UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

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

|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2004
|OR                                         
|o                                           | 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            

EFJ, INC.(Exact name of Registrant as specified in its charter)

|Delaware(State or other jurisdiction
of incorporation or organization) | 47-0801192(I.R.S. Employee
Identification No.)
|---------------------------------------------------------------------- | ----------------------------------------------

1440 Corporate Drive
Irving, Texas 75038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 819-0700
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 ý No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ý No o

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. o

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 June 30, 2004, as reported in the NASDAQ National Market, was approximately $156,000,000. 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 February 22, 2005: 18,322,107.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant's 2004 Annual Meeting of Stockholders to be filed within 120 days of the fiscal year ended
December 31, 2004 are incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Annual Report on Form 10-K.



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Forward-Looking Statements

This Annual Report on Form 10-K ("Report"), including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7, contains forward-looking statements that involve risks, uncertainties, and assumptions. If the risks or uncertainties materialize or the assumptions prove incorrect,
the results of EFJ, Inc. and its consolidated subsidiaries ("EFJ") may differ materially from those expressed or implied by such forward-looking statements. All statements other than statements
of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of earnings, revenue, expenses, or other financial items; any statement
of the plans, strategies, and objectives of management for future operations; any statements concerning developments, performance, or market share relating to products or services; any statements
regarding future economic conditions; any statements regarding pending claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing.
The risks, uncertainties, and assumptions referred to above include macroeconomic and geopolitical trends and events; the outcome of pending legislation; the execution and performance of contracts by
suppliers and customers; employee management issues; the challenge of managing asset levels, including inventory; the difficulty aligning expense levels with revenue changes; and other risks that are
described herein, including but not limited to the items discussed in "Summary of Business Considerations and Certain Risk Factors That May Affect Future Results of Operations and/or Stock Price" set
forth in this Report, and that are otherwise described from time to time in EFJ's Securities and Exchange Commission reports filed after this Report. EFJ assumes no obligation and does not intend to
update these forward-looking statements.

PART I

ITEM 1. BUSINESS

Unless the context otherwise provides, all references in this Annual Report on Form 10-K to the "Company" or "EFJ" include EFJ, Inc.,
its predecessor entities, and its subsidiaries, including E.F. Johnson Company and Transcrypt International, Inc., on a combined basis. All references to "EFJohnson" refer to
E.F. Johnson Company, and all references to "Transcrypt" refer to Transcrypt International, Inc. Further, all references to wireless communications segment refer to E.
F. Johnson company, and all references to information security segment refer to Transcrypt International, Inc.

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 and relate, without limitation, to the following:



The
actual outcomes of the above referenced matters may differ significantly from the outcomes expressed or implied in these forward-looking statements. For a discussion regarding such
differences, see "Summary of Business Considerations and Certain Risk Factors That May Affect Future Results of Operations and/or Stock Price" below.

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General

The Company is a manufacturer of wireless communications systems (including infrastructure, subscriber products, and service) and information security products.
The Company primarily sells its products to: (1) domestic public safety/public service and other government users; (2) international customers; and (3) domestic commercial users.

Through
its wholly-owned subsidiary, EFJohnson, the Company designs, develops, manufactures, and markets: mobile and portable land mobile radios ("LMR"); stationary LMR
transmitters/receivers (base stations or repeaters); and LMR systems (voting equipment, gateways, and all associated control platforms).

Through
its wholly-owned subsidiary, Transcrypt, the Company designs, manufactures, and markets information security products which prevent unauthorized access to sensitive voice
communications. To a lesser degree, Transcrypt also designs, manufactures, and markets LMR signaling accessory products. The information security products are based on a wide range of analog
scrambling and digital encryption technologies and are sold mainly to the LMR markets as an add-on security device for analog radios.

At
the Company's June 13, 2002 Annual Meeting of Stockholders, the Stockholders approved an amendment of the Company's Certificate of Incorporation to change the corporate name to
EFJ, Inc. On December 6, 2002, EFJ established a new wholly-owned subsidiary, named Transcrypt International, Inc. As of January 1, 2003, EFJ transferred all assets
associated with its Transcrypt Secure Technologies division to the new Delaware subsidiary. The Transcrypt Secure Technologies division was solely related to the Company's information security product
line.

Effective
March 1, 2005, the Company moved its principal business offices from 1232 22nd Street NW, Suite 600, Washington, D.C. 20037 to 1440
Corporate Drive, Irving, Texas 75038. The Company's telephone number is (972) 819-0700; and its website iswww.efji.com.The
Company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and its reports on
Form 8-K are available at the Company's website, at no cost to the user, as soon as reasonably practicable after filing such material with the Securities and Exchange Commission
("SEC").

Industry

Wireless Communications

The mobile wireless communications industry began in the mid-1930s when police departments began using LMR systems to enable immediate communication
between headquarters and patrolling officers. LMRs consist of hand-held and 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 radios. Originally designed to transmit information in the analog format, there has been a relatively recent migration
of LMR systems, from this historically analog format, to the digital format. Additionally, LMR service expanded beyond its traditional police and fire applications to become an integral means of
communications for a variety of government and commercial entities. 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 ("DSP's"), 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.

Conventional
and trunked are two general types of LMR systems. Both types of systems operate on the specific frequency bands that the Federal Communications Commission ("FCC") has
allocated for such types of systems. Conventional LMR systems use a single channel to transmit and receive

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information.
All users have unrestricted access, and the user must monitor the system and wait until the channel is unoccupied. Trunked systems, including "LTR®",
LTR-Net®, Multi-Net®, and Project 25 products, combine multiple channels so that an unoccupied channel is automatically selected when a user begins
transmitting. Conventional LMR systems are relatively inefficient compared to trunked systems.

Technological
developments in the 1970s by EFJohnson and others have enabled LMR systems to be "networked," permitting multiple sites to be 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. More
recent technology provides for the interconnection between sites to be accomplished over digital packet based networks using Internet type protocols in a technique called Voice over Internet Protocol
(VoIP). The Company's proprietary "switch-less" system implementation has been trademarked as Netelligent®.

Many
federal, state and local agencies operate LMR equipment which complies with specifications established by the Association of Public Safety Communications Officials
International, Inc. ("APCO"). The APCO 16 standard, established in 1979, includes recommendations for 800 MHz transmissions, analog voice modulations, and trunking functions for using the
frequency spectrum. However, the APCO 16 recommendations permitted development of proprietary systems. As a result, three proprietary APCO 16 technologies evolved: Motorola's
SmartNet®/SmartZone®; General Electric's EDACS®; and EFJohnson's Multi-Net®. These proprietary systems effectively eliminated competition
once the initial technology decision was made, thereby, severely hampering interoperability and market choice. Consequently, APCO began efforts on a more comprehensive standard which would stress the
importance of interoperability.

In
1995, APCO promulgated a new recommended standard known as Project 25. Project 25 specifies features and signaling for narrow band digital voice and data with conventional and
trunking modes of operation. The Telecommunications Industry Association ("TIA") participated in the development of this suite of standards, following an industry-sanctioned and American National
Standards Institute ("ANSI") accredited process. With TIA's assistance, Project 25 was structured to specify details of fundamental LMR communications to allow multi-source procurement and
interoperability for the life of Project 25 systems. The Company has provided significant support to both APCO and TIA, to include serving and chairing many of the committees, subcommittees, and
working groups formulating the standards.

The
Project 25 standard has been adopted by the National Telecommunications and Information Administration ("NTIA"), which controls LMR specifications for the federal government and
which specified a conversion to narrow band by the year 2005 for the 162-174 MHz bands, and by 2008 for all other bands. Several of the U.S. government agencies (including the Departments
of Defense, Interior, Justice, and Treasury) have specified a Project 25 requirement for procurements of new LMR Equipment. Although state and local public safety agencies are not currently required
by the FCC or APCO to purchase Project 25 compliant LMR systems or otherwise adopt the Project 25 standard, Project 25 compatibility is becoming one of the key purchasing factors for state and local
public safety/public service LMR users. Furthermore, as state and local LMR users upgrade their existing APCO 16 systems to comply with FCC-imposed bandwidth limitations, demand for
Project 25 compliant LMR systems is expected to increase. This is due in part to the fact that Project 25 systems can potentially be configured for compatibility with older APCO 16 mobile and portable
radios, allowing an adopter of the Project 25 standard to purchase new system equipment without replacing all of its subscriber radios.

Unlike
government LMR users, commercial LMR users have only expressed marginal interest in interoperability or compliance with APCO standards. Larger commercial entities, such as
utility, transportation, construction and energy companies, especially those that have specialized security needs,

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may
require Project 25 compatible systems. To that extent, the Company would intend to serve such LMR needs with the digital products presently marketed to domestic public safety/public service
customers. Otherwise, due to the increased competition for domestic commercial users and the increased availability of relatively inexpensive analog radios and repeaters, the Company has substantially
exited the commercial market segment.

Information Security

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. Not surprisingly, the information security industry originated from the need to secure sensitive wireless military communications.

By
the late 1970s, the availability, quality and cost of LMR information security devices had improved so that the use of these devices became economically and functionally feasible for
non-military government users (such as law enforcement, fire, emergency medical, and other public safety personnel) and large commercial users (such as transportation, construction, and
oil companies). The use of scrambling and encryption equipment, such as one of the Company's modules, is required on both the transmitting and receiving sides of communications in order to operate in
secure mode. However, most LMR encryption products, including all of Transcrypt's products, can be used in the clear, non-scrambled mode to communicate with equipment that does not contain
a security device.

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 "scrambling," or
manipulating the original signal at the point of transmission, and reconstituting the original signal at the receiving end. Digital transmissions can be made secure by a process known as "encryption,"
which involves the use of a mathematical algorithm to rearrange the bit-stream prior to transmission and a decoding algorithm to reconstitute the transmitted information back into its
original form at the receiving end. The core technologies currently available, and used by companies such as Transcrypt, include the following methods, which are listed in increasing order of
sophistication of security technique:



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. High-level scrambling and encryption devices are
used primarily by public safety agencies, government personnel, and international customers with increased security concerns.

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Markets and Products

Purchasers of the Company's wireless communications and information security products include: (1) domestic public safety/public service and other
government users; (2) domestic commercial users; and (3) international customers. Significant customers accounting for more than 10% of the Company's revenues, as a combination of both
wireless communications and information security products, included: U.S. Department of Defense, which represented approximately 35% and 42% of consolidated sales in 2004 and 2003, respectively; and
State of South Dakota, which represented approximately 12% of sales in 2002. The Company's sales, as per its defined customer markets, are shown below for the years ended December 31, 2004,
2003, and 2002:

|                                      |  | 2004
Amount |        | % |    | 2003
Amount |   | %      |  | 2002
Amount |   | % |       
|------------------------------------- |  | ----------- | ------ | - | -- | ----------- | - | ------ |  | ----------- | - | - | ------
|Revenues:                             |  |             |        |   |    |             |   |        |  |             |   |   |       
|Domestic public safety/public service |  | $           | 59,912 |   | 74 | %           | $ | 46,975 |  | 83          | % | $ | 30,193
|Domestic commercial                   |  |             | 2,159  |   | 3  |             |   | 2,100  |  | 4           |   |   | 4,474 
|International                         |  |             | 18,799 |   | 23 |             |   | 7,114  |  | 13          |   |   | 6,120 
|                                      |  |             |        |   |    |             |   |        |  |             |   |   |       
|Total Sales                           |  | $           | 80,870 |   |    |             | $ | 56,189 |  |             |   | $ | 40,787
|                                      |  |             |        |   |    |             |   |        |  |             |   |   |       

The
Company's basic marketing strategy is founded on the premise that "Quality, Value, and Service Equals Choice" for the customer (or "QVS=C"). The strategy aims at increasing market
awareness by
conveying the Company's technical capabilities, customer support philosophy, and overall product value so that the customer understands the Company represents a viable and beneficial choice in
fulfilling the customer's LMR requirements. To this end, the Company's marketing staff conducts promotions through a mix of print advertising, trade shows, Internet websites, direct mail campaigns,
press releases, presentation materials, and distribution of demonstration and loaner equipment. The goal is to obtain market awareness that the Company is a full-service LMR communications
solution provider that offers quality choice in the marketplace.

The
Company sells its products domestically through a direct sales force of account executives and sales managers, dealers, and manufacturer representatives. The Company provides support
to its LMR dealers, who re-sell the Company's product to end-users. This support includes advertising materials, sales and service training, and technical support. The
Company's international sales are primarily made through a specialized international direct sales force in conjunction with Company-authorized dealers/distributors, which typically provide a local
contact and arrange for technical training in foreign countries. See "Summary of Business Considerations and Certain Risk Factors That May Affect Future Results of Operations and/or Stock
PriceBusiness, political, regulatory, or economic changes in foreign countries in which the Company markets its products or services could adversely affect the Company's revenues."

Much
of the Company's business is won through submission of formal competitive bids. Commercial bids are frequently negotiated as to terms and conditions for schedule, specifications,
delivery, and payment. With respect to bids for government work, however, in most cases the client specifies the terms and conditions and form of contract. In situations where the client-imposed
contract type and/or terms appear to expose the Company to inappropriate risk, the Company may seek alternate arrangements or opt not to bid for the work. Essentially all contracts with the United
States Government, and many contracts with other government entities, permit the government client to terminate the contract at any time for the convenience of the government entity. Although the
Company operates under the risk that such terminations may occur and have a material impact on operations, it is the Company's experience that such terminations are rare. As with other government
contractors, the Company's business is subject to government client funding decisions and actions that are beyond the Company's control. The Company's contracts are composed of a wide range of
contract

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types,
including firm fixed-priced, time-and-materials, indefinite-delivery/ indefinite-quantity ("IDIQ"), and government-wide acquisition contracts (known as
"GWACS") such as General Services Administration ("GSA") schedule contracts.

GSA
schedule contracts are listings of services, products and prices of contractors maintained by the GSA for use throughout the federal government. In order for a company to provide
services under a GSA Schedule contract, the Company must be pre-qualified and selected by the GSA. When an agency uses a GSA Schedule contract to meet its requirement, the agency or the
GSA, on behalf of the agency, conducts the procurement. The user agency, or the GSA on its behalf, evaluates the user agency's services requirements and initiates a competition limited to GSA Schedule
qualified
contractors. Use of GSA schedule contracts provides the user agency with reduced procurement time and lower procurement costs.

Wireless Communications

EFJohnson's products consist of radios (or "subscriber units"), LMR systems (to include infrastructure equipment, system design, and installation of
infrastructure equipment), and service (technical support, maintenance contracts, service parts, and training). These products are sold under the "EFJohnson" brand name. The Company's marketing
efforts are focused on the domestic public safety/public service sector, substantially eliminating its entire commercial product offering. Subsequently, EFJohnson has also de-emphasized
its international market, as that market has predominantly been comprised of analog products that the Company has exited.

EFJohnson's
radio offerings are primarily digital offerings designed to operate in both analog and digital LMR system environments that include Multi-Net®,
Motorola's SmartNet® and SmartZone®, Project 25, and conventional. EFJohnson's digital radios, both hand-held portable and mobile radios, can contain digital
encryption technology, Over-the-Air-Re-keying ("OTAR"), Project 25 trunking, and various other features. To further enhance its LMR offerings, EFJohnson
has incorporated various encryption technologies into its digital radio products.

EFJohnson's
system sales prior to 2003 were predominantly analog systems, predominantly Multi-Net® and, to a lesser extent, LTR-Net®
systems. However, in 2004 and 2003, during which period the Company installed several Project 25 systems, system sales have been predominantly digital Project 25 systems. The Company expects this
trend toward digital Project 25 systems to continue. EFJohnson is currently developing a Project 25 trunked system offering that it expects to release in 2005.

To
further its development of digital system offerings, the Company made a strategic decision in 2004 to move its EFJohnson operations from Waseca, Minnesota to Irving, Texas. The
Company felt that the Irving, Texas area provided a larger and more experienced pool of engineering and marketing employees, which would facilitate its ability to rapidly and efficiently expand these
key areas to match its strategic growth.

The
majority of system sales involves soliciting and responding to requests for proposals ("RFP's"). The RFP process for system sales has a relatively long cycle time, typically taking
as much time as one year, and, depending on the size of the system, taking multiple years to complete installation of a project. LMR system end-users often require the supplier of the LMR
system to supply a bond from an approved surety company at the time that the bid is submitted and the contract is awarded; however, sales to the federal government generally do not have such bonding
requirements. See "Summary of Business Considerations and Certain Risk Factors That May Affect
Future Results of Operations and/or Stock PriceThe Company's inability to secure satisfactory bonding arrangements would adversely affect revenues."

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For the EFJohnson product line, the Company's customer service group provides 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, extended maintenance coverage, and product training. Product
training includes classes and seminars to provide the end-user assistance in the use, operation and application of LMR products and systems. Training is available at both the customer's
site and the Company's new Irving, Texas facility. 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, on a contractual basis, usually for an additional charge.

Domestic public safety/public service

The Company's market focus is in the areas of Project 25 compliant systems and interoperability. The Company's Project 25 compliant digital radios are compatible
and interoperable with older analog radio systems, as well as with Motorola's proprietary analog APCO 16 trunking technology (SmartNet® and SmartZone®). The Company believes
that such backward compatibility with most of Motorola's APCO 16 trunking technology will provide early adopters of the Project 25 standard, such as the federal, state and local government agencies,
the ability to purchase new equipment without replacing entire older systems. In 2002, EFJohnson introduced Project 25 system infrastructure, beginning with the Model 2600 Repeater, and, in 2003,
EFJohnson installed its first Project 25 system.

The
Company believes it has positioned itself to effectively participate in this Project 25 marketplace, particularly as a result of its established presence as a vendor to the
Departments of Defense, Homeland Security, Interior, Justice, and Treasury. EFJohnson's market emphasis continues to be on the federal, state and local governmental units seeking interoperability, and
the Company believes these opportunities will continue to increase in 2005 and beyond.

Commercial Users

As explained above, the Company has altered its market focus away from the commercial markets. Nonetheless, management believes that niche markets, such as large
public utilities, will desire Project
25 systems equipment interoperability. Given the opportunity, the Company intends to market to such commercial users.

International

EFJohnson has historically served its international users with analog product lines that reached end of life in 2004. The Company's present international focus is
generally on Latin American countries, notably Brazil, Argentina, Venezuela, and Chile, where the Company has noted recent demand for its digital products. However, EFJohnson is not strategically
focused on this market and expects international sales to remain relatively flat in 2005 and to comprise less than 5% of EFJohnson's total sales.

Information Security

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 domestic public safety/public service agencies and international governments. Since that time, the Company
has further developed and improved upon its core information security technologies, which have been implemented into the Company's scrambler modules and other products within its major information
security product families.

The
Company's customers use information security products in a variety of situations involving differing security needs. The Company offers a variety of add-on LMR scrambling
products featuring

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its
core technologies at varying levels of security. Add-on scramblers are available in two packages, which include: (1) a modular package consisting of a circuit board that is
designed to be permanently soldered into existing circuitry; and (2) a plug-in package designed for installation using connectors with standard pin configurations which original
equipment manufacturers ("OEM") or customers may install. 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), "ANI" (automatic number identification of radios) and OTAR (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 is based upon the U.S. digital encryption standard known
as "DES." This module uses the widely recognized DES algorithm for encoding transmissions.Dark Star, the Company's newest development project, allows
analog transmissions to be more securely encrypted in a digital format that will also permit backward compatibility to most of its older encryption modules.

Transcrypt's
analog products are compatible with a number of OEM manufacturers, including Motorola, Kenwood U.S.A. Corp. ("Kenwood"), Icom America, Inc., Relm Corporation
("Relm"), and Tait Electronics ("Tait"). However, substantial portions of the analog encryption modules sold by Transcrypt are for use in radios manufactured by Motorola. During 2004, the Company
renewed its Professional Radio Application Partner Contract with Motorola which certifies the Company as an Authorized Application Partner of its plug-in information security modules for
the Motorola Professional series radios in Europe, the Middle East, and Africa. Presently, the Company is investigating similar partnering relationships for other global regions.

For
the Transcrypt product line, the Company provides domestic toll-free telephone access for customers with technical or other problems. The Company will also 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. The Company documents installation instructions for its products in OEM devices and has developed instructions for more
than 2,700 OEM applications (including a majority of commercially available two-way radio models sold worldwide).

Transcrypt's
current information security products are designed solely for the encryption of analog transmissions. As the LMR encryption customers migrate from analog to digital
transmission systems, the overall market for the Company's analog encryption products may decrease. This migration from analog to digital is presently occurring more rapidly in North America and
Europe than elsewhere in the world. Due to the much higher cost of digital products, the Company anticipates that this transition to digital will occur at a fairly slow pace in that part of the world
identified as "third-world"; and, accordingly, overall global demand for analog security products is not expected to significantly decrease
over the next few years. During such period, this transition from analog to digital is only expected to have a marginal, if any, impact upon the Company's information security product sales as a
result of its development of other products, such as theDark Starproduct, and because of its aggressive marketing aimed at increasing Transcrypt's
global market share.

International
sales continue to play a dominant role in Transcrypt's sales mix. This is a result of the greater analog presence in certain parts of the world outside the United States.
Because such analog demand remains strong, international sales are expected to remain at similar levels going forward.

Products Under Development/Research and Development

Consistent with the Company's development efforts for its existing products, the Company designs new products around common wireless technologies using common
signal processing platforms and circuitry. Using this approach, the Company has generally been able to incorporate improvements in

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core
technologies into its new products more quickly and with relatively lower development costs compared to developing entirely new product platforms.

The
Company's research and development organization has expertise in: radio frequency technology, computer architecture, switch architecture, networking, cryptography, object-oriented
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 groups, involving marketing, customer service, manufacturing and engineering are used for product planning, definition, and testing. The Company's research and development efforts
presently encompass:



Wireless Communications

The Company will continue to develop products in 2005 that include feature enhancements and additions to its line of digital radios, and which will continue to
comply with the Project 25 standard. Current developments include the addition of lower-cost digital portable and mobile radios, as well as the development of Project 25 infrastructure
equipment, including Project 25 trunking infrastructure, such as repeaters, base stations, network-switching equipments, consoles, and voters. The Company expects its current development of
single-site trunked Project 25 infrastructure to be substantially complete in 2005. The Company believes that Project 25 trunking systems will be more widely implemented as costs come down
and competitively priced equipment becomes available. In addition, the Company has applied standard Internet Protocol switching techniques for voice and data interconnectivity between wireless sites;
and to that end, the Company has submitted a VoIP fixed station interface for APCO/TIA standards consideration.

Information Security

The LMR security products under development include new versions of the Company's 460 series modules for deployment in different models of radios, including
plug-in modules for certain new model Motorola, ICOM, and Kenwood radios introduced from time to time in different regions of the world. The Company has also undertaken development of Dark Star, an
analog scrambler that utilizes digital encryption techniques to achieve compatibility with digital encryption and a more secure level of
encryption.

Intellectual Property

The Company currently holds or has been assigned 47 U.S. patents. These patents cover a broad range of technologies, including trunking protocols,
high-end scrambling and encryption techniques, methods of integrating after-market devices, and a high-speed data interface for LMR communications. Furthermore, the Company
holds registered copyrights that cover software containing algorithms for frequency hopping, scrambling and LMR signaling technologies, as well as numerous registered trademarks related to the
"EFJohnson" and "Transcrypt" names and product names. In addition to

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patent,
trademark, and copyright laws, the Company relies on trade secret law and employee and third party non-disclosure agreements to protect its proprietary intellectual property
rights.

Manufacturing, Materials, and Suppliers

The Company's manufacturing operations generally consist of the procurement of commercially available subassemblies, parts, and components (such as integrated
circuits, printed circuit boards and plastic and metal parts), in addition to the assembly of these various parts and components into finished products. Through 2004, the Company produced most of its
wireless communications products, including all of its Project 25 compliant products, at its Waseca, Minnesota facility; the Company has recently outsourced its production to a Texas-based vendor,
and, by the end of the first quarter of 2005, all EFJohnson production will be outsourced. The Company assembles its information security products at its facility in Lincoln, Nebraska;
sub-assembly components for Transcrypt are produced through a manufacturing outsourcing arrangement executed in the 4th quarter of 2004.

Vendors
manufacture certain components and subassemblies in accordance with the Company's specific design criteria. Certain components and subassemblies used in the Company's products
are presently available only from a single supplier or a limited group of suppliers. With respect to other electronic parts, components and subassemblies, the Company believes that alternative sources
could be obtained to supply these products, if necessary. To date, the Company has been able to obtain adequate supplies of key components and subassemblies in a timely manner from existing sources.
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. Further, in
2005, substantially all of the Company's wireless communications products and all of the Company's information security sub-assemblies will be produced by selected vendors pursuant to
outsourcing contracts executed in 2004. The Company's decision to substantially outsource its manufacturing was consistent with its strategic plan and should permit the Company to more efficiently
allocate its resources on marketing and research and development efforts, which areas the Company perceives to be its core competencies. See "Summary of Business Considerations and
Certain Risk Factors That
May Affect Future Results of Operations and/or Stock PriceThe Company's revenues and gross margins are dependent upon the timely and consistent delivery of components by third party
suppliers."

Pursuant
to a supply agreement that expired in August 2004, Motorola was the sole manufacturer of certain electronic components used in the Company's wireless communication
products. These exclusive components included the RF module used in the Company's digital subscriber units. In anticipation of the agreement's scheduled termination, the Company developed its own RF
module to replace that which was supplied by Motorola. This RF module development was substantially complete as of December 31, 2004. Substantially all of the Company's 2004 subscriber unit
sales were manufactured with the Motorola RF module; however, as of February 2005 virtually all subscriber unit sales will be substantially manufactured with the Company's newly-developed RF
module. See "Summary of Business Considerations and Certain Risk Factors That May Affect Future Results of Operations and/or Stock PriceReduction in Motorola's provision of
certain components or technology to the Company could harm the Company's business and operations."

Further,
through 2004, Motorola supplied the Company with its DES-XL proprietary encryption module, which the Company installs in subscriber units requiring such encryption.
The Company's subscriber sales that incorporated this encryption module were $12.1 million and $17.3 million in 2004 and 2003, respectively. Motorola has indicated that it intends to no
longer supply such module to EFJohnson. Although the Company believes it has the right and the ability to install software in its subscriber units to emulate DES-XL encryption, the
Company's right to do so is presently being disputed by Motorola. See "Summary of Business Considerations and Certain Risk Factors That May Affect Future Results of Operations and/or
Stock PriceReduction in Motorola's provision of certain components or technology to the Company could harm the Company's business and operations."

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The
Company has obtained from Motorola a royalty-bearing, irrevocable, non-exclusive, worldwide license ("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 Project 25 compliant LMR products. The IPR License
includes rights to use Motorola's proprietary analog APCO 16 trunking technology (SmartNet®/ SmartZone®), Project 25 required products, and certain Motorola digital encryption
algorithms in the Company's LMR products. The digital encryption technology may also be incorporated into certain other information security products. In addition, the Company obtained a license to
utilize certain proprietary technology from Motorola relating to the development of Project 25 compliant digital LMRs. This license covers infrastructure and other Project 25 technology. See
"Summary of Business Considerations and Certain Risk Factors That May Affect Future Results of Operations and/or Stock PriceReduction in Motorola's provision of certain
technology to the Company could harm the Company's business and operations."

Through
2004, some of the Company's analog LMR products, primarily for commercial and international users, were manufactured by Icom Japan ("ICOM") under contract by the Company. These
products included hand-held portable radios that operate in both conventional and trunked mode. The Company made a last-time buy of these products in 2004 and has ceased any
further development of such analog subscriber unit products. These products, in aggregate, represented approximately 1% and 3% of EFJohnson's revenues in 2004 and 2003, respectively.

Competition

Wireless Communications

In North America, Motorola is the leading provider of LMR equipment to the public safety/public service sectors, in which market segment, the M/A-Com
is considered to be the second largest provider. Notwithstanding the fragmented international wireless communications market, the Company believes Motorola to be the dominant competitors in the Latin
American countries where the EFJohnson predominantly sells its LMR products outside the United States. Other LMR providers besides EFJohnson, who tend to focus on particular segments of the market,
include European Aeronautic Defense and Space Company ("EADS"), Thales Communications ("Thales"), Uniden America Corporation ("Uniden"), Kenwood, Icom America, Inc., Relm, Datron, Tait, and
Midland ("HYT"). EFJohnson's focus is on the domestic public safety/public service sector, where it competes primarily on the basis of price, technology and the flexibility, support, and
responsiveness provided by the Company and its dealers. See"Summary of Business Considerations and Certain Risk Factors That May Affect Future Results of Operations and/or Stock
PriceThe Company faces competitive pressures that could adversely affect revenues, gross margins and profitability."

Motorola
and M/A-Com possess entrenched market positions in the domestic public safety/public service sectors. Both companies have substantial financial, marketing and
operational resources, other intellectual property rights, and substantial technological capabilities. As such, these competitors have advantages in various aspects of the LMR market, particularly in
regards to bidding on LMR systems that will have a cost greater than $10.0 million. Therefore, the Company's strategy, as regards large LMR systems bids, is to partner with general contractors
and integrators who have substantial financial, marketing, and operational resources; in this regard, the Company can piggy-back its LMR design and product expertise with the larger
company's greater overall resources.

Other
than EFJohnson, the Company believes that Motorola, M/A-Com, ICOM, Thales, Datron, and Kenwood are currently the principal suppliers of Project 25 LMR products,
although other companies are anticipated to announce future entry into the Project 25 compliant product market. Motorola, and to a much lesser extent, M/A-Com, are believed to be the only
Project 25 suppliers

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offering
trunked infrastructure. The Company supplies trunked mobile and portable radios; however, the Company presently only offers conventional Project 25 infrastructure.

Information Security

The markets for analog LMR information security products are highly competitive. A number of companies currently offer add-on scramblers for LMRs that
compete with the Company's add-on information security products, including Future Telecom (d.b.a. "Daxon"), Kavit Electronics Industries, and Midian Electronics Inc. Significant
competitive factors in these markets include product quality and performance features, including:



Government Regulation and Export Controls

Wireless Communications

The Company's 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. Additionally, the FCC and foreign regulatory
authorities regulate the spectrum used to provide LMR communication, as well as the construction, operation, and acquisition of wireless communications systems, and certain aspects of the performance
of mobile communications products. Further, LMR communications of the U.S. government are controlled by the NTIA which regulates technical specifications of the product and spectrum used by the U.S.
government and other users. 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 the Company's wireless products are subject to FCC rules. In those countries that have accepted certain worldwide standards, such as the FCC rulings or those
from the European Telecommunications Standards Institute, the Company has not experienced significant regulatory barriers in bringing its products to market. Approval in these markets involves
retaining local testing agencies to verify specific product compliance.

The
majority of the systems operated by EFJohnson's customers must comply with the rules and regulations governing what have 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; and other channels are used to satisfy internal communications requirements.

EFJohnson
also offers products in bands below 800 MHz where multiple users in the same geographic area share channels. 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

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generally
used by entities satisfying traditional dispatch requirements in, among others, the transportation and services industries. In addition, some customers are applying trunking capabilities to
their channels in the UHF (primarily 450-470 MHz) frequency band.

The
FCC has instituted or is considering a number of regulatory changes that could affect the wireless communications industry and the Company's business, including, but not limited to,
various proposals to re-band and reallocate spectrum at 800 MHz and 900 MHz. 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
unusable 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 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 ("NCC") to advise it on issues relating to the use of the 700
MHz public safety spectrum. The Committee was 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
NCC recommended that Project 25 be established as the interim interoperability mode for digital voice communications in this new band. During January of 2001, the FCC released their
Fourth Report and Order in which Project 25 was chosen as the interoperability standard. Subsequent FCC rulings established a timetable for mandating the use of narrower channels in order to promote
better spectrum utilization. Specifically, the date of January 1, 2007 was established as the date after which all radios that are FCC type certified must include a mode that has an equivalent
6.25 kHz channel efficiency. The last date for sale or importation of 12.5 kHz only equipment was established as January 1, 2015, which date coincides with the last date for Public Safety users
to apply for 12.5 kHz licenses. Public Safety users in the band must convert all general use spectrum operation to a mode that has an effective channel efficiency of 6.25 kHz by January 1,
2017. Future FCC rulings and orders could affect products manufactured by the Company. Management cannot predict the outcome of the FCC review or any specific changes in FCC spectrum policies, or any
potential effect on the Company's sales.

FCC
rulings in the VHF and UHF frequency bands have been enacted to promote more spectral efficiency by mandating the use of narrower channels. A December 2004 ruling altered some
of the previously mandated deadlines. A decision by the FCC to issue no new licenses for 25 kHz channel equipment after January 2004 had been stayed by the FCC and was recently moved to
January 1, 2011. The FCC mandated date for requiring 6.25 kHz narrow band mode for type certification of new equipment still remains January 1, 2005; however, enforcement of this date
has been stayed pending further rulemaking. Also stayed is a date of January 1, 2005, after which no equipment can be FCC certified that incorporates a 25 kHz channel mode. Equipment that is
currently type certified can have a 25 kHz mode, but cannot be sold after January 1, 2011. Public Safety/Public Service users, as well as commercial users, have until January 1, 2013 to
convert their systems to those having efficiencies of 12.5 kHz or better. These rulings present an opportunity for manufacturers to provide product for users to upgrade their systems to meet the FCC
mandated efficiencies. The rulings also present the challenge to develop equipment to meet the mandated technical requirements within the FCC timetable.

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There are presently no mandates for narrow-banding of 800 MHz. EFJohnson offers 700/800 MHz subscriber products, the market focus of which is the domestic state and local governments.

Information Security

The Company's information security products have been subject to export restrictions administered by 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 licenses for export to approximately 120 countries since 1978, there can be no assurance that the Company will
continue to be able to secure such licenses in a timely manner in the future or at all. Additionally, in certain foreign countries, the Company's distributors are required to secure licenses or formal
permission before encryption products can be imported.

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

Backlog

Information security products typically have a short manufacturing cycle. In contrast, the Company's wireless communication products typically have a longer
manufacturing cycle. At December 31, 2004, the Company had a total backlog of approximately $20.2 million. This compared to total order backlog of $22.2 million and
$8.0 million at December 31, 2003 and 2002, respectively. The Company does not believe that its backlog, and variations from year to year therein, is necessarily indicative of sales of
products in future periods.

Employees

At December 31, 2004, the Company had 260 full-time equivalent employees. 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.

At
December 31, 2004, the Company had a staff of 74 degreed engineers, 60 of whom work primarily in research and development. The Company organizes research and development
efforts along its two main product lines: wireless communications; and information security.

At
December 31, 2004, the Company had a direct sales staff, excluding management and technical support personnel, of 24 persons.

Summary of Business Considerations and Certain Risk 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 Section 21E of
the Exchange Act. These statements may involve risks and uncertainties and relate, without limitation, to the following:



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The
actual outcomes of the above referenced 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.

If the current APCO Project 25 standard is supplanted by some other recommended protocol or is otherwise not supported by the federal, state and local government agencies, it
would adversely affect the Company's operations, cash flows, and financial condition.

The Company's wireless communications marketing and research and development efforts are substantially focused on Project 25 compliant equipment. The Company
believes that sales of its Project 25 digital LMR products have been, and will continue in the foreseeable future to be, substantially dependent upon Motorola's dominant position as a market leader in
the Project 25 marketplace. Motorola is the largest manufacturer of Project 25 compliant LMR products and has been the principal public supporter of the Project 25 digital transmission standard for
the LMR market. If Motorola does not maintain this dominant position, or if the Project 25 standard is otherwise abandoned by industry and the government public safety / public service users, it would
adversely affect the Company' operations, cash flows, and financial credit. Further, if the industry materially accelerates its movement towards Phase II, the next generation of APCO's Project 25
standard, to a degree that the Company's development efforts cannot keep pace with Phase II compliant equipment, it would have a material adverse effect on the Company's financial results.

Failure to comply with financial covenants in the Company's credit facility could result in termination of the credit facility, which would severely strain the Company's
liquidity position.

In 2004, the Company amended its revolving credit facility with Bank of America, which facility expires September 30, 2007. The credit facility has certain
financial covenants with which the Company was in compliance as of December 31, 2004. However, there can be no assurance that the Company will remain in compliance with all of these financial
covenants. Without the benefit of a revolving credit facility, a substantial decline in revenues or gross margins or a material increase in costs or expenses could severely strain the Company's
liquidity position. Further, without a revolving credit facility, the Company's ability to grow, either internally or through acquisition, would be severely restricted.

A termination in Motorola's provision of certain technologies to the Company could harm the Company's business and operations.

The Company is dependent on continuing access to certain Motorola proprietary intellectual property. Although the Company believes that its relationship with
Motorola is good, the Company cannot assure that Motorola will continue to supply proprietary intellectual property to the Company on the scale or at the price that has historically occurred. In
addition, Motorola's perception of the Company as a competitor could impact Motorola's continued willingness to do business with the Company. A decision by Motorola to reduce or eliminate the
provision of technology to the Company could significantly harm the Company's business and operations.

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The recent termination in Motorola's provision of certain components to the Company could harm the Company's business and operations.

Through 2004, Motorola supplied the RF modules used in the Company's digital radios pursuant to a supply agreement that expired in August 2004. No
further RF modules will be provided beyond the last-time purchase order received and accepted by Motorola on August 2, 2004. Although the Company substantially completed
development of a replacement RF module by December 31, 2004, virtually all the Company's digital subscriber unit sales involved radios built with Motorola's RF modules.
Conversely, 2005 sales of digital subscriber units will be predominantly built with the newly-developed RF module. Although the Company believes its newly-developed module will effectively
replace the Motorola-supplied module, if any significant technical difficulties are experienced with the new RF modules, it would result in a disruption in the Company's sales deliveries and
would adversely affect the Company's operations.

Further,
through 2004, Motorola supplied a proprietary DES-XL encryption module that the Company uses in certain of its digital radio sales requiring such encryption.
Motorola has indicated that it may no longer provide such encryption module to the Company. Approximately 20% and 35% of the Company's wireless communication sales in 2004 and 2003, respectively,
included radios containing this module. Although the Company believes it has the right and the technical ability to emulate this encryption in a software application, Motorola disputes the Company's
conclusion in this matter. If this matter is not satisfactorily resolved, the Company will not be able to sell subscriber units to customers requiring DES-XL encryption capability.
Although the Company believes that future sales opportunities requiring this proprietary encryption module may not be material in 2005 and beyond because this encryption should be near
end-of-life, the Company's operations may be adversely affected to the extent that the Company's assumption is wrong regarding such sales opportunities.

An unfavorable outcome in pending litigation could adversely affect the Company's cash flow, financial condition and results of operations.

On or about February 5, 2001, ASRC Communication ("ASRC") filed a complaint in United States District Court for the District of Alaska, against EFJohnson
seeking damages against EFJohnson on claims arising out of EFJohnson's sale of radio products to ASRC. ASRC purchased, and resold to the State of Alaska, approximately $500,000 of products from
EFJohnson since 1999. ASRC's claims against EFJohnson include breach of contract, breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of fitness for a
particular purpose, breach of duty of good faith and fair dealing, equitable estoppel, misrepresentation, and violations of the Racketeer Influenced and Corrupt Organizations Act. The complaint
anticipated that the State of Alaska would formally prosecute its administrative claim under the Alaska State Procurement Code against ASRC for damages associated with alleged malfunctions of
EFJohnson manufactured radios. Under a May 21, 2003 agreement between ASRC and EFJohnson (the "ASRC Agreement"), EFJohnson agreed to defend ASRC, at EFJohnson's expense, against any State's
claim alleging non-performance of the EFJohnson radios. In the event the State prevailed in its claim, EFJohnson and ASRC agreed to allocate any award in favor of the State in accordance
with the formula in the ASRC Agreement. In addition, the parties agreed to resolve any issue or dispute remaining between them after the conclusion of the State administrative proceeding through
mediation and binding arbitration. Based upon the ASRC Agreement, ASRC and EFJohnson dismissed the claims against each other. On or about April 6, 2004, the State of Alaska's Department of
Administration, Information Technology Group filed an administrative claim under the State Procurement Code against ASRC for damages associated with the EFJohnson radios. The State of Alaska claim
alleges damages in excess of $900,000. Subsequently, ASRC has tendered, and EFJohnson has accepted, the State's administrative claim in accordance with the ASRC Agreement. EFJohnson will undertake to
defend ASRC under the terms and conditions of the ASRC Agreement. The Company is unable to predict the likelihood of the

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outcome
or potential liability that may arise from this action and has not reserved any amount in regard to this potential liability.

The Company's inability to secure satisfactory bonding arrangements would adversely affect revenues.

In the normal course of its business activities, the Company is required under a contract with various government authorities to provide letters of credit and
bonds that may be drawn upon if the Company fails to perform under its contracts. 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. Bonds, which expire on
various dates, totaled $5.3 million at December 31, 2004, and, as of such date, no bonds have been drawn upon. However, 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. The Company's inability to secure bonding arrangements when needed would adversely affect the Company's ability to be
awarded new systems installation contracts, which would adversely affect its revenues.

The Company's industry is subject to rapid technological change, with which the Company must keep pace to successfully compete.

New technological innovations generally require a substantial investment before they are commercially viable. The Company intends to continue to make substantial
investments in developing new products and technologies, and it is possible that the Company's development efforts will not be successful and that the Company new technologies will not result in
meaningful revenues. In particular, the Company intends to continue to invest significant resources in developing trunked radio communications systems to support the public safety market.

The high amount of capital required to obtain radio frequency licenses and deploy and expand public safety wireless networks could slow the growth of the wireless
communications industry and adversely affect the Company business.

The Company's growth is dependent upon the increased use of wireless communications services that utilize the Company technology. In order to provide wireless
communications services, wireless operators must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in the United States and other countries throughout the
world and limited spectrum space is allocated to wireless communications services. Industry growth may be affected by the amount of capital required to: obtain licenses to use new frequencies; deploy
wireless networks to offer voice and data services; and expand wireless networks to grow voice and data services. Over the last several years, litigation and disputes involving prior and future
spectrum auctions has delayed the expansion of wireless networks in the United States and elsewhere, and it is possible that this delay could continue for a significant amount of time.

If subscribers pose safety risks, the Company may be subject to new regulations, and demand for the Company products and those of the Company licensees and customers may
decrease.

Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of wireless communication devices, which
would decrease demand for the Company's products. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions
from radio equipment. In addition, interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags,
hearing aids and medical

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devices.
Any legislation that may be adopted in response to these expressions of concern could reduce demand for the Company products and those of the Company licensees and customers in the
United States as well as foreign countries.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act ("SOX"), new SEC regulations and
NASDAQ National Market rules, are creating uncertainty for companies such as the Company. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due
to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. The Company is committed to maintaining high standards of corporate
governance and public disclosure. As a result, Company efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, the Company's efforts to comply with
Section 404 of SOX and the related regulations has required the commitment of significant financial and managerial resources.

The Company's business and operations would suffer in the event of internal system failures.

Despite system redundancy, the implementation of security measures and the existence of a Disaster Recovery Plan for the Company's internal information technology
networking systems, the Company's
systems are vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure, accident or
security breach that causes interruptions in the Company's operations could result in a material disruption to the Company's business, and the Company may incur additional costs to remedy the damages
caused by these disruptions or security breaches. Further, from time to time, the Company installs new or upgraded business management systems. To the extent such systems fail or are not properly
implemented, the Company may experience material disruptions to the Company's business that could have a material adverse effect on the Company's results of operations.

The Company's business and operating results will be harmed if the Company is unable to manage its business growth.

The Company's business has experienced periods of rapid growth that have placed, and may continue to place, significant demands on the Company's managerial,
operational and financial resources. In order to manage this growth, the Company must continue to improve and expand the Company's management, operational and financial systems and controls, including
the continued training of the Company's employee base. The Company must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product
introductions and product and technology transitions. The Company may not be able to timely and effectively meet that demand and maintain the quality standards required by the Company's existing and
potential customers. If the Company ineffectively manages its growth or is unsuccessful in recruiting and retaining personnel, the Company's business and operating results will be harmed.

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The Company's operating results historically fluctuate from period to period.

The Company's operating results may fluctuate from period to period due to a number of factors, as follows:



These
factors make it difficult to utilize the Company's quarterly results as a predictor of future operations. Historically, more than half of each quarter's revenues result from orders
booked and shipped during the third month of a quarter, and disproportionately in the latter half of that month. These factors make the forecasting of revenue inherently uncertain. Because the Company
plans its operating expenses, many of which are relatively fixed in the short term, on expected revenue, a relatively small revenue shortfall may cause a period's results to be substantially below
expectations. Such a revenue shortfall could arise from any number of factors, including lower than expected demand, supply constraints, transit interruptions, overall economic conditions, or natural
disasters.

Current Economic Conditions Make Forecasting Difficult

Current economic and market conditions have limited the Company's ability to forecast its sales volume and product mix, making it difficult to provide estimates
of revenue and operating results. The Company continues to have limited visibility into the capital spending plans of our current and prospective customers. Fluctuations in the Company's revenue can
lead to even greater fluctuations in operating results. The Company's planned expense levels depend, in part, on revenue expectations. The Company's planned expenses include significant investments in
research and development necessary to develop products to be sold to current and prospective customers, even though the Company is unsure of the volume, duration, or timing of any purchase orders.
Accordingly, it is difficult to forecast revenue and operating results. If the Company's revenue or operating results are below investor and market analyst expectations, it could cause a decline in
the price of the Company's common stock.

The Company faces competitive pressures that could adversely affect revenues, gross margins, and profitability.

The wireless communications and information security equipment industries, and the LMR market segment in particular, are highly competitive. In addition, other
wireless communication technologies,
including cellular telephone, paging, SMR, satellite communications and PCS 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 Project 25 compliant products or digital land mobile radios.

Motorola
and M/A-Com hold dominant and entrenched market positions in the domestic public safety/public service market for wireless communication products. In addition, these
competitors have financial, technical, marketing, sales, manufacturing, distribution and other resources substantially greater than those of the Company. Finally, these competitors have established
trade names, trademarks, patents and other intellectual property rights and substantial technological capabilities. These advantages allow such competitors to: respond more quickly to new or emerging
technologies; manage more extensive research and development programs; undertake more far-reaching marketing campaigns; engage in more aggressive merger and acquisition strategies; and
adopt more aggressive pricing policies. Accordingly, the Company cannot make assurances that it will be able to continue to

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compete
effectively in its markets, that competition will not intensify, or that future competition will not have a material adverse effect on the Company's revenues, gross margins, or profitability.
In addition, the Company cannot assure that new competitors will not begin to compete in the markets for the Company's products.

If the Company does not effectively manage the anticipated global transition from analog to digital products, its security information revenues would be adversely affected.

The LMR markets are migrating from analog to digital equipment. This migration is primarily due to bandwidth capacity constraints, availability of additional
features, and digital transmissions being more secure than analog transmissions. This transition is expected to be fairly gradual, and third world countries, for example, are not expected to
transition to digital for several years. However, if, for whatever economic or geopolitical reasons, this transition accelerates, the Company may not be in a position to effectively respond to the
change from a market and product position. Accordingly, such an occurrence would adversely effect the Company's operations as a result of the unexpected decrease in demand for the Company's
add-on security devices.

The Company's sales to foreign customers are subject to various export regulations; and the inability to obtain, or the delay in obtaining, any required export approvals would
harm revenues.

The Company's sales to foreign customers are subject to export regulations. Sales of many of the Company's encryption products require clearance and export
licenses from the U.S. Department of
Commerce under these regulations. 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, or a delay in obtaining, required export approvals would
harm the Company's international sales. In addition, foreign companies not subject to United States export restrictions may have a competitive advantage in the international market. The Company cannot
predict the impact of these factors on the international market for its products.

The Company may engage in strategic transactions that could result in significant charges or management disruption and fail to enhance stockholder value.

From time to time, the Company encounters an opportunity to engage in strategic transactions with the goal of maximizing stockholder value. These potential future
transactions may include a variety of different business arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business
combinations and equity or debt investments. These potential opportunities entail a high degree of risk; consequently, the Company cannot be assured that its future strategic investment decisions will
generate adequate financial returns or that such decisions will not ultimately result in losses and a material drain on the Company's cash resources.

The Company's stock price may be volatile.

The stock market in general, and the stock prices of technology-based and wireless communications companies in particular, have experienced volatility that often
has been unrelated to the operating performance of any specific public company. The market price of the Company's common stock has fluctuated in the past and is likely to fluctuate in the future as
well. Factors that may have a significant impact on the stock's market:



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The Company's future success will depend upon its ability and the resources available to respond to the rapidly evolving technology and customer requirements in the markets in
which the Company operates.

The wireless communications and information security 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.

Technological
developments in the digital LMR industry include 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 has made a substantial investment in capital and human resources. However, there can be no assurance that such resources will be readily available to the Company in the
future.

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. This situation could 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.

Business, political, regulatory, or economic changes in foreign countries in which the Company markets its products or services could adversely affect the Company's revenues.

Although all 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 affect
the price, competitiveness, economic attractiveness, and, ultimately, 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. Additionally, troubled economic conditions, in regions and nations to which
the Company presently markets, could result in lower revenues for the Company.

22

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In 2004, 2003, and 2002, international sales constituted approximately 20%, 13%, and 15% of revenues, respectively, most of which involve the Company's higher margin information security
products. While most of the international sales are supported by irrevocable letters of credit or cash in advance, and thereby pose little credit risk, the Company's international business could be
adversely affected by a variety of factors presenting increased risks to profitability. These factors include:



The Company's sales are substantially concentrated in public sector markets that inherently possess additional risks that could harm revenues and gross margins.

A significant portion of the Company's revenue is derived from sales to the federal, state, and local governments, both directly or through system integrators and
other resellers. Sales to these government entities present risks in addition to those involved in sales to commercial customers, including potential disruptions due to appropriation and spending
patterns, changes in government personnel, political factors, and the government's reservation of the right to cancel contracts for its convenience. The RFP bidding cycle and contract award stage can
take six months to two years before a contract is awarded and the government customers funding process for these systems can delay the bidding cycle as well. The Company expects that sales to
government entities will increasingly be subject to competitive bidding requirements. This intensified competition can be expected to result in lower prices, longer sales cycles, and lower margins.
Further, the Company's sales to these domestic public safety/public service entities can be substantially attributed to Project 25 interoperability mandates and Homeland Security initiatives. Changes
in governmental budget priorities could result in decreased opportunities for the Company to sell into this market segment.

The Company's future success is dependent upon its ability to motivate and maintain 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. Further, the Company's relocation of its wireless communications operations from Waseca, Minnesota to Irving, Texas has resulted in a
material change in its workforce. The relocation has substantially been completed; however, the Company's future success will depend on, among other factors, the Company's ability to train and retain
the new Irving-based personnel and to attract additional personnel required by the Company's anticipated growth. Failure to be successful in these human resources endeavors in the future could have a
material adverse effect on the Company's business or business prospect.

23

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The Company's revenues and gross margins are dependent upon the timely and consistent delivery of components by third party 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 the aftermath of September 11, 2001, the Company experienced a temporary disruption in its vendor supply chain. Any
significant delay in the Company's ability to obtain key components could result in lost sales, the need to maintain excessive inventory levels, higher component costs, or the need to redesign certain
affected electronic sub-assemblies. In addition, the Company's dependence on limited and sole source suppliers of components involves additional risks of inadequate supply, late
deliveries, and poor component quality. Significant lead time and costs may be required to secure secondary sources for key components. Any material disruption in the supply of essential components
would increase the cost of producing the Company's products and would have a material adverse effect on the Company's ability to meet the demand for its products.

The Company may be liable for penalties under a variety of federal procurement rules and regulations, and changes in such rules and regulations could adversely impact the
Company's revenues, operating expenses and profitability.

The Company's federal business must comply with and are affected by government regulations that impact the Company's operating costs and profit margins, as well
as its internal organization and
operation. Among the most significant regulations are the following: (1) the U.S. Federal Acquisition Regulations, which comprehensively regulate the formation, administration and performance
of government contracts, including the Company's GSA contract; (2) the U.S. Truth in Negotiations Act; and (3) the U.S. Cost Accounting Standards. These regulations affect how the
Company and its customers do business and, in some instances, impose added costs. Any failure to comply with applicable laws and/or any changes in applicable laws could result in contract termination,
price reduction, customer reimbursement, contract suspension, or debarment from contracting with the U.S. government. Any of these results could adversely affect the Company's financial
performance.

The Company depends on federal government contracts for a substantial portion of its revenues, and the loss of federal government contracts or a decline in funding of existing
or future government contracts could adversely affect the Company's revenues and cash flows.

A substantial portion of the Company's revenues are dependent upon continued funding of federal government agencies, as well as continued funding of the programs
targeted by the Company. U.S. government contracts are subject to termination for convenience by the government, as well as termination, reduction, or modification in the event of budgetary
constraints or any change in the government's requirements. Further, the Company's contract-related costs and fees, including allocated indirect costs, may be subject to audits by the U.S. government
that may result in recalculation of contract revenues and non-reimbursement of some contract costs and fees.

In
addition, U.S. government contracts are conditioned upon the continuing availability of congressional appropriations. Congress usually appropriates funds on a fiscal year basis even
though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually incrementally funded and additional funds are normally committed to the
contract by the procuring agency as Congress makes appropriations for future fiscal years. Any failure of such agencies to continue to fund such contracts could have a material adverse effect on the
Company's operating results.

These
or other factors could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts, or to exercise their right to
not renew contracts,

24

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all
of which may limit the Company's ability to obtain or maintain contract awards. Any of the aforementioned actions above could adversely affect the Company's revenues and cash flows.

Unforeseen environmental costs could adversely impact the Company's profitability.

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 at the Company's facilities, or have been or are being disposed of offsite as
wastes. Such laws may impose liability without regard as 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. 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.

If the Company does not adequately manage its outsourcing arrangement, the quality of the Company's product or the degree of the Company's production flexibility may be
curtailed.

In 2004, the Company entered in to outsource agreements at both of its operating segments. In 2005, all of Transcrypt's sub-assemblies will be
manufactured by Tran Electronics, Inc., located in Minnesota. Similarly, no later than February 2005, all of EFJohnson's products, to include final assembly, will be manufactured by
McDonald Technologies, Inc, located in Texas. The Company believes that if such outsourcing arrangements are properly managed, the result will be an improved allocation of the Company's resources as
well as a decrease in the Company's operating costs. Nonetheless, if such outsourcing arrangements are not properly managed, the Company's manufacturing could suffer from reduced flexibility,
decreased quality, and increased costs.

The Company may not be able to maintain its compliance with Section 404 of SOX, as well as to rules enacted by the SEC and NASDAQ.

The Company's rapid growth and the move of its wireless communications segment from Waseca, Minnesota to Irving, Texas, presents increasing challenges to the
maintain the internal control and disclosure control standards applicable to public companies; and the Company may not be able to effectively and timely implement necessary control changes and
employee training to insure continued compliance with the increased regulatory compliance and reporting requirements, to include the requirements of Section 404 of SOX. If the Company's
independent registered public accounting firm were not able to certify as to the adequacy of the internal controls over financial reporting, the financial markets could lose confidence in the
reliability of the Company's financial statements. In

25

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addition,
if the Company fails to maintain effective controls and procedures, the Company may not be able to provide the required financial information in a timely and reliable manner or otherwise
comply with the standards applicable to a public company. Any failure to timely provide the required financial information could materially and adversely impact the Company's business, its financial
condition and the market value of its securities.

Terrorist acts and acts of war may adversely affect the Company's business, its revenues, costs of operations, or overall financial condition.

Terrorist acts or acts of war (wherever located around the world) may cause damage or disruption to the Company, its employees, suppliers, distributors and
resellers, or customers, which could significantly impact the Company's revenues, costs of operations, or financial condition. The terrorist attacks that took place in the United States on
September 11, 2001 created many economic and political uncertainties. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts
of war or hostility could adversely affect the business and results of operations of the Company in ways that cannot presently be predicted.

The Company's revenues are dependent upon the Company's continued ability to enforce or license intellectual property rights.

The Company currently holds a number of 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 on copyright and trade secret law, as well as 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.

In
addition, much of the Company's business and many of its products rely on key technologies developed by third parties, and the Company may not be able to obtain or renew licenses or
technologies from these third parties on reasonable terms or at all. Further, third parties may claim that the Company is infringing on their intellectual property rights. Even if the Company does not
believe that its products are infringing on third parties' intellectual property rights, the claims can be time consuming and costly to defend and could, thereby, divert management's attention and
resources away from the Company's business.

The Company's failure to comply with or changes in governmental regulation could adversely affect the Company's business and operations.

The Company's wireless communications and encryption products, and the spectrum within which these products are used, are subject to regulation by domestic and
foreign laws and international treaties, as are the Company's customers. In particular, the Company's LMR products are regulated by the FCC. The Company believes itself to be in substantial compliance
with all applicable regulations governing its products and operations. However, the regulatory environment is uncertain. Changes in the regulatory structure, laws or regulations, or in the use and/or
allocation of spectrum, could adversely affect the Company and/or its customers. Such changes could make the Company's existing or planned products obsolete or not sellable in one or more markets,
which could have a material adverse effect on the Company. Further, the Company's failure to comply in the future with applicable regulations could result in penalties on the Company, such as fines,
operational restrictions, or a temporary or permanent closure of the Company's facilities.

26

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Significant increases in the Company's stock price could cause the Company to incur net losses as a result of the variable accounting used for certain repriced stock options.

During 2001 and 2000, the Company effectively decreased the exercise price on options for 1,186,000 shares, lowering the exercise price of those options to an
amount approximately 150% of the prevailing market value of the Company's common stock (the "repricing"), that is $0.656 per share. The repricing of the stock options resulted in a new measurement
date for accounting purposes and the reclassification of these options as variable plan awards beginning on the date of the repricing. Prior to
this repricing, the Company accounted for these option grants as fixed plan awards. The Company recorded $2.1 million, $3.9 million, and $0.5 million in non-cash
compensation expense in 2004, 2003 and 2002 for the cumulative effects of the repricings as a result of the Company's stock price being $9.75, $5.90 and $1.25, respectively, at December 31,
2004, 2003 and 2002. To the extent the Company's stock price exceeds $9.75 at the end of future reporting periods, the Company could incur additional non-cash compensation expense. To the
extent that such future increases in the Company's stock price are substantial, the Company's future results of operations could be adversely affected to the point where the Company incurs net losses
as a consequence.

ITEM 2. PROPERTIES

Transcrypt's administrative and manufacturing facility is located at 3900 NW 12th Street, Suite 200, Lincoln, Nebraska 68521. The facility consists
of 18,000 square feet and is located within a multi-building industrial park complex near the Lincoln airport. Transcrypt moved to this facility in 2004, upon termination of its lease at 4800 NW 1st
Street, Suite 100, Lincoln, Nebraska, 68521. The present facility is leased pursuant to a ten-year agreement terminating in June 2014; annual occupancy costs, including common area
maintenance charges, are approximately $275,000.

On
January 28, 1998, the Company purchased the 250,000 square-foot manufacturing facility located on a 20-acre site at 229 Johnson Avenue, Waseca,
Minnesota, 56093. During December 1999, the Company sold the Waseca facility for approximately $2.7 million. In conjunction with the sale, the Company leased back 136,000 square feet of
the facility for five years. The lease was extended three months beyond the original termination date and presently terminates on March 31, 2005; and the Company will pay approximately
$200,000, including common area maintenance charges, during 2005. In 2004, the Company made a decision to move its operations from this facility to a facility in Irving, Texas, which move is expected
to be fully complete by April 2005.

In
December 2003, the Company executed a ten-year lease on a 40,000 square-foot administrative and manufacturing facility located at 1440 Corporate Drive,
Irving, Texas, 75038. Pursuant to a decision reached in April 2004, the Company is moving its EFJohnson operations to this facility. The annual lease payments are $400,000 during 2005 through
2008, increasing to $436,000 during 2009 through 2013. The Company has an option to purchase this building for $3.4 million, such option extending through August 2005.

The
Company also leases additional sales and service facilities in: Waseca, Minnesota (approximately 5,000 square feet; annual rent of approximately $30,000); and Washington, D.C.
(approximately 3,800 square feet; annual rent of approximately $110,000).

ITEM 3. LEGAL PROCEEDINGS

On or about February 5, 2001, ASRC filed a complaint in United States District Court for the District of Alaska, against EFJohnson seeking damages against
EFJohnson on claims arising out of EFJohnson's sale of radio products to ASRC. ASRC purchased, and resold to the State of Alaska, approximately $500,000 of products from EFJohnson since 1999. ASRC's
claims against EFJohnson include breach of contract, breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, breach
of duty of good faith and fair

27

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dealing,
equitable estoppel, misrepresentation, and violations of the Racketeer Influenced and Corrupt Organizations Act. The complaint anticipated that the State of Alaska would formally prosecute
its administrative claim under the Alaska State Procurement Code against ASRC for damages associated with alleged malfunctions of EFJohnson manufactured radios. Under a May 21, 2003 agreement
between ASRC and EFJohnson (the "ASRC Agreement"), EFJohnson agreed to defend ASRC, at EFJohnson's expense, against any State's claim alleging non-performance of the EFJohnson radios. In
the event the State prevailed in its claim, EFJohnson and ASRC agreed to allocate any award in favor of the State in accordance with the formula in the ASRC Agreement. In addition, the parties agreed
to resolve any issue or dispute remaining between them after the conclusion of the State administrative proceeding through mediation and binding arbitration. Based upon the ASRC Agreement, ASRC and
EFJohnson dismissed the claims against each other. On or about April 6, 2004, the State of Alaska's Department of Administration, Information Technology Group filed an administrative claim
under the State Procurement Code against ASRC for damages associated with the EFJohnson radios. The State of Alaska claim alleges damages in excess of $900,000. Subsequently, ASRC has tendered, and
EFJohnson has accepted, the State's administrative claim in accordance with the ASRC Agreement. EFJohnson will undertake to defend ASRC under the terms and conditions of the ASRC Agreement. The
Company is unable to predict the likelihood of the outcome or potential liability that may arise from this action and has not reserved any amount in regard to this potential liability.

In
June 2004, Mace, Incorporated ("Mace") filed a complaint in United States District Court for the Eastern District of Virginia, against EFJohnson seeking damages against
EFJohnson on claims for third-party commissions allegedly due in conjunction with certain product sales to the federal government. Mace has alleged projected damages of $400,000 and an unspecified
percentage of past and future federal government sales. The Company believes that it has meritorious contractual defenses against such demand and intends to vigorously contest such allegation. The
Company has provided for its estimated liability relating to this matter in the accompanying financial statements.

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

No matters were submitted to the stockholders during the fourth quarter of 2004.

28

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PART II

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

The Company's application for listing on the NASDAQ National Market was accepted on February 18, 2004; as of February 19, 2004, the Company's Common
Stock began trading on the NASDAQ National Market under the symbol "EFJI." Previous to its acceptance on the NASDAQ National Market, the Company's common stock traded on the Over the Counter ("OTC")
Bulletin Board under the symbol "EFJI." The Company's common stock had traded on the OTC Bulletin Board since August 1998, following the delisting of the Common Stock from the NASDAQ Stock
Market in May 1998.

The
following table sets forth, in the periods indicated, the high and low sales prices per share of the Common Stock, as reported by the NASDAQ National Market or OTC Bulletin Board, as
respectively appropriate, for the periods presented. OTC Bulletin Board quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not
necessarily represent actual transactions.

|               |  | High |      | Low
|-------------- |  | ---- | ---- | ---
|2003           |  |      |      |    
|First Quarter  |  | $    | 2.42 |    
|Second Quarter |  | $    | 1.98 |    
|Third Quarter  |  | $    | 4.24 |    
|Fourth Quarter |  | $    | 6.25 |    
|2004           |  |      |      |    
|First Quarter  |  | $    | 7.31 |    
|Second Quarter |  | $    | 9.24 |    
|Third Quarter  |  | $    | 9.31 |    
|Fourth Quarter |  | $    | 9.81 |    

The
last sale price of the Common Stock on December 31, 2004, as reported in the NASDAQ National Market was $9.75. As of February 22, 2005, the Company had approximately
2,000 shareholders of record.

Dividends

The Company has never declared or paid any cash dividends on its shares of Common Stock. Further, the Company's revolving line of credit agreement imposes
restrictions upon the Company's ability to pay dividends. The Company currently intends to retain any future earnings to finance the growth and development of its business. Any determination in the
future to pay dividends would 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.

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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, with related notes and the independent registered public accounting firm's report thereon, 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, 2004, 2003 and 2002 and the Consolidated
Balance Sheet data as of December 31, 2004 and 2003 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, 2001 and 2000 and the Consolidated Balance Sheet data as of December 31,
2002, 2001, and 2000 are derived from financial statements not included herein.

|                                                                         |                                        | Year ended December 31,  |           
|------------------------------------------------------------------------ | -------------------------------------- | ------------------------ | ----------
|
|
|Consolidated Statement of Operations Data:                               |                                        |                          |           
|Revenues                                                                 |                                        | $                        | 42,192    
|Cost of sales                                                            |                                        |                          | 33,613    
|                                                                         |                                        |                          |           
|Gross profit                                                             |                                        |                          | 8,579     
|                                                                         |                                        |                          |           
|Operating expenses:                                                      |                                        |                          |           
|                                                                         | Research and development               |                          |           
|                                                                         | Sales and marketing                    |                          |           
|                                                                         | General and administrative(1)(2)       |                          |           
|                                                                         | Restructuring charge(3)                |                          |           
|                                                                         | Provision for litigation settlement(4) |                          |           
|                                                                         |                                        |                          |           
|                                                                         |                                        | Total operating expenses |           
|                                                                         |                                        |                          |           
|Income (loss) from operations                                            |                                        |                          | (14,077   
|Interest income, net of interest expense                                 |                                        |                          | 292       
|Other income, net of other expenses                                      |                                        |                          | 775       
|Income tax (expense) benefit(5)                                          |                                        |                          | (12,376   
|                                                                         |                                        |                          |           
|Net income (loss)                                                        |                                        | $                        | (25,386   
|                                                                         |                                        |                          |           
|Net income (loss) per shareBasic                                        |                                        | $                        | (1.88     
|                                                                         |                                        |                          |           
|Net income (loss) per shareDiluted                                      |                                        | $                        | (1.88     
|                                                                         |                                        |                          |           
|Weighted average common sharesBasic                                     |                                        |                          | 13,511,489
|                                                                         |                                        |                          |           
|Weighted average common sharesDiluted                                   |                                        |                          | 13,511,489
|                                                                         |                                        |                          |           
|Consolidated Balance Sheet Data:                                         |                                        |                          |           
|Working capital                                                          |                                        | $                        | 16,091    
|Total assets                                                             |                                        | $                        | 46,994    
|Long-term debt and capitalized lease obligations, net of current portion |                                        | $                        | 19        
|Stockholders' equity                                                     |                                        | $                        | 25,770    

---

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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
differences include, but are not limited to, those discussed under "ITEM 1. BUSINESSSummary of Business Considerations and Certain Risk 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 engaged in the design, manufacture, and marketing of wireless communications products and systems and information security products. Through
EFJohnson, the Company designs, develops, manufactures, and markets: (1) stationary LMR transmitters/receivers (base stations or repeaters); (2) mobile and portable radios; and
(3) LMR systems. Through Transcrypt, the Company primarily designs and manufactures information security products that prevent unauthorized access to sensitive voice communications; and, to a
lesser degree, Transcrypt also designs, manufactures, and markets LMR signaling accessory products. These products are based on a wide range of analog scrambling and digital encryption technologies
and are sold mainly to the LMR security markets. The Company primarily sells its products to: (1) domestic public safety/public service and other government users; (2) commercial users;
and (3) international customers.

Since
implementation of a new strategic plan in 2000, the Company has been focused on restoring growth and profitability via significant transitions in product mix and strategy. The
Company's ongoing product strategy, at its EFJohnson subsidiary, has been to exit certain lower margin analog product lines, including LTR and LTR-Net® product lines, and to
focus
EFJohnson's resources on APCO 25 product lines. This product strategy entailed a substantial exit from the commercial market, and an emphasis on the domestic public safety/public service sector,
thereby allowing the Company to focus its resources on the markets and products that the Company believes have the most potential for sustained profitability. The Company plans to continue this
product strategy in 2005, modifying it only to the degree that the Company continues to allocate an increasing share of its on-going research and development costs on its Project 25
systems infrastructure. The Company anticipates that LMR systems revenue will be a material part of its EFJohnson's revenues in 2006 and beyond.

The
Company's strategy at its Transcrypt subsidiary has been to leverage its dominant marketing position in analog encryption to gain new customers in parts of the world where LMR
systems tend to be analog and security needs are substantially high . Transcrypt has also initiated development of analog encryption products that use digital technology in order to obtain higher
levels of security; these products not only meet higher security needs, but allow for backward compatibility between Transcrypt's digital and analog encryption modules. The Company intends to maintain
its globally-focused marketing strategy through 2005.

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Results of Operations

The following table sets forth certain Consolidated Statement of Operations information as a percentage of revenues during the periods indicated.

|                               |                                   | Year Ended December 31,  |     
|------------------------------ | --------------------------------- | ------------------------ | ----
|
|Revenues                       |                                   | 100.0                    | %   
|Cost of sales                  |                                   | 53.1                     |     
|                               |                                   |                          |     
|Gross profit                   |                                   | 46.9                     |     
|                               |                                   |                          |     
|Operating expenses:            |                                   |                          |     
|                               | Research and development          |                          | 13.6
|                               | Sales and marketing               |                          | 12.8
|                               | General and administrative        |                          | 10.6
|                               | Facility move expenses            |                          | 2.3 
|                               | Stock option repricing adjustment |                          | 2.6 
|                               |                                   |                          |     
|                               |                                   | Total operating expenses |     
|                               |                                   |                          |     
|Income (loss) from operations  |                                   | 5.0                      |     
|Interest income (expense), net |                                   | (0.1)                    |     
|Other income                   |                                   | 0.0                      |     
|Income tax benefit             |                                   | 7.4                      |     
|                               |                                   |                          |     
|Net income                     |                                   | 12.3                     | %   
|                               |                                   |                          |     

Revenues

2004 vs. 2003

Revenues increased by 44% in 2004, to $80.9 million, as compared to $56.2 million in 2003. Of the total revenues for 2004, the wireless
communication segment revenues comprised $60.7 million, or 75% of total revenues; and the information security segment revenues comprised $20.2 million, or 25% of total revenues.

Wireless Communication

Wireless communication revenues increased to $60.7 million in 2004, as compared to $49.0 million in 2003. This 24% increase was the result of
increased sales to the federal government and to state and local governmental entities, $55.9 million and $45.8 million in 2004 and 2003, respectively, as EFJohnson continued to focus
its efforts on the domestic public safety/public service segment. The Company also experienced increases in its international and commercial market segments: international sales increased to
$3.1 million, from $1.6 million; and commercial sales increased to $1.8 million, from $0.8 million. In the aggregate, sales to international and commercial markets
continued to decline as a percent of total EFJohnson sales, to 8% in 2004, as compared to 9% in 2003. Management presently does not expect any material changes in its future wireless communication
sales mix as the Company's current product offerings are focused on digital Project 25 subscriber needs and marketing efforts are focused on domestic governmental entities.

Management
expects EFJohnson's 2005 revenues to increase by 22% to 27% over its revenue level in 2004. The overall revenue mix, in terms of market segment and sales to the domestic
governmental entities, is not expected to be materially different from 2004.

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Information Security

Information security revenues increased substantially to $20.2 million in 2004, as compared to $7.2 million in 2003. This represents a 180%
increase, the increase primarily coming from increased sales to the Middle East, predominantly Iraq. Transcrypt intends to maintain its increased marketing efforts in the Middle East, Asia and Latin
America where the movement to digital LMR products is expected to be delayed for several years and where security concerns are high. Additionally, the Company is presently developing a product capable
of digitally encrypting analog signals in order to enhance the level of transmission security.

Management
anticipates that Transcrypt revenues will increase by 5% to 10% in 2005 over its revenue level in 2004.

2003 vs. 2002

Revenues increased by 38% in 2003, to $56.2 million, as compared to $40.8 million in 2002. Of the total revenues for 2003, the wireless
communication segment revenues comprised $49.0 million, or 87% of total revenues; and the information security segment revenues comprised $7.2 million, or 13% of total revenues. The
increased sales in 2003 related primarily to sales to the federal government, such sales comprising 60% of the Company's total revenues in 2003 versus 20% in 2002.

Wireless Communication

Wireless communication revenues increased to $49.0 million in 2003, as compared to $33.8 million in 2002. This 45% increase was primarily the result
of increased sales to the federal government as EFJohnson continued to focus its efforts on the domestic public safety/public service segment, primarily the federal government user, and decrease its
emphasis on the international and commercial market segments.

Information Security

Information security revenues increased slightly to $7.2 million in 2003, as compared to $7.0 million in 2002, an overall increase of only 2%.

International Sales

International sales substantially relate to Transcrypt, which accounted for 84% and 70% of the Company's international sales in 2004 and 2003, respectively. In
2004 international sales were, respectively, $15.8 million at Transcrypt and $3.1 million at EFJohnson, or a total of $18.9 million. In 2003, international sales were,
respectively, $5.8 million at Transcrypt and $1.6 million at EFJohnson, or a total of $7.4 million. The increase in international sales, from 2003 to 2004, was as follows:



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.

33

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Gross
profit was $38.0 million (47% gross margin) in 2004, as compared to $23.6 million (42% gross margin) in 2003, and $17.6 million (43% gross margin) in 2002.
Gross margins for the wireless communications segment were 35% in 2004, 37% in 2003, and 37% in 2002. Gross margins for the information security segment were 82% in 2004, 75% in 2003, and 70% in 2002.
The increase in overall gross margins from 2003 to 2004 relates strictly to the higher margin information security sales being a larger part of the sales mix in 2004 as compared to 2003, that is, 25%
in 2004 versus 13% in 2003. The
relatively small decrease in overall gross margins from 2002 to 2003 relates primarily to the lower margin wireless communication sales being a larger part of the sales mix in 2003 as compared to
2002, that is, 87% in 2003 versus 83% in 2002.

The
increase in Transcrypt's margin, from 2003 to 2004, relates substantially to economies of scale reached at the materially higher sales levels in 2004. EFJohnson, to the contrary, saw
its margin erode, from 37% in 2003 to 35% in 2004, despite a 23% growth in revenues. Much of this erosion is attributed to lower productivity at EFJohnson's Waseca, Minnesota plant subsequent to the
announcement to close the facility and other inefficiencies resulting from the transition to outsourcing its production. Management believes that these inefficiencies will continue through the first
quarter of 2005, when the relocation is complete, and should not be replicated thereafter. Further, as a result of increased product complexity, the Company's warranty costs increased such that
margins were effectively reduced by 1/2 of 1%. The Company is not able to ascertain whether this increased warranty rate will continue to be applicable to future sales or whether the
Company, through improved design and production efforts, can reduce the warranty rate in the future.

Management
is continuing to review pricing strategies and product line profitability at both segments. Management intends to make adjustments to its product offerings, where deemed
appropriate, to include elimination of marginally profitable products and product lines. Management also expects that its decisions to outsource its manufacturing will result in continued production
efficiencies in 2005 and beyond. Nonetheless, anticipated higher component costs at Transcrypt are expected to hold margins in 2005 at a level consistent with that experienced on a consolidated basis
in 2004.

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 were $11.0 million in 2004, as compared to $7.0 million in 2003 and $4.6 million in 2002. As a percentage of sales, research and
development expenses were 14% of revenues in 2004, 12% of revenues in 2003, and 11% of revenues in 2002.

During
2002, the Company's research and development costs were substantially focused on the Company's new line of digital radios. In 2003, the Company's research and development efforts
were concentrated on enhancements and additions to the Company's line of digital radios that continue to comply with Project 25 standards. In 2004, the Company's research and development efforts
concentrated on: developing trunked Project 25 system infrastructure, including repeaters, voters, and base stations; developing new digital mid-tier subscriber units (both portable and
mobile); and the Company's project regarding digital encryption of analog transmissions. Research and development priorities in 2005 are expected to parallel those in 2004.

The
Company anticipates that its research and development costs in 2005 will approximate 13% to 14% of 2005 revenues.

34

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Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related costs of sales personnel, including sales commissions and travel expenses, as well as costs
of advertising, public relations and trade show participation.

Sales
and marketing expenses were $10.4 million in 2004, as compared to $7.4 million in 2003 and $5.9 million in 2002. As a percentage of sales, sales and marketing
expenses were 13% of revenues in 2004 and 2003, and 15% in 2002. The higher percentage in 2002, as compared to 2003 and 2004, was substantially due to unusually higher external commissions (to
non-employee dealers and representatives) incurred on sales at both segments in 2002.

The
Company anticipates that its sales and marketing expenses in 2005 will approximate 12% to 13% of 2005 revenues.

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.

General
and administrative expenses were $12.5 million in 2004, as compared to $10.1 million in 2003 and $5.9 million in 2002. Much of the differences between the
respective years are due to non-cash compensation relating to repriced options and the Company's facility moves, both issues explained below. General and administrative expenses, adjusted
for non-cash compensation expenses relating to repriced options and facility move expenses, were $8.5 million in 2004, as compared to $6.2 million in 2003 and
$5.4 million in 2002. As a percent of revenues, general
and administrative expenses were 11% of revenues in 2004, as compared to 11% of revenues in 2003, and 13% of revenues in 2002.

The
increased general and administrative expenses in 2004, as compared to 2003, over and above that amount which relates to the Company's overall growth in 2004, results primarily from
the Company's compliance with Section 404 of SOX. The Company incurred approximately $500,000 in expenses in its efforts to comply with Section 404, and the Company expects to incur a
similar amount in 2005. The increased general and administrative expenses in 2003, as compared to 2002 related substantially to the Company's overall growth in 2003.

Excluding
non-cash compensation expense relating to the repriced options and facility move expenses, management anticipates that general and administrative expenses for 2005
will be increased over that experienced in 2004 by an amount approximating 5% to 10% of the amount that sales increase in 2005 as compared to 2004. Additionally, the Company expects general and
administrative expenses to be increased by approximately $150,000 per quarter in both the third and fourth quarters of 2005 as a result of adherence to Statement of Financial Accounting Standards
("SFAS") No. 123(revised),Share-Based Payment(See "Recently Issued Accounting Standards" below at this Item).

Non-cash Compensation Relating to Repriced Options

In 2000 and 2001, the Company repriced certain of its stock option to a price which represented 150% of the then prevailing stock price, that is, an exercise
price of $0.656 per share. These required options are subject to variable accounting treatment, such that an increase in the Company's stock price above the repriced exercise price potentially creates
a non-cash compensation expense. The Company's stock price at December 31, 2004, 2003, and 2002, respectively, was $9.75, $5.90 and $1.25 per share. The Company's
non-cash compensation expense from these repriced options was $2.1 million, $3.9 million, and $0.5 million in 2004, 2003, and 2002, respectively. To the extent the
repriced stock option situation discussed above does not materially change in 2005, each $0.01 change in the market price of the Company's common stock from the $9.75 price per share as of
December 31, 2004 will cause, as applicable, a non-cash benefit or expense of approximately $3,500. The Company presently expects these repriced options to be substantially
exercised by June 30, 2005; accordingly, the Company does not expect any material stock repricing adjustments subsequent to the second quarter of 2005.

35

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Facility Move Costs

As explained in Note 18 to the Notes to Condensed Consolidated Financial Statements, the Company made a decision to move both its operating facilities. The
total cost incurred in 2004 to this end, was $1.8 million, $0.1 million related to moving Transcrypt's operations from one facility in Lincoln, Nebraska to another facility in the same
general vicinity, and $1.7 million related to the move of EFJohnson's operations from Waseca, Minnesota to Irving, Texas. The Transcrypt move was completed in 2004; the EFJohnson move is
expected to be complete in April 2005. Approximately $0.3 million of costs are expected to be incurred in 2005 to complete the EFJohnson move. No similar costs were incurred by the
Company in 2003 or 2002.

Net Interest Income or Expense

Net interest income (expense) 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 line of credit. Net interest income (expense) was $(84,000) in 2004 and $(151,000) in 2003, as compared to $43,000 in 2002. The Company's interest expense in 2004 and 2003
includes approximately $100,000 of amortized loan fees, which skews the interest expense relationship. The Company expects net interest income in 2005 to be increased over the amount incurred in 2004,
as a result of increasing cash balances, assuming that interest rates remain relatively unchanged.

Other Income/Expense, net

Net other income/(expense) for 2004, 2003, and 2002, respectively, was $(19,000), $31,000, and $204,000. The amount in 2002 included $240,000 of insurance
proceeds received in relation to a claim for stolen property. Excluding this non-recurring event, the amounts recorded in the three years are similarly immaterial, as would be expected.
The Company would expect that other income/(expense) in 2005 to remain at an insignificant level.

Provision for Income Taxes

The Company's income tax benefit was $6.0 million and $5.0 million in 2004 and 2003, respectively, as compared to zero in 2002. As of
December 31, 2004, the Company has $29.0 million in deferred tax assets before valuation allowance of $15.0 million. The valuation reserve is based upon management's conclusions
regarding, among other considerations, the Company's operating results during 2004, 2003, and 2002, its current and expected customer base, technological and competitive factors impacting its current
products, and management's estimates of future earnings based on information currently available. Current financial accounting standards require that organizations analyze all positive and negative
evidence relating to deferred tax asset realization, which would include the Company's historical accuracy in forecasting future earnings, as well as the Company's history of losses prior to 2001.
Should factors underlying management's estimates change, future adjustments, either positive or negative, to the Company's valuation allowance may be necessary.

The
Company's tax asset is principally composed of net operating loss carryforwards ("NOL's"). These NOL's total $52.9 million at December 31, 2004 and do not begin to
expire until 2011. The Company's deferred tax asset of $14.0 million, as of December 31, 2004, is comprised of the following components:

Tax asset component (in millions):Net operating loss carryforwards

$
18.0Timing differencesbook to tax


8.0General business tax credits


3.029.0Less: valuation allowance


15.0$
14.0


36

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In the fourth quarters of 2004, 2003, and 2002, the Company reduced its deferred tax asset valuation allowance, effectively recognizing a deferred
tax asset of $14.0 million, $8.0 million, and $3.0 million at December 31, 2004, 2003, and 2002, respectively. The respective decisions to decrease the valuation allowance
were based upon the Company's expectations of future earnings in light of earnings, excluding the impact of non-cash compensation resulting from repriced stock options, in
2004, 2003 and 2002, and excluding costs incurred in 2004 in relation to facility moves for both of the Company's operating subsidiaries. Any future adjustments in the Company's deferred tax asset
allowance, and corresponding increases or decreases in the Company's deferred tax asset, will, likewise, be recorded, respectively, as income tax benefits or expenses.

The
Company cannot presently estimate what changes to the deferred tax asset valuation allowance may be deemed appropriate in 2005 and beyond. In determining recoverability of the future
tax benefits associated with its deferred tax asset, management takes into account, among other factors, the Company's historical operating results, its current and expected customer base,
technological and competitive factors impacting its current products, and management's estimates of future earnings which are based upon a five-year earnings projection, using information currently
available, and discounted for risk. Accordingly, as management presently anticipates that the Company will continue its recent trend of profitability in 2005, management expects that some portion, if
not all, of the deferred tax asset valuation allowance will continue to be reduced in 2005. Conversely, if the Company incurs future losses, it may be necessary to increase the valuation allowance for
the deferred tax asset recorded at December 31, 2004.

Net Income

The Company had net income of $10.0 million, $3.9 million, and $1.4 million in 2004, 2003, and 2002, respectively. The amounts in 2004 and
2003 included tax benefits of $6.0 and $5.0 million, respectively; no tax benefit or expense, however, was recorded in 2002. Operating results were adversely affected in each year by
non-cash compensation expense resulting from variable accounting treatment required for certain of the Company's stock options repriced in the fourth quarter of 2000 and the first quarter
of 2001; in 2004, 2003, and 2002, respectively, the amount of this expense was $2.1 million, $3.9 million and $0.5 million. Additionally, in 2004, the Company incurred
$1.8 million in costs related to moving its operating subsidiaries.

The
table below illustrates the operating results of 2004, 2003, and 2002, adjusting for the non-cash items (i.e., tax benefit and stock option repricing effect and facility
relocation expense) as discussed above. The Company believes that such presentation offers a more comparative measurement of the Company's operating results. When adjusting for the aforementioned
items, the adjusted income is $7.9 million in 2004, $2.8 million in 2003, and $1.9 million in 2002. This reflects an earnings increase of 175% in 2004, as compared to 2003, and
47% in 2003 as compared to 2002.

2004

2003

2002Operating Results (in millions)Net income

$
10.0

$
3.9

$
1.4Income tax benefit


(6.0
)

(5.0
)

Stock repricing compensation expense


2.1


3.9


0.5Facility relocation expense


1.8





Adjusted incomecomparative basis

$
7.9

$
2.8

$
1.9Adjusted income as a percentage of total revenues


9.8
%

5.0
%

4.7
%


37

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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, 2004. 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 subsequent periods or for the entire fiscal year.

|                                                          |                          | Quarter Ended |       
|--------------------------------------------------------- | ------------------------ | ------------- | ------
|
|Revenues                                                  |                          | $             | 9,001 
|Cost of sales                                             |                          |               | 5,042 
|                                                          |                          |               |       
|Gross profit                                              |                          |               | 3,959 
|                                                          |                          |               |       
|Operating expenses:                                       |                          |               |       
|Research and development                                  |                          |               | 1,402 
|Sales and marketing                                       |                          |               | 1,311 
|General and administrative(1)(2)                          |                          |               | 1,810 
|                                                          |                          |               |       
|                                                          | Total operating expenses |               |       
|                                                          |                          |               |       
|Income (loss) from operations                             |                          |               | (564  
|Interest (expense) income and other income (expense)      |                          |               |      
|                                                          |                          |               |       
|Net income (loss) before income taxes                     |                          |               | (564  
|Income tax benefit(3)                                     |                          |               |      
|                                                          |                          |               |       
|Net income (loss)                                         |                          | $             | (564  
|                                                          |                          |               |       
|Net income (loss) per sharebasic                         |                          | $             | (0.03 
|                                                          |                          |               |       
|Net income (loss) per sharediluted                       |                          | $             | (0.03 
|                                                          |                          |               |       
|Weighted average common sharesbasic and diluted          |                          |               | 17,577
|                                                          |                          |               |       
|Weighted average common sharesbasic and diluted          |                          |               | 17,577
|                                                          |                          |               |       
|As a Percentage of Revenues:                              |                          |               |       
|Revenues                                                  |                          |               | 100.0 
|Cost of sales                                             |                          |               | 56.0  
|                                                          |                          |               |       
|Gross profit                                              |                          |               | 44.0  
|Operating expenses:                                       |                          |               |       
|Research and development                                  |                          |               | 15.6  
|Sales and marketing                                       |                          |               | 14.6  
|General and administrative(1)                             |                          |               | 20.1  
|                                                          |                          |               |       
|                                                          | Total operating expenses |               |       
|                                                          |                          |               |       
|Income (loss) from operations                             |                          |               | (6.3  
|Interest (expense) income and other income (expense), net |                          |               |      
|Income tax benefit(2)                                     |                          |               |      
|                                                          |                          |               |       
|Net income (loss)                                         |                          |               | (6.3  
|                                                          |                          |               |       

---

38

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The Company historically has experienced 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 that 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 wireless communications and information security industries. The Company believes that quarterly
results are likely to vary for the foreseeable future.

Liquidity and Capital Resources

The Company's operating activities provided (used) cash of $14.1 million, $(8.4) million, and $1.2 million in 2004, 2003, and 2002. The
amount of cash provided from operations before changes in components of working capital was $7.4 million, $4.0 million, and $2.9 million in 2004, 2003, and 2002. Cash provided
(used) by changes in components of working capital was $6.7 million, $(12.4) million, and $(1.7) million, the material differences among the years substantially resulting from
changes in accounts receivables, inventory and accounts payable. These changes related to the timing of sales orders, causing a corresponding buildup or shipment of inventory, which accounted for
$5.1 million of the cash provided by changes in components of working capital. At December 31, 2004, the Company was managing a decrease in its inventory in conjunction with the
outsourcing of manufacturing at both its operating segments. During 2003, the Company's inventory increased in preparation of substantial shipments scheduled for January 2004, while its
receivables increased as a result of substantial December 2003 sales.

During
2004, the Company used $1.9 million in investing activities; approximately $2.5 million related to the purchase of fixed assets, which was partially offset by
$0.5 million of proceeds from the sale of fixed assets and a $0.2 million decrease in other assets, primarily prepaid royalties. During 2003, the Company used $0.6 million in
investing activities, $0.8 million related to net purchase of fixed assets and $(0.2) million for prepaid royalties. During 2002, the Company used $1.3 million in investing
activities, $1.2 million related to purchase of fixed assets and $0.1 million for prepaid royalties.

During
2004, the Company's financing activities used $7.4 million, substantially as a result of paying off its $7.5 million outstanding line of credit balance in
February 2004. During 2003, the Company provided $2.4 million in financing activities, substantially related to the increase in its line of credit balance. During 2002, the Company used
$0.1 million in financing activities, substantially relating to net payments made on its line of credit.

The
Company's cash position and overall working capital position were significantly improved as of December 31, 2004, as compared to December 31, 2003. This was the result
of Company's profitable operation in 2004, as well as the aforementioned decrease in the Company's inventory balance. Cash and cash equivalents increased to $9.5 million at December 31,
2004, as compared to $4.6 million at December 31, 2003. Additionally, the Company's working capital was $31.3 million at December 31, 2004 as compared to
$24.7 million at December 31, 2003.

In
the normal course of its business activities, the Company is required under contracts with various government authorities to provide letters of credit or bonds that may be drawn upon
if the Company fails to perform under its contracts. The Company's only outstanding letter of credit, which expires in June 2006, has a total undrawn balance of $250,000 on December 31,
2004. Bonds, which expire on various dates, totaled $5.3 million at December 31, 2004. The Company's current bonding arrangement calls for zero-collateral bonding up to
$7.0 million; however, no single bond may exceed $2.0 million. The Company believes its bonding arrangements provide it with sufficient bonding availability through 2005; however, the
Company continues to seek improved bonding alternatives with

39

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increased
limits as bonding requirements are expected to increase parallel with the Company's anticipated growth in LMR systems revenue, significantly in 2006 and beyond.

The
Company also leases various equipment and buildings under operating leases. Future minimum rental payments under non-cancelable operating lease agreements are shown below
in the Tabular Disclosure of Contractual Obligations. Of the $6.1 million total operating lease obligations, $5.3 million relate to the leases of the Company's operating facilities for
Transcrypt (which lease runs through June 2014) and EFJohnson (which lease runs through December 2013). The Company anticipates that, in the normal course of business, leases will be
renewed or replaced as they expire.

In
September 2004, the Company entered into an amendment of its secured line of credit with Bank of America. The maximum line of credit availability was increased from
$10.0 million to $15.0 million, and the line's interest rate was decreased from a rate of LIBOR plus 200 basis points to a rate of LIBOR plus 150 basis points. The line of credit is
collateralized by substantially all the Company's assets; and borrowings available under the line of credit are calculated as a percentage of eligible inventory and receivables. This amended revolving
line of credit expires in September 2007 and contains certain financial covenants with which the Company was in compliance at December 31, 2004. At December 31, 2004, the Company
had zero outstanding on the revolving line of credit as compared to $7.5 million at December 31, 2003. The total available line of credit was $11.5 million at December 31,
2004.

The
Company currently does not anticipate paying cash dividends in the foreseeable future.

Tabular Disclosure of Contractual Obligations

The Company's known contractual obligations as of December 31, 2004 are shown below:

|                                             |  | Payment due by period
|-------------------------------------------- |  | ---------------------
|
|Contractual Obligations (in millions)        |  |                      
|Long-term debt obligations                   |  | $                    
|Operating lease obligations                  |  |                      
|Purchase obligations                         |  |                      
|Other long-term liabilitiesdeferred revenue |  |                      
|                                             |  |                      
|Total                                        |  | $                    
|                                             |  |                      

Pending Claims

The Company's liquidity and results of operations could be adversely affected by unfavorable outcomes of pending litigation, particularly the claims filed against
the Company by ASRC and Mace. See PART I. ITEM 3LEGAL PROCEEDINGS.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(revised),Share-Based
Payment,a revision of SFAS No. 123,Accounting for Stock-Based Compensation.SFAS No. 123(revised) requires
companies to measure the cost of employee services received in exchange for an award of equity instruments based upon the grant-date fair value of the award. The
fair-value-based method is substantially similar to the method established in SFAS No. 123 and includes use of the Black-Scholes option-pricing model. That fair value will be
recognized over the period during which the employee is required to provide service in exchange for the award, generally the option's vesting period. SFAS No. 123(revised) is effective for
interim or annual reporting periods that begin after June 15, 2005. The Company will adopt SFAS No. 123(revised) as of the quarter

40

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ending
September 30, 2005. The Company presently expects such adoption to increase its expenses by approximately $150,000 in both the third and fourth quarters of 2005.

In
December 2004, FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets,an amendment of APB No. 29, Accounting for Nonmonetary Transactions.SFAS No. 153 eliminates APB No. 29's exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that are not expected to result in significant changes in the cash flows of the reporting entity. This pronouncement is not
anticipated to have a material effect on the Company's consolidated financial position or results of operations.

In
November 2004, FASB issued SFAS No. 151,Inventory Costs,an amendment of ARB No. 43, Chapter 4, Inventory Pricing.The statement clarifies
the FASB's position that abnormal amounts of costs, such as idle freight, handling costs, or spoilage, should
be recognized as current-period costs and requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. Since,
heretofore, the Company had already been costing its inventory in accordance with the methodology required by SFAS No. 151, this pronouncement is not anticipated to have a material effect on
the Company's consolidated financial position or results of operations.

Critical Accounting Policies

The preparation of the Company's consolidated financial statements in conformity with "generally accepted accounting principles" ("USGAAP") requires management to
make judgments, estimates and assumptions in certain circumstances that affect the amounts reported in the consolidated financial statements and related footnotes. The Company regularly evaluates the
accounting policies and estimates used to prepare its financial statements. Estimates are used for, but not limited to: the accounting for allowance for doubtful accounts and sales returns;
application of the percentage of completion accounting for long-term contract revenues, inventory reserves, valuation allowance for deferred income tax asset, and contingencies. These
estimates are based on historical experience and various assumptions that the Company believes to be reasonable under the particular applicable facts and circumstances. Actual results could differ
from those estimates.

The
Company considers its critical accounting policies to be those that (i) involve significant judgments and uncertainties, (ii) require estimates that are more difficult
for management to determine and (iii) have the potential to result in materially different outcomes under varying assumptions and conditions. The application of GAAP may require management to
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. Listed below are those policies the Company believes are critical and require the
use of complex judgment in their application.

Revenue

The Company's revenue recognition policy is in accordance with the criteria put forth in Staff Accounting Bulletins 101 and 104. Revenues are recognized when the
earnings process is complete, less an estimate for an allowance for returns, if applicable, if collection is reasonably assured. The earnings process is generally complete when the product is shipped,
or received by the customer, depending upon whether the title to the goods, as well as the risks and benefits of ownership, are transferred to the customer at point of shipment or point of delivery.
For sales where collection is not reasonably assured, the Company recognizes revenue as cash is received. If collection is contingent on a future event, 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

41

---



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 services provided under systems maintenance contracts and unearned warranty fees on extended product warranty contracts sold to customers. The Company
recognizes the fees based upon a straight-line method over the life of the contract.

The
Company periodically reviews its revenue recognition procedures to assure that such procedures are in accordance with the provisions of Staff Accounting Bulletins 101 and 104.

Inventory

Inventory is recorded at the lower of cost or market with cost determined by the first-in, first-out (FIFO) method. The Company
periodically assesses its inventory for potential obsolescence and lower-of-cost-or-market issues. The Company makes estimates of inventory
obsolescence, providing reserves when necessary, based on, among other factors, demand for inventory based on backlog, product pricing, the ability to liquidate or sell older inventory, and the impact
of introducing new products. Charges associated with providing for inventory obsolescence, or revisions to related reserves, have historically correlated with
selling activity and have had a consistent impact on the Company's gross margins over the last three fiscal years.

Goodwill

In July 2002, the FASB issued SFAS No. 142.SFAS No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment, on at least an annual basis, by applying a fair value-based test. The Company adopted the provisions SFAS No. 142 effective
January 1, 2002. At least annually, the Company assesses goodwill, using a fair value-based test, consistent with SFAS No. 142. If the carrying amount exceeds the fair value, goodwill is
considered to be impaired. In evaluating impairment, the Company estimates the sum of the expected future cash flows derived from such goodwill. Such evaluations for impairment are significantly
impacted by estimates of future revenues, costs and expenses and other factors. The estimates use assumptions about the Company's market segment share in the future and about future expenditures by
government entities for wireless communications products. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining balance of goodwill may not be
recoverable. If the Company fails to deliver new products, if the products fail to gain expected market acceptance, or if the Company fails to achieve assumed revenue growth rates or assumed gross
margin, the Company may incur charges for impairment of goodwill in the future.

Income Taxes

The Company accounts for income taxes using 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. Deferred tax assets and liabilities are measured using
current enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
Valuation allowances are provided to the extent that recoverability of tax assets is not considered likely. In determining recoverability of the future tax benefits associated with its deferred tax
asset, management takes into account, among other factors, the Company's historical operating results, its current and expected customer base, technological and competitive factos impacting its
current products, and management's estimates of future earnings which are based upon a five-year earnings projection, using information currently available, and discounted for risk. If the Company
fails to achieve revenue growth rates or gross margins assumed in the calculation of the deferred tax asset, the Company may be required to increase its valuation allowance in the future.

42

---



Long-Lived Assets

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets,the Company reviews its long-lived assets, to include intangible assets subject to amortization, for recoverability whenever events
or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be
recoverable. Such circumstances include, but are not limited to:



The
Company continually evaluates whether events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be
determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use
and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of the Company's
long-lived assets, the Company may incur charges for impairment in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Although all 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 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. Additionally, troubled economic conditions, such as that recently experienced in Asia and in Latin America, could
result in lower revenues for the Company. While most international sales are supported by letters of credit, the purchase of Company products by international customers presents increased risks, which
include:



43

---





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."

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Item 15. 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 schedule filed as part of this report.

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

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Management is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company maintains a system of internal
controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from
unauthorized use or disposition.

In
accordance with Rule 13a-15(b) of the Exchange Act, the Company evaluated the effectiveness of the design and operation of its internal controls over financial
reporting as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act ("Internal Controls") as of the year ended December 31, 2004. This evaluation (the
"Controls Evaluation") was done under the supervision and with the participation of management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). The
effectiveness of the Company's Internal Controls, as determined by this evaluation, is discussed below and disclosed in the Chief Executive Officer's Certification of Report on
Form 10-K for the Year Ending December 31, 2004 and the Chief Financial Officer's Certification of Report on Form 10-K for the Year Ending
December 31, 2004 (together, "Certifications").

Internal
Controls are procedures designed with the objective of ensuring that information required to be disclosed in the Company's reports filed under the Exchange Act, such as this
Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Internal Controls are also designed with the objective of ensuring that
such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls

44

---



also
is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected, and, thus, the Company's management cannot provide absolute assurance
that the Company's Internal Controls will prevent all errors and all fraud.

The
Company's Internal Controls are also evaluated on an ongoing basis by its Finance organization. The overall goals of these various evaluation activities are to monitor the Company's
Internal Controls and to make modifications as necessary. The Company's intent in this regard is that the Internal Controls will be maintained as dynamic systems that change (including with
improvements and corrections) as conditions warrant.

Management's
Controls Evaluation used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission's ("COSO")Internal
ControlIntegrated Framework.The Controls Evaluation included review of control documentation, evaluation of the control design effectiveness, testing of the
control operating effectiveness, and a conclusion as to the overall effectiveness of the Company's Internal Controls. Based upon the Controls Evaluation, the Company's CEO and CFO have concluded that
the Company's Internal Controls were effective as of December 31, 2004 to provide reasonable assurance that its financial statements are fairly presented in conformity with USGAAP.

During
2004, the Company experienced a significant turnover in financial and transactional reporting personnel, principally resulting from the relocation of EFJohnson's operations from
Waseca, Minnesota to Irving, Texas. In light of the control risk promulgated by this turnover, the Company instituted a myriad of mitigating controls, primarily comprised on increased management
review, to insure that any material errors or omissions in its financial statements or disclosures would be readily identified and corrected prior to reporting. There were no other changes in the
Company's Internal Controls identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15(e) or 15d-15(e) that occurred
during the last quarter that have materially affected, or are reasonably likely to materially affect, the Company's Internal Control.

Management's
assessment of the effectiveness of Internal Controls as of December 31, 2004 has been audited by the Company's independent registered public accounting firm which has
also audited the Company's consolidated financial statements. Management's Report on Internal Control appears herein at Page F-1 of Part IV of this Annual Report.

The
independent registered public accounting firm's attestation report on management's assessment of the Company's Internal Controls appears herein, at Part IV of this Annual
Report.

ITEM 9B.    OTHER INFORMATION

None.

45

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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, 2004.

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," "Information About EFJ Common Stock OwnershipDid Directors,
Executive Officers and Greater-Than-10% Stockholders Comply With Section 16(a) Beneficial Ownership Reporting in 2004?," and "Code of Ethics" of the Company's definitive
proxy statement, to be filed pursuant to Regulation 14A with the SEC within 120 days after December 31, 2004.

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 EFJ 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, 2004.

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 EFJ 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, 2004.

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, 2004.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference in this Annual Report is the information required by this Item 14 contained in the section entitled "Information about the Company's
Independent Registered Public Accountants" of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC within 120 days after December 31,
2004.

46

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



|   |  |                                                                                                                  |  | Page No.   
|-- |  | ---------------------------------------------------------------------------------------------------------------- |  | -----------
|1. |  | Financial Statements and Schedules                                                                               |  |            
|   |  | Management's Report                                                                                              |  | F-1        
|   |  | Reports of Independent Registered Public Accounting Firm                                                         |  | F-3 to F-4 
|   |  | Consolidated Balance Sheets as of December 31, 2004 and 2003                                                     |  | F-5        
|   |  | Consolidated Statements of Earnings for the Years ended December 31, 2004, 2003, and 2002                        |  | F-6        
|   |  | Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 2004, 2003, and 2002 |  | F-7        
|   |  | Consolidated Statements of Cash Flows for the Years ended December 31, 2004, 2003, and 2002                      |  | F-8        
|   |  | Notes to Consolidated Financial Statements                                                                       |  | F-9 to F-26
|2. |  | Supplemental Financial Statement Schedules                                                                       |  |            
|   |  | Schedule IIValuation and Qualifying Accounts and Reserves                                                       |  | S-1        

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

3.     Exhibits

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:



47

---





Exhibit Index:

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Second Amended and Restated Certificate of Incorporation of the Company filed on September 30, 1996 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1999, File No. 0-21681).
|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).                                                                                                                                                                                  
|10.1           |  | Transcrypt International, Inc. 1999 Non Employee Director Stock Plan (incorporated by reference to Exhibit 10.1 to the 1998 Form 10-K).                                                                                                                                                                         
|10.2           |  | Transcrypt International, Inc. 1999 Executive Officer Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the 1999 Form 10-K).                                                                                                                                                                    
|10.3           |  | RESERVED                                                                                                                                                                                                                                                                                                        
|10.4           |  | Transcrypt International, Inc. 1996 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 99.1 to the S-8 Registration Statement).                                                                                                                                                             
|10.5           |  | Form of Indemnification Agreement between the Company and each executive officer and director of the Company (incorporated herein by reference to Exhibit 10.5 to 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).                                               
|               |  |                                                                                                                                                                                                                                                                                                                 

48

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|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       |  | RESERVED                                                                                                                                                                                                                                                                                 
|10.11       |  | Letter Agreement dated August 13, 2001 between Transcrypt International, Inc. and Massoud Safavi, regarding employment rights (incorporated herein by reference to Exhibit 10.11 to the 2001 Form 10-K).                                                                                 
|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).                                                     
|10.13       |  | Consigned Inventory Agreement between Arrow/Schwebber 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       |  | Transcrypt Executive Health Program (incorporated herein by reference to Exhibit 10.14 to the 2001 Form 10-K).                                                                                                                                                                           
|10.15       |  | Manufacturing Agreement for certain radio communications equipment between Transcrypt International and Tran Electronics, Inc. dated December 2, 2004 (incorporated herein by reference to Exhibit 99.1 to the Company's Report on
Form 8-K filed on December 2, 2004, File No. 0-21681).
|10.16       |  | Manufacturing Agreement for certain radio communications equipment between E.F. Johnson Company and McDonald Technologies International, Inc. dated May 14, 2004.                                                                                                                        
|10.17-10.22 |  | RESERVED                                                                                                                                                                                                                                                                                 
|10.23       |  | Addendum I to License Agreement for APCO Fed Project 25 Algorithm between Digital Voice Systems, Inc. and the Company, dated as of July 12, 2001 (incorporated herein by reference to Exhibit 10.23 to the 2001 Form 10-K [original License
Agreement is listed above as Exhibit 10.12]).
|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, NA., Master Plan Sponsor (incorporated herein by reference to Exhibit 10.25 to the January 1997 Registration Statement).                                                                                  
|10.26-10.35 |  | RESERVED                                                                                                                                                                                                                                                                                 
|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 Company's Registration Statement on Form S-1,
No. 333-35469, declared effective on October 15, 1997).     
|10.37-10.40 |  | RESERVED                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                          

49

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|10.41 |  | Consulting Agreement and Termination of Employment Agreement between the Company and John T. Connor dated February 23, 1999 (incorporated herein by reference to Exhibit 10.41 to the 1998 Form 10-K).                                                                                     
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.42 |  | Employment Agreement between the Company and Michael E. Jalbert dated October 15, 2002 (incorporated herein by reference to Exhibit 10.42 to the 2002 Form 10-K).                                                                                                                          
|10.43 |  | Schedule of base salaries of Named Executive Officers established by EFJ, Inc. Compensation Committee.                                                                                                                                                                                     
|10.44 |  | Schedule of Non-Employee Directors' Annual Compensation.                                                                                                                                                                                                                                   
|10.45 |  | Employment Agreement between the Company and Ellen O. O'Hara executed January 6, 2005 (incorporated herein by reference to Exhibit 99.1 to the Company's Report on Form 8-K filed on January 19, 2005, File
No. 0-21681).                                                                  
|10.46 |  | Transcrypt International, Inc. Michael Jalbert 1999 Stock Option Agreement (incorporated by reference to Exhibit 99.1 to the Jalbert S-8 Registration Statement).                                                                                                                          
|10.47 |  | Lease Agreement between the Company and Walnut Hill/DBI Ventures I, L.P. dated December 17, 2003. Incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003, File
No. 0-21681.                                           
|10.48 |  | Revolving Line of Credit Loan Agreement and Security Agreement between the Company and Bank of America, N.A., dated November 19, 2002 (incorporated herein by reference to Exhibit 10.48 to the 2002 Form 10-K).                                                                           
|10.49 |  | Lease Agreement between the Company and Waseca Properties, LLC dated December 30, 1999 (incorporated herein by reference to Exhibit 10.49 to the 1999 Form 10-K).                                                                                                                          
|10.50 |  | Amendment to its Revolving Line of Credit Loan Agreement and Security Agreement between the Company and Bank of America, N.A., dated September 16, 2004 (incorporated herein by reference to Exhibit 99.1 to the Company's Report on
Form 8-K filed on November 5, 2004, File No. 0-21681).
|11.1  |  | Statement re. Computation of Per Share Earnings.                                                                                                                                                                                                                                           
|21    |  | Subsidiaries of the Registrant (incorporated herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-21681).                                                                                                        
|23.1  |  | Consent of Grant Thornton LLP.                                                                                                                                                                                                                                                             
|31.1  |  | Chief Executive Officer's Certification of Report on Form 10-K for Year Ended December 31, 2004.                                                                                                                                                                                           
|31.2  |  | Chief Financial Officer's Certification of Report on Form 10-K for Year Ended December 31, 2004.                                                                                                                                                                                           
|32    |  | Written Certification of Chief Executive Officer and Chief Financial Officer, dated February 24, 2005, pursuant to 18 U.S.C. § 1350.                                                                                                                                                       

---

See
Item 15(a)(3) above.



See Item 15(a)(2) above.

50

---





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.

| | EFJ, INC.
| | ---------
| | By:      

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.

|Signature                                 |  | Title                                                                                                     |  | Date         
|----------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | -------------
|/s/MICHAEL E. JALBERTMichael E. Jalbert   |  | Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)   |  | March 2, 2005
|/s/MASSOUD SAFAVIMassoud Safavi           |  | Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 2, 2005
|/s/EDWARD H. BERSOFFEdward H. Bersoff     |  | Director                                                                                                  |  | March 2, 2005
|/s/VERONICA A. HAGGARTVeronica A. Haggart |  | Director                                                                                                  |  | March 1, 2005
|/s/WINSTON J. WADEWinston J. Wade         |  | Director                                                                                                  |  | March 1, 2005
|/s/THOMAS R. THOMSENThomas R. Thomsen     |  | Director                                                                                                  |  | March 1, 2005

51

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MANAGEMENT'S REPORT

Management's Report on Financial Statements:

Our management is responsible for the preparations, integrity and fair presentation of information in our consolidated financial statements, including estimates
and judgments. The consolidated financial statements presented in this report have been prepared in accordance with accounting principles generally accepted in the United States of America. Our
management believes the consolidated financial statements and other financial information included in this report fairly present, in all material respects, our financial condition, results of
operations and cash flows as of and for the periods presented in this report. The consolidated financial statements have been audited by Grant Thornton, an independent registered public accounting
firm, as stated in their report, which is included herein.

Management's Report on Internal Control Over Financial Reporting:

Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our system of internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.

Our
internal control over financial reporting includes those policies and procedures that:



Because
of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further,
because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.

Our
management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that
our system of internal control over financial reporting was effective as of December 31, 2004. Our management's assessment of the effectiveness of our internal control over financial reporting
has been audited by Grant Thornton, an independent registered public accounting firm, as stated in their report which is included herein.

F-1

---



Audit Committee Oversight:

The Audit Committee of the Board of Directors, which is comprised solely of independent directors, has oversight responsibility for our financial reporting
process and the audits of our consolidated financial statements and internal control over financial reporting. The Audit Committee meets regularly with management and with our internal auditors and
independent registered public accounting firm (collectively, the "auditors") to review matters related to the quality and integrity of our financial reporting, internal control over financial
reporting (including compliance matters related to our Code of Ethics and Business Conduct), and the nature, extent, and results of internal and external audits. Our auditors have full and free access
and report directly to the Audit Committee. The Audit
Committee recommended, and the Board of Directors approved, that the audited consolidated financial statements be included in this Annual Report on Form 10-K.

|                           |  | /s/MICHAEL E. JALBERTMichael E. Jalbert, Chief Executive Officer
|-------------------------- |  | ----------------------------------------------------------------
|                           |  | /s/MASSOUD SAFAVIMassoud Safavi, Chief Financial Officer        
|Irving, Texas
2 March 2005 |  |                                                                 

F-2

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders
EFJ, Inc. and Subsidiaries

We
have audited management's assessment, included in the accompanying Management's Report, that EFJ, Inc. and Subsidiaries (a Delaware Corporation) maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, management's assessment that EFJ, Inc. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based onInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also in our opinion, EFJ, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31,
2004, based onInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of EFJ, Inc. and
Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended
December 31, 2004 and our report dated March 2, 2005 expressed an unqualified opinion on those financial statements.

|                         | /s/GRANT THORNTON LLP
|------------------------ | ---------------------
|Vienna, VA
March 2, 2005 |                      

F-3

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
EFJ, Inc. and Subsidiaries

We
have audited the accompanying consolidated balance sheets of EFJ, Inc. and Subsidiaries (a Delaware corporation) as of December 31, 2004 and 2003, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EFJ, Inc. and Subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.

Our
audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule IIvaluation and
qualifying accounts and reserves of EFJ Inc. and Subsidiaries is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of EFJ, Inc. and Subsidiaries' internal
control over financial reporting as of December 31, 2004, based onInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 2, 2005 expressed an unqualified opinion on the effectiveness of EFJ Inc. and Subsidiaries' internal
control over financial reporting.

|                         | /s/GRANT THORNTON LLP
|------------------------ | ---------------------
|Vienna, VA
March 2, 2005 |                      

F-4

---



EFJ, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003

(in thousands, except share data)

ASSETS

|                                                   |                                                                                                                                                                                                                                               | 2004                      |        | 2003    |       
|-------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | ------- | ------
|Current assets:                                    |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   | Cash and cash equivalents                                                                                                                                                                                                                     |                           | $      | 9,484   |       
|                                                   | Accounts receivable, net of allowance for returns and doubtful accounts of $256 and $104                                                                                                                                                      |                           |        | 18,296  |       
|                                                   | Note and other receivables                                                                                                                                                                                                                    |                           |        | 2,384   |       
|                                                   | Cost in excess of billings on uncompleted contracts                                                                                                                                                                                           |                           |        | 1,638   |       
|                                                   | Inventory                                                                                                                                                                                                                                     |                           |        | 13,043  |       
|                                                   | Deferred income taxes                                                                                                                                                                                                                         |                           |        | 3,000   |       
|                                                   | Prepaid expenses                                                                                                                                                                                                                              |                           |        | 721     |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   |                                                                                                                                                                                                                                               | Total current assets      |        |         | 48,566
|Property, plant and equipment, net                 |                                                                                                                                                                                                                                               |                           | 3,494  |         |       
|Deferred income taxes, net of current portion      |                                                                                                                                                                                                                                               |                           | 11,000 |         |       
|Intangible assets, net of accumulated amortization |                                                                                                                                                                                                                                               |                           | 6,746  |         |       
|Other assets                                       |                                                                                                                                                                                                                                               |                           | 513    |         |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   | TOTAL ASSETS                                                                                                                                                                                                                                  |                           | $      | 70,319  |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|LIABILITIES AND STOCKHOLDERS' EQUITY               |                                                                                                                                                                                                                                              
|Current liabilities:                               |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   | Revolving line of credit                                                                                                                                                                                                                      |                           | $      |        |       
|                                                   | Current portion of long-term debt obligations                                                                                                                                                                                                 |                           |        | 126     |       
|                                                   | Accounts payable                                                                                                                                                                                                                              |                           |        | 8,534   |       
|                                                   | Billings in excess of cost on uncompleted contracts                                                                                                                                                                                           |                           |        | 1,250   |       
|                                                   | Deferred revenue                                                                                                                                                                                                                              |                           |        | 1,185   |       
|                                                   | Accrued expenses                                                                                                                                                                                                                              |                           |        | 6,171   |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   |                                                                                                                                                                                                                                               | Total current liabilities |        |         | 17,266
|Long-term debt obligations, net of current portion |                                                                                                                                                                                                                                               |                           | 68     |         |       
|Deferred revenue, net of current portion           |                                                                                                                                                                                                                                               |                           |       |         |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   | TOTAL LIABILITIES                                                                                                                                                                                                                             |                           |        | 17,334  |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|Stockholders' equity:                              |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   | Preferred stock ($.01 par value; 3,000,000 shares authorized; none issued).                                                                                                                                                                   |                           |        |        |       
|                                                   | Common stock ($.01 par value; 50,000,000 voting shares authorized, 18,257,877 and 17,359,973 issued and outstanding at December 31, 2004 and 2003; 600,000 non-voting shares authorized, 217,542 issued and outstanding at
December 31, 2003) |                           |        | 183     |       
|                                                   | Additional paid-in capital                                                                                                                                                                                                                    |                           |        | 103,459 |       
|                                                   | Accumulated deficit                                                                                                                                                                                                                           |                           |        | (50,657 | )     
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   | TOTAL STOCKHOLDERS' EQUITY                                                                                                                                                                                                                    |                           |        | 52,985  |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       
|                                                   | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                    |                           | $      | 70,319  |       
|                                                   |                                                                                                                                                                                                                                               |                           |        |         |       

See accompanying notes to the consolidated financial statements.

F-5

---



EFJ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Years Ended December 31, 2004, 2003, and 2002

(in thousands, except share and per share data)

|                                       |                                                                                                                                                                                                                                                | 2004                              |            | 2003   |        | 2002       |       
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ------ | ------ | ---------- | ------
|Revenues                               |                                                                                                                                                                                                                                                | $                                 | 80,870     |        | $      | 56,189     |       
|Cost of sales                          |                                                                                                                                                                                                                                                |                                   | 42,901     |        |        | 32,560     |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|                                       | Gross profit                                                                                                                                                                                                                                   |                                   |            | 37,969 |        |            | 23,629
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|Operating expenses:                    |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|                                       | Research and development                                                                                                                                                                                                                       |                                   |            | 11,020 |        |            | 7,005 
|                                       | Sales and marketing                                                                                                                                                                                                                            |                                   |            | 10,389 |        |            | 7,390 
|                                       | General and administrative, inclusive of: non-cash stock option repricing expense adjustment of $2,121, $3,936, and $483 in 2004, 2003, and 2002, respectively (See Note 12); and facility relocation expenses of $1,833
in 2004 (See Note 18) |                                   |            | 12,499 |        |            | 10,122
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|                                       |                                                                                                                                                                                                                                                | Total operating expenses          |            |        | 33,908 |            |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|                                       |                                                                                                                                                                                                                                                | Income (loss) from operations     |            |        | 4,061  |            |       
|Interest income                        |                                                                                                                                                                                                                                                |                                   | 37         |        |        | 35         |       
|Interest expense                       |                                                                                                                                                                                                                                                |                                   | (121       | )      |        | (186       | )     
|Other income, net                      |                                                                                                                                                                                                                                                |                                   | (19        | )      |        | 31         |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|                                       |                                                                                                                                                                                                                                                | Income (loss) before income taxes |            |        | 3,958  |            |       
|Income tax benefit                     |                                                                                                                                                                                                                                                |                                   | 6,000      |        |        | 5,000      |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|                                       |                                                                                                                                                                                                                                                | Net income                        |            | $      | 9,958  |            | $     
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|Net income per sharebasic             |                                                                                                                                                                                                                                                | $                                 | 0.56       |        | $      | 0.23       |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|Net income per sharediluted           |                                                                                                                                                                                                                                                | $                                 | 0.53       |        | $      | 0.21       |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|Weighted average common sharesbasic   |                                                                                                                                                                                                                                                |                                   | 17,824,708 |        |        | 17,577,335 |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       
|Weighted average common sharesdiluted |                                                                                                                                                                                                                                                |                                   | 18,749,893 |        |        | 18,684,451 |       
|                                       |                                                                                                                                                                                                                                                |                                   |            |        |        |            |       

See accompanying notes to the consolidated financial statements.

F-6

---



EFJ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Years Ended December 31, 2004, 2003 and 2002

(in thousands, except share data)

|                                                          |  | Common Stock |  |   |     |  |   |         |  
|--------------------------------------------------------- |  | ------------ |  | - | --- |  | - | ------- | -
|
|
|Balance, December 31, 2001                                |  | 17,577,315   |  | $ | 176 |  | $ | 96,435  |  
|Expense related to repriced options                       |  |             |  |   |    |  |   | 483     |  
|Net income                                                |  |             |  |   |    |  |   |        |  
|                                                          |  |              |  |   |     |  |   |         |  
|Balance, December 31, 2002                                |  | 17,577,315   |  |   | 176 |  |   | 96,918  |  
|Expense related to repriced options                       |  |             |  |   |    |  |   | 3,936   |  
|Other                                                     |  | 200          |  |   |    |  |   | (9      | )
|Net Income                                                |  |             |  |   |    |  |   |        |  
|                                                          |  |              |  |   |     |  |   |         |  
|Balance, December 31, 2003                                |  | 17,577,515   |  | $ | 176 |  | $ | 100,845 |  
|Expense related to repriced options                       |  |             |  |   |    |  |   | 2,121   |  
|Exercise of stock options                                 |  | 675,320      |  |   | 7   |  |   | 459     |  
|Stock issuances to directors in lieu of cash compensation |  | 5,042        |  |   |    |  |   | 38      |  
|Other                                                     |  |             |  |   |    |  |   | (4      | )
|Net Income                                                |  |             |  |   |    |  |   |        |  
|                                                          |  |              |  |   |     |  |   |         |  
|Balance, December 31, 2004 (1)                            |  | 18,257,877   |  | $ | 183 |  | $ | 103,459 |  
|                                                          |  |              |  |   |     |  |   |         |  

---

See accompanying notes to the consolidated financial statements.

F-7

---



EFJ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2004, 2003, and 2002

(in thousands, except share data)

|                                                     |                                                                                             | 2004                                                      |                                                     | 2003                                                |        | 2002   |       
|---------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ------ | ------ | ------
|Cash flows from operating activities:                |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|                                                     | Net income                                                                                  |                                                           | $                                                   | 9,958                                               |        | $      | 3,992 
|                                                     | Adjustments to reconcile net income to net cash provided by (used in) Operating activities: |                                                           |                                                     |                                                     |        |        |       
|                                                     |                                                                                             | Depreciation and amortization                             |                                                     |                                                     | 1,441  |        |       
|                                                     |                                                                                             | Gain on sale of fixed assets                              |                                                     |                                                     | (67    | )      |       
|                                                     |                                                                                             | Deferred income taxes                                     |                                                     |                                                     | (6,000 | )      |       
|                                                     |                                                                                             | Non-cash compensationintrinsic value of repriced options |                                                     |                                                     | 2,121  |        |       
|                                                     |                                                                                             | Changes in assets and liabilities:                        |                                                     |                                                     |        |        |       
|                                                     |                                                                                             |                                                           | Accounts receivable                                 |                                                     |        | (769   | )     
|                                                     |                                                                                             |                                                           | Cost in excess of billings on uncompleted contracts |                                                     |        | (769   | )     
|                                                     |                                                                                             |                                                           | Inventory                                           |                                                     |        | 4,997  |       
|                                                     |                                                                                             |                                                           | Prepaid expenses and other assets                   |                                                     |        | (134   | )     
|                                                     |                                                                                             |                                                           | Accounts payable                                    |                                                     |        | (48    | )     
|                                                     |                                                                                             |                                                           | Billings in excess of cost on uncompleted contracts |                                                     |        | 1,220  |       
|                                                     |                                                                                             |                                                           | Accrued expenses                                    |                                                     |        | 2,765  |       
|                                                     |                                                                                             |                                                           | Deferred revenue                                    |                                                     |        | (607   | )     
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|                                                     |                                                                                             |                                                           |                                                     | Total adjustments                                   |        |        | 4,150 
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|                                                     |                                                                                             |                                                           |                                                     | Net cash provided by (used in) operating activities |        |        | 14,108
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|Cash flows from investing activities:                |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|                                                     | Proceeds from sale of fixed assets                                                          |                                                           |                                                     | 464                                                 |        |        | 47    
|                                                     | Purchase of fixed assets                                                                    |                                                           |                                                     | (2,546                                              | )      |        | (897  
|                                                     | Decrease (increase) in other assets                                                         |                                                           |                                                     | 173                                                 |        |        | 212   
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|                                                     |                                                                                             |                                                           |                                                     | Net cash used in investing activities               |        |        | (1,909
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|Cash flows from financing activities:                |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|                                                     | Proceeds (payments) on revolving lines of credit, net                                       |                                                           |                                                     | (7,500                                              | )      |        | 2,500 
|                                                     | Principal payments on long-term debt                                                        |                                                           |                                                     | (359                                                | )      |        | (107  
|                                                     | Proceeds from exercise of stock options                                                     |                                                           |                                                     | 466                                                 |        |        |      
|                                                     | Other                                                                                       |                                                           |                                                     | 34                                                  |        |        | (9    
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|                                                     |                                                                                             |                                                           |                                                     | Net cash provided by (used in) financing activities |        |        | (7,359
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|Net increase (decrease) in cash and cash equivalents |                                                                                             |                                                           | 4,840                                               |                                                     |        | (6,689 | )     
|Cash and cash equivalents, beginning of year         |                                                                                             |                                                           | 4,644                                               |                                                     |        | 11,333 |       
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       
|Cash and cash equivalents, end of year               |                                                                                             | $                                                         | 9,484                                               |                                                     | $      | 4,644  |       
|                                                     |                                                                                             |                                                           |                                                     |                                                     |        |        |       

Supplemental Disclosure of Cash Flow Information:

The
Company paid interest of $40, $46 and $35 during the years 2004, 2003 and 2002, respectively.

The
Company paid $70 and $30 of income taxes in 2004 and 2002; no payment was made in 2003.

In
2003 and 2002, respectively, the Company acquired $374 and $292 of property, plant and equipment in exchange for long-term debt.

In
2002, the Company decreased its deferred tax valuation allowance, recognizing a net deferred tax asset of $2,500, which amount was offset against the Company's goodwill.

See
accompanying notes to the consolidated financial statements.

F-8

---





EFJ, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (in thousands, except for 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

EFJ, Inc. (the "Company") is a Delaware corporation engaged in the design, manufacture and marketing of wireless communication products and systems and
information security products. Through its EFJohnson subsidiary ("EFJohnson"), the Company designs, develops, manufactures and markets stationary land mobile radio transmitters/receivers and mobile
and portable radios. Through its Transcrypt International subsidiary ("Transcrypt"), the Company designs, develops, manufactures and markets encryption devices for land mobile radios. The Company
operates in two segments: wireless communications (EFJohnson), located in Irving, Texas; and information security (Transcrypt), located in Lincoln, Nebraska. In both segments, the Company primarily
markets its products to: domestic public safety/public service and other government users; domestic commercial users; and international customers.

Principles of Consolidation

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities less than 90 days as cash equivalents. The Company places its temporary cash
investments with high credit qualified financial institutions. Such investments are carried at cost, which approximates fair value.

Revenue Recognition

If collection is reasonably assured, and no significant future obligations or contingencies associated with the sale exist, revenues for product sales are
recognized when product is shipped, less an estimate for an allowance for returns or doubtful accounts, if applicable. 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. The Company's sales typically do not provide the customer with the right of return except as provided under the Company's warranties.

System
sales under long-term contracts are accounted for using 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 revenues 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 as soon as such losses are determined to be probable and reasonably
estimable.

Deferred
revenue includes unearned fees on systems maintenance contracts sold to customers. The Company recognizes the fees ratably over the life of the contract, generally on a
straight-line basis.

F-9

---



The
Company's policy does not require significant collateral or other security to support the substantial portion of its receivables. However, the Company typically requests collateral
or advance funding or payments on certain foreign sales that carry higher than normal risk characteristics.

Inventory

Inventory is recorded at the lower of cost or market with cost determined by the first-in, first-out (FIFO) method. Management
periodically assesses its inventory for potential obsolescence and lower-of-cost-or-market issues and adjusts inventory balances accordingly.

Receivables

Accounts receivable are presented in the balance sheet at net realizable value, which equals the gross receivable value less allowance for bad debts and estimated
returns and allowances. Such allowances are based upon management's estimate of non-collectibility due to customer factors, product quality, and current economic conditions. The allowance
for returns and doubtful accounts increased from $104 (or 0.5% of gross receivable value) at December 31, 2003 to $256 (or 1.2% of gross receivable value) at December 31, 2004. The
primary reason for the increase was a slight change in the customer mix in the year-end receivables.

Note
and other receivables are substantially made up by amounts owed to the Company pursuant to note agreements, which may or may not bear interest. The $2,384 balance at
December 31, 2004 is substantially comprised of a note executed by the vendor with whom the Company has outsourced its wireless communication manufacturing. The note was received in exchange
for raw material inventory transferred near the end of 2004. The Company has a security interest in the inventory, and the note agreement calls for monthly payments to not be less than actual
inventory consumed. This transaction was properly recorded as an inventory transfer and not as revenue.

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 represents the excess of purchase price over fair value of assets acquired. The Company assesses the recoverability of goodwill and other intangible
assets by performing a fair value impairment test, at least annually. If it is determined that impairment has occurred, the goodwill is written down to its estimated net realizable value. No
impairment was determined to have occurred in 2004, 2003, or 2002.

F-10

---



Warranty Costs

The Company substantially provides a one-year warranty on all of its products and generally permits an extended warranty of one or two years to be
purchased by the customer. The Company estimates future warranty claims based on historical experience and anticipated costs to be incurred. Warranty expense is accrued at the time of sale with an
additional accrual for specific items after the sale when their existence is known and amounts are determinable.

The
following represents a reconciliation of changes in the Company's accrued warranty as of December 31, 2004 and 2003:

Balance at
Beginning
of Period

Charged to
Costs and
Expenses

Deductions

Balance at
End of
PeriodYear Ended December 31, 2003

$
451

1,117

841

$
727Year Ended December 31, 2004

$
727

2,795

1,338

$
2,184


Income Taxes

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 income 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 Company periodically evaluates its deferred tax asset and assesses the need
for a valuation allowance based upon management's estimate of the recoverability of the future tax benefits associated with the deferred tax asset; this estimate takes into account, among other
factors, the Company's historical operating results, its current and expected customer base, technological and competitive factors impacting its current products, and management's estimates of future
earnings based upon a five-year earnings projection, using information currently available, and discounted for risk.

Income Per Share

Basic net income per share is calculated based upon the weighted average number of common shares outstanding during the period. Outstanding options at
December 31, 2004, 2003 and 2002, to purchase
1,398,466, 1,723,736 and 1,528,186 shares of common stock, with weighted average exercise prices of $3.00, $0.818 and $0.683, were used in the computation of common share equivalents for 2004, 2003
and 2002, respectively. All outstanding options at December 31, 2004, 2003 and 2002 were included in the computation at that date as all such options had exercise prices below the annual
average trading price in the respective years, i.e., $7.08, $3.02, and $0.99 per share in 2004, 2003, and 2002, respectively.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123(revised), Share-Based Payment,a revision of SFAS No. 123,Accounting for Stock-Based Compensation.SFAS
No. 123(revised) requires a public entity to

F-11

---



measure
the cost of employee services received in exchange for an award of equity instruments based upon the grant-date fair value of the award. The fair-value-based method is
substantially similar to the method established in SFAS No. 123 and includes use of the Black-Scholes option-pricing model. That cost will be recognized over the period during which the
employee is required to provide service in exchange for the award, generally the option's vesting period. SFAS No. 123(revised) is effective for interim or annual reporting periods that begin
after June 15, 2005. The Company will adopt SFAS No. 123(revised) as of the quarter ending September 30, 2005. The Company presently expects such adoption to increase its expenses
by approximately $150,000 in both the third and fourth quarters of 2005.

In
December 2004, FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets,an amendment of APB No. 29, Accounting for Nonmonetary Transactions.SFAS No. 153 eliminates APB No. 29's exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that are not expected to result in significant changes in the cash flows of the reporting entity. This pronouncement is not
anticipated to have a material effect on the Company's consolidated financial position or results of operations.

In
November 2004, FASB issued SFAS No. 151,Inventory Costs,an amendment of ARB No. 43, Chapter 4, Inventory Pricing.The statement clarifies
the FASB's position that abnormal amounts of costs, such as idle freight, handling costs, or spoilage, should
be recognized as current-period costs and requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. Since,
heretofore, the Company had already been costing its inventory in accordance with the methodology required by SFAS No. 151, this pronouncement is not anticipated to have a material effect on
the Company's consolidated financial position or results of operations.

Reclassifications

Certain amounts in 2003 and 2002 have been reclassified to conform to current year presentation. The reclassifications did not affect net income or stockholders'
equity as previously reported.

Research and Development Costs

Research and development ("R&D") costs are expensed as incurred in accordance with SFAS No. 2,Accounting for Research and
Developments Costs. Equipment purchased that has alternative future benefit in R&D activities is capitalized; resulting depreciation is recorded as R&D expense. Additionally,
R&D costs include employee salaries directly related to R&D efforts and all other costs directly allocable to R&D efforts, including equipment for which there is no alternative use. R&D costs are
presented separately as an operating expense in the Company's consolidated statements of operations.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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

F-12

---



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 for stock options issued to employees. When both the number of shares that an individual
employee is entitled to receive and the option price are known at the grant date, total compensation cost for the Company's grants of stock options is measured at the grant date ("fixed plan awards").
However, when either or both of these factors are not known at the grant date, the Company estimates total compensation cost each accounting period from the date of grant based on the estimated fair
value of the Company's common
stock at the end of each period ("variable plan awards"). Changes, either increases or decreases, in the estimated fair value of the shares between the date of grant and the final exercise or
expiration of the options result in a change in the measure of compensation cost for variable plan awards. Compensation cost is recognized as expense over the periods in which the employee performs
the related services, which is generally presumed to be the vesting period.

Had
compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 2004, 2003 and 2002, the Company's net income and pro
forma income (loss) per share would have been as follows:

|                                                                                   |  | 2004 |       | 2003 |   | 2002 
|---------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|Net incomeas reported                                                             |  | $    | 9,958 |      | $ | 3,992
|Less: General and administrative expenses for management stock option compensation |  |      | 519   |      |   | 313  
|                                                                                   |  |      |       |      |   |      
|Pro forma net income                                                               |  | $    | 9,439 |      | $ | 3,679
|                                                                                   |  |      |       |      |   |      
|Net income per share, basicas reported                                            |  | $    | 0.56  |      | $ | 0.23 
|Net income per share, dilutedas reported                                          |  | $    | 0.53  |      | $ | 0.21 
|Pro forma net income per share, basic                                              |  | $    | 0.53  |      | $ | 0.21 
|Pro forma net income per share, diluted                                            |  | $    | 0.50  |      | $ | 0.20 

The
weighted average fair value per option at date of grant during 2004, 2003 and 2002 was $2.28, $1.38, and $0.74, 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:

2004

2003

2002Expected option life

10 years

10 years

10 yearsExpected annual volatility

75
%
75
%
193
%Risk-free interest rate

4.24
%
3.99
%
2.93
%Dividend yield

0
%
0
%
0
%


F-13

---



2. Inventory:

During 2003, the Company sold, or otherwise disposed of $2,850 of obsolete inventory that was substantially reserved at December 31, 2002. This activity
accounted for the reduced reserve at December 31, 2003. No similar disposal activity occurred in 2004.

The
following is a summary of inventory at December 31:

2004

2003Raw materials and supplies

$
7,905

$
8,069Work in process


568


1,350Finished goods


6,520


9,25014,993


18,669Less: reserve for obsolescence


1,950


629Net Inventory

$
13,043

$
18,040


3. Contracts in Progress:

Costs incurred to date, estimated earnings and the related progress billings to date on contracts in progress are as follows as of December 31:

2004

2003Costs on uncompleted contracts

$
4,882

$
3,583Profits in uncompleted contracts


4,328


3,1509,210


6,733Less billings


8,822


5,894$
388

$
839The above is included in the consolidated balance sheet as follows:Cost in excess of billings on uncompleted contracts

$
1,638

$
869Billings in excess of cost on uncompleted contracts


(1,250
)

(30
)$
388

$
839


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 include amounts billed and accrued anticipated costs on open contracts in excess of
costs and accrued profits.

4. Property, Plant and Equipment:

Property, plant and equipment consist of the following at December 31:

2004

2003Land and land improvements

$
61

$
158Buildings and improvements


535


677Equipment


11,952


9,434Furniture and fixtures


1,063


1,211Software


1,173


1,511Construction in progress


608


20715,392


13,198Less accumulated depreciation and amortization


11,898


10,419$
3,494

$
2,779


F-14

---





5.    Intangible Assets:

As required by SFAS No. 142,Goodwill and Other Intangible Assets,the Company does not amortize its
goodwill, but instead reviews its goodwill for impairment, at least annually. The Company performed fair value-based impairment tests, in accordance with SFAS No. 142, at December 31,
2004, 2003, and 2002, concluding that no impairment of goodwill had occurred as of these dates and that no events had occurred during the respective years that would indicate that an impairment of
such assets had taken place. As of January 1, 2002, certain of the Company's intangible assets (primarily acquired workforce) were reclassified to goodwill, as these assets, per SFAS
No. 141,Business Combinations,were not deemed separable from goodwill for purposes of recognition.

Amortization
expense, related to intangible assets which are subject to amortization, was $7 and $5 for the years ended December 31, 2004 and 2003. Amortization expense of
intangible assets subject to amortization is anticipated to be approximately $7 for 2005 and annually thereafter through 2012. Intangible assets consist of the following:

December 31, 2004

December 31, 2003Intangible assets not subject to amortization:Goodwill



$
5,126



$
5,126Tradename




1,564




1,564Intangible assets subject to amortization:Proprietary and core technology

1,290




1,290Less: accumulated amortization

1,290




1,290


Patents

113




113Less: accumulated amortization

57


56

50


63Total



$
6,746



$
6,753


In the fourth quarters of 2002 and 2001, the Company decreased its deferred tax asset valuation allowance such that the Company recognized a net deferred tax
asset of $3,000 as of December 31, 2002. This amount was offset against goodwill as it was determined that the adjusted deferred tax asset valuation allowance related to an amount established
at the time of the purchase of EFJohnson in regards to acquired net operating losses ("NOL's"). As of December 31, 2002 goodwill includes no further amounts related to such acquired NOL's.

6.    Revolving Line of Credit:

The Company renewed it line of credit agreement with Bank of America in September 2004. The secured $15,000 line of credit bears interest at a rate of
LIBOR plus 150 basis points, which rate may be increased to LIBOR plus 225 basis points dependent upon certain debt ratios. The effective rate at December 31, 2004 was 3.9%. The line of credit
is collateralized by substantially all of the Company's assets, and borrowings available under the line of credit are calculated as a percentage of eligible inventory and receivables. The agreement,
which expires September 30, 2007, includes certain covenants, including financial covenants, with which the Company was in compliance as of December 31, 2004.

At
December 31, 2004 and 2003, the Company had zero and $7,500, respectively, outstanding on its lines of credit. Average borrowings under the Company's lines of credit and the
weighted average

F-15

---



interest
rate were, respectively, $150 and 31.3% during 2004, and $585 and 10.4% during 2003. The relatively high effective interest rate in 2004 and 2003 resulted from unused line availability fees,
charged at 0.375%, as the Company substantially borrowed on the line of credit only in the first quarter of 2004 and the fourth quarter of 2003. The total available credit under the line of credit was
$11,500 at December 31, 2004

7.    Long-Term Debt:

Long-term debt at December 31, 2004 solely consists of notes for financing of equipment. Future principal payments as of December 31,
2004 are as follows:

Year Ending December 312005

$
1262006


632007


52008


2009


Thereafter


$
194


8.    Leases:

In 2004, the Company made the decision to move both of its operating facilities (See Note 18). In Lincoln, Nebraska, upon the termination of its prior
facility lease in May 2004, Transcrypt moved to a near-by new facility also located in Lincoln. Transcrypt's facility is a minor portion of an industrial park and is leased pursuant
to a ten-year agreement expiring in June 2014, with an option, by Transcrypt, to renew for an additional five years. Further, in April 2004, the Company made the decision to
substantially move its EFJohnson operations from Waseca, Minnesota to Irving, Texas. The lease on the Waseca property was extended three months, until March 31, 2005, at which time the move to
Irving will be substantially complete. EFJohnson's operations are being moved to a facility in Irving leased pursuant to a ten-year agreement expiring in December 2013.

The
Company also leases various equipment and buildings under operating leases. Rent expense was $926, $730, and $680 for the years 2004, 2003, and 2002, respectively. The Company
anticipates, in the normal course of business, that leases will be renewed or replaced as they expire. Future minimum rental payments under non-cancelable operating lease agreements as of
December 31, 2004 are as follows:

Year Ending December 312005

$
9802006


7602007


7202008


6102009


650Thereafter


2,680$
6,400


F-16

---



9.    Income Taxes:

The components of income tax expense (benefit) for the years ending December 31, 2004, 2003 and 2002 are as follows:

2004

2003

2002Current:Federal

$


$


$
State








Deferred:Federal


(5,000
)

(5,000
)

State


(1,000
)




Total

$
(6,000
)
$
(5,000
)
$



A reconciliation of the Company's effective tax rate to the U.S. federal statutory rate is as follows:

|                                       |  | 2004 |        | Percent |        | 2003 |   | Percent |   | 2002  |   | Percent |     
|-------------------------------------- |  | ---- | ------ | ------- | ------ | ---- | - | ------- | - | ----- | - | ------- | ----
|U.S. federal tax at statutory tax rate |  | $    | 1,346  |         | 34.0   | %    | $ | (343    | ) | 34.0  | % | $       | 480 
|Decrease in valuation allowance        |  |      | (4,600 | )       | (116.2 | )    |   | (4,462  | ) | 442.7 |   |         | (550
|State income taxes at estimated rate   |  |      | 119    |         | 3.0    |      |   |        |   |      |   |         |    
|Provision for state income taxes       |  |      | (2,865 | )       | (72.4  | )    |   |        |   |      |   |         |    
|Other                                  |  |      |       |         |       |      |   | (195    | ) | 19.3  |   |         | 70  
|                                       |  |      |        |         |        |      |   |         |   |       |   |         |     
|                                       |  | $    | (6,000 | )       | (151.6 | )%   | $ | (5,000  | ) | 496.0 | % | $       |    
|                                       |  |      |        |         |        |      |   |         |   |       |   |         |     

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, 2004 and 2003 relate to the following:

2004

2003Special compensation expense

$
1,520

$
1,400Allowance for bad debts and returns


120


40Reserve for inventory obsolescence


720


170NOL carryforwards


19,600


20,350General business credits


2,980


2,400Non-cash compensation expense (repriced options)


2,410


1,500Difference between tax and book amortization


770


1,310Difference between tax and book depreciation


200


250Difference between tax and book liability accruals and prepaid assets


680


180Gross deferred tax assets


29,000


27,600Less valuation allowance


15,000


19,600$
14,000

$
8,000


At December 31, 2004, the Company increased its deferred tax assets by approximately $2,865 to account for the effect of state income tax on accumulated
timing differences. The Company used an estimated weighted average tax rate of 3.0%. Prior to 2004, the Company excluded any state income

F-17

---



tax
effect on its computation of deferred taxes as the Company did not believe it was more than likely that the Company would be able to utilize that aspect of its deferred tax asset related to state
income taxes.

Taxable
net operating loss carryforwards, totaling approximately $52,900 at December 31, 2004, originated in 1996 through 2003 and expire in 2011 through 2023. The Company also
has approximately $2,980 in general business credits, which were earned in 1996 through 2004 and substantially expire in 2011 through 2024. Additionally, the Company has a $4,525 tax benefit relating
to gains recognized by employees through the exercise of the Company's stock options and is not considered to have an effect on the Company's deferred tax asset. The tax credits and the stock option
benefit cannot be utilized by the Company to reduce its income taxes until the Company's NOL has been exhausted.

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, carryback opportunities, and tax planning strategies in making this assessment. In order to realize fully
its gross deferred tax asset, the Company will need to generate future taxable income of at least $79,300 prior to expiration of its NOL and tax credit carryforwards. Taxable income (loss), before
application of NOL's, for the years ended December 31, 2004, 2003, and 2002 was approximately $4,660, $(490), and $110.

As
a result of decreases in the valuation allowance in 2004 and 2003, the Company's net deferred tax asset recorded on the balance sheet increased to $14,000 at December 31, 2004,
as compared to $8,000 at December 31, 2003 and $3,000 at December 31, 2002. In determining recoverability of the future tax benefits associated with its deferred tax asset, management
takes into account, among other factors, the Company's historical operating results, its current and expected customer base, technological and competitive factors impacting its current products, and
management's estimates of future earnings which are based upon a five-year earnings projection, using information currently available, and
discounted for risk. Should factors underlying management's estimates change, future adjustments to the Company's valuation allowance may be necessary.

10.    Accrued Expenses:

Accrued expenses consist of the following at December 31:

2004

2003Payroll, bonuses and employee benefits

$
1,927

$
1,314Commissions


1,697


1,310Warranty reserve


2,184


727Other expenses


363


55$
6,171

$
3,406


F-18

---



11.    Commitments and Contingencies:

On or about February 5, 2001, ASRC Communication ("ASRC") filed a complaint in United States District Court for the District of Alaska, against EFJohnson
seeking damages against EFJohnson on claims arising out of EFJohnson's sale of radio products to ASRC. ASRC purchased, and resold to the State of Alaska, approximately $500 of products from EFJohnson
since 1999. ASRC's claims against
EFJohnson include breach of contract, breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, breach of duty of good
faith and fair dealing, equitable estoppel, misrepresentation, and violations of the Racketeer Influenced and Corrupt Organizations Act. The complaint anticipated that the State of Alaska would
formally prosecute its administrative claim under the Alaska State Procurement Code against ASRC for damages associated with alleged malfunctions of EFJohnson manufactured radios. Under a
May 21, 2003 agreement between ASRC and EFJohnson (the "ASRC Agreement"), EFJohnson agreed to defend ASRC, at EFJohnson's expense, against any State's claim alleging non-performance
of the EFJohnson radios. In the event the State prevailed in its claim, EFJohnson and ASRC agreed to allocate any award in favor of the State in accordance with the formula in the ASRC Agreement. In
addition, the parties agreed to resolve any issue or dispute remaining between them after the conclusion of the State administrative proceeding through mediation and binding arbitration. Based upon
the ASRC Agreement, ASRC and EFJohnson dismissed the claims against each other. On or about April 6, 2004, the State of Alaska's Department of Administration, Information Technology Group filed
an administrative claim under the State Procurement Code against ASRC for damages associated with the EFJohnson radios. The State of Alaska claim alleges damages in excess of $900. Subsequently, ASRC
has tendered, and EFJohnson has accepted, the State's administrative claim in accordance with the ASRC Agreement. EFJohnson will undertake to defend ASRC under the terms and conditions of the ASRC
Agreement. The Company is unable to predict the likelihood of the outcome or potential liability that may arise from this action and has not reserved any amount in regard to this potential liability.

F-19

---





In June 2004, Mace, Incorporated ("Mace") filed a complaint in United States District Court for the Eastern District of Virginia, against EFJohnson seeking
damages against EFJohnson on claims for third-party commissions allegedly due in conjunction with certain product sales to the federal government. Mace has alleged projected damages of $400 and an
unspecified percentage of past and future federal government sales. The Company believes that it has meritorious contractual defenses against such demand and intends to vigorously contest such
allegation. At December 31, 2004, the Company has recorded a liability which amount reflects the Company's evaluation of the eventual conclusion of these matters.

The
Company is presently disputing certain state tax liabilities totaling approximately $350. The Company believes the basis for the states' assessment of the amounts owed is incorrect
and intends to vigorously contest such assessments. At December 31, 2004, the Company has recorded a liability related to these assessments, which amount reflects the Company's evaluation of
the eventual conclusion of these matters.

The
Company is presently involved in a dispute regarding the computation of certain royalties. The Company believes the basis for its royalty computation is correct and consistent with
the terms of the royalty agreement. However, if the Company's method of computation proves to be wrong, accrued royalties could be understated at December 31, 2004 by approximately $450. The
Company is presently unable to predict the outcome and eventual liability related to this matter.

On
or about June 8, 2001, Electronic Engineering Company ("EEC") filed a complaint in the Iowa District Court of Polk County, against EFJohnson, such complaint alleging that
EFJohnson engaged in wrongful activities in connection with the installation of an EFJohnson trunked radio system. In May 2002, the parties entered into a settlement whereby: (i) EEC
returned to the Company certain of EFJohnson' s equipment previously sold to EEC; (ii) EFJohnson forgave a $133 receivable due from EEC; and (iii) the Company paid EEC $200. Both parties
executed and exchanged general releases.

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 government authorities to provide letters of credit and bonds that may be drawn
upon if the Company fails to perform under its contracts. The letter of credit, which expires in June 2006, has a total undrawn balance of $250. Bonds, which expire on various dates, totaled
$5,340 on December 31, 2003. As of that date, no bonds had been drawn upon.

12.    Option Plans:

Under the Company's 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 or of any other class of security or right of the Company which is convertible into
common stock. There are approximately 335,000 remaining shares available to be issued under this Plan as of December 31, 2004. The Plan provides

F-20

---



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.

During
2001 and 2000, the Company cancelled and reissued 620,000 and 366,000 stock options, respectively, under the Plan to lower the exercise price of those options to an amount
approximately 150% of the prevailing market value of the Company's common stock (the "repricing"), that is $0.656 per share. The repricing of the stock options resulted in a new measurement date for
accounting purposes and the reclassification of these options as variable plan awards beginning on the date of the repricing. Further, in 2001, similar to the Company's aforementioned repricing
decision, the Company decreased the exercise price of the 200,000 stock options issued to its Chief Executive Officer ("CEO")in 1999 (pursuant to the Michael Jalbert 1999 Stock Option Agreement,
hereafter referred to as "Mr. Jalbert's Option Agreement") from $1.4375 to $0.656 per share. The Company previously accounted for these option grants as fixed plan awards. The resulting
non-cash compensation is dependent upon the Company's closing stock price at the end of the respective period. The market value of the Company's common stock at December 31, 2004,
2003 and 2002, respectively, was $9.75, $5.90 and $1.25 per share. The Company recorded $2,121, $3,936 and $483 in non-cash compensation expense in 2004, 2003 and 2002, respectively, for
the cumulative effects of the repricings.

As
of December 31, 2004, approximately 367,000 of these repriced options, in various stages of vesting, were outstanding, of which approximately 308,000 related to options issued
to the Company's CEO and Chief Financial Officer ("CFO"). In the first quarter of 2004, the CEO and CFO adopted pre-arranged stock selling plans, pursuant to Rule 10b5-1
of the Securities and Exchange Act of 1934, in regards to the repriced option shares held by them which are subject to variable accounting treatment. Under the pre-arranged stock selling
plans, stock options will be exercised contemporaneously with the sales of the resulting shares. The respective selling of the stock commenced in the second quarter of 2004 and will continue over a
period at least through the second quarter of 2005. Any non-cash compensation related to these options will become fixed at the time the options are exercised; prior to exercise, the
options will continue to be subject to variable accounting treatment. The CEO and CFO, in aggregate, exercised approximately 465,000 options during 2004.

F-21

---



The
status of the Company's stock options:

Number of Shares

Weighted Average Price Per Share

Weighted Average Options ExercisableBalance at December 31, 2001

1,513,413


0.67

810,632Granted

529,700


0.74Forfeited

(514,927
)

0.69Balance at December 31, 2002

1,528,186


0.68

665,021Granted

227,600


1.70Exercised

(200
)

0.66Forfeited

(31,850
)

0.67Balance at December 31, 2003

1,723,736

$
0.82

793,884Granted

525,850


6.62Exercised

(675,320
)

1.30Forfeited

(175,800
)

0.69Balance at December 31, 2004

1,398,466

$
3.02

496,024


The Company's outstanding options as of December 31, 2004 are as follows:

|Range of Exercise Price |  | Number Outstanding at December 31, 2004 |  | Weighted Average Remaining Contractual Life |  | Weighted Average Exercise Price |       | Number Exercisable at December 31, 2004 |         | Exercisable Weighted Average Exercise Price
|----------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | ------------------------------- | ----- | --------------------------------------- | ------- | -------------------------------------------
|$0.3900.510            |  | 156,280                                 |  | 7.0                                         |  | $                               | 0.495 |                                         | 57,500  |                                            
|0.6560.656             |  | 403,286                                 |  | 6.5                                         |  |                                 | 0.656 |                                         | 365,124 |                                            
|0.8200.890             |  | 135,000                                 |  | 7.6                                         |  |                                 | 0.864 |                                         | 42,000  |                                            
|1.7001.880             |  | 214,400                                 |  | 8.1                                         |  |                                 | 1.708 |                                         | 39,600  |                                            
|6.0007.150             |  | 489,500                                 |  | 9.4                                         |  |                                 | 6.891 |                                         |        |                                            
|                        |  |                                         |  |                                             |  |                                 |       |                                         |         |                                            
|$0.3901.700            |  | 1,398,466                               |  | 7.9                                         |  | $                               | 3.002 |                                         | 504,224 |                                            
|                        |  |                                         |  |                                             |  |                                 |       |                                         |         |                                            

13.    Benefit Plans:

The Company has a profit sharing plan, which covers substantially all employees. Contribution levels are determined annually by the Board of Directors. There were
no profit sharing contributions in any of the three years ended December 31, 2004, 2003 and 2002.

The
Company also has a 401(k) plan, which covers substantially all employees. Participants may contribute up to 15% of their annual compensation and the Company makes matching
contributions of 40% for the first 6% of the amount contributed by participants. Contributions may not exceed the maximum allowable by law. Company contributions approximated $184, $164, and $160 for
the years ended December 31, 2004, 2003 and 2002, respectively.

F-22

---



14.    Fair Value of Financial Instruments:

The carrying amount of the Company's current assets and liabilities approximates fair value because of the short maturity of these instruments. The carrying
amount of the revolving line of credit approximates fair value as calculated by discounting the future cash flows of the instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company's bankers.

15.    Concentrations:

Sales to the U.S. Department of Defense accounted for 35% and 42% of the all sales in 2004 and 2003. Sales to the State of South Dakota accounted for 12% of all
sales in 2002.

In
addition to being a customer, Motorola is a key manufacturer of electronic components used by the Company; purchases from Motorola totaled approximately $6,886, $14,424, and $3,670 in
2004, 2003 and 2002, respectively.

16.    Export Sales:

A 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 areas, excluding Canada, were as follows for the years ended December 31, 2004, 2003 and 2002:

2004

2003

2002Europe

$
604

$
1,051

$
685Middle East and Asia


15,084


3,446


4,148Central and Latin America


3,111


2,617


1,287$
18,799

$
7,114

$
6,120


17.    Related Party Transaction:

On January 7, 2000, the Company extended an interest free loan to the Company's Chief Executive Officer, Michael E. Jalbert, in the principal amount of
$175. In March 2001, the Company forgave repayment of Mr. Jalbert's loan. Accordingly, general and administrative expense in 2001 includes this charge. In April 2002, the Company
extended another loan to Mr. Jalbert in the principal amount of $75 bearing interest at the rate of 6%. Any tax obligations associated with the loan were the sole responsibility of
Mr. Jalbert. Mr. Jalbert fully paid off the loan, principal and interest, in July 2004.

18.    Planned Moves of the Company's Operating Facilities:

During the second quarter of 2004, Transcrypt's operations moved from its previous facility in Lincoln, Nebraska to a similar 18,000 square-foot
facility located a short distance from its previous operations. The Company incurred approximately $139 in relation to this move in 2004. The new facility was obtained pursuant to a
ten-year lease with anticipated facility costs approximating those of the departed facility. The move was precipitated by the May 31, 2004 termination of the lease agreement on the
segment's previous facility and was complete by September 30, 2004.

F-23

---



On
April 14, 2004, the Company announced its decision to move EFJohnson's operations, to include the outsourcing of its manufacturing, from its current facility in Waseca,
Minnesota to the Dallas, Texas area. The Company expects to incur costs of $1,900 in relation to this move of EFJohnson. The timing of the recognition of costs associated with this move will be
determined in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities,and other relevant guidance, which
provide that a liability for a cost associated with an exit or disposal activity shall be recognized at
its fair value in the period in which the liability is incurred. In particular, employee-related termination costs associated with the relocation are generally recognized ratably over the period that
the employees are required to provide services in order to earn the respective termination benefit. This move is expected to be completed by April 2005 and is not expected to cause significant
disruption of the business; however, a significant portion of EFJohnson's workforce was replaced or otherwise terminated in relation to this move.

EFJohnson and Transcrypt Operating Facility Relocation Costs (in 000's):

|                     |                                          | Total amount expected to be incurred |   | Amount incurred in the year ended December 31, 2004 |       | Remaining amount to be incurred in 2005
|-------------------- | ---------------------------------------- | ------------------------------------ | - | --------------------------------------------------- | ----- | ---------------------------------------
|Description of Costs |                                          |                                      |   |                                                     |       |                                        
|                     | Employee related costs                   |                                      | $ | 1,020                                               |       | $                                      
|                     | Furniture and equipment relocation costs |                                      |   | 319                                                 |       |                                        
|                     | Manufacturing outsourcing set-up costs   |                                      |   | 350                                                 |       |                                        
|                     | Other                                    |                                      |   | 350                                                 |       |                                        
|                     |                                          |                                      |   |                                                     |       |                                        
|                     |                                          | Total                                |   | $                                                   | 2,039 |                                        
|                     |                                          |                                      |   |                                                     |       |                                        

F-24

---





19.    Segment and Related Information:

The Company operates in the following two industry segments: the wireless communication industry (EFJohnson), which is comprised of the design, development,
manufacture and sale of stationary land mobile radio transmitters/receivers, mobile and portable radios and complete radio communication systems; and the information security industry (Transcrypt),
which is comprised of the design, manufacture and sale of devices that prevent the unauthorized interception of sensitive voice and data communication.

The
Company evaluates segment results based on gross margin and income from operations. Corporate expenses are allocated to the operating segments based upon estimated usage of corporate
resources. The following table is a summary of annual results for the years ended December 31, 2004, 2003 and 2002.

|(in thousands)                           |  | 2004 |        | 2003 |   | 2002   |  
|---------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|Revenues:                                |  |      |        |      |   |        |  
|Wireless Communication                   |  | $    | 60,716 |      | $ | 49,028 |  
|Information Security                     |  |      | 20,154 |      |   | 7,161  |  
|                                         |  |      |        |      |   |        |  
|                                         |  | $    | 80,870 |      | $ | 56,189 |  
|                                         |  |      |        |      |   |        |  
|Gross Profit:                            |  |      |        |      |   |        |  
|Wireless Communication                   |  | $    | 21,342 |      | $ | 18,292 |  
|Information Security                     |  |      | 16,627 |      |   | 5,337  |  
|                                         |  |      |        |      |   |        |  
|                                         |  | $    | 37,969 |      | $ | 23,629 |  
|                                         |  |      |        |      |   |        |  
|Operating Income (Loss):                 |  |      |        |      |   |        |  
|Wireless Communication                   |  | $    | (4,275 | )    | $ | 1,052  |  
|Information Security                     |  |      | 10,457 |      |   | 1,996  |  
|                                         |  |      |        |      |   |        |  
|Income (Loss) from Operations            |  |      | 6,182  |      |   | 3,048  |  
|Stock Option Repricing Benefit (Expense) |  |      | (2,121 | )    |   | (3,936 | )
|Other Income (Expense), net              |  |      | (103   | )    |   | (120   | )
|                                         |  |      |        |      |   |        |  
|Income (Loss) before Taxes               |  | $    | 3,958  |      | $ | (1,008 | )
|                                         |  |      |        |      |   |        |  
|Depreciation & Amortization:             |  |      |        |      |   |        |  
|Wireless Communication                   |  | $    | 1,277  |      | $ | 951    |  
|Information Security                     |  |      | 164    |      |   | 142    |  
|                                         |  |      |        |      |   |        |  
|                                         |  | $    | 1,441  |      | $ | 1,093  |  
|                                         |  |      |        |      |   |        |  
|Assets:                                  |  |      |        |      |   |        |  
|Wireless Communication                   |  | $    | 42,580 |      | $ | 46,626 |  
|Information Security                     |  |      | 13,146 |      |   | 6,742  |  
|Corporate                                |  |      | 14,593 |      |   | 8,901  |  
|                                         |  |      |        |      |   |        |  
|                                         |  | $    | 70,319 |      | $ | 62,269 |  
|                                         |  |      |        |      |   |        |  

F-25

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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 ended December 31,
2004. 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 earnings per share 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.

|                                          |  | Quarter Ended |       
|----------------------------------------- |  | ------------- | ------
|
|
|2004                                      |  |               |       
|Revenues                                  |  | $             | 22,244
|                                          |  |               |       
|Income (loss) from operations             |  |               | 3,049 
|Interest and other income (expenses), net |  |               | (54   
|                                          |  |               |       
|Income (loss) before income taxes         |  |               | 2,995 
|Provision for income taxes                |  |               |      
|                                          |  |               |       
|Net income (loss)                         |  | $             | 2,995 
|                                          |  |               |       
|Net income (loss) per sharebasic         |  | $             | 0.17  
|                                          |  |               |       
|Net income (loss) per sharediluted       |  | $             | 0.16  
|                                          |  |               |       
|2003                                      |  |               |       
|Revenues                                  |  | $             | 9,001 
|                                          |  |               |       
|Income (loss) from operations             |  |               | (564  
|Interest and other income (expense), net  |  |               |      
|                                          |  |               |       
|Income before income taxes                |  |               | (564  
|Provision for income taxes                |  |               |      
|                                          |  |               |       
|Net income                                |  | $             | (564  
|                                          |  |               |       
|Net income per sharebasic                |  | $             | (0.03 
|                                          |  |               |       
|Net income per sharediluted              |  | $             | (0.03 
|                                          |  |               |       

As explained in Note 12, the Company has repriced stock options which are accounted for as variable plan awards. As a result of the prevailing market price
of the Company's common stock exceeding the Company's repriced stock options in 2003, the Company incurred non-cash compensation expense (benefit) of:$(1,087), $3,398, $(1,425), and $1,235
in the quarters ended March 31, June 30, September 30, and December 31, 2004, respectively; and $446, $(150), $1,890, and $1,750 in the quarters ended March 31,
June 30, September 30, and December 31, 2003, respectively.

F-26

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SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND RESERVES

|                                                    |                              | Balance at Beginning of Period |            | Charged to Expenses (Provisions) |            | Charged to Other Accounts |            | Deductions (Write-offs) |            | Balance at End of Period
|--------------------------------------------------- | ---------------------------- | ------------------------------ | ---------- | -------------------------------- | ---------- | ------------------------- | ---------- | ----------------------- | ---------- | ------------------------
|Allowance for Doubtful Accounts for the:            |                              |                                |            |                                  |            |                           |            |                         |            |                         
|                                                    | Year Ended December 31, 2002 |                                | 284,360    |                                  | 436,782    |                           |           |                         | 485,064    |                         
|                                                    | Year Ended December 31, 2003 |                                | 236,078    |                                  | 202,027    |                           |           |                         | 333,690    |                         
|                                                    | Year Ended December 31, 2004 |                                | 104,415    |                                  | 254,599    |                           |            |                         | 103,036    |                         
|Inventory Obsolescence Reserve for the:             |                              |                                |            |                                  |            |                           |            |                         |            |                         
|                                                    | Year Ended December 31, 2002 |                                | 2,159,788  |                                  | 1,020,760  |                           |           |                         | 712,762    |                         
|                                                    | Year Ended December 31, 2003 |                                | 2,467,786  |                                  | (484,781   | )                         |           |                         | 1,354,242  |                         
|                                                    | Year Ended December 31, 2004 |                                | 628,763    |                                  | 1,817,062  |                           |            |                         | 495,463    |                         
|Valuation Allowance for Deferred Tax Asset for the: |                              |                                |            |                                  |            |                           |            |                         |            |                         
|                                                    | Year Ended December 31, 2002 |                                | 27,400,000 |                                  | (1,000,000 | )                         | (2,500,000 | )                       |           |                         
|                                                    | Year Ended December 31, 2003 |                                | 23,900,000 |                                  | 700,000    |                           |           |                         | (5,000,000 | )                       
|                                                    | Year Ended December 31, 2004 |                                | 19,600,000 |                                  | 1,400,000  |                           |            |                         | (6,000,000 | )                       
|Allowance for Warranty Reserve for the:             |                              |                                |            |                                  |            |                           |            |                         |            |                         
|                                                    | Year Ended December 31, 2002 |                                | 434,108    |                                  | 869,223    |                           |           |                         | 852,419    |                         
|                                                    | Year Ended December 31, 2003 |                                | 450,912    |                                  | 1,116,785  |                           |           |                         | 841,136    |                         
|                                                    | Year Ended December 31, 2004 |                                | 726,561    |                                  | 2,795,286  |                           |            |                         | 1,337,512  |                         

See independent auditors' report

S-1

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Index of Attached Exhibits

The following documents are included in this report.

| | Exhibit
Number |  | Description                                                                                                                                                      
| | -------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.16          |  | Manufacturing Agreement for certain radio communications equipment between E.F. Johnson Company and McDonald Technologies International, Inc. dated May 14, 2004.
| | 10.43          |  | Schedule of Named Executive Officers Base Salary.                                                                                                                
| | 10.44          |  | Schedule of Non-Employee Directors' Annual Compensation.                                                                                                         
| | 11.1           |  | Statement re. Computation of Per Share Earnings.                                                                                                                 
| | 23.1           |  | Consent of Grant Thornton LLP.                                                                                                                                   
| | 31.1           |  | Chief Executive Officer's Certification of Report on Form 10-K for Year Ended December 31, 2004.                                                                 
| | 31.2           |  | Chief Financial Officer's Certification of Report on Form 10-K for Year Ended December 31, 2004.                                                                 
| | 32             |  | Written Certification of Chief Executive Officer and Chief Financial Officer, dated February 24, 2005, pursuant to 18 U.S.C. § 1350.                             

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