,783,078    6,783,078   10,056,690    12,946,624
                                                                               ----------  -----------  -----------  ------------
                                                                               ----------  -----------  -----------  ------------

CONSOLIDATED BALANCE SHEET DATA:                                                                                      
Working capital................................................      $ 3,353   $    1,684  $     1,844  $    44,836  $     17,426
Total assets...................................................      $ 9,627   $    7,523  $    11,938  $   106,694  $     87,212
Long-term debt and capitalized lease obligations,  net of current    
portion........................................................      $ 2,164   $    1,847  $     2,632  $     2,758  $          6
Stockholders' equity...........................................      $ 5,945   $    3,907  $     4,966  $    75,390  $     53,096
</TABLE>

------------
(1) Includes amortization of intangible assets. For years prior to 1997,
    includes the amortization of intangible assets related to the acquisition of
    the Company's business in December 1991. Commencing in August 1997,
    amortization of intangible assets related to the acquisition of E.F. Johnson
    began. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS -- Results of Operations -- General and
    Administrative."
(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.
(3) Represents a non-recurring, non-cash expense of $9.8 million due to the
    write-off of purchased in-process research and development costs associated
    with the acquisition of E.F. Johnson.
(4) Represents a charge for a 25% reduction in workforce taken in the third
    quarter of 1998.
(5) Represents a special provision taken in the fourth quarter of 1998 for
    potential class action litigation settlement.
(6) 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.
(7) 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 and net income (loss) per share.
(8) Statement of Operations Data reflects the operations of E.F. Johnson since
    the date of its acquisition on July 31, 1997.



                                       23
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS

    This Annual Report on Form 10-K, including the following Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements that may involve risks and uncertainties.
The Company's actual results may differ significantly from those discussed
herein. Factors that might cause such a difference include, but are not limited
to, those discussed under "ITEM 1. BUSINESS -- Summary of Business
Considerations and Certain Factors That May Affect Future Results of Operations
and/or Stock Price." The following discussion should be read together with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Annual Report on Form 10-K.

OVERVIEW

    The Company is a manufacturer of information security products and wireless
communications products and systems. The Company designs and manufactures
information security products that prevent unauthorized access to sensitive
voice communications. These products are based on a wide range of analog
scrambling and digital encryption technologies and are sold mainly to the LMR
and telephony security markets. Through the E.F. Johnson subsidiary, the Company
designs, develops, manufactures and markets (1) stationary LMR
transmitters/receivers (base stations or repeaters) and (2) mobile and portable
radios. The Company sells its LMR products and systems mainly to two broad
markets: (1) business and industrial ("B&I") users and (2) public safety and
other governmental users.

     On July 31, 1997, the Company acquired the outstanding shares of capital
stock and assumed certain indebtedness of E.F. Johnson. In exchange, the Company
paid cash consideration of $436,000 and issued 832,465 shares of Common Stock.
The acquisition was accounted for under the purchase method of accounting.

    In 1998, the Company restated its previously released results for the year
ended December 31, 1997, the Company's financial statements for the year ended
December 31, 1996 and the financial statements as of and for each of the
quarterly periods ended March 31, June 30, September 30 and December 31 during
1997 and 1996. The restatement of the Company's financial statements and other
events relating to the restatement, including the class action lawsuits and the
SEC investigation which occurred subsequent to March 31, 1998, have had an
adverse impact on the Company's business, financial condition, results of
operations, liquidity and cash flows. These events have had, to varying degrees,
an adverse impact on the Company's relationships with its customers and vendors.
Because of these events, the Company is also evaluating all of its product
lines, and has implemented and is continuing to look at various initiatives to
reduce operating expenses in order to keep them in line with revenues. During
the third quarter of 1998, the Company implemented a reduction in workforce.
Implementation of any other plan resulting from these initiatives in the future
may result in substantial up front costs and cash expenditures. The Company can
provide no assurance that the restatement of the financial statements and the
ongoing class action and securities lawsuits and SEC investigation, regardless
of their outcomes, will not continue to have a material adverse effect on the
Company's business, financial condition, results of operations, liquidity and
cash flows.



                                       24
<PAGE>



RESULTS OF OPERATIONS

    The following table sets forth certain Consolidated Statement of Operations
information as a percentage of revenues during the periods indicated. These
results include the results of E.F. Johnson only since July 31, 1997, the date
it was acquired.

<TABLE>
<CAPTION>

                                                       YEAR ENDED DECEMBER 31,
                                                 ----------------------------------
                                                    1996         1997         1998
                                                 -----------  -----------  --------
<S>                                                <C>         <C>         <C>
Revenues ...................................       100.0%      100.0%      100.0%
Cost of sales ..............................        40.2%       64.6%       72.4%
                                                   -----       -----       -----
Gross profit ...............................        59.8%       35.4%       27.6%
                                                   -----       -----       -----
Operating costs and expenses:
  Research and development .................        21.0%       11.1%       14.2%
  Sales and marketing ......................        20.6%       17.4%       18.5%
  General and administrative ...............        23.8%       11.7%       20.2%
  Special compensation expense .............        52.4%        --          --
  In-process research and development costs          --         24.3%        --
  Restructuring charge .....................         --          --          2.0%
  Provision for litigation settlement ......         --          --         16.1%
                                                   -----       -----       -----
          Total operating costs and expenses       117.9%       64.4%       71.0%
                                                   -----       -----       -----
Loss from operations .......................       (58.1)%     (29.0)%     (43.4)%
Interest income (expense), net .............        (1.2)%       0.6%        1.1%
Other income ...............................         --          --           .1%
Benefit for income taxes ...................       (20.6)%      (1.3)%      (6.3)%
                                                   -----       -----       -----
Net loss ...................................       (38.8)%     (27.1)%     (35.9)%
                                                   -----       -----       -----
                                                   -----       -----       -----
Loss before pro forma income taxes .........       (59.4)%     (28.4)%     (42.2)%
Pro forma benefit for income taxes .........       (20.6)%      (1.3)%      (6.3)%
                                                   -----       -----       -----
Pro forma net loss .........................       (38.8)%     (27.1)%     (35.9)%
                                                   -----       -----       -----
                                                   -----       -----       -----
</TABLE>



REVENUES

    Revenues are recognized when product is shipped, less an estimate for an
allowance for returns, if applicable, if collection is reasonably assured. For
shipments where collection is not reasonably assured, the Company recognizes
revenue as cash is received. If collection is contingent on a future event, such
as a reseller of product selling the product to the end user, the Company
recognizes revenue when the contingency lapses, generally upon cash collection.

    System sales under long-term contracts are accounted for under the
percentage of completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized revenue is that percentage of
estimated total revenue that incurred costs to date bear to estimated total
costs to complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in operations as soon as such losses are determined to
be probable and reasonably estimable.

    Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees based on
the expected warranty repairs to be incurred over the life of the contract.
Deferred revenue also includes an advanced payment received for products to be
sold to a former division of EFJ. The advance payment was negotiated as part of
the sale agreement of the division by EFJ. The advanced payment is recognized as
revenue is earned.

    Revenues increased 53.5% to $62.0 million in 1998 from $40.4 million in
1997. Of total revenues for 1998, the information security segment comprised
17.6% and the wireless communication segment comprised 82.4%. The increase in
revenue was attributable primarily to revenues derived from the sale of E.F.
Johnson products subsequent to July 31, 1997. As a result of the uncertainty
raised by the restatement which was completed in the third quarter of 1998 and
other related events, sales of products, including LMR systems to governmental
agencies, were adversely impacted during 1998. Revenues declined from $22.0
million in the first quarter of 1998 to $13.9 million in the second quarter,
$14.3 million in the third quarter and $11.9 million in the fourth quarter of
1998. Further, the Company did not enter into any major new domestic systems
contracts during 1998. However, during the first quarter of 1999, the Company
was awarded two contracts in the domestic public safety market.



                                       25
<PAGE>


    The Company is also experiencing reduced demand for and downward pricing
pressure on its wireless communication analog products sold to business and
industrial users. Management believes that this is due to several factors. These
include the fact that (1) no new 800 MHz SMR frequencies are being made
available and existing channels are filling up; (2) SMR operator's with licenses
for 900 MHz channels have been slow to develop their build outs; (3) there has
been consolidation in both of these SMR marketplaces; and (4) a large number of
SMR systems have been converting from analog to digital which has resulted in
the increasing availability of used analog radios and repeaters in the
marketplace.

    Revenues increased 280.7% to $40.4 million in 1997 from $10.6 million in
1996. Of the total revenues in 1997, the information security segment comprised
26.2% and the wireless communication segment comprised 73.8%. All revenues in
1996 were derived from the information security segment, as the Company did not
have a wireless communication segment until its acquisition E.F. Johnson on July
31, 1997. This increase in 1997 was attributable primarily to revenues derived
from the sale of E.F. Johnson products subsequent to July 31, 1997.

    International sales as a percentage of revenues in 1998 were 36.6%, compared
to 38.1% in 1997 and 53.9% in 1996. The decline from 1996 is primarily due to
the inclusion of E.F. Johnson, which makes a larger percentage of its sales to
domestic markets. The Company experienced a 48.4% decline in revenues from the
Middle East and Asian regions during 1998 as compared to 1997 primarily from its
wireless communications segment and as a result of the effect of the troubled
Asian economies. The Company experienced a 143.2% increase in sales to the
Central and Latin America regions from both the information security and
wireless communication segments in 1998 as compared to 1997. The Company does
not expect this significant increase in sales to Latin America to continue
because of the Company's existing market penetration in Central and Latin
America and the current fluctuations in the economies of various countries in
the region.

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 was $17.1 million (27.6% gross
margin) in 1998, compared to $14.3 million (35.4% gross margin) in 1997 and $6.3
million (59.8% gross margin in 1996). Gross margins for the information security
segment were 53.3% in 1998, 44.1% in 1997 and 59.8% in 1996. Gross margins for
the wireless communications segment were 22.1% in 1998 and 32.3% in 1997.

    The overall decline in gross margin percentage from 1998 to 1997 was due to
a number of factors. These include (1) the inclusion of E.F. Johnson's revenues
which has historically had lower gross margins than Transcrypt's business for a
full year in 1998 compared to five months in 1997; (2) the decline in sales of
domestic system contracts to the public safety market which provides a higher
margin than the business and industrial portion of E.F. Johnson's wireless
segment; (3) product mix and the level of sales not being sufficient to fully
absorb the Company's manufacturing overhead; (4) a shift in the Company's
information security product segment from primarily add-on products to more
radios and cellular phones incorporating the Company's encryption products,
which tends to have a lower gross margin; and (5) the approximately $1.0 million
in costs to correct systems contract problems in 1998 for certain E.F. Johnson
projects begun prior to the Company's acquisition of E.F. Johnson. Gross margins
are likely to vary in the future based primarily upon the mix of products and
the amount of revenues for that period.

    The decrease in gross margin percentage from 1996 to 1997 was primarily due
to the addition of E.F. Johnson revenues in August 1997 and inventory
obsolescence which was charged to cost of goods sold primarily relating to
products returned by a customer which was not sellable to other customers.

RESEARCH AND DEVELOPMENT

    Research and development expenses consist primarily of 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 97.2% in 1998 to $8.8 million from $4.5 million in 1997. The increase
is attributable to the inclusion of E.F. Johnson for a full year in 1998 as
compared to only five months in 1997. Research and development expenses were
14.2% of sales in 1998 compared to 11.1% in 1997.

    The Company expects research and development expenses to decline during
1999, due to a reduction in the overall number of engineers from 87 at June 30,
1998 to 75 at December 31, 1998. The Company has also implemented a new product
development process in 1998, which requires a reduced amount of resources and is
intended to speed up the Company's ability to deliver products to market which
should also aid in reducing research and development expenses. The Company is
focusing on research and development projects in the future that will not
require the staffing levels employed in 1998.



                                       26
<PAGE>


    Research and development expenses increased 100.0% to $4.5 million in 1997
from $2.2 million in 1996 due to the addition of E.F. Johnson and an increase in
the members of the engineering staff. However, research and development expenses
as a percentage of sales decreased to 11.1% in 1997, compared to 21.0% in 1996,
due to increased revenues in 1997.

    The information security and wireless communications product markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The Company may not have, either currently or in the future, adequate capital or
human resources to respond to these changes.

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 and trade show participation. Sales and
marketing expenses increased 63.2% to $11.5 million, or 18.5% of sales, in 1998,
compared to $7.0 million, or 17.4% of sales, in 1997. The increase in 1998 was
due primarily to a full year of E.F. Johnson sales and marketing expenses
compared to only five months of E.F. Johnson sales and marketing expenses in
1997. The Company anticipates expenses in the sales and marketing area to
decline as a percentage of revenue going forward as a result of the Company's
effort to bring its operating expenses in line with future revenue expectations.

    Sales and marketing expenses increased 221.5% to $7.0 million, or 17.4% of
sales, in 1997, compared to $2.2 million, or 20.6% of sales, in 1996. The
increase in 1997 was due primarily to the acquisition of E.F. Johnson and an
increase in the number of direct sales personnel and associated expenses and
increased participation in advertising and trade shows.

GENERAL AND ADMINISTRATIVE

    General and administrative expenses consist primarily of salaries and other
expenses associated with the Company's management, accounting, finance and
administrative functions, and amortization of intangible assets. In connection
with Transcrypt's purchase of all of the outstanding shares of capital stock of
E.F. Johnson, the Company recorded $18.0 million of goodwill and other
intangibles at the closing of this acquisition. The Company is amortizing this
amount on a straight-line basis over a period of 5 to 15 years. This
amortization began in August 1997.

    General and administrative expenses increased 165.9% to $12.5 million from
$4.7 million in 1997. The increase is attributable primarily to the inclusion of
EFJ for a full year in 1998 compared to only five months in 1997, the addition
of several administrative employees, the amortization of goodwill and other
intangibles relating to the E.F. Johnson acquisition for a full year, severance
payments and substantial legal and professional fees incurred in connection with
the restatement of the Company's financial statements and related class action
lawsuits, SEC and Audit Committee investigations. On a percentage of revenue
basis, general and administrative expenses were 20.2% in 1998 compared to 11.7%
in 1997. The Company anticipates a reduction in general and administrative
expenses in 1999.

    General and administrative expenses increased 86.3% to $4.7 million in 1997,
compared to $2.5 million in 1996. The increase was attributable primarily to the
addition of E.F. Johnson and several administrative employees and costs
associated with becoming, and maintaining its status as, a publicly held company
in 1997. General and administrative expenses as a percentage of revenues
declined to 11.7% in 1997, compared to 23.8% in 1996, primarily as a result of
the increased revenues during 1997.

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.

IN-PROCESS RESEARCH AND DEVELOPMENT COSTS

    The Company incurred a write-off in the third quarter of 1997 totaling
approximately $9.8 million of in-process research and development costs acquired
in the acquisition of E.F. Johnson. This write-off was recognized as the
technological feasibility of such in-process technology had not yet been
established and the technology had no alternative future use.



                                       27
<PAGE>


RESTRUCTURING CHARGE

         The Company incurred a restructuring charge in the third quarter of
1998 of approximately $1.2 million in connection with the 25% reduction in its
workforce. The reduction in force utilized a voluntary severance program which,
among other things, provided outplacement services to the employees who chose to
participate in the program.

PROVISION FOR LITIGATION SETTLEMENT

    In December 1998, the Company took a special provision of $10.0 million
relating to the federal and state class action lawsuits pending in Nebraska
against the Company and certain of its current and former officers. The Company
is in ongoing settlement discussions regarding these lawsuits. While no
settlement agreement has been reached, the $10.0 million special provision is
the Company's best estimate of the amount that would be necessary for the
Company to contribute to settle the class actions. The Company would anticipate
satisfying any settlement by issuing shares of common stock to the class members
rather than using its cash reserves. Despite the taking of the special
provision, the Company can give no assurances whether any settlement can be
reached, what would be the terms of any settlement or whether the Company would
be required to contribute more than $10.0 million.

NET INTEREST INCOME OR EXPENSE

    Net interest income consists of interest income earned on cash and invested
funds, net of interest expense related to amounts payable on its term and
installment loans and bank lines of credit. Net interest income was $655,000 in
1998 compared to $231,000 in 1997. Net interest expense was $131,000 in 1996.
The increase in net interest income in 1998 is due primarily to an increase in
interest income from the investment of the net proceeds from the Company's
initial and secondary public offerings in interest-bearing instruments for the
full year of 1998 and a repayment of certain debt during 1997. The increase in
net interest income in 1997 from 1996 was due primarily to the same reasons as
the increase in 1998. The Company expects net interest income to decline in 1999
when compared to 1998 as the Company's cash, cash equivalents and investments
declined throughout the year of 1998.

PROVISION FOR INCOME TAXES

    The Company's benefit for income taxes were $3.9 million in 1998, $524,000
in 1997 and $2.2 million in 1996. The increase in the benefit for income taxes
in 1998 from 1997 is a result of a larger operating loss in 1998 as compared to
1997 and the write-off of in-process research and development costs in 1997 of
$9.8 million not being tax deductible. The Company will not record a benefit for
income taxes going forward until the Company generates net profits sufficient to
utilize the current deferred tax asset.

    Prior to June 1996, Transcrypt 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. Transcrypt converted from a partnership to a "C"
corporation effective June 30, 1996. Pro forma net loss and pro forma net loss
per share calculations reflect a pro forma benefit for income taxes as if the
Company had been taxed as a "C" corporation in the first six months of 1996.

    The Company's benefit for income taxes for the year ended December 31, 1996
primarily resulted from a deferred tax benefit of $1.8 million in connection
with the stock option related special compensation expense of $5.4 million. The
Company's effective tax benefit rate was 14.9% in 1998 as a result of an
increase in the valuation allowance against tax assets. The Company's effective
tax rate was 33.7% in 1997, excluding the $9.8 million write-off of in-process
research and development costs, which was not a tax-deductible item. The
acquisition of E.F. Johnson resulted in an addition of $5.1 million in deferred
tax assets.

    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
(1) ten percent of the purchase price of new equipment, (2) a refund of sales
taxes (currently at a rate of 6.0%) paid on purchases of new equipment during
each year, and (3) 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 a substantial
portion of its expected Nebraska state income tax liability during such period.
In addition, the Company utilizes its foreign sales corporation subsidiary
located in Guam to exempt from income taxation a portion of its foreign sales
income.



                                       28
<PAGE>


QUARTERLY RESULTS OF OPERATIONS

    The following table sets forth certain unaudited financial information in
dollars and as a percentage of revenues for the Company for the eight quarters
ended December 31, 1998. 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 Annual Report on 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,  Sept. 30,   Dec.31,  March 31,  June 30,   Sept. 30,  Dec. 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)           1997       1997    1997(6)     1997      1998       1998       1998       1998
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------

<S>                                             <C>        <C>      <C>       <C>        <C>        <C>        <C>        <C>    
Revenues....................................... $ 3,512    $2,915   $13,428   $20,568    $21,988    $13,877    $14,325    $11,851
Cost of sales..................................   1,272     2,289     9,561    12,984     12,910     10,853     11,220      9,922
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Gross profit..................................    2,240       626     3,867     7,584      9,078      3,024      3,105      1,929
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Research and development......................      633       683     1,298     1,855      2,038      2,703      2,174      1,897
Sales and marketing...........................      942       731     2,361     2,997      3,210      3,355      2,626      2,285
General and administrative(1).................      572       651     1,647     1,841      2,113      4,715      3,030      2,671
In-process research and development                                                                                      
costs(2)........                                      -         -     9,828         -          -          -          -          -
Restructuring charge(3).......................
                                                      -         -         -         -          -          -      1,230          -
Provision for litigation
settlement(4)...................                      -         -         -         -          -          -          -     10,000
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
  Total operating costs and expenses...........   2,147     2,065    15,134     6,693      7,361     10,773      9,060     16,853
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Income (loss) from operations.................       93   (1,439)  (11,267)       891      1,717    (7,749)    (5,955)   (14,924)
Interest (expense) income and other income,                                                                              
net...........................................       76      159      (227)       241        311       108         29        253
Net income (loss) before income taxes.........      169   (1,280)  (11,494)     1,132      2,028    (7,641)    (5,926)   (14,671)
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Provision (benefit) for income 
taxes(5)................                             27     (490)     (468)       407        712    (2,598)    (2,030)          -
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Net income (loss).............................   $  142   $ (790)   $ (11,026)  $ 725    $ 1,316   $(5,043)   $(3,896)   $ (14,671)
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Net income (loss) per share
Basic.........................................   $ 0.02   $(0.09)   $ (1.12)    $ 0.06   $ 0.10    $ (0.39)   $ (0.30)   $ (1.13)
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Diluted......................................    $ 0.02   $(0.09)   $ (1.12)    $ 0.06   $ 0.10    $ (0.39)   $ (0.30)   $ (1.13)
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Weighted average common shares
Basic........................................     8,700     9,283     9,844    12,362     12,947     12,947     12,947     12,947
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Diluted......................................     9,282     9,283     9,844    13,103     13,621     12,947     12,947     12,947
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
As a Percentage of Revenues
Revenues.....................................     100.0%    100.0%    100.0%    100.0%     100.0%     100.0%     100.0%     100.0%
Cost of sales................................      36.2      78.5      71.2      63.1       58.7       78.2       78.3       83.7
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Gross profit.................................      63.8      21.5      28.8      36.9       41.3       21.8       21.7       16.3
Operating costs and expenses:
Research and development.....................      18.0      23.4       9.7       9.0        9.3       19.5       15.2       16.0
Sales and marketing..........................      26.8      25.1      17.6      14.6       14.6       24.2       18.3       19.3
General and administrative(1)................      16.3      22.3      12.3       8.9        9.6       34.0       21.2       22.5
In-process research and development                 0.0       0.0      73.2       0.0        0.0        0.0        0.0        0.0
costs(2)........
Restructuring charge(3)......................       0.0       0.0       0.0       0.0        0.0        0.0        8.6        0.0
Provision for litigation
settlement(4)...................                    0.0       0.0       0.0       0.0        0.0        0.0        0.0       84.4
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
  Total operating costs and expenses.........      61.1      70.8     112.7      32.5       33.5       77.6       63.3      142.2
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Income (loss) from operations................       2.6     (49.4)    (83.9)       4.3        7.8     (55.8)     (41.6)    (125.9)
Interest (expense) income and other income,  
net.....                                            2.2       5.5      (1.7)       1.2        1.4        0.8        0.2        2.1
Provision (benefit) for income                
taxes(5).................                           0.8     (16.8)     (3.5)       2.0        3.2     (18.7)     (14.2)        0.0
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
Net income (loss)............................       4.0%    (27.1)%   (82.1)%      3.5%       6.0%    (36.3)%    (27.2)%   (123.8)%
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
                                              ---------- --------- ---------  -------- ---------- ---------- ---------- ----------
</TABLE>



                                       29
<PAGE>


---------------
(1) Includes amortization of intangible assets. For years prior to 1997,
reflects the amortization of intangible assets related to the acquisition of the
Company's business in December 1991. Commencing in August 1997, amortization of
intangible assets related to the acquisition of E.F. Johnson began.

(2)  Represents a non-recurring, non-cash expense of $9.8 million resulting from
     the write-off of in-process research and development costs obtained in the
     acquisition of E.F. Johnson.

(3)  Represents a charge for a 25% reduction in workforce taken in the third
     quarter of 1998.

(4)  Represents a special provision taken in the fourth quarter of 1998 for
     potential class action litigation settlement.

(5)  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.

(6)  The results of E.F. Johnson are included in the results of operations
     beginning July 31, 1997. 

---------------------
    The Company historically has experienced, and expects to continue
experiencing, substantial variability in its results of operations from quarter
to quarter. The level of revenues in a particular quarter varies primarily based
upon the timing of customer purchase orders, due principally to the seasonal
nature of governmental budgeting processes and the needs of competing budgetary
concerns of the Company's customers during the year. Other factors which affect
the results of operations 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. The Company believes that quarterly results
are likely to vary for the foreseeable future.

LIQUIDITY AND CAPITAL RESOURCES

       Since January 1, 1997, the Company has financed its operations and met
its capital requirements primarily through short-term borrowings, long-term debt
and stock offerings completed on January 22, 1997 and October 15, 1997.

    The Company's operating activities used cash of $11.0 million in 1998, $18.1
million in 1997, and generated cash of $921,000 in 1996. Cash used in operating
activities in 1998 consisted primarily of a loss from operations and reductions
to accounts payable, accrued expenses and billings in excess of cost on
uncompleted contracts off-set by decreases in accounts receivable, inventory and
an increase in a special provision for litigation settlement. The Company
incurred approximately $3.0 million (net of reimbursement from the Company's
insurance carrier) on legal, audit and severance payments during 1998 related to
the restatement, class action lawsuits, the audit committee investigation and
SEC investigation, which adversely impacted cash flows. Cash flows may continue
to be adversely impacted by the uncertainty of sales volumes.

     Cash used in operating activities in 1997 consisted primarily of increases
in accounts receivable and inventory and the reduction of accounts payable.
Approximately $7.2 million of the cash used in the Company's operations was
attributable to the reduction of liabilities incurred due to the E.F. Johnson
acquisition and the buildup of E.F. Johnson's inventory, which E.F. Johnson's
prior management had not maintained at adequate levels due to their cash
position, to meet sales demands. Accounts payable to vendors of E.F. Johnson
amounted to $13.0 million upon the Company's acquisition of E.F. Johnson on July
31, 1997. The Company believes that this level of trade payables was
significantly higher than that historically associated with E.F. Johnson's
business as a result of decisions by E.F. Johnson's prior management to defer
payments to certain vendors. During the first six months of 1998, the Company
paid down the high level of trade payables assumed in the acquisition of E.F.
Johnson.

    Cash provided from investing activities were attributable primarily to the
sale of investments in 1998 offset in part by capital expenditures related to
the completion of the Company's Phase III expansion of its corporate
headquarters in Lincoln, Nebraska. The net amount of cash provided from
investing activities in 1998 was $11.1 million.



                                       30
<PAGE>



    Cash used for investing activities, attributable primarily to capital
expenditures and purchase of investments in 1997 and capital expenditures and
payments for non-compete agreements in 1996, totaled $20.9 million and $3.0
million, respectively. Capital expenditures consisted primarily of computer and
networking equipment, office furniture and manufacturing equipment for both
years and expenses related to the expansion of the Company's Lincoln facility
during the second quarter of 1997. In May 1997, the Company completed
construction, begun in August 1996, of the 21,000-square-foot expansion of its
existing Lincoln facility, primarily to accommodate additional manufacturing
capacity.

    The deferred tax assets totaling $12.4 million and $8.0 million for the
years ended December 31, 1998 and 1997, resulted primarily from the E.F. Johnson
acquisition in 1997, net operating loss carryforwards and stock option related
special compensation expense of $5.4 million incurred in September 1996.
Deferred tax assets were 14.2% and 7.5% of total assets and stockholders' equity
at December 31, 1998. The Company believes that it is more likely than not that
future taxable income will be sufficient to utilize deferred tax assets
recorded, net of existing valuation allowances at December 31, 1998.
Approximately $3.0 million of the deferred tax assets relate to $8.6 million of
federal and state net operating loss carryforwards attributable to its acquired
E.F. Johnson subsidiary. A valuation allowance was established at the time of
the purchase of E.F. Johnson for this amount. Any subsequently recognized tax
benefits relating to this portion of the valuation allowance as of December 31,
1998 will be allocated to goodwill. These net operations loss carryforwards
expire in 2012. Tax regulations limit the amount that may be utilized on an
annual basis to approximately $588,000.

    The Company's financing activities have consisted primarily of borrowings
under and payments on an industrial development revenue bond issue ("IDR"), term
and installment notes payable, bank lines of credit and proceeds from an initial
public offering and secondary public offering completed in January 1997 and
October 1997, respectively. Such activities generated $4.9 million in 1998,
$54.3 million in 1997, and $1.8 million and 1996. The amount generated in 1997
was reduced by the liquidation of the revolving credit line and term loans of
$15.7 million assumed in the E.F. Johnson acquisition.

    The Company had outstanding on its IDR at December 31, 1998 a principal
amount of $2.7 million due in annual principal payments of $140,000, plus
interest at a variable rate (3.65% at December 31, 1998), until March 1, 2007,
increasing to annual principal payments of $145,000, plus interest at a variable
rate, from March 1, 2008 through March 1, 2016, with the remaining principal and
accrued interest due on March 1, 2017. At December 31, 1998, the remaining net
proceeds of $516,000 were held in escrow for the Company. Subsequent to the year
ended December 31, 1998, the Company has pledged cash collateral of $2.8 million
as additional security on its long-term indebtedness. $2.6 million of long-term
debt was reclassified to a current liability on the Company's balance sheet at
December 31,1998 pending the Company's efforts to refinance the debt.

    In the normal course of its business activities, the Company is required
under a contract with various governmental authorities to provide letters of
credit and bonds that may be drawn upon if the Company fails to perform under
its contracts. The letters of credit, which expire on various dates in 1998,
have a total undrawn balance of $128,000, and bonds which expire on various
dates through 1999, totaling $24.5 million at December 31, 1998.

    The Company has a line of credit with a regional bank. It is a secured line
of credit not to exceed $10.0 million. Interest was 6.18% at December 31, 1998
and is at a variable rate of 1.25% over the interest rate earned on the $10.0
million on certificates of deposits pledged as security on the bank line of
credit. This line of credit, which was originally due on December 31, 1998, was
renewed until August 31, 1999. The working capital line is collateralized by
substantially all the Company's assets including $10.0 million in certificate of
deposits with the bank.

    At December 31, 1998, the Company had $7.2 million outstanding on the
revolving line of credit. Average borrowings under the Company's line of credit
and the weighted average interest rate during 1998 were $6.6 million and 6.94%.
The total available credit as of December 31, 1998 was $2,574 under the above
line. The Company also had an additional secured fixed line of credit of 196,000
with the same regional bank. The interest rate was 7.75% at December 31, 1998.
This line of credit and applicable accrued interest was paid off on February 10,
1999.

    The Company currently intends to retain earnings, if any, and does not
anticipate paying cash dividends in the foreseeable future.

    The Company anticipates expenditures of approximately $550,000 to $750,000
to ensure that its systems are ready for processing information in the Year
2000. The Company anticipates funding year 2000 expenditures from working
capital and operating leases for certain portions of the project.



                                       31
<PAGE>

     As of December 31, 1998, the Company had approximately $20.3 million in 
cash and cash equivalents, which includes $10.0 million of certificates of 
deposit pledged as security on its line of credit. There was approximately 
$2.6 million available under its bank line of credit at December 31, 1998. 
Subsequent to the year ended December 31, 1998, the Company pledged $2.8 
million cash collateral as additional security on its long-term indebtedness. 
The Company's bank line of credit expires on August 31, 1999 and the Company 
is currently seeking to refinance its bank line of credit and long term 
indebtedness with other lenders. However, it has been difficult to refinance 
the debt or obtain new lines of credit primarily due to uncertainties 
primarily resulting from the pending class action lawsuits and declining 
revenues and losses incurred since March 31, 1998. To improve its cash 
position, the Company is currently negotiating for the sale and leaseback of 
its facilities in Waseca and Lincoln. The Company believes that its cash, 
cash equivalents, and lines of credit will be sufficient to meet anticipated 
cash needs for working capital and for Year 2000 capital expenditures through 
1999. However, if sales do not increase and operating losses do not decline, 
or the Company incurs unanticipated substantial costs, the Company may be 
required to seek additional financing or funding sources, including possible 
sale of securities. No assurance can be given that the Company will be able 
to obtain such additional funding or financing, or a renewal of its line of 
credit or be able to obtain financing on satisfactory terms. Additionally, 
see "Pending Litigation" below for a discussion regarding certain pending 
litigation, the resolution of which could materially adversely affect the 
Company's liquidity, operating results and financial condition.

PENDING LITIGATION

    The Company has been named as a defendant in class action lawsuits that were
filed subsequent to the Company's announcement on March 27, 1998 that the filing
of its Annual Report on Form 10-K for year ended December 31, 1997 would be
delayed and that adjustments would be made to the Company's previously announced
financial results. Between March 31, 1998 and May 27, 1998, twelve purported
class action lawsuits were filed against the Company in the United States
District Court for the District of Nebraska, and one complaint was filed in the
District Court of Scotts Bluff County, Nebraska. Certain of the complaints, as
amended, also name one or more current and former officers of the Company and
PriceWaterhouseCoopers, LLP as additional defendants. The longest class period
alleged in any of the class complaints is the period from January 22, 1997
through April 24, 1998.

    The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10 and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and relate primarily
to allegations of false and misleading financial statements and representations
and material omissions by the Company. The Nebraska action alleges violations of
Nebraska securities laws. The class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed. The amended federal class action
complaint was filed on March 4, 1999 and the Company is required to answer or
otherwise respond to the complaint by March 27, 1999.

    Although the class action complaints do not allege the amount of damages and
other relief that the plaintiffs are seeking, the Company believes the amount of
damages ultimately sought by the plaintiffs will be material. In light of the
Company's restatement of financial information contained in its various
registration statements and prospectuses, the Company believes that there may be
an unfavorable outcome for at least some of the claims asserted in the lawsuits
or which may be asserted in the future against the Company.

    The Company is attempting to settle the class action lawsuits with a 
combination of Company stock and cash up to the limits of its directors' and 
officers' liability insurance. In the quarter ended December 31, 1998, the 
Company recorded a special provision of $10.0 million relating to the federal 
and state class action lawsuits pending in Nebraska against the Company and 
certain of its current and former officers. The Company is in ongoing 
settlement discussions regarding these lawsuits. While no settlement 
agreement has been reached, the $10.0 million special provision is the 
Company's best estimate of the amount that would be necessary for the Company 
to contribute to settle the class actions. The Company would anticipate 
satisfying any settlement by issuing shares of common stock to the class 
members rather than using its cash reserves. Despite the taking of the 
special provision, the Company can give no assurances whether any settlement 
can be reached, what the terms of any settlement would be or whether the 
Company would be required to contribute more than $10.0 million.

    On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000. The Company is unable to predict
the likelihood of the outcome or range or amount of potential liability that may
arise therefrom.

    Many factors will ultimately affect and determine the results of the
litigation, and the Company can provide no assurances that the outcome will not
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.



                                       32
<PAGE>


RECENTLY ISSUED ACCOUNTING STANDARDS

    In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 requires publicly-held enterprises to report certain information
about their operating segments, to report certain enterprise-wide information
about their products and services, their activities in different geographic
areas, and their reliance on major customers, and to also disclose certain
segment information in their interim financial statements. The basis for
determining an enterprise's operating segments is the manner in which management
operates the business. SFAS 131 is effective for financial statements for
periods beginning after December 31, 1997, however implementation is not
required for interim periods in the first year. The Company has adopted SFAS 131
effective December 31, 1998, and segment reporting can be found in "Notes to
Consolidated Financial Statements, Note 19 " Segment and Related Information".

IMPACT OF THE YEAR 2000 ISSUE

STATE OF READINESS

      The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.

    All products currently being shipped by the Company are Year 2000 compliant.
Should a customer use the Company's software with a personal computer that is
not compliant with the year 2000, at that time, the customer may experience
erroneous dates on usage reports, but should not experience any operational
issues. Customers inquiring about previously shipped products are forwarded to
the Year 2000 Compliance Manager in Engineering Product Development. The Year
2000 Compliance Manager researches the customer's product and responds in
writing as to whether the product is compliant. One obsolete software product
has been identified which will incorrectly report the date after December 31,
1999. A solution for this issue has been developed to correct this problem and
has been offered to customers identified as having purchased systems which
include this application software. Written test instructions are also published
for the customer to check their equipment.

     In February 1999, Transcrypt completed the first phase of identifying and
thoroughly researching non-compliant hardware and software. In addition, the
Company has completed the process of seeking quotes and delivery estimates for
the equipment and software that must be replaced or upgraded to be Year 2000
compliant.

Transcrypt has identified and prioritized the following non-compliant items:

           -  The current version of our Enterprise Resource Planning ("ERP")
              software is non-compliant. Our ERP system consists of our
              manufacturing and accounting software systems. The software
              upgrade has been scheduled with the vendor and the contracts are
              currently going through final financial and legal review. The
              operating system software will be converted as is, with very few
              customizations. In addition to vender support, three contractors
              have been lined up for the conversion process. The Company is
              advised that software upgrade is Year 2000 compliant and is
              scheduled for completion in the third quarter 1999.

           -  Four wide area network file servers, which run our software
              applications and interconnects the Company's various locations,
              must be replaced with compliant servers. We are in the process of
              ordering replacement servers. The servers are to be installed by
              the end of June 1999. The remaining servers have already been
              upgraded with Year 2000 compliant operating software.

           -  The payroll system also must be upgraded to be Year 2000
              compliant. The contract for this upgrade has been signed with the
              vendor, the equipment has been ordered. The upgrade should be
              completed by end of May 1999.

           -  Approximately 98 workstations used by various Company personnel
              must be replaced due to compliance issues. The ordering of these
              replacements have begun and is scheduled for completion by the end
              of August 1999. Additional resources have been hired to assist
              with this compliance step.

           -  The voicemail systems in Waseca and Lincoln are not Year 2000
              compliant and must be upgraded. The necessary software has been
              ordered to upgrade the Waseca system. The problem with the Lincoln
              voicemail system will be corrected with the replacement of the
              telephone switch in Lincoln. Both locations installations are to
              be completed by end of May 1999.



                                       33
<PAGE>


     Management believes that all projects relating to Year 2000 compliance will
be completed by the end of the third quarter of 1999. The hardware and software
issues have been researched by Company and vendors. We believe the amount of
changes we must make to be manageable and most contracts are signed and the
installations/conversions are in the process of being scheduled with the
venders. The software we are upgrading is purchased with very few
customizations.

    The upgrade to the Company's ERP software discussed above only addresses the
information technology part of the Company's state of readiness with Year 2000
issues. There are other computerized systems involved in manufacturing and
engineering systems of the Company that may contain embedded technology such as
microcontrollers. A preliminary assessment was made as to what effect, if any,
the Year 2000 issue will have on these systems and whether or not there will be
a material effect on future financial results. As of March 26, 1998, no
definitive conclusions have been drawn. Furthermore, the Company has not yet
initiated formal communications with all of its significant suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. The Company intends to perform
steps to obtain reasonable verification and written assurances from these
suppliers as to their Year 2000 readiness by June 30, 1999.

     Certifications have been received from the security system, elevators, fire
alarm systems, air conditioning and heating systems at the Lincoln facility. The
same checks are being performed in Waseca, and remote offices.

COSTS TO ADDRESS THE YEAR 2000 ISSUE.

    The Company has budgeted expenditures of approximately $550,000 to $750,000
to ensure that its systems are ready for processing information in the Year
2000. The majority of these expenditures relate to the cost of purchasing
hardware and hardware installation. The Company estimates that it has incurred
approximately $50,000 in Year 2000 expenditures through December 31, 1998 with
the balance of the budgeted expenditures to be incurred by the end of 1999. In
addition, the Company has incurred, and will continue to incur, certain costs
relating to the temporary reallocation of its internal resources to address Year
2000 issues. The Company does not separately account for the internal costs
incurred for the Year 2000 issue. The Company anticipates funding year 2000
expenditures from current cash reserves and operating leases for certain
portions of the project.

RISKS PRESENTED BY THE YEAR 2000 ISSUE

    If these other internal computerized systems are not found to be Year 2000
compliant and these significant suppliers were to become unable to process
shipments to the Company as a result of Year 2000 issues, it may have a material
adverse effect on the Company's business, results of operations, and financial
condition. There can be no guarantee that the systems of other companies on
which the Company relies upon will be timely converted. The adverse impact may
include the requirement to pay significant overtime to manually process certain
transactions as a result of a systems failure resulting in the inability to
process transactions or engage in normal business activities. At this time, the
Company is unable to predict with any certainty the estimated lost revenue it
may experience as a result of such failure or disruption.

CONTINGENCY PLANS

     The Company does not currently have any contingency plans to address the
event of the Company or a major supplier not becoming Year 2000 compliant. The
contingency plan is in the process of being completed as we continue to research
all available information on products and vendors. The project schedules will be
closely monitored and additional resources will be added early in the project.
All systems are to be completed by the end of the third quarter. This allows the
last quarter for final testing and adjustments if necessary. During the last
week of December 1999, all users will be instructed to save critical information
to their hard drives, or to print hard copies of critical data. Hard copy
reports of production schedules, shipments, and forms will be printed in
advance. A team of information systems staff, department representatives, and
contractors will be scheduled for the weekend of January 1, 2000 to monitor the
date change.



                                       34
<PAGE>


ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The Company does a significant amount of business in foreign countries. The
Company sales in these foreign countries are denominated in United States
dollars. Certain sales in foreign countries may be secured with irrevocable
letters of credit. The Company also carries foreign credit insurance to cover
receivables in a majority of the foreign countries where it does business.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K" for the Company's Consolidated Financial Statement, and the notes thereto,
and the financial statement schedules filed as part of this report.

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

    The information called for under this item has been previously reported by
the Company in its (1) Current Report on Form 8-K filed with the SEC on May 4,
1998, (2) Current Report on Form 8-K filed with the SEC on May 12, 1998 and (3)
Amendment No. 1 to Current Report on Form 8-K filed with the SEC on May 20,
1998.


                                    PART III


    Incorporated by reference in Items 10 to 13 below are certain sections of
the Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1998.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

    Incorporated by reference in this Annual Report is the information required
by this Item 10 contained in the sections entitled "Discussion of Proposals
Recommended by the Board -- Proposal 1: Elect Two Directors," "Information About
Directors and Executive Officers" and "Information About Transcrypt Common Stock
Ownership -- Did Directors, Executive Officers and Greater-Than-10% Stockholders
Comply With Section 16(a) Beneficial Ownership Reporting in 1998?" of the
Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1998.

ITEM 11.  EXECUTIVE COMPENSATION

    Incorporated by reference in this Annual Report is the information required
by this Item 11 contained in the sections entitled "Information About Directors
and Executive Officers" and "Information About Transcrypt Common Stock Ownership
-- Compensation Committee Interlocks and Insider Participation" of the Company's
definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC
within 120 days after December 31, 1998.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Incorporated by reference in this Annual Report is the information required
by this Item 12 contained in the section entitled "Information About Transcrypt
Common Stock Ownership" of the Company's definitive proxy statement, to be filed
pursuant to Regulation 14A with the SEC within 120 days after December 31, 1998.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Incorporated by reference in this Annual Report is the information required
by this Item 13 contained in the section entitled "Information About Directors
and Executive Officers -- Certain Relationships and Related Transactions" of the
Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1998.



                                       35
<PAGE>


                                     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>

                                                                                                                     Page No.
                                                                                                                     --------
<S>                                                                                                                   <C>
1.     FINANCIAL STATEMENTS AND SCHEDULES
       Independent Auditors' Report.................................................................................  F-1
       Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................  F-2
       Consolidated Statements of Operation for the Years ended December 31, 1998, 1997 and 1996....................  F-3
       Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1998, 1997
       and 1996.....................................................................................................  F-4
       Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996...................  F-5
       Notes to Consolidated Financial Statements...................................................................  F-6 to F-22
2.     FINANCIAL STATEMENT SCHEDULE
       Independent Auditors' Report.................................................................................  S-1
       Schedule II -- Valuation and Qualifying Accounts and Reserves................................................. S-2
</TABLE>

    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.


                                       36
<PAGE>


3.  EXHIBITS

    (1)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 Annual Report on
Form 10-K:

    1. Employment Agreement between the Company and John T. Connor dated as of
       July 31, 1997 (incorporated herein by reference to Exhibit 10.1.1 to the
       Company's Registrant Statement on Form S-1, No. 333-35469, declared
       effective on October 15, 1997).

    2. Employment Agreement between the Company and Jeffery L. Fuller dated as
       of July 31, 1997 (incorporated herein by reference to Exhibit 10.2.1 to
       the Company's Registration Statement on Form S-1, No. 333-35469, declared
       effective on October 15, 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
       Exhibit 10.3 to the Company's Registration Statement on Form S-1, No.
       333-14351, declared effective on January 22, 1997).

    4.  Employment Agreement between the Company and Frederick G. Hamer dated as
        of July 29, 1997 (Exhibit 10.3.1 below).

    5.  Transcrypt International, Inc. 1996 Stock Incentive Plan, as amended 
        (Exhibit 10.4 below).

    6. 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 the Company's Registration Statement on Form S-1, No.
       333-14351, declared effective January 22, 1997).

    7. Severance Agreement and Mutual Release between the Company and Jeffery L.
       Fuller dated June 2, 1998 (Exhibit 10.39 below).

    8. Severance Agreement and Mutual Release between the Company and Charles 
       E. Baumann  dated June 2, 1998 (Exhibit 10.40 below).

    9. Consulting Agreement and Termination of Employment Agreement between
       the Company and John T. Connor dated February 23, 1999 (Exhibit 10.41
       below).

   10. Employment Agreement between the Company and Michael E. Jalbert dated
       March 1, 1999 (Exhibit 10.42 below).

   11. Employment Agreement between the Company and Michael P. Wallace dated
       March 25, 1999 (Exhibit 10.43 below).



                                       37
<PAGE>



    12.(2) EXHIBIT INDEX:
<TABLE>
<CAPTION>

      EXHIBIT
       NUMBER                      DESCRIPTION
       ------                      -----------
      <S>             <C>
      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
                      Registration Statement on Form S-1, No. 333-14351,
                      declared effective on January 22, 1997 (hereinafter the
                      "January 1997 Registration Statement")).

      3.2             Amended and Restated Bylaws of the Company (incorporated 
                      herein by reference to Exhibit 3.2 to the January 1997 
                      Registration Statement).

      4.1             Form of Common Stock certificate (incorporated herein by 
                      reference to Exhibit 4.1 to the January 1997 Registration 
                      Statement).

      4.2             Registration Rights Agreement, dated as of July 31, 1997, 
                      by and among NorAm Energy Corp., Intek Diversified
                      Corporation and the Company (incorporated herein by
                      reference to Exhibit 4.1 to the Company's Current Report 
                      on Form 8-K, File No. 0-21681, filed with the SEC on 
                      August 14, 1997).

     10.1             RESERVED

     10.1.1           Employment Agreement between the Company and John T.
                      Connor dated as of July 31, 1997 (incorporated herein by
                      reference to Exhibit 10.1.1 to the Company's Registration
                      Statement on Form S-1, No. 333-35469, declared effective
                      October 15, 1997 (hereinafter the "October 1997
                      Registration Statement")).

     10.2             RESERVED

     10.2.1           Employment Agreement between the Company and Jeffery L. 
                      Fuller dated as of July 31, 1997 (incorporated herein by
                      reference to Exhibit 10.2.1 to the October 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 the
                      January 1997 Registration Statement).

     10.3.1           Employment Agreement between the Company and Frederick G.
                      Hamer dated as of July 29, 1997 (incorporated herein by
                      reference to Exhibit 10.3.1 to the Company's Annual Report
                      on Form 10-K for the Year Ended December 31, 1997, File
                      No. 0-21681 (hereinafter "1997 Form 10-K")).

     10.4             Transcrypt International, Inc. 1996 Stock Incentive Plan, 
                      as amended.

     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 the
                      January 1997 Registration Statement).

     10.6             License Agreement for APCO 25 Compliant Product between
                      Motorola, Inc. and the Company dated as of August 2, 1994
                      (incorporated herein by reference to Exhibit 10.6 to the
                      January 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 the 
                      January 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 the January 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 the January 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 the January 1997 Registration Statement).

     10.10.1*         Second Amendment, dated March 31, 1997, to 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
                      10.10.1 to the Company's Quarterly Report on Form 10-Q for
                      the Quarter Ended March 31, 1997, File No. 0-21681
                      (hereinafter "1Q 1997 Form 10-Q")).

     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 the January 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 the January 1997 Registration Statement).

</TABLE>


                                       38
<PAGE>


<TABLE>
<CAPTION>

      EXHIBIT
       NUMBER                      DESCRIPTION
       ------                      -----------
      <S>             <C>
     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
                      the January 1997 Registration Statement).

     10.14-           RESERVED

     10.16

     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 the January 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 the
                      January 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 the
                      January 1997 Registration Statement).

     10.20-           RESERVED

     10.23

     10.24            Form of Adoption Agreement for Nonstandardized 401(k) 
                      Profit Sharing Plan (incorporated herein by reference to
                      Exhibit 10.24 to the January 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 the
                      January 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 the January 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 the January 1997 Registration Statement).

     10.27.1          Fifth Amendment, dated as of March 1, 1997, 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 10.27.1 to
                      the 1Q 1997 Form 10-Q).

     10.28            Construction Loan, dated November 15, 1996, by and between
                      Norwest Bank Nebraska, N.A., and the Company, together
                      with related documents (incorporated herein by reference
                      to Exhibit 10.28 to the Company's Annual Report on Form
                      10-K for the Year Ended December 31, 1996, File No.
                      0-21681 (hereinafter "1996 Form 10-K")).

     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 (incorporated herein by reference to
                      Exhibit 10.29 to the 1996 Form 10-K).

     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
                      (incorporated herein by reference to Exhibit 10.30 to the
                      1996 Form 10-K).

     10.31            Nebraska Investment Finance Authority $2,850,000 Variable
                      Rate Demand Industrial Development Revenue Bond
                      (Transcrypt International, Inc. Project), Series 1997,
                      dated as of March 25, 1997 (incorporated herein by
                      reference to Exhibit 10.31 to the 1Q 1997 Form 10-Q).

     10.32            Trust Indenture, dated as of March 1, 1997, for $2,850,000
                      Variable Rate Demand Industrial Development Revenue Bond
                      (Transcrypt International, Inc. Project), Series 1997,
                      between Nebraska Investment Finance Authority as Issuer
                      and Norwest Bank Nebraska, N.A. as Trustee (incorporated
                      herein by reference to Exhibit 10.32 to the 1Q 1997 Form
                      10-Q).

     10.33            Loan Agreement, dated as of March 1, 1997, for $2,850,000 
                      Variable Rate Demand Industrial Development Revenue Bond
                      (Transcrypt International, Inc. Project), Series 1997,
                      between Nebraska Investment Finance Authority as Issuer 
                      and the Company (incorporated herein by reference to
                      Exhibit 10.33 to the 1Q 1997 Form 10-Q).

     10.34-           RESERVED

     10.35

</TABLE>




                                       39
<PAGE>


<TABLE>
<CAPTION>

      EXHIBIT
       NUMBER                      DESCRIPTION
       ------                      -----------
      <S>             <C>
     10.36            License Agreement, dated as of January 15, 1997, between
                      E.F. Johnson Company and Johnson Data Telemetry
                      Corporation (incorporated herein by reference to Exhibit
                      10.36 to the October 1997 Registration Statement).

     10.37            Loan Agreement, dated as of December 31, 1997, by and
                      between U.S. Bank National Association d/b/a First Bank
                      N.A., and the Company, together with related documents.
                      (incorporated herein by reference to Exhibit 10.37 to the
                      1997 Form 10-K).

     10.38            First Amendment to Loan Agreement dated May 21, 1998 by and
                      between U.S. Bank National Association and the Company,
                      together with related documents. (incorporated herein by
                      reference to Exhibit 10.38 to the 1997 Form 10-K).

     10.39            Severance Agreement and Mutual Release between the Company
                      and Jeffery L. Fuller dated June 2, 1998 (incorporated
                      herein by reference to Exhibit 10.39 to the 1997 Form
                      10-K).

     10.40            Severance Agreement and Mutual Release between the Company
                      and Charles E. Baumann dated June 2, 1998 (incorporated
                      herein by reference to Exhibit 10.40 to the 1997 Form
                      10-K).

     10.41            Consulting Agreement and Termination of Employment
                      Agreement between the Company and John T. Connor dated
                      February 23, 1999.

     10.42            Employment Agreement between the Company and Michael E.
                      Jalbert dated March 1, 1999.

     10.43            Employment Agreement between the Company and Michael P.
                      Wallace dated March 25, 1999.

     11.1             Statement re: Computation of Per Share Earnings.

     21               Subsidiaries of the Registrant. (incorporated herein by
                      reference to Exhibit 21 to the 1997 Form 10-K).

     23.1             Consent of KPMG Peat Marwick LLP.

     27.1             Financial Data Schedule.


</TABLE>

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

* Confidential treatment has previously been granted by the SEC 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 1998.

    (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 II -- Valuation
and Qualifying Accounts and Reserves.




                                       40
<PAGE>


                                   SIGNATURES

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

                                       TRANSCRYPT INTERNATIONAL, INC.

                                       By:    /s/     MICHAEL E. JALBERT
                                          --------------------------------------
                                                    Michael E. Jalbert
                                            CHAIRMAN OF THE BOARD OF DIRECTORS
                                                AND CHIEF EXECUTIVE OFFICER
                                               (Principal Executive Officer)

                                                   Dated: March 25, 1999

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

<TABLE>
<CAPTION>

                SIGNATURE                                                   TITLE                                DATE
                ---------                                                   -----                                ----

<S>                                                   <C>                                                   <C>
      /S/  MICHAEL E. JALBERT                         Chairman of the Board of Directors, President and     March 25, 1999
---------------------------------------------------                Chief Executive Officer
           Michael E. Jalbert                                   (Principal Executive Officer)


      /S/  CRAIG J. HUFFAKER                          Senior Vice President of Finance and                  March 25, 1999
---------------------------------------------------           Chief Financial Officer
            Craig J. Huffaker                         (Principal Financial and Accounting Officer)


      /S/  JOHN T. CONNOR                                                 Director                          March 25, 1999
---------------------------------------------------
             John T. Connor


      /S/ TERRY L. FAIRFIELD                                              Director                          March 25, 1999
---------------------------------------------------
          Terry L. Fairfield


      /S/ THOMAS E. HENNING                                               Director                          March 25, 1999
---------------------------------------------------
         Thomas E. Henning


      /S/ THOMAS R. LARSEN                                                 Director                          March 25, 1999
---------------------------------------------------
          THOMAS R. LARSEN


      /S/ THOMAS C. SMITH                                                   Director                          March 25, 1999
---------------------------------------------------
          Thomas C. Smith


      /S/  THOMAS R. THOMSEN                                                Director                          March 25, 1999
---------------------------------------------------
           Thomas R. Thomsen


      /S/  WINSTON J. WADE                                                  Director                          March 25 , 1999
---------------------------------------------------
           Winston J. Wade


</TABLE>



                                       41


<PAGE>


                          INDEPENDENT AUDITORS' REPORT

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, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated 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, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.


                                                    /s/ KMPG Peat Marwick LLP

Omaha, Nebraska
February 12, 1999


                                      F-1

<PAGE>



                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1997
                      (IN THOUSANDS, EXCEPT SHARE AND DATA)

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                    1998                 1997
                                                                              -----------------    -----------------
<S>                                                                               <C>            <C>      
Current assets:
       Cash and cash equivalents ............................................    $   20,262      $  15,384
       Investments ..........................................................          --           15,900
       Accounts receivable, net of allowance for returns and doubtful
       accounts of $1,997 and $2,417 in 1998 and 1997 respectively ..........         9,287         16,008
       Receivables - other ..................................................           605            785  
       Cost in excess of billings on uncompleted contracts ..................         1,216            942  
       Inventory ............................................................        13,907         18,363  
       Income tax recoverable ...............................................          --            1,065  
       Prepaid expenses .....................................................           552            478  
       Deferred tax assets ..................................................         5,157          3,523  
                                                                                  ---------      ---------
                   Total current assets .....................................        50,986         72,448 
Property, plant and equipment, net ..........................................        11,885         11,261 
Deferred tax assets .........................................................         7,219          4,504 
Intangible assets, net of accumulated amortization ..........................        16,711         18,029 
Other assets ................................................................           411            452 
                                                                                  ---------      --------- 
                                                                                  $  87,212      $ 106,694 
                                                                                  ---------      --------- 
                                                                                  ---------      --------- 

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Revolving line of credit .............................................     $   7,426      $    --
       Current portion of long-term debt ....................................         2,732          2,545 
       Accounts payable .....................................................         2,620          9,305 
       Billings in excess of cost on uncompleted contracts ..................         4,541          6,696 
       Deferred revenue .....................................................         1,140          1,743 
       Accrued expenses .....................................................         5,101          7,323 
       Provision for litigation settlement ..................................        10,000           --   
                                                                                  ---------      --------- 
                   Total current liabilities ................................        33,560         27,612 
Long-term debt, net of current portion ......................................             6          2,758 
Deferred revenue ............................................................           550            934 
                                                                                  ---------      --------- 
                                                                                     34,116         31,304 
                                                                                  ---------      --------- 

Commitments and contingencies

Stockholders' equity:
       Preferred stock ($.01 par value; 3,000,000 shares authorized; none
       issued)  .............................................................          --             --
       Common stock ($.01 par value; 19,400,000 voting shares
       authorized, 12,729,082 issued and outstanding; 600,000 non-voting
       shares authorized, 217,542 issued and outstanding) ...................           129            129
       Additional paid-in capital ...........................................        90,315         90,315
       Accumulated deficit ..................................................       (37,348)       (15,054)
                                                                                  ---------      ---------
                                                                                     53,096         75,390
                                                                                  ---------      ---------
                                                                                  $  87,212      $ 106,694
                                                                                  ---------      ---------
                                                                                  ---------      ---------
</TABLE>


         See accompanying notes to the consolidated financial statements.

                                      F-2

<PAGE>

                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>

                                                              1998              1997              1996
                                                         ------------      ------------      ------------
<S>                                                      <C>               <C>               <C>         
Revenues ...........................................     $     62,041      $     40,423      $     10,619
Cost of sales ......................................           44,905            26,106             4,274
                                                         ------------      ------------      ------------
      Gross profit .................................           17,136            14,317             6,345
                                                         ------------      ------------      ------------
Operating expenses:

    Research and development .......................            8,812             4,469             2,234
    Sales and marketing ............................           11,476             7,031             2,187
    General and administrative .....................           12,529             4,711             2,529
    Special compensation expense ...................             --                --               5,568
    In-process research and development ............             --               9,828              --   
    Restructuring charge ...........................            1,230              --                --   
    Provision for litigation settlement ............           10,000              --                --   
                                                         ------------      ------------      ------------
      Total operating expenses .....................           44,047            26,039            12,518
                                                         ------------      ------------      ------------
      Loss from operations .........................          (26,911)          (11,722)           (6,173)

Other income (expense) .............................               46                18              --   

Interest income ....................................            1,304               874                31

Interest expense ...................................             (649)             (643)             (162)
                                                         ------------      ------------      ------------
      Loss before income taxes .....................          (26,210)          (11,473)           (6,304)
Income tax benefit .................................           (3,916)             (524)           (2,186)
                                                         ------------      ------------      ------------
           Net loss ................................     $    (22,294)     $    (10,949)     $     (4,118)
                                                         ------------      ------------      ------------
                                                         ------------      ------------      ------------
  Pro forma net loss per share - Basic and Diluted .     $      (1.72)     $      (1.09)     $      (0.61)
                                                         ------------      ------------      ------------
                                                         ------------      ------------      ------------
  Weighted average common shares - Basic and Diluted       12,946,624        10,056,690         6,783,078
                                                         ------------      ------------      ------------
                                                         ------------      ------------      ------------

</TABLE>



         See accompanying notes to the consolidated financial statements


                                      F-3

<PAGE>



                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                   (IN THOUSANDS, EXCEPT UNITS AND SHARE DATA)

<TABLE>
<CAPTION>
                                                                     Common Stock
                                                                     ------------  Additional
                                                                           Par       Paid-in   Accumulated   Partners'
                                                   Units      Shares      Value      Capital     Deficit      Capital     Total
                                                ---------   ---------  ---------   ----------  -----------   ---------    -------
<S>                                             <C>          <C>       <C>         <C>        <C>           <C>        <C>       
Balance, December 31, 1995..................    5,175,434          --  $     --    $      --  $       --    $    3,907 $    3,907
Distributions...............................           --          --        --           --          --         (181)      (181)
Net loss....................................           --          --        --           --      (4,105)         (13)    (4,118)
Issuance of stock in exchange for
  units of the Predecessor..................    (5,175,434) 5,175,434        52        3,661          --       (3,713)        --
Additional shares issued in
  1.3106311-for-1 stock split
  effected in the form of a stock dividend..           --   1,607,644        16          (16)         --           --         --
Special compensation-- options issued.......           --          --        --        5,358          --           --      5,358
                                                ---------    --------     -----     --------    --------      -------   --------
Balance, December 31, 1996..................           --   6,783,078        68        9,003      (4,105)          --      4,966
Net loss....................................           --          --        --           --     (10,949)          --    (10,949)
Initial public offering, net of related costs          --   2,500,000        25       17,685          --           --     17,710
Issuance of shares in connection
  with the purchase of the E.F.  Johnson
Company.....................................           --     832,465         8        9,992          --           --     10,000
Secondary stock offering, net of related costs         --   2,684,481        27       52,912          --           --     52,939
Exercise of stock options...................           --     146,600         1          228          --           --        229
Income tax benefit of exercise of stock
   options..................................           --          --        --          495          --           --        495
                                                ---------    --------     -----     --------    --------      -------   --------

Balance, December 31, 1997..................           --   12,946,624      129       90,315     (15,054)          --     75,390
Net loss....................................           --          --        --           --     (22,294)          --    (22,294)
                                                ---------   ---------  --------    ---------  -----------   ---------  ----------
Balance, December 31, 1998..................           --   12,946,624 $    129    $  90,315  $  (37,348)          --  $  53,096
                                                ---------   ---------  --------    ---------  -----------   ---------  ----------
                                                ---------   ---------  --------    ---------  -----------   ---------  ----------
</TABLE>



         See accompanying notes to the consolidated financial statements



                                      F-4

<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                         1998         1997         1996
                                                                                  ------------  -----------    ---------
<S>                                                                                 <C>           <C>           <C>      
Cash flows from operating activities:
     Net loss .................................................................     ($22,294)     ($10,949)     ($ 4,118)
                                                                                    --------      --------      --------
     Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
             Special compensation expense .....................................         --            --           5,358
             In-process research and development costs ........................         --           9,828          --
             Provision for litigation settlement ..............................       10,000          --            --   
             Depreciation and amortization ....................................        4,596         2,206         1,580
             Loss (gain) on sale of fixed assets ..............................         (102)          (15)            6
             Provisions for inventory reserves ................................          978         1,100           114
             Provisions for bad debts .........................................          922           202           289
             Deferred taxes ...................................................       (4,349)         (706)       (2,207)
             Changes in assets and liabilities, net of effects of acquisitions:
                 Accounts receivable ..........................................        5,979        (8,884)          489
                 Cost in excess of billings on uncompleted contracts ..........         (274)          201          --
                 Inventory ....................................................        3,478        (6,179)       (1,733)
                 Income taxes recoverable .....................................        1,065          (357)         (213)
                 Prepaid expenses and other assets ............................          (74)         (144)         --
                 Accounts payable .............................................       (6,685)       (4,855)          997
                 Billings in excess of cost on uncompleted contracts ..........       (2,155)         (823)         --
                 Accrued expenses .............................................       (1,138)          325           359
                 Deferred revenue .............................................         (987)          933          --
                                                                                    --------      --------      --------
                     Total adjustments ........................................       11,254        (7,168)        5,039
                                                                                    --------      --------      --------
                     Net cash provided by (used in) operating activities ......      (11,040)      (18,117)          921
                                                                                    --------      --------      --------
Cash flows from investing activities:
     Purchases of investments .................................................         --         (15,900)         --
     Sale of investments ......................................................       15,900          --            --   
     Proceeds from sale of fixed assets .......................................          111            15            31
     Purchase of fixed assets .................................................       (3,504)       (2,422)       (2,119)
     Increase in intangible assets ............................................         (407)         --            (581)
     Decrease in other assets .................................................           41           118          --
     Payments on restructuring reserve ........................................       (1,084)       (2,380)         --
     Acquisition of E.F. Johnson Company, net of cash acquired ................         --            (292)         --
                                                                                    --------      --------      --------
     Payments under noncompete agreements .....................................         --            --            (340)
                                                                                    --------      --------      --------
                     Net cash provided by (used in) investing activities ......       11,057       (20,861)       (3,009)
                                                                                    --------      --------      --------
Cash flows from financing activities:
     Proceeds on revolving lines of credit, net ...............................        7,426       (11,914)        1,022
     Proceeds from long term debt .............................................         --           2,850         1,377
     Payments on long term debt ...............................................       (2,540)       (7,634)         (408)
     Principal payments on capitalized leases .................................          (25)         --             (16)
     Partnership distributions paid ...........................................         --            --            (181)
     Bank overdraft ...........................................................         --            (386)          386
     Issuance of common stock, net of issuance costs ..........................         --          71,217          --
     Proceeds from the exercise of employee stock options .....................         --             229          --   
     Initial public offering costs ............................................         --            --            (384)
                                                                                    --------      --------      --------
                     Net cash provided by financing activities ................        4,861        54,362         1,796
                                                                                    --------      --------      --------
Net increase (decrease) in cash and cash equivalents ..........................        4,878        15,384          (292)
Cash and cash equivalents, beginning of period ................................       15,384          --             292
                                                                                    --------      --------      --------
                                                                                    --------      --------      --------
Cash and cash equivalents, end of period ......................................     $ 20,262      $ 15,384      $   --
                                                                                    --------      --------      --------
                                                                                    --------      --------      --------

</TABLE>

         See accompanying notes to the consolidated financial statements


                                      F-5

<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

1. SIGNIFICANT ACCOUNTING POLICIES:

    The following is a summary of significant accounting policies followed in
the preparation of these consolidated financial statements.

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 telephony markets.
Through its E.F. Johnson subsidiary, the Company designs, develops, manufactures
and markets stationary land mobile radio transmitters/receivers and mobile and
portable radios. The Company markets its products to customers worldwide in two
broad markets: business and industrial users and public safety and other
governmental users. Management considers its operations to comprise two industry
segments. One segment consists of business conducted in the information security
industry and the second business segment competes in the wireless communication
industry.

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. The results of
operations of E.F. Johnson Company (EFJ) are included from the date of its
acquisition, July 31, 1997.

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. Such investments
are carried at cost, which approximates fair value. Cash and cash equivalents 
includes the certificate of deposits as discussed in Note 7.

INVESTMENTS

    Investments include Dutch auction securities, which are bought and held
primarily for the purpose of selling them in the near term and, accordingly,
these investments are classified as trading securities. Trading securities are
recorded at fair value and unrealized holding gains and losses are included in
earnings.

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>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)


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 maintenance and repairs. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets as follows:
land improvements -- 15 years; buildings and improvements -- 15 to 30 years;
equipment and furniture and fixtures -- 3 to 7 years. 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.

INTANGIBLE ASSETS

     Goodwill, which represents the excess of purchase price over fair value 
of assets acquired, is amortized on a straight-line basis over the expected 
periods to be benefited, 15 years. Other intangibles are also carried at cost 
less applicable amortization. Provision for amortization of other intangible 
assets is based upon the estimated useful lives of the related assets and is 
computed using the straight-line method. Intangible assets are being 
amortized over periods from 5 to 15 years. 

     The Company assesses the recoverability of goodwill and other intangible 
assets by determining whether amortization of the balances over the remaining 
lives can be recovered through undiscounted future operating cash flows. The 
amount of impairment, if any, is measured based on projected discounted 
future operating cash flows using a discount rate reflecting the Company's 
average cost of funds. The assessment of the recoverability will be impacted 
if estimated future operating cash flows are not achieved.

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.

    Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

    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 all years presented. The actual provision for income taxes for
1996 included in the consolidated statements of operations 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.


                                      F-7
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

REVENUE RECOGNITION

    Revenues are recognized when product is shipped, less an estimate for an
allowance for returns, if applicable, if collection is reasonably assured. For
shipments where collection is not reasonably assured, the Company recognizes
revenue as cash is received. If collection is contingent on a future event, such
as a reseller of product selling the product to the end user, the Company
recognizes revenue when the contingency lapses, generally upon cash collection.

    System sales under long-term contracts are accounted for under the
percentage-of-completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized revenue is that percentage of
estimated total revenue that incurred costs to date bear to estimated total
costs to complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in operations as soon as such losses are determined to
be probable and reasonably estimable.

    Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees based on
the expected warranty repairs to be incurred over the life of the contract.
Deferred revenue also includes an advanced payment received for products to be
sold to a former division of EFJ. The advance payment was negotiated as part of
the sale agreement of the division by EFJ. The advanced payment is recognized as
revenue is earned.

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.

LOSS PER SHARE

    Basic earnings per share (EPS) is calculated based upon the weighted average
number of common shares outstanding during the period. The diluted EPS
calculation reflects the potential dilution from common stock equivalents such
as stock options. As the years ended December 31, 1998, 1997 and 1996 have net
losses, the impact of outstanding stock options on diluted EPS is anti-dilutive.

    Pro forma net loss per share for 1996 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, and adjusted for the
stock split discussed below.

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 have been restated to reflect the split.


                                      F-8
<PAGE>

                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

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.

STOCK OPTION PLAN

         The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant of options to employees, only if the current market price of the
underlying stock exceeded the exercise price.


2. ACQUISITION:

    On July 31, 1997, the Company acquired all of the outstanding shares of
capital stock and certain indebtedness of EFJ for $436 in cash and 832,465
shares of common stock, with an approximate market value of $10,000. The
acquisition was accounted for by the purchase method of accounting. Purchased
in-process research and development costs of $9,828 were written off as the
technological feasibility of such in-process technology had not yet been
established and the technology had no alternative future use. Intangibles
recorded as part of the purchase include goodwill of $10,880, core technology of
$891, work force of $1,374, customer base of $1,561, and trade names of $3,299.
The intangible assets are being amortized over 5 to 15 years.

    The operating results of EFJ are included in the Company's consolidated
results of operations from the date of acquisition. The following unaudited pro
forma financial information assumes the acquisition occurred at the beginning of
1996. These results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made at the beginning of 1996, or of the results, which may occur in the future.

<TABLE>
<CAPTION>
                                                     1997        1996
                                                  (UNAUDITED) (UNAUDITED)
<S>                                                <C>         <C>      
Total revenues...............................      $  70,959   $  89,585
Net loss.....................................      $  (9,949)  $ (32,077)
Loss per share-- Basic and Diluted...........      $   (0.94)  $   (4.21)

</TABLE>


                                      F-9
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

3. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS:

    Amounts included in the consolidated financial statements that relate to
billings on uncompleted contracts in excess of incurred costs as of December 31,
1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                                   1998          1997
                                               ----------     ----------
<S>                                             <C>           <C>     
Costs on uncompleted contracts ............     $ 30,615      $ 31,814
Profits in uncompleted contracts ..........       10,501        13,547   
                                                --------      --------   
                                                  41,116        45,361
Less billings .............................       44,441        51,115  
                                                --------      --------   
                                                $ (3,325)     $ (5,754) 
                                                --------      --------   
                                                --------      --------   


Included in the consolidated balance sheet:
  Cost in excess of billings on uncompleted     
  contracts ...............................     $  1,216      $    942
  Billings in excess of cost on uncompleted
  contracts ...............................       (4,541)       (6,696)
                                                --------      --------
                                                $ (3,325)     $ (5,754)
                                                --------      --------   
                                                --------      --------   
</TABLE>

    Cost in excess of billings on uncompleted contracts includes direct costs of
manufacturing, installation, project management, engineering, and allocable
manufacturing overhead costs and accrued profits in excess of amounts billed.
Billings in excess of costs on uncompleted contracts includes amounts billed and
accrued anticipated losses (anticipated losses were $3,644 and $3,530 at
December 31, 1998 and 1997, respectively, of which $3,773 was established in
connection with the E.F. Johnson acquisition described in Note 2) on open
contracts in excess of costs and accrued profits.

4. INVENTORY:

    The following is a summary of inventory at December 31, 1998 and 1997, net
of reserves for obsolescence of $3,146 and $4,114, respectively

<TABLE>
<CAPTION>
                                                      1998        1997
                                                    --------    --------
<S>                                                 <C>         <C>     
Raw materials and supplies....................      $  6,267    $  7,523
Work in process...............................         1,337       1,977
Finished goods................................         6,303       8,863
                                                    --------    --------
                                                    $ 13,907    $ 18,363
                                                    --------    --------
                                                    --------    --------
</TABLE>


5. PROPERTY, PLANT AND EQUIPMENT:

    Property, plant and equipment consists of the following at December 31, 1998
and 1997:

<TABLE>
<CAPTION>

                                                           1998      1997
                                                         --------  --------
<S>                                                      <C>       <C>    
Land and land improvements..........................     $    262  $   262
Buildings and improvements..........................        7,245    4,860
Equipment...........................................        9,033    8,152
Leased equipment....................................           74      136
Furniture and fixtures..............................        1,317    1,255
Construction in progress............................          209      178
                                                         --------  -------
                                                           18,140   14,843
  Less accumulated depreciation and amortization....        6,255    3,582
                                                         --------  -------
                                                         $ 11,885  $11,261
                                                         --------  -------
                                                         --------  -------
</TABLE>


                                      F-10
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

6. INTANGIBLE ASSETS:

    Intangible assets consist of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                             1998      1997
<S>                                                        <C>       <C>    
Goodwill...............................................    $ 10,880  $10,880
Proprietary technology and licensing agreements........         400    3,763
Acquired work force, customer base, trade name.........       6,234    6,234
Other..................................................       1,446    1,038
                                                           --------  -------
                                                             18,960   21,915
  Less accumulated amortization........................       2,249    3,886
                                                           --------  -------
                                                           $ 16,711  $18,029
                                                           --------  -------
                                                           --------  -------
</TABLE>

7. REVOLVING LINES OF CREDIT:

    The Company has a line of credit with a regional bank. It is a secured line
of credit not to exceed $10,000. Interest was 6.18% at December 31, 1998 and is
at a variable rate of 1.25% over the interest rate earned on the $10,000 cash
collateral used as security on the bank line of credit. This line of credit was
due on December 31, 1998 and was renewed until August 31, 1999. The working
capital line is collateralized by substantially all the Company's assets
including $10,000 in certificate of deposits with the bank.

    At December 31, 1998, the Company had $7,230, outstanding on the revolving
line of credit. At December 31, 1997, the Company had no amounts outstanding on
this line of credit. Average borrowings under the Company's line of credit and
the weighted average interest rate during 1998 were $6,564 and 6.94% and during
1997 were $761 and 8.5%. The total available credit as of December 31, 1998 was
$2,574 under the above line. The Company had an additional fixed line of credit
with the same regional bank. It is a secured line of credit for $196. The
interest rate was 7.75% at December 31, 1998. This line of credit and applicable
accrued interest was paid off on February 10, 1999.

8. LONG-TERM DEBT:

    Long-term debt at December 31, 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                                                                        1998        1997
                                                                                                      ---------   -------
<S>                                                                                                    <C>        <C>   
Industrial development revenue bonds (IDR) payable to bank with interest
 payments due March 1and September 1 and annual principal payments of $140 beginning March 1, 1998
at variable interest rates with principal due on March 1, 2017. This note is collateralized
by a deed of trust on a building .................................................................     $2,710     $2,850

Capital lease obligation, due in monthly principal and interest installments of
$32 through July 31, 2002, effective interest rate of 9.1% per annum, secured by land and
building .........................................................................................       --        2,400

Other capital lease obligations ..................................................................         28         53
                                                                                                       ------     ------

                                                                                                        2,738      5,303

Less current portion .............................................................................      2,732      2,545
                                                                                                       ------     ------
                                                                                                       ------     ------
                                                                                                       $    6     $2,758
                                                                                                       ------     ------
                                                                                                       ------     ------
</TABLE>

    The revolving lines of credit discussed in Note 7 require, among other
things, that the Company maintain certain levels of net worth. At December 31,
1998, the Company was in compliance with these debt covenants or had obtained
the appropriate waivers. The IDR bonds require the Company to maintain at all
times a letter of credit in an amount at least equal to 103% of the aggregate
principal amount of bonds then outstanding plus a specified portion of interest
payable.


                                      F-11
<PAGE>

                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

8. LONG-TERM DEBT: (CONTINUED)

    Subsequent to the year ended December 31, 1998, the Company pledged cash
collateral of $2.8 million as additional security on its long-term indebtedness.
$2.6 million of long-term debt was reclassified to a current liability on the
Company's balance sheet at December 31,1998 pending the Company's efforts to
refinance the debt.


9. LEASE OBLIGATIONS:

    The Company leases various equipment, automobiles and buildings under
operating leases. Rent expense was $706 and $520 for the years ended December
31, 1998 and 1997, respectively and was immaterial in 1996. Future minimum
rental payments under non-cancelable operating lease agreements are as follows:

<TABLE>
<CAPTION>

            YEAR ENDING DECEMBER 31                                  
            -----------------------                           
            <S>                                              <C>    
            1999.........................................    $   308
            2000.........................................        220
            2001.........................................        149
            2002.........................................         54
            2003.........................................         10
            Thereafter...................................          4
                                                             -------
                      Total minimum lease payments.......    $   745
                                                             -------
                                                             -------
</TABLE>

10. INCOME TAXES:

    The components of the benefit for income taxes for the period ending
December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                               1998         1997         1996  
                             -------   ----------   ----------
<S>                          <C>          <C>          <C>    
           Current:         
              Federal ...    $   433      $   163      $    21
              State .....       --             19         --   
                             -------      -------      -------
                             -------      -------      -------
                                 433          182           21
                             -------      -------      -------
                             -------      -------      -------
           Deferred:        
              Federal ...     (4,349)        (637)      (2,207)
              State .....       --            (69)        --   
                             -------      -------      -------
                              (4,349)        (706)      (2,207)
                             -------      -------      -------
                             $(3,916)     $  (524)     $(2,186)
                             -------      -------      -------
                             -------      -------      -------
</TABLE>


                                      F-12
<PAGE>

                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

10. INCOME TAXES: (CONTINUED)


    The Company's effective tax rate on pretax loss differs from U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>

                                                          1998      Percent        1997      Percent        1996      Percent
                                                       -------      -------     -------      -------     -------      -------
<S>                                                    <C>             <C>      <C>             <C>      <C>         <C> 
U.S. federal tax at statutory tax rate ...........     $(8,911)        34.0     $(3,901)        34.0     $(2,143)        34.0
Income taxable directly to partners of Predecessor        --         --            --         --               4       --

Increase in valuation allowance ..................       5,013         19.1        --         --            --         --

In-process research and development costs ........        --         --           3,341         29.1        --         --   

Benefit of foreign sales corporation .............        --         --             (61)        (0.5)        (53)        (0.7)

State taxes, net of federal benefit ..............        --         --             (33)        (0.3)       --         --

Non deductible amortization ......................         251          0.1          49          0.4        --         --

Other ............................................        (269)        (0.1)         81          0.7           6       --
                                                       -------        -----     -------         ----     -------         ----  
                                                       $(3,916)       (14.9)    $  (524)        (4.6)    $(2,186)       (34.7)
                                                       -------        -----     -------         ----     -------         ----  
                                                       -------        -----     -------         ----     -------         ----  
</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, 1998 and 1997 relate to the following.

<TABLE>
<CAPTION>
                                                              1998          1997
                                                        -----------   -----------
<S>                                                       <C>         <C>    
Deferred tax assets:
   Special compensation expense .....................     $ 1,403     $ 1,403
   Allowance for bad debts ..........................         525         993
   Net operating loss carryforwards .................      12,255       5,549
   Provision for litigation settlement ..............       3,400        --
   Difference between tax and book amortization .....       1,538       1,547
   Difference between tax and book liability accruals       2,452       1,939
                                                          -------     -------
   Gross deferred tax assets ........................      21,573      11,431
   Less valuation allowance .........................       8,013       3,000
                                                          -------     -------
                                                           13,560       8,431
                                                          -------     -------
Deferred tax liabilities:
   Difference between tax and book depreciation .....       1,184         404
                                                          -------     -------
Net deferred asset ..................................     $12,376     $ 8,027
                                                          -------     -------
                                                          -------     -------
</TABLE>


    There was no valuation allowance for deferred tax assets as of January 1,
1997 and 1996. A valuation allowance of $3,000 was established at the time of
the purchase of EFJ. An additional $5,013 was added to the valuation allowance
during 1998. Any subsequently recognized tax benefits relating to $3,000 of the
valuation allowance as of December 31, 1998 will be allocated to goodwill. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income
prior to expiration of the net operating loss carryforwards. Taxable losses for
the year ended December 31, 1998 and December 31, 1997 and the six


                                      F-13
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

10. INCOME TAXES: (CONTINUED)

months ended December 31, 1996 were approximately $16,950, $7,800 and $1,300,
respectively. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of existing valuation
allowances at December 31, 1998. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.

    Net operating loss carryforwards, which originated in 1998, 1997 and 1996,
will begin to expire in 2011. The Company has approximately $8,600 in Federal
and state net operating loss carryforwards attributable to EFJ which expire in
2012. Tax regulations limit the amount that may be utilized on these acquired
net operating losses on an annual basis to approximately $588.

11. ACCRUED EXPENSES:

    Accrued expenses consist of the following:


<TABLE>
<CAPTION>
                                                          1998        1997    
                                                        ----------  ----------
<S>                                                      <C>        <C>   
              Payroll, bonuses and employee benefits     $1,361     $1,534
              Warranty reserve .....................        530        806
              Commissions ..........................         65        789
              Restructuring reserve ................      1,800      2,581
              Other expenses .......................      1,345      1,613
                                                         ------     ------
                                                         $5,101     $7,323
                                                         ------     ------
                                                         ------     ------
</TABLE>


    In August 1998, the Company announced a voluntary reduction in force for
which the Company took a restructuring reserve of $1,230 to cover costs
associated with severance and other related costs to reduce the workforce by
approximately 125 employees. As of December 31, 1998, $927 has been expended. In
connection with the acquisition of EFJ, a portion of the purchase price was
allocated to a restructuring reserve in 1997 to cover costs associated with the
purchase such as severance and relocation costs. A reserve of $4,961 was
recorded, and as of December 31, 1998, $3,464 has been expended.

12. COMMITMENTS AND CONTINGENCIES:

    The Company has been named as a defendant in class action lawsuits that were
filed subsequent to the Company's announcement on March 27, 1998 that the filing
of its Annual Report on Form 10-K for year ended December 31, 1997 would be
delayed and that adjustments would be made to the Company's previously announced
financial results. Between March 31, 1998 and May 27, 1998, twelve purported
class action lawsuits were filed against the Company in the United States
District Court for the District of Nebraska, and one complaint was filed in the
District Court of Scotts Bluff County, Nebraska. Certain of the complaints, as
amended, also name one or more officers of the Company and
PriceWaterhouseCoopers, LLP as additional defendants. The longest class period
alleged in any of the class complaints is the period from January 22, 1997
through April 24, 1998.


                                      F-14



<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

12. COMMITMENTS AND CONTINGENCIES:

    The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10 and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and relate primarily
to allegations of false and misleading financial statements and representations
and material omissions by the Company. The Nebraska action alleges violations of
Nebraska securities laws. The class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed. The amended federal class action
complaint was filed on March 4, 1999 and the Company is required to answer or
otherwise respond to the complaint by March 27, 1999.

    Although the class action complaints do not allege the amount of damages and
other relief that the plaintiffs are seeking, the Company believes the amount of
damages ultimately sought by the plaintiffs will be material. In light of the
Company's restatement of financial information contained in its various
registration statements and prospectuses, the Company believes that there may be
an unfavorable outcome for at least some of the claims asserted in the lawsuits
or which may be asserted in the future against the Company.

    The Company is attempting to settle the class action lawsuits with a 
combination of Company stock and cash up to the limits of its directors' and 
officers' liability insurance. In the quarter ended December 31, 1998, the 
Company recorded a special provision of $10.0 million relating to the federal 
and state class action lawsuits pending in Nebraska against the Company and 
certain of its current and former officers. As previously disclosed, the 
Company is in ongoing settlement discussions regarding these lawsuits. While 
no settlement agreement has been reached, the $10.0 million special provision 
is the Company's best estimate of the amount that would be necessary for the 
Company to contribute to settle the class actions. The Company would 
anticipate satisfying any settlement by issuing shares of common stock to the 
class members rather than using its cash reserves. Despite the taking of the 
special provision, the Company can give no assurances whether any settlement 
can be reached, what the terms of any settlement would be or whether the 
Company would be required to contribute more than $10.0 million. Many factors 
will ultimately affect and determine the results of the litigation however, 
and the Company can provide no assurances that the outcome will not have a 
significant adverse effect on the Company's business, financial condition, 
results of operations and cash flows.

    On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000. The Company is unable to predict
the likelihood of the outcome or range or amount of potential liability that may
arise therefrom.

    The Company may in the future be the subject of additional lawsuits or
claims in connection with the events or facts surrounding its restatement of
previously announced financial results. The Company is unable to predict when or
whether such additional lawsuits or claims may be initiated or the likelihood of
the outcome or range or amount of potential liability that may arise therefrom.



                                      F-15
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

12. COMMITMENTS AND CONTINGENCIES: (Continued)

    In April 1998, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation to determine whether violations of certain aspects
of the Federal securities laws had occurred in connection with the Company. At
the present time, the Company is unable to predict whether the SEC is likely to
initiate enforcement action against the Company or its affiliated parties
relating to these events.

    The Company is involved in certain other legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to such other legal proceedings are likely to be,
individually or in the aggregate, material to the Company's business, financial
condition, results of operations or cash flows.

    In the normal course of its business activities, the Company is required
under a contract with various governmental authorities to provide letters of
credit and bonds that may be drawn upon if the Company fails to perform under
its contracts. The letters of credit, which expire on various dates in 1999,
have a total undrawn balance of $128, and bonds which expire on various dates
through 1999, totaling $24,500 at December 31, 1998. As of December 31, 1998 no
bonds have been drawn upon and the Company's bonding capacity remains at
$50,000.

    As a result of the EFJ acquisition, the Company has an agreement with a
vendor to purchase certain annual dollar volume of products. In the event the
Company fails to purchase the minimum volume, it must pay a penalty equal to 35%
of the shortfall. Future minimum purchase quantities are as follows: 1999 --
$2,500; 2000 --$391. The Company does not anticipate meeting its future minimum
purchase commitments. This shortfall was anticipated and accrued as a liability
in the allocation of the purchase price for EFJ. In 1998, the Company incurred
$666 as a result of this take or pay contract.


13. 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 then outstanding on September 30, 1996. The vesting
resulted in a special compensation charge of $5,358 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 non-employee 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 as amended in October 1998, shall not exceed
2,000,000. As of December 31, 1998 the Company 962,933 shares have been issued
under the Plan. 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
with vesting of the options at a rate of 20% per year.


                                      F-16
<PAGE>

                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)


13. OPTION PLANS: (Continued)

    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 1998, 1997
and 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:
<TABLE>
<CAPTION>

                                                                      1998           1997        1996
                                                                 ---------      ---------    --------
<S>                                                              <C>             <C>          <C>
Pro forma net loss-- as reported .............................   $ (22,294)      $(10,949)    $(4,114)
Pro forma net loss-- as adjusted under SFAS No. 123 ..........     (23,010)       (11,149)     (4,114)
Pro forma net loss per share-- as reported:
  Basic and Diluted ..........................................       (1.72)         (1.09)       (.61)
Pro forma net loss per share-- as adjusted under SFAS No. 123:
  Basic and Diluted ..........................................       (1.78)         (1.11)       (.61)

</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. No
options were granted subsequent to September 30, 1996, during the year ended
December 31, 1996. The weighted average fair value per option at date of grant
durring 1998 and 1997 was $11.33 and $7.92, respectively.

    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 granted:
<TABLE>
<CAPTION>

                                                        1998       1997       1996
                                                     ---------  ---------  -------
<S>                                                  <C>        <C>        <C>
Expected option life.............................    10 years   10 years   10 years
Expected annual volatility.......................      110%        68%        N/A
Risk-free interest rate..........................      4.65%      6.62%      6.50%
Dividend yield...................................       0%         0%         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, 1995                                  464,619    $    1.13           --
  Granted ................................................    252,297         3.05           --
  Exercised ..............................................         --          --
  Forfeited ..............................................         --          --
                                                              -------    ---------      -------
Balance at December 31, 1996                                  716,916         1.81      716,916
  Granted ................................................    459,600        10.29
  Exercised ..............................................   (146,600)        1.57
  Forfeited ..............................................   (146,383)       10.01
                                                              -------    ---------      -------
Balance at December 31, 1997                                  883,533         4.90      553,933
  Granted ................................................    215,000         7.72
  Exercised ..............................................         --           --           --
  Forfeited ..............................................   (135,600)        5.12
                                                              -------    ---------      
Balance at December 31, 1998 .............................    962,933    $    4.94      627,933
                                                              -------    ---------      -------
                                                              -------    ---------      -------


</TABLE>


                                      F-17
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

13. OPTION PLANS: (Continued)

<TABLE>
<CAPTION>

                                                          WEIGHTED
                                            NUMBER         AVERAGE    WEIGHTED     NUMBER       EXERCISABLE
                                        OUTSTANDING AT    REMAINING    AVERAGE EXERCISABLE AT    WEIGHTED
 RANGE OF                                DECEMBER 31,    CONTRACTUAL  EXERCISE  DECEMBER 31,      AVERAGE
EXERCISE PRICE                               1998           LIFE        PRICE       1998      EXERCISE PRICE
-----------------                       --------------  -----------  --------- -------------  --------------
<S>                                     <C>             <C>          <C>       <C>            <C>
$      0.76      --        0.76            294,257          6.67     $   0.76     294,257        $  0.76
       2.69      --        2.75             85,000          9.78         2.71           0           0.00
       3.05      --        3.05            259,676          7.15         3.05     259,676           3.05
       3.94      --        8.00            204,000          8.43         7.20      56,000           8.00
      10.50      --        21.69            80,000          8.88        13.62      10,000          15.50
      23.50      --        23.50            10,000          8.88        23.50       2,000          23.50
      23.94      --        23.94            30,000          9.08        23.94       6,000          23.94
      --------------------------           -------         ------    --------     -------        ---------
       0.76      --        23.94           962,933          7.73     $   4.94     627,933      $   2. 88
      --------------------------           -------         ------    --------     -------        ---------
      --------------------------           -------         ------    --------     -------        ---------


</TABLE>


14. 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 $0, $100 and $60 for the years
ended December 31, 1998, 1997 and 1996, 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 50% for the first 6% of the amount
contributed by participants. Contributions may not exceed the maximum allowable
by law. Company contributions approximated $372, $111 and $16 for the years
ended December 31, 1998, 1997 and 1996, respectively.


15. CONCENTRATIONS:

    No customer accounted for sales 10% or greater in 1998. Sales to major
customers were as follows:
<TABLE>
<CAPTION>

                                                             1997     1996
                                                           -------  -------
<S>                                                        <C>      <C>
Individual customers representing 10% or more of
  consolidated sales in each year:
  Motorola, Inc.......................................     $    --  $ 2,180
  Modern Scientific and Electronic Corporation........     $ 4,374  $    --

</TABLE>


    In addition, a substantial portion of the Company's revenue is from
customers in the governmental sector, both domestic and foreign. The Company's
policy does not require significant collateral or other security to support such
receivables.

    In addition to being a customer, Motorola is also a key manufacturer of 
electronic components used by the Company. Purchases by the Company from 
Motorola totaled approximately $1,244, $3,862 and $1,878 in 1998, 1997, and 
1996, respectively.

                                      F-18
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)


16. FAIR VALUE OF FINANCIAL INSTRUMENTS:

    The carrying amount of cash and cash equivalents, accounts receivable,
receivables-other, cost in excess of billings on uncompleted contracts, income
taxes recoverable, prepaid expenses, accounts payable, billings in excess of
cost on uncompleted contracts and accrued expenses approximate fair value
because of the short maturity of these instruments. The carrying amount of
long-term debt and the revolving line of credit approximate fair value as
calculated by discounting the future cash flows of each instrument at rates
currently offered to the Company for similar debt instruments of comparable
maturities by the Company's bankers.

17. STOCK OFFERINGS:

    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
$17,710.

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

    On October 15, 1997, the Company completed a secondary public offering of
3,175,000 shares of common stock at a price of $21.00 per share. Of the
3,175,000 shares offered, 2,684,481 shares were sold by the Company and 490,519
were sold by certain of the Company's stockholders. The Company's net proceeds
from the offering, after underwriting commissions and expenses, were
approximately $52,939.

    A portion of the Company's net proceeds from the offering was used to retire
the revolving credit facility and term facility of EFJ. The remaining net
proceeds have been and will be used to finance expansion and modernization of
the Company's manufacturing and administrative facilities, and for working
capital and general corporate purposes.

18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    Interest paid by the Company during the years ended December 31, 1998, 1997
and 1996 amounted to $514, $618 and $163, respectively. Income taxes paid, net
of refunds, during the years ended December 31, 1998 and 1997 were $0 and $642,
respectively.

    During 1996, the Company made non-cash additions to property, plant and
equipment and deferred initial public offering costs of $174 and $184,
respectively.

    In conjunction with the acquisition during the year ended December 31, 1997
(see Note 2) assets acquired, liabilities assumed and common stock issued were
as follows:
<TABLE>

<S>                                                             <C>
Fair value of assets acquired...............................    $  30,574
Excess of cost over net tangible assets acquired............       27,833
Liabilities assumed.........................................      (48,115)
Common stock issued.........................................      (10,000)
                                                                ---------
          Cash paid, net of cash received...................    $     292
                                                                ---------
                                                                ---------

</TABLE>



                                      F-19
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)


19. SEGMENT AND RELATED INFORMATION:

      The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in 1998. The statement allows, and the
Company has chosen, the adoption of this statement for the year ended December
31, 1998 and 1997.

      The Company's reporting segments are strategic business units that offer
different products and services. Management considers its operations to comprise
two industry segments. One segment consists of business conducted in the
information security industry, which comprises the design, manufacture and sale
of devices that prevent the unauthorized interception on sensitive voice and
data communication. The second business segment competes in the wireless
communication industry where the Company designs, develops, manufactures and
markets stationary land mobile radio transmitters/receivers, mobile and portable
radios and complete radio communication systems.

      The following table is a summary of unaudited annual results for the years
ended December 31, 1998, 1997 and 1996. E.F. Johnson was acquired on July 31,
1997, the Company prior to the acquisition was comprised solely of the
Information Security business segment.


<TABLE>
<CAPTION>

                                                             YEAR ENDED
                                             --------------------------------------------
                                             DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                             --------------------------------------------
IN THOUSANDS                                    1998             1997           1996
-----------------------------------------------------------------------------------------
<S>                                           <C>               <C>           <C>
SALES
Information Security ......................   $10,925           $10,586       $10,619
Wireless Communication ....................    51,116            29,837          --
                                              -------           -------       -------
TOTAL SALES ...............................    62,041            40,423        10,619
                                              -------           -------       -------
COST OF GOODS SOLD
Information Security ......................     5,105             5,919         4,274
Wireless Communication ....................    39,800            20,187          --
                                              -------           -------       -------
TOTAL COST OF GOODS SOLD ..................    44,905            26,106         4,274
                                              -------           -------       -------
GROSS MARGIN
Information Security ......................     5,820             4,667         6,345
Wireless Communication ....................    11,316             9,650          --
                                              -------           -------       -------
TOTAL GROSS MARGIN ........................   $17,136           $14,317       $ 6,345
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
GROSS MARGIN PERCENTAGE
Information Security ......................      53.3%             44.1%        59.8%
Wireless Communication ....................      22.1%             32.3%         0.0%
                                              -------           -------       -------
TOTAL GROSS MARGIN PERCENTAGE .............      27.6%             35.4%        59.8%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

</TABLE>


                                      F-20
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)


19. SEGMENT AND RELATED INFORMATION: (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.
Export sales by major geographic area were as follows:
<TABLE>
<CAPTION>

                                        1998       1997     1996
                                      --------   -------  ------
<S>                                   <C>        <C>      <C>
Europe.............................   $  1,902   $   804  $ 1,960
Middle East and Asia...............      3,953     7,657    1,525
Central and Latin America..........     16,859     6,933    2,235
                                      --------   -------  -------
                                      $ 22,714   $15,394  $ 5,720
                                      --------   -------  -------
                                      --------   -------  -------

</TABLE>



20. UNAUDITED QUARTERLY FINANCIAL DATA:

         The following table sets forth unaudited condensed operating results
for each of the eight quarters in the two-year period ending December 31, 1998.
This information has been prepared on the same basis as the financial statements
appearing elsewhere in this report. The Company's operating results for any one
quarter are not indicative of results for any future period.

         Earnings per share for each quarter are computed independently of
earnings per share for the year. The sum of the quarterly may not equal the
earnings per share for the year because of (i) transactions affecting the
weighted average number of common shares outstanding in each quarter and (ii)
the uneven distribution of earnings during the year.



                                      F-21
<PAGE>


                 TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

20. UNAUDITED QUARTERLY FINANCIAL DATA: (Continued)
<TABLE>
<CAPTION>

                                                                             QUARTER ENDED
                                                              ----------------------------------------------
                                                              MARCH 31,    JUNE 30,    SEPT. 30,    DEC.31,
                                                              ---------    --------    ---------    --------
                                                                  (in thousands, except per share data)
<S>                                                           <C>          <C>         <C>          <C>
1998
Revenues ..................................................   $ 21,988    $ 13,877    $ 14,325    $   11,851
Income (loss) from operations .............................      1,717      (7,749)     (5,955)      (14,924)
Interest (expense) income and other income, net ...........        311         108          29           254
                                                              --------    --------    --------    ----------
Net income (loss) before income taxes .....................      2,028      (7,641)     (5,926)      (14,670)
Provision (benefit) for income taxes ......................        712      (2,598)     (2,030)           --
                                                              --------    --------    --------    ----------
Net income (loss) .........................................   $  1,316    $ (5,043)   $ (3,896)   $  (14,670)
                                                              --------    --------    --------    ----------
                                                              --------    --------    --------    ----------
Net income (loss) per share
Basic .....................................................   $   0.10    $  (0.39)   $  (0.30)   $    (1.13)
                                                              --------    --------    --------    ----------
                                                              --------    --------    --------    ----------
Diluted ...................................................   $   0.10    $  (0.39)   $  (0.30)   $    (1.13)
                                                              --------    --------    --------    ----------
                                                              --------    --------    --------    ----------
1997
Revenues ..................................................   $  3,512    $  2,915    $ 13,428    $   20,568
Income (loss) from operations .............................         93      (1,439)    (11,267)          891
Interest (expense) income and other income, net ...........         76         159        (227)          241
                                                              --------    --------    --------    ----------
Net income (loss) before income taxes .....................        169      (1,280)    (11,494)        1,132
Provision (benefit) for income taxes ......................         27        (490)       (468)          407
                                                              --------    --------    --------    ----------
Net income (loss) .........................................   $    142    $   (790)   $(11,026)   $      725
                                                              --------    --------    --------    ----------
                                                              --------    --------    --------    ----------
Net income (loss) per share
Basic .....................................................   $   0.02    $  (0.09)   $  (1.12)   $     0.06
                                                              --------    --------    --------    ----------
                                                              --------    --------    --------    ----------
Diluted ...................................................   $   0.02    $  (0.09)   $  (1.12)   $     0.06
                                                              --------    --------    --------    ----------
                                                              --------    --------    --------    ----------

</TABLE>



    The Company incurred a charge of $1.2 million for restructuring the
workforce in the third quarter ended September 30, 1998.

     In the quarter ended September 30, 1997, the Company incurred a charge of
$9.8 million for in-process research and development cost in connection with its
acquisition of EFJ.

     In the quarter ended December 31, 1998, a special provision of $10.0 
million was made for the potential settlement of the pending class action 
litigation and no provision was made for future tax benefits in connection 
with the loss. The tax benefit was fully offset by an increase in the 
valuation allowance (See Note 10).



                                     F-22
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Transcrypt International, Inc.

    The audits referred to in our report dated February 12, 1999, included the
related financial statement schedule as of December 31, 1998, and for each of
the years in the three-year period ended December 31, 1998, included in Form
10-K. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits. In our opinion, such financial statement
schedule when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

                                               /s/ KMPG Peat Marwick LLP

Omaha, Nebraska
February 12, 1999








                                     S-1
<PAGE>



          SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>

                                                  BALANCE AT   CHARGED TO      CHARGED                    BALANCE AT
                                                  BEGINNING     EXPENSES      TO OTHER      DEDUCTIONS        END
                                                  OF PERIOD   (PROVISIONS)    ACCOUNTS     (WRITEOFFS)     OF PERIOD
                                                 ----------------------------------------------------------------------
<S>                                              <C>           <C>           <C>           <C>          <C> 
       Allowance for doubtful accounts for the:
         Year Ended December 31, 1996                $181,659      $288,596            --        $40,004      $430,251
         Year Ended December 31, 1997                $430,251      $202,321    $2,337,291       $553,361    $2,416,502
         Year Ended December 31, 1998              $2,416,502      $921,684            --     $1,341,395    $1,996,791


       Inventory Obsolescence Reserve for the:
         Year Ended December 31, 1996                 $82,041      $127,650            --       $170,842       $38,849
         Year Ended December 31, 1997                 $38,849    $2,636,107    $5,187,000     $3,747,526    $4,114,430
         Year Ended December 31, 1998              $4,114,430      $977,688            --     $1,946,186    $3,145,932


       Allowance for Restructuring Reserve for
       the:
         Year Ended December 31, 1997                      --            --    $4,960,500     $2,379,424    $2,581,076
         Year Ended December 31, 1998              $2,581,076    $1,230,000            --     $2,010,412    $1,800,664


       Allowance for Warranty Reserve for the:
         Year Ended December 31, 1996                 $64,455       $24,142            --        $15,282       $73,315
         Year Ended December 31, 1997                 $73,315      $408,687      $706,244       $381,757      $806,489
         Year Ended December 31, 1998                $806,489      $264,539            --       $540,881      $530,147


</TABLE>




                                                 S-2
<PAGE>


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

   EXHIBIT
   NUMBER                           DESCRIPTION
   -------                          -----------
   <S>         <C>
      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 Registration Statement on Form S-1,
               No. 333-14351, declared effective on January 22, 1997
               (hereinafter the "January 1997 Registration Statement")).

      3.2      Amended and Restated Bylaws of the Company (incorporated herein
               by reference to Exhibit 3.2 to the January 1997 Registration
               Statement).

      4.1      Form of Common Stock certificate (incorporated herein by
               reference to Exhibit 4.1 to the January 1997 Registration
               Statement).

      4.2      Registration Rights Agreement, dated as of July 31, 1997, by and
               among NorAm Energy Corp., Intek Diversified Corporation and the
               Company (incorporated herein by reference to Exhibit 4.1 to the
               Company's Current Report on Form 8-K, File No. 0-21681, filed
               with the SEC on August 14, 1997).

     10.1      RESERVED

     10.1.1    Employment Agreement between the Company and John T. Connor dated
               as of July 31, 1997 (incorporated herein by reference to Exhibit
               10.1.1 to the Company's Registration Statement on Form S-1, No.
               333-35469, declared effective October 15, 1997 (hereinafter the
               "October 1997 Registration Statement")).

     10.2      RESERVED

     10.2.1    Employment Agreement between the Company and Jeffery L. Fuller
               dated as of July 31, 1997 (incorporated herein by reference to
               Exhibit 10.2.1 to the October 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 the January 1997
               Registration Statement).

     10.3.1    Employment Agreement between the Company and Frederick G. Hamer
               dated as of July 29, 1997 (incorporated herein by reference to
               Exhibit 10.3.1 to the Company's Annual Report on Form 10-K for
               the Year Ended December 31, 1997, File No. 0-21681 (hereinafter
               "1997 Form 10-K")).

     10.4      Transcrypt International, Inc. 1996 Stock Incentive Plan, as
               amended.

     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 the January 1997
               Registration Statement).

     10.6      License Agreement for APCO 25 Compliant Product between Motorola,
               Inc. and the Company dated as of August 2, 1994 (incorporated
               herein by reference to Exhibit 10.6 to the January 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 the January 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 the January 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 the January
               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 the January
               1997 Registration Statement).

     10.10.1*  Second Amendment, dated March 31, 1997, to 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 10.10.1 to the Company's Quarterly Report
               on Form 10-Q for the Quarter Ended March 31, 1997, File No.
               0-21681 (hereinafter "1Q 1997 Form 10-Q")).

     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 the January
               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
               the January 1997 Registration Statement).

</TABLE>


<PAGE>


<TABLE>
<CAPTION>

   EXHIBIT
   NUMBER                           DESCRIPTION
   -------                          -----------
   <S>         <C>
     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 the January 1997
               Registration Statement).

     10.14-    RESERVED

     10.16

     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 the January
               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 the January 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 the January 1997 Registration
               Statement).

     10.20-    RESERVED

     10.23

     10.24     Form of Adoption Agreement for Nonstandardized 401(k) Profit
               Sharing Plan (incorporated herein by reference to Exhibit 10.24
               to the January 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 the January 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 the January 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 the January
               1997 Registration Statement).

     10.27.1   Fifth Amendment, dated as of March 1, 1997, 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 10.27.1 to the 1Q 1997 Form 10-Q).

     10.28     Construction Loan, dated November 15, 1996, by and between
               Norwest Bank Nebraska, N.A., and the Company, together with
               related documents (incorporated herein by reference to Exhibit
               10.28 to the Company's Annual Report on Form 10-K for the Year
               Ended December 31, 1996, File No. 0-21681 (hereinafter "1996 Form
               10-K")).

     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
               (incorporated herein by reference to Exhibit 10.29 to the 1996
               Form 10-K).

     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 (incorporated herein by
               reference to Exhibit 10.30 to the 1996 Form 10-K).

     10.31     Nebraska Investment Finance Authority $2,850,000 Variable Rate
               Demand Industrial Development Revenue Bond (Transcrypt
               International, Inc. Project), Series 1997, dated as of March 25,
               1997 (incorporated herein by reference to Exhibit 10.31 to the 1Q
               1997 Form 10-Q).

     10.32     Trust Indenture, dated as of March 1, 1997, for $2,850,000
               Variable Rate Demand Industrial Development Revenue Bond
               (Transcrypt International, Inc. Project), Series 1997, between
               Nebraska Investment Finance Authority as Issuer and Norwest Bank
               Nebraska, N.A. as Trustee (incorporated herein by reference to
               Exhibit 10.32 to the 1Q 1997 Form 10-Q).

     10.33     Loan Agreement, dated as of March 1, 1997, for $2,850,000
               Variable Rate Demand Industrial Development Revenue Bond
               (Transcrypt International, Inc. Project), Series 1997, between
               Nebraska Investment Finance Authority as Issuer and the Company
               (incorporated herein by reference to Exhibit 10.33 to the 1Q 1997
               Form 10-Q).

     10.34-    RESERVED

     10.35


</TABLE>



<PAGE>


<TABLE>
<CAPTION>

   EXHIBIT
   NUMBER                           DESCRIPTION
   -------                          -----------
   <S>         <C>

     10.36     License Agreement, dated as of January 15, 1997, between E.F.
               Johnson Company and Johnson Data Telemetry Corporation
               (incorporated herein by reference to Exhibit 10.36 to the October
               1997 Registration Statement).

     10.37     Loan Agreement, dated as of December 31, 1997, by and between
               U.S. Bank National Association d/b/a First Bank N.A., and the
               Company, together with related documents. (incorporated herein by
               reference to Exhibit 10.37 to the 1997 Form 10-K).

     10.38     First Amendment to Loan Agreement dated May 21, 1998 by and
               between U.S. Bank National Association and the Company, together
               with related documents. (incorporated herein by reference to
               Exhibit 10.38 to the 1997 Form 10-K).

     10.39     Severance Agreement and Mutual Release between the Company and
               Jeffery L. Fuller dated June 2, 1998 (incorporated herein by
               reference to Exhibit 10.39 to the 1997 Form 10-K).

     10.40     Severance Agreement and Mutual Release between the Company and
               Charles E. Baumann dated June 2, 1998 (incorporated herein by
               reference to Exhibit 10.40 to the 1997 Form 10-K).

     10.41     Consulting Agreement and Termination of Employment Agreement
               between the Company and John T. Connor dated February 23, 1999.

     10.42     Employment Agreement between the Company and Michael E. Jalbert
               dated March 1, 1999. 

     10.43     Employment Agreement between the Company and Michael P. Wallace
               dated March 25, 1999.

     11.1      Statement re: Computation of Per Share Earnings.

     21        Subsidiaries of the Registrant. (incorporated herein by reference
               to Exhibit 21 to the 1997 Form 10-K).

     23.1      Consent of KPMG Peat Marwick LLP.

     27.1      Financial Data Schedule.


</TABLE>

------------------
* Confidential treatment has previously been granted by the SEC as to a portion
of this exhibit.